4/A - Commercial Property Insurance Flashcards
Overview of Commercial Property Insurance
- Covers direct and indirect losses related to business property
- Does not include farms and 1-4 family dwellings
- Insures on an ACV basis
- Replacement cost is available as an Endorsement if you follow coinsurance guidelines
The Commercial Property Policy
Four sections in a standard commercial insurance policy:
- Declarations Page
- Conditions
- Coverage Forms
- Cause of Loss Forms
Contents of the Dec Page
Part 1) The Declarations Page contains:
- name and address of the insured
- property covered
- deductible
- limits
- term
- expiration date
- coverage forms
- endorsements
Commercial Policy Conditions
Part 2) Conditions Pages of a policy include:
- cancellation/non renewal
- vacancy
- changes in policy
- concealment, misrepresentation, and fraud
- control of property
- other insurance
- legal action against an insurer
- subrogation
- liberalization
- no benefit to bailee
Conditions Specific to Commercial Policies
Cancellation/Non-Renewal:
- Insurer should inform the policyholder at least 45 days before cancellation
- Penalty for not giving 45 days notice: insurer must offer 30 more days of coverage at same rates
Vacancy definition
- building is closed for 60 days
- less than 31% of the building’s available floor space is occupied for 60 days
Legal Action Against Insurer
- insured must comply with all policy obligations
- insured has 2 years from the date of loss to file a lawsuit
Liberalization
- all current insureds will benefit from increases in coverage that do not raise the premium
- applies to changes that go into effect during policy period or up to 45 days before policy start date
Commercial Property Coverage Forms
Part 3) Coverage Forms
Types of Commercial Property Coverage Forms Available:
- Building and Personal Property Coverage Form
- Business Income Coverage Form
- Contingent Business Interruption Coverage Form
- Builders Risk Coverage Form
- Condominium Coverage Form
- Leasehold Interest Coverage Form
- Legal Liability Coverage Form
- Differences in Conditions Coverage Form
- Other Coverage Forms and Popular Endorsements
Building & Personal Property Coverage Form
The basis of all Commercial Property Policies
- Coverage A-Buildings and Structures
- Coverage B-Business Personal Property
- Coverage C-Personal Property of Others
Coverage A
Buildings and Structures: Covers building and structures listed on the “Dec Page” as well as:
- Additions
- Additions under construction
- Any construction equipment within 100 ft of insured property
- Machinery & equipment inside the building
- Maintenance property
Coverage B
Business Personal Property: the property of the business that is not affixed to the structure, such as:
- business owned personal property used for business purposes
- labor, services and materials furnished on the personal property of others
- inventory or products held for sale
- leased business personal property
- property within 100 ft of the business premises
Coverage C
Personal Property of Others: applies to property owned by another party when it is in the care of the insured business
- commonly $2,500 of coverage
- only applies to the locations listed on the “Dec Page”
Exclusions
- currency, bills, accounts, evidences of debt, securities, food stamps, and bullion
- animals, unless owned by others and boarded by the poilcyholder
- automobiles held for sale
- bridges, roads, patios, walkways or other paved surfaces
- contraband or property being illegally transported or traded
- the costs associated with excavations, filling or grading
- foundations of buildings or structures, machinery or boilers if such foundations are below ground or lower than the lowest basement floor
- outdoor radio and TV antennas or masts and associated wiring
- underground pipes or drains
- fences, wiring and masts
- outdoor signs not attached to buildings
- trees, shrubs, plants
Universal Exclusions
Types of loss or damage not covered under the policy
- a loss resulting from enforcement of building ordinances which regulate construction, use or repair of property
- earthquakes or land movement
- seizure or destruction by governmental action or authority
- nuclear reaction, radiation and associated radioactive contamination hazards
- loss resulting from utility service failures
- war
- flood, or the rising of water and/or mudslides, and the backup of water through sewage pipes or drains
- damages to wiring or devices caused by artificially generated electrical current
- explosions of boilers, steamers, pipes and engines (available but requires endorsements)
Common Additional Coverages
- Debris Removal
- Pollution Clean-Up and Removal
- Preservation of Property
- Fire Department Service Charge
- Increased Construction Costs
- Electronic Data
Debris Removal
- Pays for removal of debris resulting from a covered peril
- Limit: 25% of total claim
- Additional $25,000 of coverage is available if:
- property damage and debris removal together exceed policy limit
- debris removal expense exceeds its 25% limit
Pollution Cleanup and Removal
- Pays up to $10,000 for pollution damages caused by a covered peril
- Insured must report the loss within 180 days
Preservation of Property (Removal Coverage)
- Applies when the insured removes property to protect it from a covered peril
- Property is covered for any cause of loss during removal and storage at another location
- Coverage lasts up to 30 days
Fire Department Service Charge
- Covers the cost of emergency services when insured is trying to protect covered property
- Limit applies to each premises
- No deductible
Increased Construction Costs
- Applies when the insured has to pay extra in order to conform to new building ordinances when repairing or replacing a covered loss
- Limit is the smaller of two amounts:
- $10,000
- 5% of coverage A limit
- Only applies to building insured on RC basis
Electronic Data
- Covers costs of replacing or restoring electronic data lost or damaged by a covered loss, such as a hacker planting a virus in the company’s system
- Up to $2,500 per year, no limit to the number of occurrences
- Limit does NOT apply to electronic data used to operate the building’s:
- elevator
- lighting
- heating
- ventilation
- air conditioning
- security system
Coverage Extensions
Include:
- Only for policyholders who maintain the coinsurance requirement of 80% to the value
- Not subject to policy limits
Newly Acquired Property Extension
- 30 days of coverage
- $250,000 coverage for buildings and structures
Property Off-Premises
- $10,000 for covered property that is temporarily located off the premises
- Excludes Property off-premises if it’s being sold
Personal Effects and Property of Others
- Up to $2,500 in coverage for damage or destruction of personal belongings
- Loss must occur on the insured premises
Valuable Papers and Records
- Up to $2,500 towards the recovery or replacement of valuable papers and computer records
- Does not cover money and securities
Outdoor Property
- Covers damage to television and radio antennae, detached signs, and trees, plants, or shrubs
- Limit: $1,000
- Limit for trees, plants, and shrubs: $250 per unit
- Covered perils: fire, lighting, explosion, riot, civil commotion, and damage by aircraft
Non-Owned Trailers Extension
- Up to $5,000 for any non-owned trails being used on the premises
- Only if the trailer is not attached to a vehicle
- Only if insured is contractually responsible for damages to the non-owned trailers
Conditions
Each Coverage Form has its own set of Conditions.
Business and Personal Property Form Conditions:
- abandonment
- appraisal
- duties in the event of a loss
- loss payment
- recovered property
- vacancy
- valuation
- coinsurance
- mortgagee clause
Valuation
- Based on coinsurance:
- If 80% Coinsurance requirement is met: pays RC up to $2,500
- If 80% Coinsurance requirement is not met: pays ACV
- Stock (sold but not delivered): indemnified at net selling price
- Glass (with safety glaze): valued at replacement cost
Optional Coverages
- Agreed Value Coverage
- Inflation Guard
- Replacement Cost
- Value Reporting
Agreed Value Coverage Option
Policyholder and insurer agree on a specific value for the property before the policy is written.
- Coinsurance requirements are waived.
- Often applies to rare property or high-value collector items
Inflation Guard
- Optional coverage
- Policyholder can increase the limit of insurance by a specified percentage periodically throughout the policy term
- Keeps the amount of coverage consistent with rising prices
Replacement Cost
Changes the loss settlement terms from ACV to Replacement Cost
- Requires Coinsurance minimum
- Does not apply to property of others on the insured premises
- When covered damages occur:
- Pays ACV up front
- Pays the remaining difference between ACV and RC once property has been repaired or replaced
Value Reporting
For businesses whose property values fluctuate or who buy and set multiple properties throughout the year
- Insured purchases a limit of insurance to cover the highest property value expected that year
- Every month, insured submits a “value report” of the actual property value
- If the insured fails to submit a report, the insurer uses the numbers from the previous month
- There is a percentage penalty for under-reporting the value of a property
Other Coverage Forms in Commercial Property Policies
- Business Income Coverage Form
- Contingent Business Interruption Coverage Form
- Builders Risk Coverage Form
- Condominium Coverage Form
- Leasehold Interest Coverage Form
- Legal Liability Coverage Form
- Differences in Conditions Coverage Form
- Other Coverage Forms and Popular Endorsements
Business Income Coverage Form
a.k.a. Business Interruption Form: provides protection for loss of income due to a covered loss
Business Income Coverage: Period of Restoration
Time frame within which Business Income Coverage indemnifies the policyholder for loss of income
- Begins exactly 72 hours after damage occurs
- Ends the date that either the damaged property is restored or that business resumes at a new location
What does it pay for?
- The loss of net income on a profit and loss statement
- Any continuing operating expenses incurred during the Period of Restoration:
- rent
- salaries
- payments to the bank
- utilities
- taxes
- administrative costs
Profit & Loss
Profit and Loss Statement - determines indemnification for Net Income
Terms:
- Total Revenue: sales & services provided
- Cost of Goods Sold: materials and labor associated directly with sales and services
- Operating Expenses: general and administrative
Profit & Loss Statement
Equations:
- Total Revenues - Cost of Goods Sold = Gross Income
- Gross Income - Operating Expenses = Net Income from Operations
Business Income Coverage Exclusion
- Business Income Coverage excludes Cost of Goods Sold
- This means any expenses that go into making or selling a product:
- inventory
- labor
- material
- supervision
Extra Expense Coverage
Business Income Coverage with Extra Expense:
covers the costs of getting a business running again after a covered loss
Covered extra expenses must be:
- Necessary
- Incurred during the period of restoration
- A type of expense that would not have been incurred had there been no loss to the covered property
Extra Expense: 2 Categories
“True extra expenses”: necessary to avoid or minimize the halt in business operations
These can include:
- Subcontracting work
- Relocation expenses
- Rental of generators to run power at a damaged property
- Leasing and rentals to continue a disrupted business
“Expediting expenses”: the cost of repairing or replacing property in order to get the business going again
Note: expediting expenses are only covered to the extent that they reduce the amount of income lost
Extra Expense Coverage, Locations
Extra Expense Coverage applies at either:
- The damaged property
Example: the factory is partially damaged and needs extra machinery to keep it running
- A new property until damaged property is repaired
Example: the factory is nearly destroyed, so a new building will be leased for operations
Period of Restoration
Extra Expense - Period of Restoration:
- Begins immediately after damage occurs (no 72 hour waiting period before coverage begins)
- Ends when damaged property is repaired or replaced
The Period of Restoration: never subject to the policy period
Business Income Coverage & Extra Expense Coverage
- Provides coverage for:
- Loss of business income
- Costs associated with getting the business running again - Business Income Coverage without Extra Expenses - provides coverage for:
- Loss of business income
- “Expenses to reduce loss” - but only to the extent that the extra expenses reduce the original loss
Extra Expense Coverage Only
Extra Expense Coverage without Business Income:
for companies that must continue business regardless of loss of income, such as:
- banks
- hospitals
- newspapers
- utilities
The Period of Restoration: no 72 hour waiting period, coverage begins immediately after damage, and continues until business is back up and running
“Limit of Loss Payment”: limits the total amount of recovery available to the insured based on 30-day increments
Limits of Loss Payment
- Expressed in percentages
- Stated on the dec page
- Based on the length of the Period of Restoration (in 30-day increments)
Order of Civil Authority
- Provides coverage when a civil authority restricts a business from being occupied due to a pending covered loss
- Coverage lasts for up to 4 consecutive weeks
- 72-hour window before benefits apply
Extended Business Income & Newly Acquired Properties
Extended Business Income - Extends coverage for up to 60 days if the business is still losing income after the Period of Restoration expires.
Coinsurance Method
Businesses have the option of establishing a level of coinsurance at 50%, 60%, 70%, 80%, 90%, 100%, or even 125%.
Maximum Period of Indemnity
Takes away coinsurance requirement and the Period of Restoration last up to 120 days after the 72-hr window. If the policy maxes out, coverage will end before 120 days.
Monthly Limit of Indemnity
Removes coinsurance requirement, but the policyholder parcels his stated limit of into a fractional maximum available each month (i.e. 1/3, 1/4, or 1/6)
Agreed Value
Waives the coinsurance requirement, Company submits two reports:
- One report provides financial data from the previous year.
- Another report provides financial data for the upcoming year.
All losses are fully indemnified (minus deductible).
Contingent Business Interruption Form
Covers a business for loss of income caused by damages to a key supplier or key customer.
- Indemnifies the dependent company, not the key supplier
- Has nothing to do with the supplier’s insurance policy
Builders Risk Coverage Form
Provides protection for buildings, materials, and equipment under construction or renovation.
- 100% Coinsurance is required on the building
Not every form will list the same criteria for policy termination, but here are some you will typically see:
- The policy expires
- The building is accepted by the purchaser
- The policyholder no longer has an insurable interest in the property
- 90 days after construction is completed
- 60 days after the building becomes occupied
- The property is abandoned with no intention to complete
- The building is put into its intended use
Building Risk Extensions
Can include:
- Debris removal
- Fire department service charges
- Pollutant cleanup and removal
- Preservation of property
- Scaffolding, construction forms, and temporary structures (only while property is on the insured premises)
- Property at other locations ($10,000 limit)
- Property in transit ($25,000 limit)
- Sewage Backup ($5,000)
Condominium Coverage Form
Provides insurance coverage for:
- Condo buildings and complexes
- The common area of the condo building
- Infrastructure essential to function of the condo as a whole (piping, ductwork, electrical and wiring units, etc)
- Business personal property used by the condo as a whole
It will NOT cover:
- Upgrades within individual condo units
- Business or personal property of individual commercial unit owners
Leasehold Interest Coverage Form
“Favorable Lease”: one that is acquired below market value
Leasehold Interest Coverage Form: pays for the difference in cost between the old rental and the new
Takes into account:
- The policyholder’s rent before the damage
- The amount of time that was left on the policyholder’s lease when the damage occurred
- The cost to rent a new place that is the same size and quality as the old
Legal Liability Coverage Form
Provides coverage for:
- Property damage to the personal property of others caused by negligence
- Expenses for legal defense when claims are brought against the business
- Theft of another’s personal property
Bailee: businesses that hold the property of others for the purpose of storage, repair, or servicing, such as:
- Dry cleaners
- Computer repair shops
- Businesses that refurbish furniture
No deductible
No coinsurance
Differences in Conditions Form
(“all-risks”): designed to bridge coverage gaps left by typical policies
- Only covers perils that could lead to catastrophic losses
- Excludes risks that are already covered under a different policy
- Does not require Coinsurance
- Usually requires a very large Deductible
- Can be purchased as a separate policy or added as an endorsement to an existing policy
Earthquake and Volcanic Eruption Coverage Form
Protection against damages caused by earth movements and volcanic eruption.
- Percentage deductible at limit of liability
- “Single occurrence” = damages that occur within a single 168-hr period (1 week)
- Excludes: tidal waves and tsunamis
- May be used to purchase insurance for Earthquake-Sprinkler Leakage Only
Ordinance or Law Endorsement
Indemnifies a business for the additional costs associated with repairing or rebuilding a facility in order to comply with current building codes.
Peak Season Endorsement
Temporarily increases coverage limits at specified intervals over the course of the year in order to account for increased inventories
Protective Safeguard
Offers lower premiums if the policyholder uses certain safety precautions, such as:
- Automatic sprinkler systems
- Fire alarms
- Security services or watch guards
- Burglar alarms
- Video surveillance
- Protective storage of valuable papers and records
Coverage suspended if the insured does not notify the insurer of known impairments or problems with the safety systems.
Spoilage Endorsement
Adds perishable stock to covered property, so if it spoils, the insurer will purchase the stock based on the following formula:
Indemnification = Market selling price - Any discounts the insured would expect
Note: this is not Income Loss coverage; only include the amount spent on the merchandise, not the amount the insured expected to make by selling it
Scheduled and Unscheduled Building Property Tenant’s Policy
Scheduled Building Property Tenant’s Policy: lets a tenant add coverage for specifically scheduled items of landlord-owned building property
Unscheduled Building Property Tenant’s Policy: lets a tenant add blanket coverage for certain landlord-owned building property (not including building glass)
Ordinance or Law Coverage for Tenant’s Interest in Improvements and Betterments
Provides Ordinance and Law coverage for any additions a tenant has made to a leased commercial building
- Coverage A: covers loss to undamaged portions of the tenant’s additions
- Coverage B: covers demolition costs, and
- Coverage C: covers the increased cost of construction
Causes of Loss Forms
- Required as an attachment to the Coverage Form
- States exactly what perils are insured under the coverage, and which are excluded
Three Categories of Causes of Loss Forms:
- Basic Form
- Broad Form
- Special Form
Commercial Property Universal Exclusions
- Loss resulting from enforcement of building ordinances, which regulate construction, use, or repair of property
- Earthquakes or land movement
- Seizure or destruction by government action or authority
- Nuclear reaction, radiation, and associated radioactive contamination hazards
- Loss resulting from utility service failures
- War
- Flood, or the rising of water and/or mudslides, and the backup of water through sewage pipes or drains
- Damages to wiring or devices caused by artificially generated electrical current
- Explosion of boilers, steamers, pipes, and engines (available but requires endorsements)
Basic Form
Named peril policy that covers:
- fire
- lightning
- explosions, not including ruptures caused by high pressure devices or boilers
- windstorm and hail damage
- smoke damage
- aircraft or vehicles not owned by the insured
- riot and civil commotion, including damage caused by striking employees
- vandalism and malicious mischief (excluding theft and glass breakage)
- sprinkler leakage
- volcanic events and shock waves
- sinkhole collapse
Broad Form
Named peril policy covering all the perils listed under the Basic Form with the addition of the following:
- Breakage of glass
- Falling objects
- Weight of ice, snow and sleet
- Water damage from sources other than sprinkler leakage, such as damage resulting from a water or steam system or appliance
- Additional coverage for collapse, if caused by:
- any covered perils listed in the policy
- hidden decay, hidden insect or vermin damage
- weight of people, personal property, or rain collecting on a rooftop
- use of defective materials or construction methods, but only if occurring during a period of construction or remodeling
Special Form
Open peril policy that covers all known perils except for those listed in the exclusions sections.
Common exclusions to the Special Form:
- Wear and tear, rust and decay
- Smog damage or damage caused by the release of pollutants
- Damage, other than collapse, caused by vermin infestation
- Settling or cracking buildings
- Explosion of steam boilers
- Damages that result from off-premises utility outage
- Dishonesty on the part of the insured or employees
- Losses to property left in the open rain, snow or ice conditions
- Governmental intervention
- Errors or faults in planning, zoning, design, workmanship or materials
- Voluntary surrender of property
- Missing property
