When you purchase commercial property coverage as part of your overall business insurance policy, one of the things that is covered is your company’s inventory.
Specifically, commercial property insurance includes coverage to repair or replace your merchandise and inventory if damaged by fire or flood or stolen by a burglar. It also provides coverage for replacing or repairing your equipment, electronics, furnishings, and repairs to the building itself.
Often referred to as business contents insurance, when you add this type of coverage to your policy, it’s recommended that you create and maintain an up-to-date contents inventory. Your inventory is a list of all the physical assets and goods that your company needs to operate.
Creating a contents inventory is necessary if you must file a claim for damage or loss due to an insured event. It allows you to present an accurate, detailed list to your insurance company showing what inventory needs to be replaced. But taking stock of every piece of merchandise and its estimated value at your place of business sounds like a Herculean task. So, how do you do it?
For starters, know that insurance companies categorize the items you have at your office, store, warehouse, or other commercial property as one of the following: inventory, equipment, or business contents. Let’s go over how this works so you can begin to compile your contents inventory.
How Do Insurers Categorize Inventory, Equipment, and Business Contents?
To gain a better understanding of how insurance companies classify the items you have at your place of business, let’s walk through each category:
- Inventory: Think of your inventory as the merchandise you sell to consumers or to partners in a supply chain to generate revenue for your company. Your office equipment, machinery, or other business contents are not considered part of your inventory. Clarifying what your inventory consists of helps distinguish your overhead and production costs or fixed and variable expenses.
Fixed expenses typically cost the same month-over-month. Variable expenses are related to the cost of production of goods or services, which may increase or decrease depending on your company’s sales or productivity.
- Equipment: Insurers think of your equipment as your business’s fixed assets. It includes machinery, tools, fixtures, and other expensive equipment used to produce, sell, or store the goods or services you provide.
- Business Contents: Your business contents include various items like laptops, desktop computers, mobile phones, photocopiers, office furniture like desks and chairs (or tables, chairs, and bars if you own a restaurant), and point-of-sale terminals. These things may be insured for their actual cash value or replacement costs (we’ll get into that further below).
Determining Business Contents Value
Many Zensurance customers ask us about how to determine the value of their business contents. It can be tricky to figure out but think of it this way: your business contents policy covers your equipment, office supplies, fixtures and fittings, such as the shelves on the wall and countertops. To estimate what your contents are worth, follow this method for each insured category:
- Equipment: list each piece of machinery, tool, and other fixtures. Determine their purchase dates and what it would cost to replace them. If you paid for renovations to the commercial property (whether you own it or are a tenant), consider using the approximate cost of the upgrades in your calculations.
- Inventory: think of what it would cost to replace all your inventory or merchandise that you sell to produce revenue. The amount of inventory you hold may fluctuate during the year, so pick a month when your inventory is at its largest and never select your inventory’s average or lowest value.
- Business Contents: list and determine the cost of all computing equipment, including point-of-sale terminals, mobile phones, laptops, and other office equipment. Know what the purchase dates were for each and estimate the cost to replace it all with new equipment.
If you don’t own the commercial property you inhabit but are a tenant, factor in the expense of any improvements you’ve made to the building. For instance, if you installed new shelves on the walls, improved the lighting fixtures, and installed a new countertop at the checkout desk, add those costs to your contents list.
Be sure to read your lease agreement closely. It’s possible it may state that you, as a new tenant, are responsible for renovations or improvements made to the premises by the former tenant as well. In that case, you’ll need to estimate what the costs are for those improvements and include them in your contents list, otherwise, you may be leaving yourself underinsured.
Also, be aware insurers’ commercial property policies vary as to whether a tenant’s improvements are covered under business contents or equipment. Check with your broker to find out how it applies to your policy.
Understanding Replacement Cost and Actual Cash Value Coverages
There are pros and cons to insuring your business contents and other assets based on their replacement cost or actual cash value. First, let’s define what each means:
- Replacement cost coverage involves your insurance carrier providing you with funds to restore your business contents to their original condition or replace them with new items that are similar to what was lost or damaged. The upside to having a replacement cost policy is you receive an adequate claim payment to replace damaged or destroyed items. The downside is you will likely pay a higher annual premium for this type of policy.
- Actual cash value coverage means your claim payment is based on the cost of purchasing the items you lost plus depreciation. For instance, if your five-year-old laptop computer is destroyed in a fire, your insurer will determine its current value in its used condition. Going with actual cash value coverage typically means you’ll pay a lower annual premium. But the amount of your claim payout to purchase new items to replace those lost may not be enough, meaning you’ll have to pay the difference out-of-pocket.
Keep in mind your commercial property insurance covers items that were purchased for business purposes only. Any personal items belonging to you or your employees that were stored at your place of business that are damaged or lost will not be covered by your policy.
Steps to Creating a Business Contents Inventory List
It sounds daunting to put together an accurate, thorough contents list, especially if you’ve never done it. Effort and attention to detail are required but don’t be deterred from doing it and revisiting your list often to ensure you don’t miss anything. For example, don’t overlook things like security cameras or signage that you paid for and own. Follow these four steps to build your list:
- Do a walkthrough at your business property and take photos and videos of everything. Keep notes as you do, record each item you have and include a description, serial numbers, purchase dates, and what you know or think the estimated value is of each. If it’s more comfortable for you, document everything on a spreadsheet or use an inventory mobile app (some inventory apps are free, others charge monthly fees).
- Make copies of your inventory list and store them securely. After you’re satisfied you’ve got a detailed inventory list that includes descriptions, values, photos and videos; make multiple copies of it. Keep hard copies stored in different locations (a company safe and another secure location at home, for instance) and upload digital copies to a secure, encrypted cloud storage service.
- Save all receipts for the items you buy for your business. You may not have receipts for everything you have at your commercial property but get into the habit of keeping receipts for anything you buy for your business. As they are when filing your taxes, receipts are the ultimate proof you have for confirming an item’s value.
- Do it again and often. After taking the above steps, go back and tour your business again to ensure you didn’t miss anything the first time around. It’s worth making this at least a biannual exercise to ensure your inventory list is as up-to-date as possible and accounts for any newly acquired goods, equipment, or other items you need to run your business.
Lastly, if your company owns a vehicle or a few vehicles, know that your commercial property coverage does not cover vehicles. You will need commercial auto insurance to protect your business’s cars, vans, or trucks.
Commercial Property Insurance: The Best Way to Protect Your Assets
Despite whatever precautions we may take as business owners, there’s always the possibility that severe weather or an unexpected incident like a fire, flood, or a break-in may occur, resulting in damages or losses to your company. In those situations, that’s when the value of having commercial property insurance is realized.
Fill out an online application to get a free, non-obligatory quote from Zensurance to protect your business and its assets. Our licensed brokers will shop the market for you and provide you with a customized policy that suits your needs at the best price.
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