Understanding the Impact of Inflation on Business Insurance Limits and How to Protect Your Assets
When inflation is in the news, the headlines are often about “getting inflation under control” or “getting inflation back down to normal.” However, inflation in some amount is a near constant.
Have you ever stopped to consider what effect inflation is having on your insurance protection?
Let’s take a moment to consider two areas where inflation should cause buyers of business coverage to reevaluate their current insurance limits.
1. Property/Asset Insurance
Inflation can increase the cost of replacing damaged or destroyed assets, which can cause the amount of insurance needed to cover the asset to increase. If a business doesn’t adjust its insurance limits to account for inflation, it may not have adequate coverage in the event of a loss.
For example, let’s say a business has a property insurance policy with a limit of $1,000,000 to cover the replacement of its building. Over time, inflation may cause construction materials, labor, and other expenses to rise. If the cost of replacing the building increases to $1,500,000, but the insurance policy limit remains at $1,000,000, the business would be responsible for covering the $500,000 difference in the event of a loss, possibly more if the property policy includes the standard Co-Insurance penalty clause.
Questions to consider:
- How long ago did you establish the amount of coverage needed on your property?
- How much have values/costs increased since then?
- Are you still adequately covered?
2. Liability Insurance
As Inflation has driven down the value of the dollar, so the amount of liability coverage a business needs to protect itself from liabilities resulting from its operations has increased. If a business does not carry enough coverage to protect itself from the potential damage or injury its operations could cause another party, it could wind up being directly responsible for any amount not covered by its insurance.
Another type of inflation affecting liability insurance is Social inflation, which refers to the trend of increasing litigiousness and higher jury awards in personal injury and liability cases, resulting in higher insurance claims payouts.
In the context of liability insurance, social inflation can significantly impact the amount of insurance needed to protect a business from claims and lawsuits. If a business does not adjust its liability coverage limits to account for social inflation, it may find itself underinsured in the event of a claim.
For example, let’s say a business has a general liability insurance policy with a limit of $1,000,000, and, over time, social inflation has caused the cost of paying out claims to increase. If the cost of paying out a given claim rises to $1,500,000, but the insurance policy limit remains at $1,000,000, the business would be responsible for covering the $500,000 difference in the event of a loss.
Questions to consider:
- How long has it been since you decided how much liability insurance was right for your business?
- Has anything changed since then?
- Have costs or risks gone down since then or increased?
So especially when considering inflation, it’s crucial for business owners to periodically re-evaluate their insurance limits and make sure they have adequate coverage to protect themselves from claims and lawsuits in the event of a loss. This can help ensure they can fully recover from a loss and maintain their operations, regardless of the effects of regular and social inflation.
If you have questions about a similar scenario, feel free to contact us, and one of our business coverage experts can walk you through some readily available options.
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About the Author
Larry St. John is a 20+ year veteran of insurance and risk management for the construction and electronic security industries.
He can be reached at LStJohn@eclipseinsurance.com