The Insurance industry likes to call the text of their policy language “Forms”. An insurance form is just the contract and wording that determines who pays what.
Generally, there are 3 differnt types of policy coverage in a form. Basic, broad, and special form coverage break down and determine your premium depending on the nee
Property Insurance for example, can be simple, if you look at it from a very basic view point. Two things are the main drivers of your premiums.
- The more causes of loss or hazards that you want to be insured against, the more expensive the policy.
- The more money you expect to be paid after a claim, the more expensive the premiums.
There are three different sets of perils that you can insure your property against. These are usually referred to as coverage forms. Basic Form, Broad Form, and Special Form Coverage. Each of these three are progressively more expensive but cover you against more types of loss.
1. Basic Form – covers your property against fire, lightning, explosion, smoke, windstorm, hail, riot, civil commotion, aircraft, vehicles, vandalism, sprinkler leakage, sinkhole collapse, volcanic action.
2. Broad Form – covers your property against everything that Basic Form does, but also covers falling objects; weight of snow, ice, or sleet; water damage (in the form of leakage from appliances); and collapse from specified causes.
3. Special Form Coverage – this type of coverage protects you for everything or all risks except what the carrier has specifically excluded from coverage. The exclusions are things such as nuclear hazards, earthquakes, war, water (usually defined as floods). These exclusions are why your agent is always pushing you to buy flood and earthquake policies.
The other major factor in premiums amounts is how much you get paid out after a loss. Replacement Cost and Actual Cash Value are two types of valuation that carriers use to determine the payout after a loss.
1. Replacement Cost pays you to replace your building with “Like kind and quality”. It allows you to rebuild your building to the same standard before you suffered the loss.
2. Actual Cash Value is replacement cost minus depreciation. They adjust your payment for the age of your building. These adjustments typically make it very difficult to rebuild your property without extra funds from an outside source.
As you probably guessed, Replacement Cost is more expensive than Actual Cash Value. So, how can you use this information in making your insurance buying decisions? Unless you have cash reserves that you can use to cover the gap between what insurance will pay and how much it actually costs to rebuild your building, you’ll want to stick with a Special Form Coverage policy that uses Replacement Cost valuation.
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Article by Aaron Hennings
Aaron has been in the insurance industry since 2010. He specializes in helping businesses in the Construction, Habitational, and Manufacturing industries, but has experience working with businesses of all kinds.
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