Integrating Insurance Policy Retentions into Asset Based Lending Borrowing Base Formulas
Asset based lenders offset insurance deductibles by applying dollar-for-dollar borrowing base reserves or reducing advance rates against eligible collateral.
Co-Insurance Clause
Meaning
Property insurance requirements dictate that a policyholder must insure their manufacturing facility for a specified percentage of its total replacement value to receive full payment for a loss. Inclusion of a co-insurance clause prevents companies from underinsuring their plants to save on monthly premium costs. It establishes a proportional penalty if the chosen coverage limit falls below the agreed percentage of the actual facility value.
Replacement Appraisal
Professional appraisers must determine the replacement cost of the factory machinery and building structure at regular intervals. This valuation determines the adequacy of the policy limit. If the cost of rebuild is higher than expected, the co-insurance clause applies.
Payout Proportion
In the event of partial damage from a fire or equipment failure, the payout is calculated based on the ratio of actual insurance carried to the required amount. For example, if a manufacturer carries four hundred thousand dollars in coverage when the policy requires eight hundred thousand, the insurer pays only half of any covered loss. The company must then cover the remaining half out of pocket, which can drain cash meant for scaling up the new assembly lines.
Premium Exposure
Relying on old machinery valuations when transitioning a pilot line to full production often causes significant underinsurance. New equipment increases the total facility value. A failure to update the policy limits can leave the company exposed to huge recovery costs.