Hardware store property coverages

Hardware store property coverages

Utschig, H

Author’s note: Beginning with this issue, this column will focus on identifying and insuring loss exposures for various types of businesses. The exposures and applicable coverages discussed will range from the very basic to quite sophisticated insurance concepts.

Besides identifying loss exposures, the initial articles in this series will address the use of the businessowners policy (BOP), including its limitations. Many insurers have developed their own BOPs. We will analyze the BOP developed by the Insurance Services Office (ISO). You can then determine how the BOP(s) you use compares with it.

Most of what will be discussed here can apply to more than one type of business. For example, workers compensation coverage is desirable or mandatory (depending upon the jurisdiction) for any client who has one or more employees. Most businesses also need commercial general liability coverage. My intention will be to provide some explanation of a coverage the first time that it is introduced. Once a coverage has been explained in any article, it will not be discussed in future articles when that coverage is used for a different type of business.

To begin our series, let’s consider the risk of a hardware store-using for illustrative purposes a fictitious business called Riverside Hardware Store (RHS). (In this article, we will deal with some of Riverside Hardware Store’s property loss exposures. In future articles we will deal with liability, automobile and workers compensation exposures.)

RHS is a complete hardware store. Because its principal clients are contractors, the store opens at 6:00 a.m. to service them. Contractors stop at the store en route to their job sites to pick up items that they need for their day’s work.

Included in its inventory are air-cooled engines of various sizes and a complete line of woodworking equipment. Not only does the business handle woodworking equipment, it also is an authorized repair service for two of the largest manufacturers of power tools. It also refills liquefied petroleum gas (LPG) tanks.

Within the last six months, Riverside Hardware Store completed putting in $500,000 of improvements and betterments. It revamped its entire lighting system, moved some interior walls and installed wall coverings. Although RHS installed these items, they actually belong to the building owner. Because it was at the beginning of another 10-year lease, Riverside Hardware Store expected to get its “value” out of the improvements and betterments during the course of the next decade.

Riverside Hardware Store had about $300,000 in furniture and fixtures plus $1 million in inventory. Because it was expected to carry an amount of insurance equal to 100% of its values, RHS carried a limit of $1,300,000 ($300,000 in furniture and fixtures plus the $1,000,000 inventory) on its businessowners policy.

About one month after the insurance was put into force, a tornado blew through town, damaging both the building and the business personal property of RHS. Fortunately, prior to this loss RHS had conducted a thorough physical inventory using a reputable firm. It also had maintained very good computer records regarding its inventory. These records showed every item that was entered into the store’s inventory and every item that was sold each day Thus, the property loss settlement was not difficult. The adjuster estimated that it would total about $1.3 million. Payment for the new furniture, fixtures and inventory would be made as soon as Riverside Hardware Store actually spent money for those items.

Improvements and betterments

The owner of Riverside Hardware Store talked to the landlord about the improvements and betterments. RHS presumed that the landlord would replace them because they belonged to the building owner. He was surprised when the landlord told him that the building repairs would not include any of these improvements and betterments. RHS contacted the adjuster to determine if there was coverage for improvements and betterments. The adjuster told him that RHS’s BOP covered them. Improvements and betterments are automatically covered whenever business personal property is covered with a businessowners policy. No sub-limits applied to this coverage. However, the amount of coverage for improvements and betterments is included in whatever limit is written for business personal property.

The business had a limit of $1.3 million applying to its business personal property including improvements and betterments. Improvements and betterments are included in the same limit that applies to furniture and fixtures. Because the loss for the stock, furniture and fixtures would use up the entire business personal property limits, there would be no insurance left to pay for the improvements and betterments part of the loss.

Business income

In another part of the country, about the same time that Riverside Hardware Store was hit by the tornado, a major hurricane swept inland for hundreds of miles. Repairs for the hurricane damage created a huge demand for building materials. Most of the lumber and plywood that was being produced was sent to the hurricane-damaged part of the country. This resulted in a shortage in other parts of the country.

Without the building supplies, no repairs could be made to the building occupied by Riverside Hardware Store. Normally, the building would have been rebuilt and operational in about 10 months. However, due to the building material shortage, it was 15 months before the building was ready for occupancy. It took another month for the business to move in new furniture, fixtures, and stocks. It reopened for business 16 months after the loss.

Businessowners policies provide coverage for a firm’s continuing expenses and loss of profits while the firm is shut down completely or has a partial reduction in business due to an insured loss. A businessowners contract does not apply any dollar limit to its time element coverage. As a result, Riverside Hardware Store expected to recover 100% of its time element claim. RHS’s owner was quite surprised when the adjuster told him that he would not recover his entire business income claim. While the businessowners policy does not have a dollar limit on time element coverage, coverage applies for only 12 months. Thus, RHS had four months of uninsured business income losses.


As a promotional idea to get many of its old customers back, RHS decided to hold a tent sale. About a dozen manufacturers whose tools RHS stocked agreed to be a part of the sale and have factory representatives there. Extra amounts of merchandise would be shipped in specifically for the sale-with one manufacturer sending in an entire truckload of tools such as table saws, drill presses, battery operated power tools and similar items. As the truck loaded with these tools was heading toward Riverside Hardware Store, a tornado was heading for the truck. It tore the truck’s roof off and then flipped the semi-trailer upside down. All of the power tools were damaged.

The hardware store’s owner who presumed that the manufacturer would send another truckload of tools, was very surprised when the manufacturer told him that they would need to pay for all of the damaged tools. The tools had been sent f.o.b. origin. This means that the ownership of the tools switched from the manufacturer to RHS the minute that the truck delivering the tools left the manufacturer’s loading dock. To insure this loss, RHS needed to have insurance on incoming shipments.

He presented a claim to the trucking firm. The trucking firm told him that if he had coverage, it would be for only a small part of the value of the cargo. However, the trucker had no liability for the loss so it would not be paying anything. Truckers are not responsible for losses caused by an “act of God.” A tornado hitting the truck is considered as an act of God.

Common carriers, per law, are responsible for only a small amount of money per each parcel or package. This value is usually substantially less than the value of anything that is being shipped.

As neither the shipper nor the trucker would pay for the damaged cargo, RHS presented a $20,000 claim to its businessowners insurer for the loss. There is coverage on a BOP for this type of a loss. However, the BOP had a limit of $1,000.

Accounts receivable

A businessowners policy can provide all of the coverage(s) that an insured needs. Many loss exposures are insured by a BOP My admonition to you is to be careful because BOPS have very low limits for a number of loss exposures. A good example is accounts receivable– with a lmit of $1,000. Some hardware stores might have between $100,000 to $250,000 in accounts receivable. A $1,000 accounts receivable limit would not begin to cover the potential loss.

Copyright Rough Notes Co., Inc. Sep 2000

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