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Commercial Property Insurance

Commercial property insurance is designed to protect your organization’s buildings, personal property and loss of income resulting from a covered loss.  There are three different types of commercial property policies which greatly impact the broadness of your coverage: Basic Form, Broad Form and Special Form.

Additionally, you are required to insure your property to the full value.  There are two primary valuation methods used by insurers: Replacement Cost Value (RCV) and Actual Cash Value (ACV).  Note that insurers do NOT use market value.

Their concern is the cost to either replace your loss in full (RCV) or pay you on a depreciated basis (ACV).  Failure to insure to the full values can create a penalty at time loss called the Coinsurance penalty.  These items should be discussed and evaluated with a qualified agent.

Types of Coverage Forms

Basic Form

The perils covered under Basic Form are as follows:

  • Fire or Lighting
  • Explosion (no coverage for bursting pipes or rupture of pressure relief devices)
  • Smoke (sudden and accidental loss or damage – no coverage for agricultural smudging or industrial smoke)
  • Windstorm or Hail
  • Riot or Civil Commotion
  • Vehicle or Aircraft Collision
  • Vandalism and Malicious Mischief
  • Sinkhole Collapse (excludes cost of filling or collapse into man-mad underground cavities)
  • Volcanic Action (excludes removal of ash or other debris that does not cause direct damage)

Broad Form

The perils covered under Broad Form are as follows:

  • Fire or Lighting
  • Explosion (no coverage for bursting pipes or rupture of pressure relief devices)
  • Smoke (sudden and accidental loss or damage – no coverage for agricultural smudging or industrial smoke)
  • Windstorm or Hail
  • Riot or Civil Commotion
  • Vehicle or Aircraft Collision
  • Vandalism and Malicious Mischief
  • Sinkhole Collapse (excludes cost of filling or collapse into man-mad underground cavities)
  • Volcanic Action (excludes removal of ash or other debris that does not cause direct damage)
  • Basic Named Perils plus….
  • Falling Objects
  • Weight of Snow, Ice, or Sleet
  • Water Damage (from appliance leakage)
  • Building Collapse
  • Glass Breakage

Special Form

Special Form is the broadest property coverage you can buy.  It covers all those which are not otherwise excluded.  The exclusions are as follows:

  • Ordinance or Law
  • Earth Movement
  • Government Action
  • Nuclear Hazard
  • Utility Services
  • War Military
  • Rupture or Bursting of Water Pipes
  • Steam Boilers
  • Mechanical Breakdown (except, resulting damage of a covered peril)
  • Artificially generated electrical current (if resulting in fire, then damage from fire is covered)
  • Delay, loss of use, or loss of market
  • Smoke, vapor, or gas from agricultural smudging or industrials operation
  • Wear and tear (except, resulting damage is covered)
  • Rust, corrosion, fungus, decay, deterioration, hidden or latent defect or any quality in property that causes it to damage or destroy itself (except, resulting damage of a covered peril)
  • Smog (except, resulting damage of a covered peril)
  • Settling, cracking, shrinking, or expansion (except, resulting damage of a covered peril)
  • Birds, vermin, rodents, and insects (except, resulting damage of a covered peril)
  • The following causes of loss to personal property: dampness or dryness of atmosphere; changes in or extremes of temperature; and marring or scratching (except, resulting damage of a covered peril)
  • Seepage
  • Plumbing, heating, or air conditioning systems – damage from water, other liquids, powder, or molten material that leaks or flows from plumbing, heating, air conditioning, or other equipment (except fire protective systems) cause by or resulting from freezing, unless: you do your best to maintain heat in the building or structure; or you drain the equipment and shut off the supply if the heat is not maintained
  • Dishonesty
  • Fraud
  • Rain, snow ice, or sleet damage to personal property in the open
  • Pollutants (unless discharge, dispersal, seepage, migration, release, or escape results from specified cause of loss)

Commercial Property: Common Coverage Gaps

Ordinance or Law

If your building is old, then you should consider requesting the O&L Endorsement – ask for Coverage A, B and C to be fully insured.  After loss to an old building, you may be obligated to comply with various new building codes in your area.

This could be very expensive and could even require you, at times, to demolish undamaged portions, in addition to updating damaged portions (that’s where Coverages A, B and C become relevant). The ISO form includes about $10K worth of coverage for the damaged portion for O&L compliance if you select Replacement Cost Valuation – but this is a very low limit!

Vacancy Permit

If your property is vacant for more than 60 days (or anticipated to be), always inform your agent.  He/she will need to request a Vacancy Permit in order to remove many of the coverage restrictions imposed on vacant properties (i.e. exclusion for Vandalism, Theft, Water Damage, etc.)

Coinsurance

Pay close attention to the coinsurance provisions in your policy.  If you can have coinsurance waived, that is preferable, all else being relatively equal. Coinsurance clauses create exposure to significant claims penalties if you are under-insured.  Be sure you are using adequate valuations for your building, contents and business income limits.

Electronic Data Limitations

Note that ISO property forms contain very little coverage for the restoration of electronic data and none for forensic, breach notifications or any other “first party” costs common (and expensive) after a significant data loss. Cyber insurance was created to address this gap, along with many liability gaps also explored later.

Pollution

Clean up and removal of pollutants is limited to $10K and only applies if resulting from a “Covered Cause of Loss” (e.g. fire causes subsequent pollution of premises, then remediation costs would be covered up to $10K).  Your actual costs could exceed $10K, especially in larger buildings.

Mechanical Breakdown

If your building contains expensive machinery or equipment (complex phone or computer networks, generators, HVACs, boilers or pressure vessels, etc.), then you have an exposure for mechanical failure or electrical arcing and this coverage can be purchased for a very nominal cost.

Flood

If your property has high risk exposure to flooding, then you should consider purchase of a separate policy.  ISO property forms do NOT cover flood.

Earthquake

If your property is on or near a fault line, you will need to purchase an endorsement or a separate policy.  Earth movement is excluded from coverage.

Wind

If your property is near a coastal shoreline, then wind coverage may be an issue.  Beware of special deductibles or outright exclusions for wind/hail.  If you are in a “Tier 1” area, always try to negotiate a “Named Storm” deductible, rather than a “Wind/Hail” deductible, since the former is less restrictive.

Roof Limitations

In “Tier 1” coastal areas, where you are buying coverage from non-standard Insurers, watch out for certain limitations imposed on roofs older than 10-15 years old.  Often, they will endorse the policy with an “ACV clause” for any roofs of a certain age, so you may be surprised to not have very little coverage during a claim if you overlook this pitfall.

Personal Property of Others

If you take personal property of others into your care, custody or control and do not schedule it in the declarations page, then you likely do not have any coverage.  Even if you do schedule it, the coverage only applies if it stays within 100 feet of your premises.  This coverage issue applies to businesses that may accept customer property for repair, borrow equipment or tools or retailers who take items on consignment.

Utility Services – Direct Damage/Time Element

Your property policy does NOT cover your loss from utility services disruption.  Direct damage to your property can be caused by utility disruptions, but even more important is the possibility of lost revenue.  If you are a retail business, this is even more imperative.

After Hurricane Katrina, for example, many buildings with very little damage were unable to be used for business due to utility services disruption.  Sometimes you can buy this coverage for nominal additional costs.  If you are a commercial or residential landlord or own any kind of retail or distribution business, this coverage gap could be important to address.