Kentucky Insurance Adjuster Practice Exam

The purpose of the “inflation guard” in a Business Owner Policy is to prevent underinsurance. This feature automatically increases the coverage limits of certain property insurance coverages to keep pace with inflation, ensuring that the insured's property values are adequately covered over time. As inflation affects the cost to replace or repair property, the inflation guard adjusts the insured amounts accordingly, minimizing the risk of being underinsured after a loss.

This mechanism is crucial for businesses as it helps maintain sufficient coverage levels without requiring the policyholder to perform regular evaluations and adjustments of their insurance limits. If a business does not have this feature and property values increase due to inflation, the insurer may only reimburse the actual cash value of the property at the time of loss, which may be less than what it would cost to replace it. Thus, by utilizing the inflation guard, businesses protect themselves against the financial impacts that rising costs may have on their coverage.