The recent devastation caused by the Los Angeles wildfires raised relevant concerns for business owners not just in the US but also for Canada, the Insurance Bureau of Canada said in a blog post.
Small businesses, including bookstores, flower shops and cafes, contribute to their communities but may not have sufficient insurance coverage. Without adequate protection, they face significant financial challenges during a disaster.
According to the IBC, business and property owners face two major issues: an increase in natural disasters and the rising costs of rebuilding.
Data from Catastrophe Indices and Quantification Inc. (CatIQ) indicates that severe weather has impacted more than 132,000 Canadian businesses over the past 15 years.
In the last five years alone, over 53,000 businesses filed insurance claims related to extreme weather, compared to around 40,000 claims in each of the two preceding five-year periods. Insured losses across all lines, including commercial, have increased from $10 billion to $12 billion to $20 billion over these intervals.
At the same time, the cost of rebuilding continues to rise. According to the October 2024 Consumer Price Index (CPI), construction costs in Canada have increased by 66% since 2019, significantly outpacing the 19% rise in general inflation. As a result, insurance valuations may not reflect the current cost of rebuilding, leaving businesses exposed to financial shortfalls.
Underinsurance can lead to significant financial burdens for business owners, particularly due to co-insurance clauses in commercial property policies. These clauses require policyholders to insure their properties at a minimum of 80% to 90% of the replacement cost. If a policyholder falls below this threshold, they may be responsible for a portion of the loss.
For example, if a building has a replacement cost of $2 million but is insured for only $1 million, the owner has covered just 50% of the value. If the building sustains $500,000 in damage, the insurer would only pay half that amount ($250,000), leaving the owner to cover the remaining $250,000 out of pocket. This financial strain could force a small business to close.
Co-insurance also applies to business interruption coverage, which compensates for lost income during rebuilding. If revenue estimates are too low, a business may struggle to recover even if it resumes operations.
To ensure adequate coverage, the IBC said that business owners should obtain accurate replacement cost appraisals. These valuations should factor in material and labor costs, debris removal, compliance with building codes, and other relevant expenses.
A professional appraisal provides a current estimate of rebuilding costs, helping businesses align their insurance coverage accordingly.
A base appraisal can also be used for up to three years, with adjustments based on Statistics Canada’s Building Construction Price Index. This approach helps keep insurance values in line with market conditions, IBC said.
Additionally, business owners should regularly review the value of their stock and equipment to confirm that coverage limits are sufficient. Annual discussions with an insurance representative can help ensure policies remain up to date.
Accurate insurance valuations are essential. While disasters are unpredictable, businesses can take proactive measures to protect themselves and secure financial stability in the face of potential losses, IBC said.
