Commercial Property Coverage
Property coverage is "first party" coverage, meaning it covers property that you own or are required to insure as part of a lease agreement. Your property coverage is limited to the amount of coverage you choose to purchase, or the amount the insurer would pay in the event of a total loss. Earthquake and Flood insurance are almost always excluded from property policies, but can often be added via an endorsement or separate policy should you request it.
Common items to look for when purchasing your property insurance are the coinsurance clause and replacement cost. The policy's coinsurance language requires the insured to purchase coverage for their property, up to some stated percentage of the property's replacement value. The lower the coinsurance clause, the better. If your policy has a 100% coinsurance clause, they you are required to be insured to 100% of your replacement value at the time of loss. This is pretty rare with commercial property, but is frequently the required amount on homeowners coverage.
For example, suppose the replacement value of your property is $400,000, but you only purchase $200,000 in coverage. Since you are only 50% insured to value, you will only receive 50% of any loss, even if it is below the policy limit. So if you had a $50,000 claim, you will receive only $25,000 (less your deductible).
The Replacement Cost clause covers your property without any deduction for depreciation. This is a common coverage that is offered by most companies. Underwriters look at specific items when underwriting and pricing a risk for property coverage
- The age and condition of the building. The newer the better.
- The type of construction of the building and the roof.
- For older buildings, improvements to electrical, plumbing, heating and cooling systems and the roof.
- If the building is sprinkler-equipped, the adequacy of the system must be documented. This is typically done by a sprinkler contractor.
- Any cooking equipment systems are reviewed for adequacy. Most systems must now be UL300 systems, a type of system for lower fat content in vegetable and cooking oil used in today's restaurants.
- Adequate space between deep-fat fryers and stove gas flames.
You should be aware of these underwriting requirements and try to make your business a "preferred account," one that is up to code, regularly maintained and highly desirable, for the best premium rates.
Replacement Cost (RCV) - replaces your damaged property with the same style and types of materials.
Actual Cash Value (ACV) - ACV is Replacement Cost valuation, less depreciation. It is the "fair-market" value of your property. Depreciation is typically calculated as 1% per year for the age of the property, up to a maximum of 50%.
Functional Value (FCV) - Replaces your damaged property with similar style and like-kind materials.
Commercial Property Policies May Include Coverage For:
Buildings: If you own your building or are responsible to insure it through written contract, like a lease, building coverage sets an amount the building is covered for and a valuation type on that amount. Additional structures at the same address or secondary locations can be added so long as the named insured on the policy is the same for all structures.
Betterments & Improvements: Just because you lease your space and are not required to insure it doesn't mean you don't need any building coverage. Any fixtures or improvements you make as a tenant (remodeling or renovations) that become a part of the building then fall under building coverage, not business personal property. So if you lease your space, dump $15,000 into new floors, booths, etc... you're improving your landlord's property, but you wouldn't be able to recoup it if you had a property claim, because it's not your building. This is a property endorsement that covers you in a situation like that. It could include hoods, fire suppression systems, walk-in coolers, bathrooms, new flooring, and often even major appliances.
Business Personal Property: Also called "Contents" coverage, this covers anything that belongs to the business in the building that is not a fixed part of the building. Things like inventory, tables and chairs, silverware, glassware, electronic equipment, etc... would need included in this limit.
Crime: Restaurants and taverns have a great deal of crime exposure due to their dealing with cash. You face robbery, both on and off premises, and dishonest employees. In pricing and selecting this risk, insurers will want to know the following:
- How much cash is on or off the premises at any one time?
- How often are bank deposits made?
- Who reconciles your bank accounts?
- Who can sign checks?
- In what type of araea is the business located?
Equipment Breakdown: Pretend it's a sweltering summer afternoon. As the temperature climbs higher and higher, more and more patrons wander into your establishment to escape the heat and have a cold drink or two. Now imagine your air conditioner breaks or your cooler goes out. Think those customers will drink tepid beer or sit in a humid bar waiting for the problem to be fixed? Probably not. While this endorsement doesn't cover machinery that is simply old and worn out (it's not a maintenance contract), it will protect you if a machine fails or malfunctions. Coverage does not apply to Business Personal Property items.
Spoilage: In the event that you have a mechanical breakdown or power failure and you lose some of your perishable stock (despite making efforts to salvage the food and drink, such as bringing in coolers and ice or moving the product to alternate locations), this endorsement would reimburse you for the lost inventory. [More info]
Sewer Back-Up: If your local municipal drainage system were to become backed up, which resulted in your plumbing not having anywhere to go but overflowing into your building, this endorsement would pick up the clean-up costs.
Pollution Clean-Up: Is you business located in or near a heavy industrial area? If you had this endorsement, any mandatory clean-up ordered by the EPA that could be proved a result of nearby industrial byproducts and waste would not come out of your pocket.
Outdoor Property: Covers property on the land you own, but not attached to or stored in the building(s) that are insured. A good example of this is an outdoor patio or beer garden and the patio furniture on them. Other examples may include signs, awnings, light posts, fences, parking lots, satellite dishes or antennas, and even trees and shrubbery.
Ordinance & Law: Covers any improvements deemed necessary by local ordinances or laws of your municipality. Whereas older buildings may have had exemptions due to "grandfather clauses", if your building is damaged the insurance company is only going to pay to replace was was destroyed. They will not pay to replace out-of-date, undamaged portions of the building that your town may require you to replace as long as you're fixing a portion of the building, even though they weren't damaged, in order to get up to code. This endorsement would provide extra money to cover those additional costs. Examples of this are handicapped ramps and bathrooms, sprinkler systems, and breaker boxes.
Debris Removal: In the event your building has to be torn down due to a substantial enough loss, your building limit only provides an amount to put up a new building. But tearing down and hauling away what remains of the damaged pre-existing structure and clearing the site can cost thousands upon thousands of dollars. This endorsement would cover the expense of removing the debris from the lot in order to rebuild.
Business Income/Extra Expense: If your business has to close down from a covered property loss, such as a fire, then you will lose income, which can be covered by your insurance program. This covers your lost net income and ongoing expenses. Coverage can be written two ways. First, you could have a limit that is subject to coinsurance. Today, many insurers write unlimited business income coverage with a time limit, typically 12 months.
Mine Subsidence: coverage for property damage caused by ground movement as a result of the collapse of an underground mine. [ Read more ]