Commercial property insurance is critical coverage for businesses to protect their physical assets and locations. For insurance agents, having a deep understanding of commercial property policies, coverages, and claims processes is essential. This comprehensive guide will provide agents with key details on the commercial property coverage form, limits, exclusions, valuation methods, and more core policy components. Read on for an in-depth overview of commercial property insurance tailored specifically for insurance professionals.
Commercial Property Insurance: What Agents Need to Know
What is the Commercial Property Coverage Part?
The commercial property coverage part, also called the business owner coverage form, covers physical damage to a business's buildings, contents, and loss of income from damage that halts operations. It protects against common risks like fire, theft, vandalism, windstorms, and more causes of loss. Limits, deductibles, exclusions, and endorsements can customize the policy.
Standard coverages include:
- Building coverage: Covers structural damage to a workplace
- Business personal property: Protects furnishings, equipment, inventory and mobile equipment
- Business income/extra expense: Covers income lost and extra costs incurred when the business is suspended due to covered damage
- Additional coverages like debris removal, equipment breakdown, and off-premises utility interruption
Which Coverage May Not be Added to the Commercial Package Policy?
One coverage that cannot be included in a commercial package policy is flood insurance. Due to the commonality and severity of flood losses, flood coverage must be purchased as a separate policy either through the NFIP or a private flood insurer. All other standard property coverages can be components of a business owner's policy.
What is the Loss Limit for Property Insurance?
Property insurance policies have a loss limit, which is the maximum payout for a single occurrence. For commercial policies, coverage limits are based on the insurable value of the property. Replacement cost and actual cash value are two common valuation methods used. Replacement cost pays the cost to replace damaged property without deducting for depreciation. Actual cash value accounts for depreciation. Higher limits equal greater protection.
What is the Margin Clause in Property Insurance?
The margin clause in property insurance refers to a provision that requires insured businesses to carry a certain level of insurance relative to property value. A common margin clause states that the limit must be within a set percentage (i.e. 15%) of the property's value. This ensures adequate coverage. Violating the margin clause can result in a coinsurance penalty if a loss occurs.
What is a 110% Margin Clause?
A 110% margin clause requires the insured to maintain coverage equal to at least 110% of the property's value. This provides a buffer above the standard 100% coinsurance requirement. If the limit falls below 110%, a coinsurance penalty applies. This gives incentive to insure up to full rebuilding cost.
What is the 110% MAP Average Clause?
MAP stands for "monthly aggregate policy." The 110% MAP average clause requires that the total value reported to the insurer over the last 12 months stays within 110% of the coverage limit. This allows flexibility for inventory fluctuations while still mandating adequate insurance. Falling outside 110% triggers coinsurance penalties.
How is the Insurance Average Calculated?
The insurance average, also called coinsurance, is calculated by dividing the coverage limit by the total insurable value. For example, $500,000 coverage on a $1 million building is 50% insurance to value. If underinsured, the policyholder receives a reduced claim payment per the coinsurance formula.
What is the 85% Average Clause?
An 85% average clause allows the coverage limit to fall to 85% of the property's value before invoking coinsurance penalties. This gives some flexibility versus a standard 100% clause. However, it still incentivizes adequate limits to avoid a reduced payout after a loss.
What is the Lloyd's Average Clause?
This clause bases coinsurance on the total reported values across all the insured's policies with underwriters at Lloyd's of London, rather than each policy's limit individually. This gives protection if shifting values cause one policy to fall below margin requirements.
What are the 5 Principles of Insurance?
The five core principles of insurance are:
- Utmost good faith: All parties are obligated to act honestly and ethically.
- Insurable interest: The policyholder must have an interest in the people or property covered.
- Indemnity: Restores the insured after a loss back to pre-loss condition, no better or worse.
- Subrogation: The insurer takes legal action to recover losses paid if a third party is liable.
- Contribution: Multiple policies contributing to the same loss will each pay a pro-rata share.
What is the Proximate Cause of Insurance?
Proximate cause is the primary cause that sets in motion the chain of events leading to a loss. Even if subsequent incidents occur, the proximate cause is the key factor in determining coverage. The proximate cause must be a covered peril for the loss to be paid.
What is a Subrogation Clause?
The subrogation clause gives the insurer the right to legally pursue third parties liable for a loss for repayment. For example, if faulty wiring causes a fire, the insurer can take action against the electrician via subrogation to recover what they paid their policyholder for damage.
Understanding all aspects of commercial property insurance is critical for insurance professionals guiding business clients to the right coverage. Key areas like coverages provided, valuation methods, coinsurance, limits, and causes of loss directly impact the protection received. Agents should stay up-to-date on emerging risks like cyber and supply chain exposures as well. With a great foundation of property insurance expertise, agents can build tailored solutions to fit each business's unique risks and needs.
