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The Moral of the “Twix” Story

The Moral of the “Twix” Story

We have all seen the commercial about the Twix candy bar and the competition between Right Twix and Left Twix.

Both factories are identical and produce the right and left halves of a single product. Yet, there is a sinister difference between the two. In order to save money on Insurance, Right Twix only insures for one half the value that Left Twix does. That’s right, Left Twix insures for 100% of Replacement Cost Value and pays twice the premium that Right Twix does.

Right Twix has determined that with all of the safeguards in place it is very unlikely the whole factory will burn down. Maybe half of it at the most.

It turns out their estimate was correct because when the fire started in one facility and eventually spread to the other, the fire was brought under control with only partial damage to both Right and Left Twix.

Right Twix called their Insurance company to file a claim fully expecting they would pay for all of the damage. Left Twix did the same.

Since Right Twix only insured for half their value and paid half the premium that Left Twix did, does it seem fair to you that Right Twix should receive the same benefit as Left Twix, who paid twice the premium for twice the amount of insurance?

It isn’t fair at all, not to all the business owners who pay their full share of premium or to the insurance companies who collect the premiums of the many to pay the losses of the few.

For this reason, Fire Insurance policies usually contains a premium levelling mechanism referred to as the Co-Insurance Clause. The Insurance Broker for Left Twix took the time to explain this important condition. For a Replacement Cost Policy, Coinsurance is usually set at 90% of the Replacement Value. Failure to do so will result in a penalty if there is a claim, and the following is an example of how it works;

The Twix factories both had Replacement values of $1,000,000.00. The minimum amount required by the Coinsurance Clause is therefore $900,000.00. It is of course best to insure for 100% of Replacement Value, but that is another story.

The formula is best explained as Did, divided by Should, multiplied by the amount of the damage to the factory. In this case each factory had $250,000 in damage.

That means that Right Twix was paid;

DID. SHOULD. DAMAGE. SETTLEMENT

$500,000 \ $900,000 X $250,000 = $138,000 and became a Co-Insurer for the difference of $112,000.00

Left Twix promptly received the full settlement of their claim and was soon back in operation.

Right Twix needed to obtain additional financing to rebuild causing delays in resuming operations and went eventually went out of business leaving Left Twix making both halves of the chocolate bar.

The moral of this story is that the right Insurance Broker will tell you what you need to know, not just what you want to hear, or;

You can’t expect to get both halves of the Twix if you only pay for one.

So How Much is Enough?

So How Much is Enough?

Nobody wants to be over insured so the question to ask is how much is enough? This a question that a qualified insurance broker is well equipped to help you find an answer to.

For property insurance the answer is fairly simple. What is the replacement cost value of your property? Take that figure and allow a percentage for increases over the policy term. Many insurance policies already include that provision. Does yours?

What is your appetite for risk? This question goes to the amount of deductible that you should carry. This is one of the best ways to reduce premiums. If you wouldn’t submit a small claim, why pay a premium based on low deductibles?

For business owners the place of work is important to income and any damage can result in an interruption in the revenue stream. Time becomes of the essence in restoring damaged property so the business may continue producing revenue. The expression “time is money” is never so graphically proven as when a business owner is struggling to carry on operations in the midst of property restoration. Your broker can assist you in selecting the correct form of Business Interruption Insurance, and more importantly, the correct amount to make you whole again.

Selecting an appropriate amount of Business Liability Insurance used to be an objective process based on the value of the asset needing protection from lawsuits. Our society has changed and with it the complexity of legal tangles an individual or business owner needs to manage. Your broker can assist you in identifying these exposures and how to mitigate many of them as the first step in financing the risk with the correct form of liability insurance. It is a process that should and does take some time but consider it well spent.

As for the amount, liberal courts are awarding higher damages these days, so select an amount that represents the value of your asset and add a piece of mind factor. The most-costly part of any business liability policy is in the first $1,000,000 of the limit; excess insurance beyond that is relatively inexpensive.

The short answer? Engage in best practices, self insure as much as you can afford, and buy high limits to cover the catastrophic loss that will put you out of business.

As your insurance broker, I’ll be there to advise and guide you through this process.

Make sure you have enough!  email heather@thinkinsure.ca for more information and a complimentary review!