Business Owners Policy (BOP)

A business owners policy (BOP) is often described as the commercial equivalent of a homeowners policy. It combines property and liability protection for small businesses in a simplified package.

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.

Eligibility

Whether a business is eligible for a BOP depends largely on the size and type of the operation.

• Office buildings may be no more than 6 stories high and contain no more than 100,000 square feet.
• Apartments and wholesale services may not exceed 25,000 total square feet and must have less than $3 million in gross annual sales.

Property coverage forms

Property coverage is provided under one of two available forms:

1. Standard Property Coverage form
2. Special Property Coverage form

These coverage forms include a definitions section, along with conditions and exclusions. Property coverage is also subject to a deductible.

Standard Property Coverage form (named perils)

The standard form provides coverage against specified causes of loss, including:

• Fire
• Lightning
• Extended coverages
• V&MM
• Sprinkler leakage
• Sinkhole collapse
• Transportation

Special Property Coverage form (open perils)

Under the Special Property Coverage form, covered property is insured on an open-peril basis. That means all causes of loss are covered unless the policy specifically excludes them.

The insured may modify this coverage so that property losses are covered only for causes of loss specifically named in the policy by adding an endorsement that provides named-peril coverage.

When property coverage is written on a specified (named) causes of loss basis, coverage applies only to losses resulting from causes listed in the policy. Common specified causes of loss include events such as fire or lightning, explosions, wind or hail damage, smoke, losses caused by aircraft or vehicles, riots or similar disturbances, vandalism, accidental discharge or leakage from fire extinguishing equipment, sinkhole collapse, volcanic activity, damage caused by falling objects, collapse due to the weight of snow or ice, and certain types of water damage.

The Special Form provides open-peril coverage except for those causes of loss that are specifically excluded.

Optional coverages

Both forms have available optional coverages for an additional premium.

Optional coverages available under the Standard Form include:

• Burglary and robbery
• Employee dishonesty
• Outdoor signs
• Glass
• Mechanical breakdown of objects

The optional coverages available under the Special form include money and securities in addition to the available coverages of the Standard form.

BOP structure: Section I and Section II

The BOP is comprised of Section I and Section II coverages.

Section I provides property coverage and is divided into two major coverages: Coverage A - Buildings and Coverage B - Business Personal Property.

Coverage A - Buildings covers the building or structure described in the Declarations, including completed additions and permanently installed fixtures, machinery, and equipment.

Coverage B - Business Personal Property covers personal property owned by the insured and used in the business, including furniture, fixtures, machinery, equipment, and stock.

The business personal property is covered in the covered building, on the covered building, or anywhere within 100 feet of the insured premises.

Section II of the BOP provides coverage for commercial liability similar in scope to that provided by the CGL. Coverage is provided for the legal liability of the insured arising out of the ownership of the business premises and the business activities. Products liability, fire legal liability, medical payments, and supplementary payments are also provided by the liability section in the same fashion they are provided by CGL coverage.

The basic liability limit is $300,000 and can be increased to $500,000 or $1,000,000.

Ineligible and eligible risks

There are several classes of risks that are not eligible for BOP coverage including but not limited to:

• Most types of contracting businesses
• Any large manufacturer of products
• Hospitals
• Auto dealerships
• Financial institutions (banks and credit unions)

As mentioned previously, only certain types of small businesses are eligible for BOP coverage. The following are examples of eligible risks for BOP coverage:

• Small repair shops of any kind
• Drugstores
• Bake shops
• Beauty salons
• Small convenience stores
• Pizza shops

Valuation and deductibles

Under both policy forms, losses, except money and securities, are settled on a replacement cost basis. This includes coverage for the buildings and the business personal property.

Deductibles are available starting at $500 (standard) and may be increased to reduce the premium (maximum of $2,500).

Sidenote

Know this...

An important feature of a BOP is that it offers replacement cost and no coinsurance coverage to small and medium-sized businesses.

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 and aircraft parts

• Watercraft while afloat

• Money, bank notes, bullion, and securities (except as provided by optional coverage)

• Outdoor fences, radio or television antennas, and signs (unless specifically endorsed)

• Trees, shrubs, and plants

Coverage for fungi, including mold, mildew, and spores, is limited under the BOP. While certain losses involving fungi may be covered when caused by a covered peril, the policy restricts the amount payable and applies additional conditions and exclusions unless additional coverage is added by endorsement.

Under a Business Owners 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, theft, sprinkler leakage, water damage, and glass breakage are not covered during extended vacancy. Coverage for other causes of loss, such as fire or lightning, generally remains in force.

Endorsements

Several endorsements may be attached to a BOP, including:

• Spoilage
• Hired and non-owned auto
• Valuable papers and records
• Liquor liability
• Civil authority
• Pollution cleanup and removal

Spoilage

This endorsement extends to cover damage to perishable stock owned by or in the insured’s care, custody, or control at the insured premises. It includes 3 covered causes of loss including:

1. Breakdown
2. Contamination
3. Power outage

Hired Auto and Non-owned Auto

This endorsement extends liability protection for hired autos and non-owned autos.

• Hired auto liability covers bodily injury and property damage to others as a result of operating autos that it leases.
• Non-owned auto coverage protects the small business insured who operates a vehicle owned by another.

Valuable Papers and Records

This endorsement covers loss to valuable papers and records that the insured possesses (except money and securities).

Liquor Liability Coverage

This endorsement will provide liquor liability coverage in limited instances. The insured must list the specific functions at which liquor will be sold. An insured who is engaged in fundraising or social activities may add this endorsement to extend liability coverage.

Pollution 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.

Civil Authority

Pays loss of income that the insured sustains due to actions of civil authorities that prohibit access to the insured premises because property other than at the insured premises was damaged by an insured peril. Coverage begins 72 hours after the action by the civil authority and is available for up to three consecutive weeks.

Sidenote

Know this...

Unless at least 31% of a building’s total square footage is rented or used to conduct customary operations, the building owner would have no coverage for Vandalism, sprinkler leakage, water damage, glass breakage, or theft. Other perils, such as fire, are still covered.

Coverage extensions

In addition to Coverage A and Coverage B, the BOP provides certain coverage extensions. Coverage extensions automatically provide limited amounts of insurance for specific types of property or losses without requiring an endorsement.

Under the newly acquired or constructed property coverage extension, if the insured acquires a building at another location or constructs a new building on the described premises, the newly acquired or constructed building is automatically covered under Coverage A - Buildings, subject to a maximum limit of$250,000 at each location.

Workers Compensation Insurance

Workers Compensation insurance provides protection for employees who are injured as a result of their employment. It also protects an employer against legal action that an injured employee (or survivors) may pursue.

In most cases, benefits provided under workers’ compensation laws serve as the employee’s primary remedy for work-related injuries, limiting the employee’s ability to sue the employer for damages.

Workers Compensation law is based on the following principles:

• Negligence is not a factor in determining liability for bodily injuries sustained by an employee
• The injury cannot be intentionally self-inflicted
• Benefits will be paid to an injured employee on a periodic (monthly) basis
• The cost of coverage is paid by the employer (non-contributory)
• The purchase of insurance coverage is required
• Workers Compensation insurance provides coverage for work-related injuries and sickness only. It does not provide benefits to employees who suffer non-work-related injuries.

Workers Compensation insurance is available from commercial insurers. Premium charges are based on the type of business involved (work or job classification), the number of employees, and the total payroll.

If an employer is qualified, it may self-insure. If an employer is unable to secure Workers Compensation insurance in the standard market, most states operate an assigned risk pool which allows these employers to obtain Workers Compensation protection.

The Workers Compensation policy consists of several parts.

Part I

Coverage under Part I applies to mandated or statutory benefits. The insurer providing coverage agrees to pay the injured employee all benefits required by the Workers’ Compensation law.

The benefits available to an employee who is injured as a result of his/her employment include:

Medical Expense Benefits

• The insurer will cover unlimited reasonable medical expenses related to the occupational injury or sickness.

Income Benefits

• Loss of income benefits are paid to qualified injured or diseased employees. Generally, the injured worker must satisfy a waiting period before income benefits are paid.

Dependent Funeral Expense Benefit

• Benefits will be paid if a worker dies as a result of his/her employment. Two types of benefits are provided: burial expenses and survivor benefits. Reasonable burial or funeral expenses will be covered by the policy. In addition, a survivor or dependent benefit is also available if the worker is fatally injured.

Vocational Rehabilitation Benefits

• It not only aids the injured worker to recuperate more quickly but also helps the employer since his/her injured employee will return to work sooner. Covered expenses or services include:
  • Physical, occupational and speech therapy
  • Vocational training
  • Wheelchairs, mechanical appliances and prosthetic devices (artificial limbs)
  • Transportation and lodging during the rehabilitation period

Part II

Part II of the Workers Compensation policy is Employer’s Liability coverage and protects an employer against legal suits filed by an employee.

The standard limits of liability presently available for this protection is $100,000 per accident; $100,000 per occupational disease; and a $500,000 aggregate for occupational diseases. An employer may purchase higher limits for an additional premium.

Part III

Part III of the Workers Comp policy provides optional “Other States” insurance coverage. Part I and II are mandatory if the policy is purchased.

Other States insurance provides Workers Compensation coverage in additional states to which an employee may travel as part of his/her employment duties.

A Workers Compensation policy also includes the following policy sections:

• Part IV duties to be performed by all parties when an injury occurs
• Part V description of premiums
• Part VI conditions of the insured and insurer

All premiums will be determined by the insurer and will be based upon the type of work in which the employer is involved, the payroll of all workers, and the number of workers employed.

Experience Modification Factor is a numerical representation of claims history used to increase or decrease a company’s worker’s comp premiums at time of renewal. It is the ratio of the costs of a company’s actual workers’ compensation claims compared to the expected costs for companies of similar size in the same industry. It can be either above or below the industry average of 1.0. Above 1.0 means the claims history is worse than the industry’s average (increased premium) while below 1.0 means it is better (decreased premium).

Types of disability include:

• Permanent Total - Cannot work at all
• Permanent Partial - Loss of hand - can work
• Temporary Total - Sprained back, out six weeks
• Temporary Partial - Broken arm, light duty

Longshoremen and Harbor Workers

Compensation and medical benefits for disabled or deceased employees of maritime employments are provided under federal law. Employments such as longshoring, harbor work and ship repairing fall under federal guidelines. Coverage is furnished by a Workers Compensation policy with an added endorsement. The employee’s death or disability must result during travel upon navigable waters of the U.S.

The Jones Act

The Jones Act, a section of the Merchant Marine Act, allows an injured seaman to elect to sue for damages and to have a jury trial. Insurance is provided under the Employers Liability section, but when the exposure exists, the insurer usually requires the Maritime Coverage Endorsement that actually limits the insurance and adds a few more exclusions.

Federal Employees Compensation Act

Employees of the federal government are provided (civilian employees) benefits administered by the federal government. Private insurance is not involved.

Federal Employers Liability Act

This Act protects interstate railroad workers only. It allows the injured worker (or representative of the deceased worker) to sue the employer for negligence and removes contributory negligence and assumption of risk (two common law defenses).

Lesson Summary

Business Owners Policy (BOP) provides property and liability protection for small businesses. Key points about BOP include:

• Offers coverage for small and medium-sized offices, apartments, manufacturing, service, and processing businesses
• Includes property coverage under Standard and Special Property Coverage forms that have their own declarations, conditions, and exclusions
• Covers various causes of loss like fire, lightning, and more, with optional coverages available for additional premiums
• Comprised of Section I for buildings and business personal property and Section II for commercial liability similar to CGL coverage
• Provides coverage for liability arising from business ownership and activities with basic liability limits and optional increased coverage amounts

Endorsements that can be added to a BOP include Spoilage, Hired and non-owned auto, and more. Workers Compensation Insurance offers protection for work-related injuries; key points include:

• Benefits paid on a periodic basis and cover medical expenses, income loss, and dependent benefits
• May cover expenses like therapy, training, and prosthetic devices for injured workers
• Includes Employer’s Liability coverage to protect against employee legal suits, with optional coverage for injuries in other states

Other insurance policies related to workers’ compensation include the Longshoremen and Harbor Workers Compensation and the Jones Act for maritime employees’ coverage. Federal Employees Compensation Act provides benefits for federal government employees, while the Federal Employers Liability Act protects interstate railroad workers by allowing negligence claims against the employer.

Chapter Vocabulary

Definitions

Business Owners Policy (BOP)

Business insurance is typically for property, liability, and business interruption coverage.

Commercial Package Policy

Provides a broad package of property and liability coverages for commercial ventures other than those provided insurance through a business owners policy.

Commercial Property

Property insurance coverage sold to commercial ventures.

Covered Employment (For Workers’ Comp)

The majority of workers’ compensation laws cover most employment situations. However, there are three types of employment commonly exempted: farming, part-time employees, and domestic servants.

Employers Liability

Employers’ liability coverage for the legal liability of employers arising out of injuries to employees. This code should be used when coverage is issued as an endorsement or as part of a statutory workers’ compensation policy.

Independent Contractor

An individual who is not employed by a company but instead works for themselves, providing goods or services to clients for a fee.

Liquor Liability

Coverage for the liability of an entity involved in the retail or wholesale sales of alcoholic beverages or the serving of alcoholic beverages to persons who have incurred bodily injury or property damage arising from an intoxicated person.

Package Policy

Two or more distinct policies combined into a single contract.

Workers’ Compensation

Insurance that covers an employer’s liability for injuries, disability, or death to persons in their employment, without regard to fault, as prescribed by state or federal workers’ compensation laws and other statutes.