Businesses today are facing a risk landscape that is more volatile, more expensive, and less forgiving than at any point in recent memory. While social inflation plays a role, other factors such as rising property values and supply chain driven repair costs contribute to the bigger picture as well. On top of this, increasingly aggressive litigation tactics can drive up the costs and risks associated with lawsuits. What can businesses do to stay resilient in this financial landscape? It is more important than ever for business owners to take a proactive approach to their risk management, including understanding and routinely evaluating their property valuations, reviewing their property and liability limits in light of their risks, and strengthening their internal risk management controls.
Click here to read more content from Cross Insurance
The Most Undervalued Asset in Business: The Right Connection
By Emilio DiSpirito IV License Partner | Private Office Advisor Engel & Volkers Oceanside www.DiSpiritoteam.com…
Learn More
Property Insurance: Understanding and Evaluating Valuations and Limits
A potential risk that business owners should regularly assess is the possible undervaluation of their assets. Assets can appreciate in value over time, and business owners should make sure that they are providing their insurance agent with up-to-date valuation information so that policy limits can be adjusted as appropriate. Failing to do so can potentially lead to a gap between the insured limit and the actual cost to repair or replace the asset.
Business owners should understand the difference between replacement cost and market value. Replacement cost represents what it would take to rebuild or replace an asset today, including materials, labor, engineering, code upgrades, demolition, debris removal, and time. Market value, by contrast, reflects what a buyer would pay for the property in its current condition and may include land value. These numbers rarely align.
As Linda Cordeiro of Cross Insurance noted, “Replacement Cost coverage is intended to provide a business with the required funds to cover the rising costs of construction materials and associated labor.” This distinction is critical because insuring to market value may reduce premiums in the short term, but it can expose the organization to significant underinsurance issues after a major event. In some cases, replacement cost can exceed market value by 30 to 60 percent, especially when construction inflation, labor shortages, and supply chain pressures are factored in.
Business owners should make sure their limits are based on updated, third-party appraisals and reviewed annually. Automatic inflation guards may help, but depending on a variety of dynamic factors, they may or may not be enough to keep pace with actual construction costs. Business interruption values, which are often overlooked by business owners, must also reflect realistic downtime, supply chain delays, and contingent exposures. Businesses should be sure to regularly communicate all of this information to their insurance agent so that policies can be updated as needed, and they should let their agent know if they have any questions or concerns about their coverage.
Claims Settlement and the Consequences of Underinsurance
In a loss scenario, insurers apply coinsurance clauses and valuation conditions strictly. If a property is insured for less than the required percentage of replacement cost, the organization may absorb a proportional share of the loss, even on partial claims.
As Linda Cordeiro explained, “Businesses who choose to insure at a valuation under what is considered Replacement Cost will face Coinsurance penalties at time of loss.” This makes valuation more than just a pricing decision. It directly affects how a claim may be paid and how much of the loss the business may have to fund on its own.
For uninsured or severely underinsured properties, the financial impact can be severe. Claims may be settled on an actual cash value basis, reducing payouts dramatically. Rebuilding may become difficult without significant capital infusion, and lenders may impose penalties or additional requirements. In these situations, the organization’s balance sheet, not the insurer, becomes the primary risk bearer.
One of the clearest warnings from Linda Cordeiro is that “A single event can deplete cash reserves and overthrow an otherwise stable balance sheet.” For that reason, understanding how claims settlement works is not a technical detail. It is a core governance responsibility of all business owners.
Business owners should make sure that they understand how their policy may respond before a claim occurs. Regular reviews with an insurance agent can help identify coverage gaps, reduce the chance of claim disputes, and support better documentation at the time of loss.
Liability Insurance: Social Inflation and the New Underwriting Reality
The liability environment has shifted sharply in recent years. Social inflation, litigation funding, changing societal attitudes, and aggressive plaintiff strategies, has created a more challenging environment for commercial insureds.
Businesses are facing larger jury awards than ever before, along with higher legal costs and longer claim timelines. Linda Cordeiro also noted that “Higher litigation frequency and the severity of claims have been direct contributors to the now challenging liability environment.” Outside investors have also increasingly financed lawsuits in exchange for a share of the recovery, which can prolong litigation and increase settlement pressure.
This shift has reshaped underwriting across the commercial insurance market. General liability carriers are tightening terms, increasing deductibles, and scrutinizing risk controls more closely. Umbrella and excess liability capacity has also become more difficult to secure, with some carriers reducing available limits or pulling back from higher hazard classes.
Organizations must reassess their liability limits in light of modern verdict trends and their own individual risk profile, budget, and level of risk tolerance. Business owners should review and reevaluate their liability limits at least annually, as well as any time there has been a change to the company’s operations or risk profile. Higher liability limits are often available, so businesses should let their agent know if they are interested in receiving quotes and learning more about their options. As Linda Cordeiro stated, businesses are now facing “nuclear” verdicts, and awards exceeding $10 million are no longer limited to traditionally high-risk industries.
Strengthening Risk Management Controls
To navigate this environment, organizations should take a more disciplined and proactive approach to their risk management. This includes but is not limited to:
• Conducting regular valuation reviews and updating property schedules.
• Reviewing property limits against current replacement cost, not market value.
• Evaluating business interruption values based on realistic downtime, supply chain delays, and contingent exposures.
• Modeling worst case liability scenarios using current verdict trends.
• Reassessing umbrella and excess liability limits in today’s litigation environment.
• Building multi-layered excess towers with diversified carriers when higher limits are desired.
• Strengthening safety, compliance, documentation, and operational controls.
• Communicating all operational changes to their insurance agent, such as work in a new state, delivery exposure, new services, or new product lines.
• Using documented HR policies, safety procedures, fleet controls, cyber security practices, and operational data preservation to help improve underwriting outcomes.
• Engaging brokers and agents who understand emerging litigation, property valuation trends, and carrier underwriting expectations.
A strong insurance program should not be reviewed only at renewal, it is something that businesses should regularly examine and reevaluate. Regular conversations with insurance agents can help reduce the risk of costly uncovered losses, improve underwriting outcomes, and protect the organization’s financial stability. Cross Insurance emphasized that changes such as taking on work in a new state, adding delivery exposure, or introducing a new product line can affect how the current insurance program responds. If a company does not inform their agent about those changes in a timely fashion so that the insurance program can be updated, then there may be an increased risk of an uncovered loss.
Cross Insurance | 291 Promenade St., Providence, RI | 401-431-9200 | CrossAgency.com
