Property Insurance for Multiple Locations: what does a loss limit do for you.

Loss limit policies insure property on an occurrence basis to a limit of the probable maximum loss rather than an actual total property value.

If a manufacturer has ten locations in ten states each valued at three million dollars including contents, the probable maximum loss might be three million dollars. No one storm, earthquake, or fire will destroy any two in one occurrence. If all ten locations are within a mile of the east coastline, a hurricane might destroy several plants, for a probable maximum loss of, say for example, nine million dollars.

In the first case, the policy limit might be four million, in the second, maybe ten rather than thirty million.

This method of valuation provides insurance for very high value risks or when some portion of the risk is hard to reinsure.

Reinsurance is a spread of risk system for all insurance companies. For very high value risks, sometimes it is not possible to reinsure the total value of property. Insurers and reinsurers each have a maximum limit per loss.

Windstorm, flood and earthquake hazards can be difficult to insure. Insuring all locations with a single maximum loss is a way to get some insurance for all locations.

Loss limit policies tend to be more expensive because total losses are theoretically many more times as likely.

Co-insurance became popular with insurance companies because insureds only wanted to buy enough insurance for the probable maximum loss on a single property. Loss limit policies can be viewed as total protection without a coinsurance clause. The insurance underwriter goes into the process with eyes wide open about pricing each occurrence for ten potential first dollar losses or one catastrophic loss.

The principles of spread of risk and actuarial loss prediction remain constant but apply differently.

If you have a portfolio of properties spread geographically, with perhaps a few in hurricane or earthquake zones, review your loss limit options.

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