Commercial property coverage is any type of insurance that indemnifies an insured who suffers a financial loss because property has been damaged or destroyed. Property is considered to be any item that has a value. Property can be classified as real property or personal property. Real property is land and the attachments to the land, such as buildings. Personal Property is all property that is not real property. The Building and Personal Property coverage form is the form used to insure almost all types of commercial property. The insuring agreement in the Building and Personal Property coverage form promises to pay for direct physical loss or damage to covered property at the premises described in the policy when caused by or resulting from a covered cause of loss. The following is a brief outline of coverages and how they are used within the Commercial Building And Personal Property coverage form.
Buildings and Business Personal Property
Coverage for the building includes the building and structures, completed additions to covered buildings, outdoor fixtures, permanently installed fixtures, machinery and equipment. The building material used to maintain and service the insured’s premises is also insured. Business Personal Property owned by the insured and used in the insured’s business is covered for direct loss or damage. The coverage includes furniture and fixtures, stock, and several other similar business property items when not specifically excluded from coverage. The policy is also designed to protect the insured against loss or damage to the personal property of others while in the insured’s care, custody or control.
Coverage Extensions and Additional Coverages
In addition to the limits stated in the Building and Personal Property coverage form, the policy has a coverage extensions section and an additional coverages section. The coverage extensions section provides limited coverage for newly acquired or constructed property, property of others, certain outdoor property, and the cost to research and reconstruct information on destroyed records. When coverage is placed on the all risk form, two additional extensions are added for property in transit and coverage for certain repair costs related to damage caused by water. The two additional extensions are covered by certain perils only. The additional coverage section provides coverage for indirect losses that result from a direct loss. The coverage applies to removal of debris, preservation of property, fire department service charges and pollutant cleanup and removal. The coverage extensions and the additional coverages have limitations and are subject to certain conditions.
Replacement Cost and Actual Cash Value
Property can be valued in several different ways. Insurance companies commonly use two approaches to determine value, which also determines how a loss will be paid; the replacement cost method and the actual cash value method. Insurers consider replacement cost of a property item to be the cost to replace it with new property of like kind. Actual cash value is replacement cost, minus the accumulated depreciation for age and condition.
When the agreed value option is used the coinsurance requirement is removed and the insurer agrees to cover loses for it’s agreed value. As an example, the insured has property insured for $100,000 and the agreed value is also $100,000, if a loss occurs, any loss up to $100,000 is covered at 100% When this option is used the insured and the insurance company agree on the value of the property before the policy is issued. This option is usually assigned to one-of-a-kind property.
Business interruption insurance
When a business is damaged by weather, vandalism or another cause, the consequences can be numerous: in addition to costly repairs, sometimes the business can’t continue, at least temporarily. A typical property damage policy will cover the cost to repair or replace buildings and equipment, but it will not cover the other financial effects the business is likely to experience during its downtime. Revenue may come to a halt, but the expenses continue – taxes, payroll, loan payments, etc. In addition, the company may face extra expenses in a crisis, such as employee overtime or rent on a temporary location. Finally, businesses confronting temporary shutdowns are faced with the prospect that clients and customers may establish relationships with competitors. For this, many business owners buy business interruption insurance, also called time element or business continuity coverage.
There are three basic elements of business interruption insurance:
- Business income
- Rental value
- Extra expense
Business income is defined as net income (profit or loss) the owner would have earned if normal operations had continued. The insurance company will determine this based on past financial records.
Example: A café has been destroyed due to a tornado. The business owner can re-open the café temporarily in another building three weeks after the storm and resume business there until the original building is repaired or replaced. Business income coverage would pay any profits the owner would have made during the three-week period he was unable to operate the café, any ongoing expenses he has such as mortgage payments, payroll, satellite TV bills, etc.
Rental value is much like business income coverage for owners of rental property. It covers the anticipated rental income a landlord would have received from tenants during normal operations. It also includes any other charges the landlord normally transferred to the tenants for payment, such as trash pickup or cable television.
Extra expense coverage reimburses a business owner for extra expenses paid because of the storm. It allows the business owner to continue operations at a new location and be covered for the additional expenses that go along with it. There is usually no waiting period to begin collecting extra expense coverage after a loss.
Example: The café owner above, operating in a temporary location, can use his extra expense coverage to reimburse him for expenses such as renting equipment he needs to operate, the cost of rent for the temporary space (if he is obligated to continue paying rent or making loan payments on his original space), advertising to communicate his temporary new location to his customers, etc.
What is a period of restoration?
Your insurance company, in consultation with you, will determine how long you qualify for payments under your business interruption coverage. This period of time is known as a period of restoration. The period of restoration ends as soon as the business can resume normal operations.
If the policy expires during the period of restoration, the coverage does not cease but continues until the property has been repaired or replaced and the insured can resume normal business operation.
The period of restoration cannot be extended if new building codes or pollution cleanup require a delay in resuming normal operations.
Many disputes arise between insurance companies and business owners over how long the period of restoration should last. In these cases, owners should talk with their insurance agent, their insurance company or file a complaint with the Department of Insurance.
What are the advantages of business interruption insurance?
- It allows the business owner to continue operations. This helps the business retain customers and market position.
- It covers the business owner’s continuing expenses and profits while the business is unable to operate.
- The business owner can retain employees by continuing to pay salaries and benefits while recovering from the loss.
- It gives the insurance company an incentive to promptly pay to have damages repaired.
You and your insurance agent should answer these questions about business interruption coverage:
- Many commercial policies already include business interruption. Find out if your does, or if that coverage can be added.
- How long would it take to rebuild your business after severe damage?
- How long would it take to restore operations after repairs are completed?
- What is your annual profit?
- What are your continuing normal businesses expenses? Are they the same every month or do you have high and low seasons?
- What are your duties to minimize the business interruption exposure?
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