Whether you are an insurance agent just starting or a seasoned pro, it is crucial to have a solid grasp of commercial property insurance if your book of business includes any businesses. With commercial policies being more complex and business owners having unique risks to protect, agents who understand commercial coverages will be better positioned to advise their clients properly. In this comprehensive guide, we will break down the key components of commercial property insurance that every agent needs to know.

Commercial Property Insurance: What Agents Need to Know?

What is Commercial Property Insurance?

Commercial property insurance provides financial protection for a business in the event their commercial space or any contents are damaged or destroyed by a covered loss like a fire, severe storm, or vandalism. It covers the physical building, whether owned or leased. It also covers belongings inside the building like furniture, inventory, equipment, and more.

Common coverages included in a commercial property policy are:

• Building coverage: Covers structural damage to the physical office space, retail store, or other commercial property.
• Business personal property: Protects items like furniture, inventory, supplies, machinery, and equipment.
• Loss of income: Provides reimbursement for lost income if the business must suspend operations due to damage.
• Equipment breakdown: Fixes or replaces equipment or machinery that experiences mechanical or electrical failure.

Additional endorsements can be added to expand or customize the policy. Common additions are flood insurance, earthquake insurance, or higher liability limits.

What is the Commercial Property Coverage Part?

The commercial property coverage part of an insurance policy outlines the specifics of what is covered and the limits of protection. This section will provide details on covered perils, exclusions, deductibles, and loss settlement provisions.

The commercial property coverage form is typically written on an “all risks” basis, meaning it covers any risk of physical loss except for those specifically excluded in the policy. Common exclusions are floods, earthquakes, war, and nuclear hazards.

Agents should review the commercial property coverage part closely with clients to ensure there are no unnecessary coverage gaps that could leave them exposed. Being well-versed in this section is key to properly advising businesses.

What is MOP in Insurance?

MOP stands for “maximum occurrence/aggregated policy limit." This is the maximum amount an insurance company will pay out for any single covered loss event. For commercial property insurance, this loss limit caps the payout for damages to the building and business personal property.

The MOP loss limit should be adequate to completely rebuild, repair, or replace the building and contents in the event of a covered total loss. Agents work with clients to select an appropriate MOP limit based on the property value and risk profile. Too low of a limit could leave the client underinsured following a major loss.

Which Coverage May Not be Added to the Commercial Package Policy?

The commercial package policy (CPP) combines general liability, commercial property, business income, and other common coverages into one bundled policy for convenience and potential cost savings. However, one coverage that may not be added to a CPP is workers’ compensation insurance.

Workers’ compensation must be purchased as a standalone policy per individual state regulations. All other commercial coverages can typically be packaged together, but workers’ comp is the exception due to legal requirements governing this mandatory employee coverage.

What is the Loss Limit for Property Insurance?

The loss limit outlines the maximum payout an insurer will provide for a single loss event impacting the insured commercial property. This limit is stated in the commercial property declarations page.

For example, if a policy has a maximum occurrence limit of $500,000 and an office building suffers fire damage estimated at $400,000, the insurance company will pay up to the $400,000 loss but no more than the $500,000 loss limit.

Loss limits vary based on the property value and other factors like location, risk level, and the client’s desired level of protection. Agents work with clients to determine appropriate loss limits when structuring the commercial property policy.

How Do You Calculate Insurance Loss?

There are two main methods for calculating covered losses under a commercial property policy:

Actual Cash Value: This is the depreciated value of the damaged property. The payout is calculated based on the current replacement cost minus depreciation for age and usage.

Example: A destroyed office printer originally cost $3,000. It has been used for 5 years with a useful life of 10 years. The payout using ACV would be:

Replacement value: $3,000 Depreciation (50% for 5 years’ use): $1,500 ACV payout: $1,500

Replacement Cost Value: This method pays the amount needed to replace at today's prices without deducting for depreciation. However, the policy may only pay ACV until repairs are completed.

Example: Using the same printer example, the RCV payout would be the full $3,000 replacement cost with no depreciation deduction.

How is the Loss Limit Calculated?

Several factors determine the maximum loss limit on a commercial property policy:

• Building reconstruction cost: The limit must cover rebuilding structural damage based on today's construction prices which tend to inflate over time.
• Business personal property value: The total value of business contents like furniture, inventory, machinery, and equipment dictates the contents loss limit.
• Business interruption costs: The limit can incorporate projected income losses and expenses if unable to operate for a period.
• Insurance-to-value: The desired percentage of replacement cost covered, often 80-100%. Higher percentages justify higher limits.
• Deductibles: Higher deductibles allow lower limits to save on premiums.

Agents work with underwriters to calculate appropriate loss limits that adequately protect the client without overpaying for unnecessary limits.

What is an example of a Loss Limit?

Here is an example of how a loss limit works:

ABC Corp has a commercial property policy with a maximum occurrence limit of $1 million covering their office building worth $2 million. Their policy has a $5,000 deductible.

A fire destroys half the office resulting in $800,000 in rebuilding costs and $100,000 in damaged office contents.

The policy will pay:

• $395,000 for structural damage (after the $5,000 deductible)
• $100,000 for destroyed contents

Total payout = $495,000 of the $1 million loss limit.

What is the Maximum Loss Limit?

Commercial property policies typically state a maximum or “per occurrence" limit. This caps the payout for any single loss event no matter how devastating. Even if rebuilding costs far exceed the limit due to a total loss, the insurer will not pay more than this maximum.

For a business with a single location, it is recommended the max loss limit matches the insured value. For a business with multiple locations, blanket limits covering all properties are common. In this case, limits equal to the largest property value location are typical.

The maximum loss limit for commercial property insurance generally ranges from several hundred thousand for small retail shops up to $500 million or more for large corporations.

What is the Monthly Loss Limit?

A monthly loss limit restricts the amount the insurer will pay per month following a loss event that results in a business income claim. This applies when the policy's loss of income coverage activates after a property loss that disrupts operations.

The monthly loss limit paces payouts for ongoing income losses over time as the business works to reopen. Rather than one lump sum payment, the insurer pays a set maximum monthly until the business resumes normal operations.

Typical monthly loss limits are between 1/3 and 1/6 of the total annual business income limit. So for example, a policy with a $600,000 annual income loss limit may have a $100,000 monthly loss limit.

What is the Daily Loss Limit?

Some commercial property policies have a specified daily loss limit which caps the dollar amount payable per day for business income losses stemming from a covered property loss.

This functions similarly to a monthly loss limit but spaces payments based on daily losses rather than monthly. This creates a payment schedule over time rather than one lump sum payment.

A policy with a $100,000 monthly loss limit could instead have a daily limit of around $3,000 ($100,000 per month / 30 days).

What is a Monthly Limit?

A monthly limit restricts how much the insurance company will pay per month for an ongoing claim, most commonly business interruption losses. This helps avoid paying the full policy limit in one lump sum right after a claim is filed.

For example, say a restaurant has $300,000 in annual business income coverage with a monthly limit of $50,000. If a fire shuts them down indefinitely, the insurer will pay no more than $50,000 for each month the restaurant can't operate rather than the full $300,000 immediately.

Monthly limits space out payments and are also referred to as periodic payment limits. They require the insured to submit ongoing evidence of continuing income losses.

What is the Net Loss Limit?

The net loss limit reduces the amount payable for a business income loss claim by any continuing income the business still generates or any expenses eliminated. This is meant to arrive at the true "net" loss amount after accounting for offsetting revenue or savings.

For example, say a retailer has a $60,000 monthly limit for income losses but can still generate 25% of normal sales through online orders during closure. The net loss limit would be $60,000 minus ongoing online sales paid out monthly.

Rather than the full limit, the net loss provision ensures the insurer only pays the net loss after reductions. It prevents overpayment beyond the actual sustained loss.

How Do You Calculate Total Revenue?

Total revenue is calculated by adding up all sources of income a business generates in a specific period. The main components are:

• Sales revenue - All sales of products and services
• Membership/subscription revenue - Ongoing subscriptions like SaaS companies
• Advertising revenue - Money generated from any advertising
• Rental income - Any rental of space, equipment, etc
• Investment & interest income - Revenue from investments
• Government subsidies or grants

The period for measurement is typically annual so all revenue streams over a calendar year would get totaled to determine annual total revenue. Quarterly periods are also common.

How Do You Find the Revenue?

Businesses determine their total revenue by looking at all accounting records and financial statements. The main sources for finding revenue numbers are:

• Income statement - Reports total revenue near the top, which may be called "total income" or "total sales."
• Cash flow statement - The top section lists sources of cash inflows including all revenues.
• General ledger - Contains line-by-line entries of all revenues that can be totaled.
• Invoices and sales records - Transaction-level records summing to total revenue.
• Point-of-sale or billing system reports - Sales reports from POS/billing software.
• Bank deposits - Sums deposits which include revenues.

Audited financial statements prepared by an accountant are the most accurate source for determining total annual revenues. However unaudited reports can also serve to calculate revenue.

What is Revenue Loss?

Revenue loss refers to the decline in income a business suffers after a covered event like a natural disaster, fire, or theft resulting in suspended operations. The financial harm from being unable to generate sales or collect rent/fees equates to lost revenue.

To recoup revenue losses from property damage, commercial policies can include business interruption coverage and loss of income coverage (aka business income coverage).

These coverages compensate the business for net income lost during the restoration period relative to financials before the loss. Calculating the revenue loss and documenting continuing expenses proves the loss for claims.

This comprehensive guide provided commercial insurance agents with detailed knowledge regarding commercial property insurance policies. We covered what coverages they include, how loss limits work, and key considerations when advising business clients on structuring adequate protection. Understanding components like MOP, loss limits, net loss provisions, and business income protection is crucial for agents selling and servicing these complex policies. Use this content as a reference to gain confidence in discussing commercial property risks and insurance with your clients.