The devastating Los Angeles wildfires have revealed a lot more than the destructive effects of wildfires. They have also brought to light how small businesses are highly susceptible to being underinsured.
A recent Wall Street Journal article provides a cautionary tale for business owners. It involves the popular Reel Inn, a much-loved family-run fish shack in Malibu. Unfortunately, the 40-year-old seafood outlet, known for its fresh seafood and fun menu items like “Salmon and Delilah,” and “Leprawn James,” was unfortunately one of the casualties of the fires. Although the restaurant had more than $1 million in insurance coverage for business interruption and rebuilding, it is expected that the actual costs will be a lot more than that.
We love our small businesses in Alberta, which make up more than 96% of the entrepreneurial enterprises in the province. And we are also highly aware of how susceptible our province is to disastrous weather events such as fires and floods. Sadly, many of our little cafés, independent bookstores, and funky clothes stores could suffer the same fate as the Reel Inn.
Rising risks and soaring costs
Over the past 15 years, severe weather events have caused financial losses for more than 132,000 businesses in Canada, according to Catastrophe Indices and Quantification Inc.. The trend is worsening, with over 53,000 businesses filing claims for weather-related damages in the past five years, compared to about 40,000 in each of the two previous five-year periods. Insured losses across all sectors have surged from $10 billion to $12 billion to a massive $20 billion over successive five-year spans.
Adding to the problem, rebuilding costs have skyrocketed. According to Canada’s Consumer Price Index for October 2024, construction costs have risen by 66% since 2019, far outpacing the general inflation rate of 19% over the same period.
And, of course, there is the impending threat of 25% tariffs on steel and aluminum imports to the U.S. These materials are widely used in building construction and the automobile manufacturing industries.
Canada is the number one exporter of steel to the U.S., according to data from the U.S. Department of Commerce. This country sent about 566,000 metric tons of steel across the border last month alone. A total of $20 billion in trade of steel between the two countries takes place annually, with 40% of imports coming just from Canada, says the Canadian Steel Producers Association.
In addition, the majority of aluminum imported to the U.S. comes from Canada, with 3.2 million tonnes exported last year.
The rising costs due to both inflation and tariffs significantly increase the risk that insurance valuations may be outdated and insufficient.
Co-insurance and your small business insurance
Many business owners may be unaware that most commercial property policies include a co-insurance clause, which is designed to encourage accurate valuations. This clause typically requires the insured value to meet at least 80% to 90% of the property’s replacement cost. Falling below this threshold makes the policyholder a “co-insurer” and responsible for covering the proportional share.
For example, suppose a building’s replacement cost is $2 million, but the owner insures it for only $1 million — just 50% of its value. If the building sustains $500,000 in damages, with a co-insurance clause the insurer will cover only half that amount ($250,000). The owner will be required to pay the remaining $250,000 out of pocket. That is enough to permanently shutter a small business, many of which operate with very narrow margins.
The co-insurance clause also applies not only to physical property, but also to business interruption coverage, which compensates for lost income during rebuilding. If a business underinsures its revenue and lowballs the amount needed to meet that threshold it may struggle to even reopen.
Accurate and up-to-date valuations are a must
Business owners need to obtain accurate replacement cost appraisals that account for all relevant factors, including material and labour costs, debris removal, building bylaws, and expenses for heritage properties. A business appraiser can be provided through us at Lane’s insurance and can provide a clear snapshot of amounts needed for rebuilding and business interruption based on current costs.
This appraisal can serve as a baseline for the next three years, provided you take the time to adjust it annually using Statistics Canada’s Building Construction Price Index to reflect changing costs. Business owners should also monitor the value of their stock and equipment to ensure adequate coverage for replacement in case of a major loss.
Lane’s Insurance covers Alberta
While no one can predict when disaster will strike, small businesses can take proactive steps to safeguard their future. By maintaining accurate insurance valuations and regularly reviewing coverage, small business owners can ensure they are fully protected when it matters most.
If you are looking for a small business insurance appraisal, take the time to talk to an insurance broker. We know the right questions to ask to find you lower business insurance rates. Taking advantage of any bit of savings that may be available can help protect your company’s viability.
You’ve worked hard to grow your business through difficult times, and you need to protect that investment with the right customized business insurance policy.
Business insurance policies available through Lane’s include:
