Posted by Andy Gregory on Thu, Jul 16, 2009 @ 09:23 AM
If you want to start a long business discussion, start with the words "supply chain management", and send out for lunch and dinner. So much goes into to planning raw materials and inventory flow, which can make for a property insurance headache. To address the fluctuating values, a reporting form can be used to notify the insurance company on a monthly, quarterly, or bi-annual basis. Most large companies are doing just this, relying on expensive, mission critical supply chain management software tools. But what about middle market and small business America?
The current recession has caused many businesses to have supply chain and warehouse fluctuations that resemble a Six Flags roller coaster ride. But small to mid-sized companies do not have the luxury of deploying a seven-figure software solution to keep tabs on materials and inventories. This makes property insurance strategy a difficult task, as choosing coverage limits is like playing pin the tail on the donkey. You either choose property limits that are somewhat higher than what is expected, or you take a stab at using a reporting form. However, using a reporting form for a small to mid sized company is difficult and dangerous, for several reasons. Accuracy is certainly one reason, as human error is the cousin to Murphy's Law. Further, if a scheduled valuation report is late or is never submitted, the insurance company will use the last report that was submitted. If there is a subsequent loss, and the last report was far less that the current valuation, there is going to be a gap between the loss and the adjusted claim payment.
So what is a small to mid sized business to do? Since everyone is doing more work in less time, taking on more responsibility isn't realistic. If it were me, I would estimate higher property limits than are expected and consider higher deductibles to defray the premium increase. Additionally, insurers offer better property rates to businesses that insure to value, or reasonably close to it, and will offer an Agreed Amount clause to waive any coinsurance snags. On the other hand, lowering your limits gets you into coinsurance clauses, which could be further exacerbated by the valuation fluctuations as discussed above.
Of course, now I'm thinking about the mission critical supply chain management solutions used by large companies. What if that systems were to go down...