commercial property insurance

11 - 1Copyright 2008, The National Underwriter Company

Commercial Property Insurance

What is it? Types of policy forms that business or not-for-profit

organizations use Most common forms cover:

Buildings Business income Personal property used in Crime exposures

the business Flood Boiler and machinery Condominium associations

equipment Building under construction

Inland Marine Insurance Contractors’ heavy equipment or goods, while being transported

Chapter 11Risk Management for Financial Planners


Business Uses Repair or replace damaged property

Actual cash value Replacement cost less depreciation

First property insurance Pays benefit to owner whose property was destroyed




Advantages Peace of mind Loss control services that decrease chance of loss Standardized coverage forms Opportunity to pay small premiums for large possible

recoveries Opportunity to take advantage of the greater financial

resources of the insurer Ability to eliminate potential loss of revenue Eliminating a reduction in property value because of

unrepaired damage Regulated by the state departments of insurance




Disadvantages Opportunity cost associated with premium dollars Desired coverage may not be available Difficult to identify exposures Difficult to establish the appropriate amount of coverage Loss may exceed amount of insurance in place Insurer may become insolvent and unable to pay claims Loss may be denied because of policy exclusions Policy may be cancelled or nonrenewed for a number of

reasons




Design features Building and personal property coverage

ISO – Insurance Services Office & AAIS – America Association of Insurance Services

Provide forms Collect information on claims

Covers building and contents For larger commercial risks, these forms may be combined with:

CGL – Commercial Employers liability formGeneral Liability Form Crime coverage

Business auto form Inland marine form Boiler and machinery form

For smaller risks (like mom and pop grocery) Businessowners form




Methods of insuring commercial property Specific Insurance

Assign separate limit to each building

Blanket insurance One limit for building and contents Advantage—no per building limit




Policy structure Coverage form

What is covered

Cause of loss form Lists the perils

Conditions form Information on the right to cancel, who pays the premium, and

what happens if the named insured dies




What’s covered Buildings

Building or structures described in the declarations page Completed additions; those under construction; fixtures Permanently installed machinery and equipment Personal property used to service /maintain the building

Refrigerators, stoves, floor coverings, fire extinguishing equipment

Building personal property Furniture, fixtures, machinery, leased property, other property

used in the business Fixtures—property that may be removed by a tenant Merchandise held in storage for sale Raw materials




What’s not covered Autos or vehicles Land and contraband Bills and currency Bridges, roads, and other paved surfaces Underground pipes and foundations below the

basement floor




Additional coverages Expense to remove debris of damaged property Fire department service charge Limited expense to clean pollutants from land or water

at premises Additional costs to repair or replace a damaged building

because of an ordinance or law Limited coverage to restore lost or damaged electronic

data




Coverage extensions Provide additional amounts of coverage

Coinsurance percentage must be at least 80%

Coinsurance – purchasing enough insurance to match the value of the property

Value reporting Used with business personal property Limit of insurance set high enough to cover maximum value of

property on hand during the policy period Particularly useful when amounts of merchandise or product on

hand fluctuate




How losses are settled Limit of insurance

Commercial property policy will pay up to the limit of insurance shown on the declarations page for any one occurrence

Occurrence —event that triggers the coverage fire, wind storm etc)

Deductibles Amount of loss the insured agrees to assume Dollar amount or percentage Insured may select different deductibles for difference

coverages

Valuation How properties are valued at the time of loss




How losses are settled (cont’d) Valuation (cont’d)

Valuation systems for commercial properties Replacement cost Agreed value Actual cash value

Perils insured against Cause of loss form must be attached to business and personal

property forms Lists the perils insured against Direct physical loss




How losses are settled (cont’d) Perils insured against (cont’d)

Consequential losses Losses that may result from a property loss Example—loss of income

Causes of loss forms Basic Form—11 cause of losses

Fire Riot or civil commotion

Lightening Vandalism Explosion Leakage Windstorm and hail Sinkhole collapse Smoke Volcanic action Aircraft or vehicles




How losses are settled (cont’d) Perils insured against (cont’d)

Causes of loss forms (cont’d) Broad Form—14 cause of losses

11 from the basic form plus Falling objects Weight of ice, sleet, and snow Water damage from a plumbing device

Special form Covers any loss that is not specifically excluded




How losses are settled (cont’d) Coverage limitations and exclusions

Ordinance or law Precludes coverage for increased costs incurred to comply with

any ordinance or law when damaged property is being repaired or rebuilt

Earth movement Landslide, mine subsidence, earth shifting

Government actions Seizure or destruction of property by order of a government

authority

Nuclear hazard Utility services




How losses are settled (cont’d) Coverage limitations and exclusions (cont’d)

War and military action Water Damage

Doctrine of concurrent causation If any covered cause of loss contributes to an otherwise

excluded loss, the entire loss must be covered

Other exclusions Artificially generated electric current Explosion of steam boilers, pipes, or engines Mechanical breakdown Neglect




Business Income Coverage Coverage for the net profit or loss before income taxes

that would have been earned had there been no loss Loss of income must be caused by a covered cause of

loss Civil Authority

Access to property denied by civil authority

Alterations and new buildings Extended business income Interruption of computer operations




Business Income Coverage (cont’d) Newly acquired locations Expense to reduce loss Time deductible will apply

Coverage will not begin until 72 hours after the time of the direct physical loss

Boiler and machinery Coverages for some exposures (e.g., furnaces, air

conditioners, computers) for business not engaged in manufacturing is limited under the building and personal property forms—so special coverage needed




Builders risk Coverage to protect not only building , but also the

materials and supplies used in construction Standard commercial property form

For smaller projects Added as an endorsement

Condominium Association Condominium form—for property contained in the

individual units Appliances Improvements Alterations




Flood Insurance Available directly from the government or private

insurers who participate in the “write your own” program Types of forms

Dwelling form General property form Residential condominium building association policy

Condo’s with 75% of the floor area occupied

Forms cover losses caused by flood Consequential losses are not covered

Federal flood coverage is not unlimited Maximum per building and contents apply




Inland Marine Provides coverage for property in transit Loss can be based on actual cash value, replacement

cost basis, invoice basis Business owners

Smaller business where commercial property form is too expensive

Eligibility requirements include Cap on annual gross sales limit on the total floor space

Examples Apartment and office buildings, small contractors, restaurants



commercial property insurance

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