Does your current policy have catastrophic location coverage, or do you pay a deductible for each piece of equipment? This is an important question for firms that have equipment (such as tractors and trailers) spread across many locations.
Let's say you have a $5,000 deductible for physical damage that applies to each piece of equipment. You could suffer a loss of $50,000 if you max out your deductible on 10 pieces of equipment (10 x $5,000 = $50,000). Just imagine if you had 50 pieces of equipment — 50 x $5,000 = $250,000! The out-of-pocket exposures for one catastrophe event (a wind storm, tornado, vandalism, etc.) could really add up!
Catastrophic coverage is for a specific place — for example, a particular lot where you park your trucks. Each catastrophic policy has unique coverages, which may include damage from extreme weather or vandalism. Catastrophic coverage covers what comprehensive insurance does, but it establishes a maximum cost for a everything at a particular location with a deductible.
It's important to emphasize that catastrophic coverage is location specific. Your firm's location is made up of many elements. Location includes geography, climate and weather, and the physical address. When you're buying catastrophic coverage, it matters whether your firm is in an industrial park next to a bunch of propane tanks or whether you're in Tornado Alley in the heart of the continental United States. In short, your location may be more likely to have one kind of catastrophe, and your coverage should protect against that catastrophe.
How do you determine how much catastrophic coverage you need? Here's a peek at the workbook we use with clients and prospects.
|Location A||Location B|
|Max pieces of equipment at any one time|
|Max value of any one piece of equipment|
|Min/Max pieces of equipment at any one time|
|Min/Max value of any one piece of equipment|
|Location Total Catastrophe Limit|
Naturally, you can customize this workbook and add as many locations (columns in the table) as you want. The really useful part of this workbook is that it helps firms think about maximum exposure. Maximum exposure is the No. 1 factor in deciding how much catastrophic coverage your firm needs.
It's always a good practice to assess your risk associated with location. If your firm is in a rough neighborhood, it's probably a good idea to have a locked gate and a security guard. If your firm is located near wetlands, it's probably smart to pay extra attention to how your land is graded so that water flows away from your property. Think about your exposures, and have a disaster plan in place.
But catastrophic coverage exists because of unknown risk. The events covered by catastrophic insurance are unavoidable, unpredictable, and unpreventable. It's risk that can't be neutralized by the culture of the firm. Sometimes you just have bad luck!
Is there a way to "beat" catastrophic risk? Well, you can decrease it by spreading it around. For example, you could not park all your trucks in one yard. It's the old adage about not putting all your eggs in one basket. But like was mentioned before, these sorts of events (tornado, flood, etc.) really can't be prevented or predicted. (Well, maybe you can predict that there's going to be tornadoes in the Midwest next summer, or that the Upper Peninsula of Michigan is going to get a ton of snow in the next few months.)
In the end, we all know you can't really plan for a catastrophe. Should disaster strike, you're chiefly in reaction mode, and, with hope, you can lean on your catastrophic insurance coverage.
What's the bottom line? Catastrophic coverage is a security blanket for an entire location. The alternative is insurance for individual pieces of equipment, which could be a huge out-of-pocket cost should you be slammed with a disaster.