What are they and how can they affect your coverage?
As a business owner, you’ve taken every precaution to make sure that your property is covered if an unexpected event or disaster occurs. And while you probably purchased a blanket policy that provides protection for all of your business assets and locations, you may not be aware that your insurance includes a margin clause.
And if it does, what exactly does that mean and how will it affect your coverage? Margin clauses are not uncommon and can reduce or even eliminate a lot of the benefits of your blanket policy, so it’s important to be aware of them. Take a look:
What’s a margin clause?
In the simplest terms, it’s a clause that’s added to your commercial property policy that limits the amount you’ll be able to receive if you suffer a loss covered under a blanket policy. If there’s a fire in one of your business locations, for example, your insurer will not pay out more than a specified percentage of the value of the covered property. Here’s a more detailed example:
Let’s say that you own two stores and you’ve reported the value of each building and their contents to be a total of $1.5 million. Your margin clause in your $3 million blanket policy is 120 percent, which means that your provider will use that percentage to determine the maximum loss payable for each of your properties.
If one of your buildings is destroyed by fire, your insurer will not pay you more than $1.2 million ($1million x 1.2). In addition, if everything inside your building is destroyed, you won’t receive more than $600,000 ($500,000 x 1.2). Which means that your total pay out would be $1.8 million—and in many cases, this amount is less than it would cost for you to replace or rebuild at current rates.
This example does not take into account any co-insurance payments or deductibles that you may be responsible for—so you can see how important it is to be aware of any margin clause in your commercial policy.
How does it affect your coverage?
While the effects of a margin clause vary from business to business, they can be a cause for concern in certain cases. There are instances, for example, where having a margin clause in your blanket policy can significantly decrease the amount you’ll receive in the event of a loss. Some important considerations include:
• Your property suffers a large loss
• The insured property has increased in value since you bought the policy
• The policy hasn’t been updated with the current value of the contents
Although it may be confusing, it’s easy to see that a margin clause can adversely affect your coverage in the event that you suffer a substantial loss.
Understanding how these clauses work and knowing if your commercial policy includes one is important to protect yourself in the event that one or more of your business properties is destroyed or damaged. Keep in mind that even the specifications that are in small print should be clearly explained so that you are aware of what they mean and how they can affect you.
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