What it means
Businesses depend on papers that cannot easily be replaced. An architect keeps drawings for buildings, a law firm holds signed agreements and a publisher keeps original manuscripts.
If a fire or flood destroys them, the cost of recreating the information can be considerable even when the paper itself is worth very little. The policy normally pays for the cost of research, labour and materials needed to replace or restore the documents.
This can include paying staff overtime, hiring specialists to rebuild drawings and obtaining certified copies from public records. It does not pay for the money or property the documents represent.
Cover is usually subject to a limit that applies to each loss, often set far below the limit for a building or stock. Insurers may also exclude money and securities, which are covered by other policies, and they may apply a deductible, the amount the policyholder pays first.
The policy might be a standalone product or an extension to a general property policy. Insurers often ask whether the information is also stored elsewhere.
If a business keeps secure digital copies in another location, the cost of replacement is lower, and the risk is smaller. That is why good backups reduce premiums and reduce the loss itself.
For a finance manager, the main task is to estimate the cost of recreating key records and to check the limit. Many businesses assume that their general property policy covers documents, when it may include only a small sublimit.
A short review of the policy wording can reveal gaps before a loss happens. Valuable papers cover is often paired with cover for electronic data, since many records are now digital.
The two overlap but are not the same, so a business that keeps both paper and electronic files should check that each type of record is included. The policy may also have conditions, such as keeping records in a fire-resistant safe.
In practice
Real-world examples.
Example
A law firm stores signed contracts in a filing room that is damaged by a burst pipe. The policy pays to scan, restore and obtain duplicate copies of the documents. The firm's office manager also keeps a log of which files were affected, because the insurer will ask for evidence of the cost.
Example
A small publisher loses the original manuscripts of three books in a fire. The insurer pays for the cost of retyping and re-editing the texts, but not for the lost sales of the books.
Example
A land surveyor's office is flooded, destroying plans for current projects. The policy pays the cost of re-surveying and redrawing, up to its limit. The surveyor had kept digital copies off site for half of the plans, which meant the claim was smaller and the recovery faster.
Formula
Calculation
Claim paid = lesser of (reconstruction cost, policy limit) - deductible
Suppose a design firm loses a set of original drawings in a fire. Rebuilding them costs $85,000 in labour and materials, the policy limit is $100,000 and the deductible is $5,000. The lesser of $85,000 and $100,000 is $85,000. After deducting the $5,000 deductible, the claim paid is 85,000 - 5,000 = $80,000. If rebuilding had cost $130,000, the insurer would pay the limit of $100,000 less the deductible, which is $95,000.Case study
Seen in the real world.
Ashgrove Architects is an illustrative, fictional practice with 25 staff and a store of original drawings going back 30 years. A fire damages its basement archive, and about half of the drawings are lost.
The practice's office manager checks its policy and finds that the valuable papers limit is only $50,000. Her estimate of the cost of redrawing the lost plans is $180,000, because some of the drawings relate to buildings still in use.
In this illustrative story the insurer pays its limit, less the deductible, and the practice funds the rest from its reserves. After the loss the practice moves its drawings into a digital archive and raises the cover limit, which also lowers its premium on the next renewal. The office manager also adds a yearly task to review the limit against the number of drawings in the archive.
Watch out
Common mistakes.
- Assuming the policy pays for the value of the information, when it pays the cost of replacing or reproducing the document.
- Relying on a general property policy, when documents may be covered only by a small sublimit.
- Keeping the only copy of key records in one place, when a backup stored elsewhere would reduce both the risk and the cost.
Questions
People also ask.
Does valuable papers insurance cover cash and securities?
Usually not, since money and securities are covered by other policies.
Is it the same as cyber insurance?
No, cyber insurance deals with data breaches and system attacks, while valuable papers insurance deals with physical loss or damage to documents.
How should a business choose the limit?
By estimating the cost of rebuilding its most important records, including staff time and outside help.
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