Commercial Property Insurance

1. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

2. Commercial Property Insurance Chapter 11 Risk 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

3. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

4. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

5. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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 form General Liability Form  Crime coverage • Business auto form  Inland marine form • Boiler and machinery form • For smaller risks (like mom and pop grocery) • Businessowners form

6. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

7. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

8. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

9. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

10. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

11. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

12. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

13. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

14. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

15. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

16. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

17. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

18. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

19. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

20. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

21. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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

22. Commercial Property Insurance Chapter 11 Risk Management for Financial Planners • 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