Business Owners Policy (BOP)
A businessowners policy (BOP) is often described as the commercial equivalent of a homeowners policy. It combines property and liability protection for small and medium-sized businesses in a simplified package. Its standard form is the Businessowners Coverage Form.
Characteristics and purpose
A BOP is designed for many small and medium-sized operations, such as offices, apartments, and certain manufacturing, service, and processing businesses. It includes its own Declarations and common conditions, similar to those found in a commercial package policy (CPP) used for larger businesses.
The purpose of the BOP is to give a small or medium-sized business the property and liability coverages it needs in a single form. Its main characteristics are:
- One form in three sections. Section I is Property, Section II is Liability, and Section III holds the common policy conditions that apply to both.
- Open-peril property coverage. Section I covers direct physical loss unless the loss is excluded or limited.
- Replacement cost valuation. Covered property is generally valued at replacement cost, without deduction for depreciation.
- Business income and extra expense included. They are additional coverages, paid outside the Section I limits of insurance.
- Limits that adjust automatically. The building limit rises through the policy year, and the business personal property limit rises for seasonal peaks.
Eligibility
Whether a business is eligible for a BOP depends largely on the size and type of the operation. Eligibility rules are not part of the policy form. They are underwriting rules, and they vary by insurer.
Insurers commonly write BOPs for risks such as:
- Small repair shops
- Drugstores
- Bake shops
- Beauty salons
- Small convenience stores
- Pizza shops
Classes of risks that insurers commonly treat as not eligible for BOP coverage include, but are not limited to:
- Any large manufacturer of products
- Hospitals
- Auto dealerships
- Financial institutions (banks and credit unions)
Businessowners Section I — Property
Coverages
The insurer agrees to pay for direct physical loss of or damage to covered property at the premises described in the Declarations, caused by or resulting from any covered cause of loss.
Covered property is buildings, business personal property, or both, depending on whether a limit of insurance is shown in the Declarations for each.
- Buildings means the buildings and structures at the described premises, including completed additions, fixtures (including outdoor fixtures), permanently installed machinery and equipment, and personal property the insured owns that is used to maintain or service the buildings or premises.
- Business personal property includes property the insured owns that is used in the business, property of others in the insured’s care, custody or control, and tenant’s improvements and betterments.
Business personal property is covered in or on the buildings at the described premises, or in the open (or in a vehicle) within 100 feet of the buildings or of the described premises, whichever distance is greater.
Property not covered. The BOP does not cover certain types of property, including but not limited to:
- Land, including land on which the building is located
- Aircraft, automobiles, motortrucks and other vehicles subject to motor vehicle registration
- Watercraft while afloat
- Money and securities (except as provided by the money and securities or employee dishonesty optional coverage)
- Outdoor fences, radio or television antennas, signs that are not attached to buildings, and trees, shrubs and plants (except as provided by the outdoor property coverage extension or the outdoor signs optional coverage)
Covered causes of loss. Under Section I, covered property is insured on an open-peril basis. That means all causes of loss are covered unless the policy specifically excludes or limits them.
Additional coverages are written into Section I, so no endorsement is needed for them. Business income, extra expense and civil authority protect the income of the business. They are not subject to the Section I limits of insurance, and no deductible applies to them.
- Business income pays the actual loss of business income the insured sustains due to the necessary suspension of its operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property at the described premises, from a covered cause of loss. Coverage begins 72 hours after the loss and applies to loss that occurs within 12 consecutive months after it. Extended business income continues the coverage after the property is repaired and operations resume. It ends on the date the insured could, with reasonable speed, restore operations to the level that would have existed without the loss, or 60 consecutive days after operations resume (unless the Declarations show a greater number), whichever is earlier.
- Extra expense pays necessary expenses the insured incurs during the period of restoration that it would not have had without the loss, such as the cost of moving to a temporary location and equipping it. It begins immediately after the loss, and only extra expense that occurs within 12 consecutive months after the date of the loss is paid.
- Civil authority. Pays the actual loss of business income and the necessary extra expense caused by action of civil authority that prohibits access to the described premises because a covered cause of loss damaged property other than at the described premises. Access to the area immediately surrounding the damaged property must be prohibited by civil authority as a result of the damage, and the described premises must be within that area but not more than one mile from the damaged property. The action of civil authority must be taken in response to dangerous physical conditions resulting from the damage or the continuation of the covered cause of loss, or to give the civil authority unimpeded access to the damaged property. Coverage for business income begins 72 hours after the first action of civil authority and applies for up to four consecutive weeks from the date it began. Coverage for extra expense begins immediately.
Among the other additional coverages are:
| Additional coverage | What it pays | Limit or time rule |
|---|---|---|
| Debris removal | Expense to remove debris of covered property after a covered loss | Up to 25% of the sum of the loss payment and the deductible, within the limit of insurance. Up to an additional $25,000 for each location in any one occurrence when the expense exceeds that 25%, or when the loss plus the expense exceeds the limit |
| Fire department service charge | Charges the insured assumed by contract or owes under a local ordinance | $2,500 for each premises, unless the Declarations show a different limit |
| Pollutant clean-up and removal | Provides up to $10,000 coverage for the costs of extracting pollutants from land or water at the insured’s premises as a result of a covered loss. | $10,000 for each location in each 12-month policy period |
Coverage extensions. Coverage extensions automatically provide limited amounts of insurance for specific types of property or losses without requiring an endorsement. They are in addition to the Section I limits of insurance. The main ones are:
| Coverage extension | What it covers | Most the insurer pays |
|---|---|---|
| Newly acquired or constructed property | New buildings being built on the described premises, and buildings acquired elsewhere for a similar use or as a warehouse. Coverage ends when the first of these occurs: the policy expires, 30 days pass after the insured acquires the property or begins construction, or the insured reports values to the insurer | $250,000 at each building, and $100,000 at each building for business personal property |
| Outdoor property | Fences, antennas, signs not attached to buildings, trees, shrubs and plants, damaged by fire, lightning, explosion, riot or civil commotion, or aircraft | $2,500 (unless the Declarations show a higher limit), but not more than $1,000 for any one tree, shrub or plant |
| Valuable papers and records | Loss to valuable papers and records (which do not include money or securities) that the insured owns or has in its care, custody or control | $10,000 at the described premises (unless the Declarations show a higher limit) and $5,000 away from them |
Exclusions
The main Section I exclusions fall into three groups.
The first group is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss. It includes:
- Ordinance or law: enforcement of a law regulating the construction, use or repair of property
- Earth movement: earthquake, landslide, mine subsidence and earth sinking (other than sinkhole collapse), rising or shifting, although a resulting fire or explosion is covered; and volcanic eruption, although resulting fire, building glass breakage or volcanic action is covered
- Nuclear hazard
- Utility services: failure of power, communication, water or other utility service supplied to the premises, if the failure originates away from the premises or involves equipment at the premises that supplies the service from a source away from them
- War and military action
- Water: flood, surface water, waves, tides, mudslide, backup of sewers or drains, and water under the ground
The second group excludes, among others, loss caused by or resulting from:
- Consequential losses: delay, loss of use or loss of market
- Frozen plumbing, unless the insured does its best to maintain heat, or drains the equipment and shuts off the supply
- Dishonesty: dishonest or criminal acts, including theft, by the insured, its partners, officers or employees
- Other types of loss: wear and tear, rust, corrosion, decay, hidden or latent defect, and mechanical breakdown
- Continuous or repeated seepage or leakage of water over a period of 14 days or more
The third group is weather conditions (only when they combine with a first-group exclusion), acts or decisions of any person or governmental body, and negligent work. If one of these results in a covered cause of loss, the resulting loss is paid.
Coverage for fungi, including mold, mildew, and spores, is limited under the BOP. Loss caused by fungi is excluded unless the fungi result from fire or lightning. When they result from another specified cause of loss, a limited additional coverage pays up to $15,000 in a 12-month period.
Limits of insurance
The most the insurer pays for loss or damage in any one occurrence is the applicable Section I limit shown in the Declarations. For outdoor signs attached to buildings, the most it pays is $1,000 per sign in any one occurrence. The coverage extensions are paid in addition to the limits.
Two provisions raise the limits automatically.
- Building limit, automatic increase. The building limit increases by 8% a year, unless the Declarations show a different percentage. The increase is applied pro rata by the number of days since the policy year began.
- Business personal property limit, seasonal increase. The business personal property limit increases by 25% to provide for seasonal variances, unless the Declarations show a different percentage. The increase applies only if the limit shown is at least 100% of the insured’s average monthly values during the 12 months before the loss, or during the time the insured has been in business if that is shorter.
Deductibles
Property coverage is subject to a deductible. The insurer does not pay for loss or damage in any one occurrence until the amount exceeds the deductible shown in the Declarations. It then pays the amount in excess of the deductible, up to the limit of insurance.
No deductible applies to fire department service charge, business income, extra expense, civil authority, or fire extinguisher systems recharge expense.
Loss conditions
The property loss conditions govern how a Section I claim is handled. They include:
- Abandonment. The insured may not abandon property to the insurer.
- Appraisal. If the parties disagree on the amount of loss, either may demand an appraisal in writing. Each selects an appraiser, the two appraisers select an umpire, and a decision agreed to by any two is binding.
- Duties in the event of loss or damage. The insured must notify the police if a law may have been broken, give the insurer prompt notice, and protect the property from further damage. A signed, sworn proof of loss is due within 60 days after the insurer requests it.
- Legal action against us. No one may sue the insurer unless there has been full compliance with the policy terms and the action is brought within two years after the date of the loss.
- Loss payment. The insurer pays within 30 days after receiving the proof of loss, once the amount is agreed or an appraisal award is made.
Valuation. Property is valued at replacement cost, without deduction for depreciation, if the limit of insurance is 80% or more of the property’s full replacement cost at the time of loss. If the limit is less than 80%, the insurer pays the greater of the actual cash value of the lost or damaged property or a proportion of the cost to repair or replace it, after application of the deductible and without deduction for depreciation, but not more than the limit of insurance. The proportion is the limit divided by 80% of the full replacement cost.
For example, a building with a full replacement cost of $100,000 is insured for $70,000, and 80% of its replacement cost is $80,000. On a loss of $25,000, the proportion is $70,000 ÷ $80,000 = .875, and .875 x $25,000 = $21,875. The insurer pays that amount or the actual cash value of the loss, whichever is greater.
Replacement cost is not paid until the property is actually repaired or replaced, and only if the repair or replacement is made as soon as reasonably possible after the loss. If the cost to repair or replace damaged building property is $2,500 or less, the loss is settled at replacement cost whether or not the repair or replacement is complete.
Vacancy. Under a businessowners policy (BOP), special vacancy provisions apply when a building has been vacant for an extended period of time. If a building has been vacant for more than 60 consecutive days, coverage for certain causes of loss is limited or suspended. Losses caused by vandalism, sprinkler leakage (unless the system was protected against freezing), building glass breakage, water damage, theft and attempted theft are not covered. Payment for any other covered cause of loss, such as fire or lightning, is reduced by 15%.
A building owner’s building is vacant unless at least 31% of its total square footage is rented to a tenant who uses it for its customary operations, or is used by the owner for its own.
General conditions
The property general conditions are:
- Control of property. An act or neglect of someone other than the insured, beyond the insured’s direction or control, does not affect the insurance.
- Mortgageholders. Building losses are paid to each mortgageholder shown in the Declarations in order of precedence, as interests may appear.
- No benefit to bailee. No one other than the insured who has custody of covered property benefits from the insurance.
- Policy period, coverage territory. Loss must commence during the policy period and within the coverage territory: the United States (including its territories and possessions), Puerto Rico and Canada.
The common policy conditions in Section III apply to Section I as well. They are covered with Section II.
Optional coverages
Four optional coverages are printed in Section I. Each applies only if it is shown as applicable in the Declarations.
- Outdoor signs. All outdoor signs at the described premises that the insured owns or has in its care, custody or control.
- Money and securities. Loss of money and securities used in the business by theft, disappearance or destruction.
- Employee dishonesty. Loss of business personal property, money and securities from dishonest acts of employees. A loss must be discovered no later than one year from the end of the policy period.
- Equipment breakdown protection coverage. Loss to covered property from a mechanical breakdown or electrical failure of pressure, mechanical or electrical machinery and equipment.
Definitions
Section I gives special meaning to certain terms, among them:
Lesson summary
- A BOP gives a small or medium-sized business property and liability coverage in one form with three sections. Eligibility is an underwriting rule that varies by insurer.
- Section I covers buildings and business personal property on an open-peril basis.
- Business income and extra expense are additional coverages paid outside the limits, with no deductible, for up to 12 consecutive months. Business income begins 72 hours after the loss, and civil authority coverage for business income lasts up to four consecutive weeks.
- Coverage extensions add limited insurance, such as $250,000 at each newly acquired or constructed building for up to 30 days.
- Losses are paid at replacement cost when the limit is at least 80% of full replacement cost.
- After more than 60 consecutive days of vacancy, some causes of loss are not covered, and other losses are reduced by 15%.