Defining Commercial Property Coverage Forms
Commercial Property Coverage Forms are an integral part of most large property insurance policies. Their purpose is to organize and provide easy reference to a multitude of different insurance coverages, exclusions, and conditions. These can usually be found at the front of the document and each may be divided into its own section or chapter. They will provide important information as to each coverage part under the policy. They serve to summarize the coverage available, explain the different forms available, and provide a reference to the specific form in a given situation.
As an example, there is a common form used in this area called causes of loss. It provides a list of covered perils (causes of loss) that are available for either interests at a covered location or personal property away from that location. This form is broken down into three sections: Basic form, Broad form, and the Special form. Each section explains the coverage, and provides a cross-reference to the actual coverage . The Basic Form is an all risk (i.e., named perils) form that provides coverage for buildings for loss of fire, lightning, windstorm, civil commotion, etc. The Broad Form is an all risk (named perils) form that provides coverage for buildings for all the causes of the basic form, but provides, as well, coverage for water damage, building glass breakage, and building content theft. The Special Form is an all risk form that covers everything unless excluded.
Other common commercial property forms include the Building and Personal Property Coverage Form that provides coverage for buildings at a location or on personal property in transit, etc. The Business Property Causes of Loss Form provides coverage for business value (which is generally less than the actual value). Business Personal Property May 1993 provides coverage for personal property at a location or in transit. The options will vary by location, but this gives a general overview of common options available to commercial property owners.
Key Features of a Commercial Property Coverage Form
A commercial property coverage form serves as the critical document that outlines an insured’s property insurance contract with an insurer. As such, it is essential that policyholders be familiar with its essential elements so that they can understand what is and is not covered under the policy.
The essential components of a commercial property coverage form include the following: the declarations page, coverage sections, terms, and conditions.
Declarations Page:
The declarations page is the first page of the form and is generally divided into sections or boxes labeled "1," "2," "3" and "4." In section "1," the name and address of the policyholder and each location covered by the policy are listed. In section "2," which is only used if more than one insured is named on the declarations, the policy will identify all additional insureds. Section "3" contains the itemized subject of the insurance, such as buildings, equipment, vehicles, etc., for which coverage is provided under the policy. Finally, section "4" discloses the applicable limits of insurance, deductibles and expiration date applicable to each item listed in section "3."
Coverage Sections:
After the declarations page comes the section outlining the applicable coverages of the policy. The commercial property coverage form contains provisions concerning property coverage, liability coverage and numerous conditions that apply to both the coverage and liability sections of the form. Coverage for extra expenses, loss or rental value, outdoor signs, debris removal, collapse and pollution are typically included as part of the property coverage section of the policy. Liability coverages often include general liability and automobile liability. The conditions part of the coverage form addresses topics such as audit examinations, vacancy, business interruption, cancellation, subrogation and concealment and fraud.
Terms and Conditions:
The actual terms and conditions of the policy are contained in those pages on the coverage form that are not part of the declarations page or not specifically identified on the declarations page as part of the coverage. For example, the conditions of the policy are generally included on the last pages of a coverage form that are distinct from the declaration page because the form identifies some conditions on the declaration page but not all of the conditions that are included in the policy.
Types of Coverage Offered in Commercial Property Forms
The scope of coverage provided under commercial property forms varies depending on the type of coverage form purchased and the specific endorsements attached. Building coverage is the most basic form of coverage, but can expand to include other structures. Business personal property coverage is generally offered as separate coverage, but can also be included with building coverage. Coverage may also be purchased for business income and extra expense, or "rental value" coverage. Finally, general liability coverage may be included with property coverage, or purchased separately for a business.
Building Coverage
Coverage to building structures, including fixtures and permanent improvements, can be purchased on the basic, broad, and special causes of loss forms under the commercial property coverage. Broad causes of loss forms include nearly all the coverage offered under the basic form, covers the fractures and collapse of building structures, and provides some coverage to collapse of building structures. It also insures against risks of direct loss to covered property and has a list of exclusions similar to the basic causes of loss form. Collapse coverage provides additional coverage for building contents which are within 100 feet of the perimeter of the "building" (including the building and any structure on the same premises containing business personal property). Special causes of loss is the most comprehensive coverage available. It provides "all risks" coverage for direct physical loss. The exclusions under special causes of loss are similar to the exclusions under the broad causes of loss form, but are broader. If collapse coverage is needed, it is critical to review the specific language of the collapse section to determine what is included and excluded. Collapse sections vary from policy to policy and depending on the amount of coverage purchased. Standard "collapse" language includes the caving in of a building or any part of a building, but otherwise, is vague. Coverage is only afforded to structures that are in imminent danger of collapse. If covered, coverage will be provided for the costs to demolish and rebuild the undamaged portion of the building. Other associated coverage includes coverage for costs to sue for the cost of demolition and the cost to collect an insured loss. Specific limits to this coverage apply based on the number of collapse coverages purchased.
Business Personal Property Coverage
Business personal property is also commonly covered under a commercial package policy. Business personal property is defined as personal property owned by the insured and used in the business, but does not include personal property of others that is in the insured’s care, custody, or control and personal property of the insured tenant improvements and betterments. In addition to general limits of liability, various specific coverage limitations apply to electronic data, signs, valuable papers, accounts receivable, etc. Finally, coverage can be added for the business income and extra expense loss exposures, or "rental value" coverage. The benefit of the extra expense coverage is that it provides coverage not only for the loss of business income due to an insured loss, but to cover the costs of moving to temporary space and rebuilding. The coverage ends once the property is rebuilt or after the expiration of 12 months, whichever is shorter.
Additional Endorsements
In addition to the building and business personal property coverage described above, numerous types of coverage are commonly included as endorsements. These include, but are not limited to the following: Carriers also offer various endorsements, or optional coverages under the general liability portion of a commercial package policy. These can include, but again, are not limited to the following:
Common Policy Exclusions and Limitations
Most commercial property coverage forms contain some level of exclusions and limitations. Many insurance companies use the Insurance Services Office, Inc. (ISO) forms and endorsements as a base from which to build their policy provisions. Although there are many differences between insurance companies, most have similar coverage provisions. However, the exclusions and limitations are where the insurance companies break away from the base ISO language and insert their own wordings and restrictions of coverage. It is this section of the policy that insurers twist and turn the intent of the coverage provided, so they can wrongfully deny coverage to the policyholder.
For example, exclusions commonly found in commercial property policies include the following: "wear and tear" an "industrial smoke," and "pollutants." An insurer may try to use these exclusions to deny a claim when the loss arises from, or is related to, wear and tear, industrial smoke, or pollutants. The policy language may not be clear and is subject to various interpretations, leaving the door open to help achieve the differing outcome sought by the policyholder and the carrier in resolving the coverage.
How to Tailor Your Commercial Property Coverage
The commercial property coverage forms are very broad and do not even suggest how the coverages might be customized to fit your business. Both the ISO and AAIS forms specify that only a business can determine how coverage should be customized to meet its specific needs. The AAIS coverage form does provide a few instructions regarding this customization, but our survey indicates that many property owners simply fail to do so. Our experience suggests that most property owners could benefit by a detailed analysis of their coverage by a knowledgeable insurance agent or other insuring professional.
Some of the basic policy provisions that could be customized include:
1. Additional Insureds – Most property coverage forms exclude coverage for leased property. An organization using leased property could require that the landlord be added as an additional insured on its policy. This is done by checking Item 5F of the Commercial Building Coverage Form (IBM CP 00 10), and Item 6F of the Business Personal Property Coverage Form (IBM CP 00 10). Our survey indicates that this is not done by over half of organizations.
By adding the leased building and/or personal property as a named insured, that organization will be covered for the perils and related causes of loss identified in its policy — its interests with respect to the perils are covered. However , having the landlord as a named insured in an "additional insured" capacity may limit coverage to those perils recognized as a "named peril." As discussed below, if the building owner also has the broadest causes of loss — the special form (SPF) — it may protect the tenant from some inherent risks. SPF gives broader coverage than either the basic or broad form. Yet, in certain instances, the use of SPF can increase the tenants’ premium costs.
2. Coverage extension endorsements – There are basically three types of coverage extension endorsements: blanket coverage, newly acquired or constructed property, and personal property of others coverage (Coverage Form CL 04 11).
3. Increased limits of insurance – Many business income policies provide limited coverage for extra expense; but just how much? Agents should ask for guidance from the policy form itself, which provides the following:
[The insurer] will pay any necessary Extra Expense caused by action of civil authority that prohibits access to the described premises provided that both of the following apply:
a. The action is due to direct physical damage to property, other than at the described premises, caused by or resulting from a Covered Cause of Loss; and
b. The action is taken in response to dangerous physical conditions arising at the described premises or area immediately surrounding the described premises.
The Commercial Property Coverage Claims Process
The intricacies of the claims process under a commercial property coverage form can be complex and challenging to understand. The process generally entails: notification, cooperation, claims preparation, investigation, appraisal, and the final determination of loss.
Notification
Generally, the first step in a claim process is to notify the insurer of the loss. Prompt notification is essentially important because a delay in notification of a covered loss has the potential to prejudice or limit recovery if the claim is ultimately covered. Many times insurers will include a provision in the policy that requires the policyholder to act within certain set timeframes, however, such timeframes are often malleable, especially when the time constraints work to the benefit of an insurer. To that end, the prudent course of action is to provide notice of a loss as soon as possible after the occurrence of the loss. If you’re not sure whether notice must be provided, provide notice anyway if possible.
Cooperation
The next step in the claims process is the insurer’s investigation of the alleged loss. Generally, an insurer is required to investigate and evaluate the loss in good faith. Further, the policyholder is generally required under the cooperation clause to cooperate with an insurer during the policy’s investigation and appraisal of a loss. The policyholder’s cooperation must be reasonable however, which means the insurer cannot require the policyholder to cooperate in an unreasonable manner, such as to participate in an elaborate testing procedure for coverage. Likewise, the insurer’s cooperation must be reasonable. Basically, cooperating with an insurer includes producing documentation of a loss, providing access to the property, etc.
Procedures for filing the claim
Most commercial policies require prompt notice of a loss, however often seek to restrict the notice requirement to one of the following:
Notice in the event of collapse
The policy shall include straight-forward language requiring the insurer to pay the claim if the direct physical loss was a total loss to all property at the described premises, or $250,000 or more, of loss in any one occurrence to all property at the described premises except personal property of others.
Preparation of Claim
Under most commercial property forms the insured is required to cooperate in all respects with the amount of the claim. If the insured has hired a public adjuster, along with other professionals, an insurer cannot expect perfect amounts when answering the questions for example. Many forms require a proof of loss to be submitted, which is a statement made by an insured with full intent to recover for its loss. It is not a sworn statement but it is required by law. Under the terms of a commercial policy, the insured must generally submit a signed, sworn proof of loss on a prescribed form, including account receivable records; inventories of undamaged property; detailed estimates of damage; and other pertinent information. The standard policy requires a proof of loss within sixty (60) days after the "cause of loss," which means that the policy may routinely limit the claim by limiting the time by which the proof of loss is to be submitted.
Investigation of the Loss
During the investigation, the field adjuster will typically examine the property, interview the insured as well as other witnesses and document his findings. If coverage appears to be an issue, the insurer has a duty to disclose that fact in order to avoid prejudice against the insured’s rights.
Selecting the Next Right Commercial Property Insurance Provider
When it comes to choosing the right commercial property insurance coverage, one of your most important decisions is choosing a reputable insurance provider. Your insurance provider will be your first point of contact when a loss occurs and will handle the payment of your covered losses. It’s essential that you choose a company that can be relied on to honor its contractual obligations and treat you fairly.
In a free-enterprise society, the practice of choosing an insurer should be optional, but not usually in insurance. In the vast majority of commercial insurance placements, the business lost the choice of its desired insurer once it completed the application process. From that point on insurers usually compete for the insured’s favor. This competition takes place behind the scenes, between the brokers and carriers , rather than directly between the business and its agent. Carriers will communicate their intent to compete for your commercial business by making coverages and pricing available to your agent, who then presents those options to you.
When choosing the right commercial property insurance provider, consider the following factors:
• Ask for recommendations from other businesses in your industry.
• Review the carrier’s credit rating.
• Consider the carrier’s financial strength, especially if you are purchasing an insurance product that offers broad, specialized and potentially complex coverage.
• Explore the company’s customer service reputation.
• Look for an insurance company that specializes in commercial property coverage.
• Assess how the company handled prior claims.
• Review the policy’s omitted exclusions, limitations, terms, conditions, warranties, modifications and definitions established by an insurance agent or underwriter during the proposal phase of the negotiations.