Commercial Property Forms
The commercial property coverage part of a commercial package policy insures a business’s buildings and contents and the income that depends on them.
Commercial property forms
This coverage part includes its own declarations and conditions. Several specific coverage forms are available to add to this coverage part, depending on the business’s property exposures.
Common commercial property coverage forms include:
- Building and personal property
- Builders risk
- Business income
- Legal liability
- Extra expense
- Condominium association
- Condominium commercial unit owners
Two of these are written for condominiums: one for the condominium association and one for the owner of a commercial unit.
Coverage forms for building and business personal property
The Building and Personal Property Coverage Form insures buildings and business personal property. This is the standard form used to insure most types of business property. Coverage may be written to cover buildings only, personal property only, or both. A type of property is covered only if the declarations show a limit of insurance for it.
The form describes three types of covered property: building, your business personal property and personal property of others. It does not call them Coverage A, B and C.
Building means the building or structure described in the declarations and includes:
- The structure identified in the policy
- Completed additions
- Fixtures, including outdoor fixtures
- Permanently installed machinery and equipment
- Personal property owned by the insured that is used to maintain or service the building or its premises, including fire extinguishers, floor coverings, appliances, or outdoor furniture
- Additions under construction, alterations and repairs to the building
- Materials and supplies used for additions, alterations, or repairs of the covered building as long as they are on or within 100 feet of the described premises.
The last two items are covered only if no other insurance covers them.
Your business personal property includes furniture and fixtures, machinery and equipment, stock, and all other personal property owned by the insured and used for business purposes. Stock means merchandise held in storage or for sale, raw materials and in-process or finished goods. Business personal property also includes a tenant’s use interest in improvements and betterments, which are fixtures, alterations, installations or additions the tenant made at its own expense to a building it does not own and cannot legally remove.
This business personal property must be located in or on the building described in the declarations or within 100 feet of the described premises. Property within 100 feet may be in the open or in a vehicle.
Personal property of others is covered while it is in the insured’s care, custody, or control and in or on the building or within 100 feet. The insurer’s payment is for the account of the owner of the property.
Property not covered
Property not covered under the Building and Personal Property Coverage Form includes:
- Accounts, bills, currency, money, notes or securities
- Sidewalks and patios
- Cost of excavations, grading, or filling
- Foundations below the lowest basement floor, or below the surface of the ground if there is no basement
- Land (including land on which the property is located) and water
- Personal property while airborne or waterborne
- Piers, docks or wharves
- Underground pipes, flues or drains
- Retaining walls that are not part of a building
- Crops or lawns
- Fences, antennas and their lead-in wiring, masts or towers, and trees, shrubs or plants while outside of buildings, except as the outdoor property coverage extension provides
- Automobiles held for sale, and vehicles licensed for use on public roads
- Electronic data, except as the electronic data additional coverage provides
Additional coverages
Additional Coverages provides additional coverages that are similar to those provided by dwelling and HO policies. They include debris removal, preservation of property, fire department service charges and pollutant cleanup and removal. The form also includes increased cost of construction and electronic data.
| Additional coverage | What it pays | Limit |
|---|---|---|
| Debris removal | Expense to remove debris of covered property after a covered loss, if reported in writing within 180 days | 25% of the sum of the deductible plus the amount paid for the direct loss, and the loss payment plus debris removal cannot exceed the limit of insurance. If the expense is more than either cap allows, up to an additional $25,000 at each location in any one occurrence |
| Preservation of property | Any direct physical loss to covered property while it is moved or temporarily stored to protect it from a covered cause of loss | Applies for 30 days after the property is first moved |
| Fire department service charge | Charges the insured is liable for by contract or local ordinance | $1,000 at each premises, unless the declarations show a higher limit, with no deductible |
| Pollutant clean-up and removal | Expense to extract pollutants from land or water at the described premises after a covered cause of loss | $10,000 at each premises in each 12-month period |
| Increased cost of construction | Increased cost to comply with an ordinance or law when repairing a damaged building. Applies only to buildings insured for replacement cost | The lesser of $10,000 or 5% of the building’s limit |
| Electronic data | Cost to replace or restore electronic data destroyed or corrupted by a covered cause of loss | $2,500 in any one policy year, unless the declarations show a higher limit |
For example, a building insured for $90,000 with a $500 deductible has a $50,000 covered loss. The insurer pays $49,500 for the damage. Debris removal is limited to 25% of $50,000 ($49,500 plus the $500 deductible), or $12,500, so a $10,000 debris removal bill is paid in full. The total paid, $59,500, is within the $90,000 limit.
The form’s coverage extensions are described in the chapter on the commercial package policy.
Limits of insurance and deductible
The most the insurer pays for loss in any one occurrence is the limit of insurance shown in the declarations. Outdoor signs, whether or not attached to a building, are limited to $2,500 per sign in any one occurrence.
An insured, for instance, who owns several buildings may specifically insure each of them individually or may cover all of them on a blanket basis. With a blanket limit, the coinsurance condition applies to the total of all property the limit covers.
The deductible is applied once per occurrence, after any reduction for coinsurance.
Valuation and coinsurance
Covered property is valued at actual cash value at the time of loss. Two exceptions are tested often. If the building limit meets the coinsurance requirement and the cost to repair the building is $2,500 or less, the insurer pays the cost of repair or replacement. Stock that has been sold but not delivered is valued at its selling price less discounts and expenses the insured otherwise would have had.
If the declarations show a coinsurance percentage, the insured must carry a limit at least equal to that percentage of the property’s value at the time of loss. If the limit is lower, the insurer pays only part of the loss:
- Multiply the value of the property by the coinsurance percentage.
- Divide the limit of insurance by that figure.
- Multiply the loss by the result.
- Subtract the deductible.
For example, property worth $250,000 is insured for $100,000 with 80% coinsurance and a $250 deductible. The insured should carry $200,000 ($250,000 × 80%). After a $40,000 loss the insurer pays $100,000 ÷ $200,000 = 0.50 of the loss, or $20,000, less the $250 deductible: $19,750.
The vacancy condition also reduces payment. If the building has been vacant for more than 60 consecutive days before a loss, the insurer does not pay for loss by vandalism, sprinkler leakage (unless the system was protected against freezing), building glass breakage, water damage, theft or attempted theft, and it reduces payment for any other covered loss by 15%. An owner’s building is vacant unless at least 31% of its total square footage is rented and used, or used by the owner, for customary operations.
Optional coverages
Four optional coverages apply when the declarations show them:
- Agreed value suspends the coinsurance condition. The insurer and the insured agree on the property’s value in advance.
- Inflation guard increases the limit of insurance automatically by an annual percentage shown in the declarations.
- Replacement cost replaces actual cash value, so no deduction is taken for depreciation. The insurer does not pay on this basis until the property is actually repaired or replaced. It does not apply to personal property of others, contents of a residence, works of art, antiques or rare articles, or stock (unless the declarations show that stock is included).
- Extension of replacement cost to personal property of others removes the first of those exceptions.
Builders risk
This form pays for damage to structures while they are being built. Covered property is the building under construction, including its foundations, fixtures and machinery, equipment used to service the building, and the insured’s building materials and supplies used for construction. In the standard form, the fixtures, machinery, equipment and materials qualify only if they are intended to be permanently located in or on the building or within 100 feet of its premises. Temporary structures built on site, such as scaffolding and construction forms, are covered if no other insurance covers them.
The limit of insurance should equal the value the building will have on the date of completion. If the limit is lower, the insurer pays only the proportion of a loss that the limit bears to the completed value. Losses are valued at actual cash value.
In the standard form, coverage ends when the first of these occurs:
- The policy expires or is cancelled
- The property is accepted by the purchaser
- The insured’s interest in the property ceases
- The insured abandons the construction with no intention to complete it
- 90 days after construction is complete
- 60 days after the building is occupied in whole or in part, or put to its intended use
The insurer may change the last two periods in writing.
Business income
This is another available commercial property coverage form that will protect the insured against the loss of earnings sustained as a result of a covered loss.
Business income coverage will pay an insured if business operations are suspended due to a direct (covered) physical loss to the insured location.
There are two available forms. One form includes extra expense coverage, and the other one provides business income coverage without extra expense coverage.
Business income means the net income (net profit or loss before income taxes) the business would have earned, plus the normal operating expenses that continue during the shutdown, including payroll. The insurer pays the actual loss of business income sustained during the period of restoration.
The period of restoration for business income begins 72 hours after the direct physical loss. It ends on the earlier of the date the property should be repaired, rebuilt or replaced with reasonable speed and similar quality, or the date business resumes at a new permanent location. The expiration of the policy does not cut the period short.
The form adds these coverages:
- Civil authority. When a covered cause of loss damages other property not more than one mile away and a civil authority prohibits access to the insured’s premises, business income coverage begins 72 hours after that action and lasts up to four consecutive weeks.
- Alterations and new buildings. Loss of business income from covered damage at the described premises to new buildings, complete or under construction, and to alterations or additions to existing buildings. If the damage delays the start of operations, the period of restoration begins on the date operations would have begun.
- Newly acquired locations. A coverage extension of up to $100,000 at each location (unless the declarations show a higher limit), for up to 30 days, available when the declarations show business income coinsurance of 50% or more.
Extended business income
Extended business income provides up to 60 consecutive days of automatic coverage for continued loss of business income once restoration is complete. The period begins on the date when the property is actually repaired, rebuilt or replaced and operations are resumed. It ends sooner on the date the insured could, with reasonable speed, bring operations back to the level that would produce the income it would have had without the loss. An optional coverage, the extended period of indemnity, replaces the 60 days with the number of days shown in the declarations.
Legal liability
The Legal Liability Coverage Form covers the insured’s liability for damage to tangible property of others in its care, custody or control that is described in the declarations or on the form’s schedule. The insurer pays the sums the insured becomes legally obligated to pay as damages because of direct physical loss or damage, including loss of use, to that property, when the loss is caused by accident and arises out of a covered cause of loss.
The building and personal property form pays the owner of personal property of others whether or not the insured was at fault. The legal liability form pays only if the insured is legally liable, so the insurer also has the right and duty to defend the insured against a suit seeking those damages. Supplementary payments, such as the insurer’s defense expenses, do not reduce the limit of insurance, which applies to each accident.
Extra expense
Extra expense coverage insures against the necessary extra expenses during the period of restoration that would not have been incurred had there been no underlying property loss.
This coverage includes expenses incurred to avoid or minimize the suspension of operations, at either the described location or at a replacement premises or a temporary location.
The separate Extra Expense Coverage Form pays extra expense only and does not pay for lost income. There is no waiting period: the period of restoration begins on the date of the direct physical loss.
Payment is capped by percentages shown in the declarations, which release the limit in stages. The first percentage applies when the period of restoration is 30 days or less, the second when it is more than 30 but not more than 60 days, and the third when it is more than 60 days. With a $100,000 limit and percentages of 40%, 80% and 100%, an insured whose restoration takes 45 days can collect no more than $80,000, even if its extra expenses were $90,000.
Chapter vocabulary
Lesson summary
- The Building and Personal Property Coverage Form covers three named types of property: building, your business personal property and personal property of others.
- Its additional coverages are debris removal, preservation of property, fire department service charge, pollutant clean-up and removal, increased cost of construction and electronic data. Debris removal is limited to 25% of the sum of the deductible plus the amount paid for the direct loss.
- Property is valued at actual cash value unless the replacement cost optional coverage applies. A coinsurance penalty reduces payment when the limit is less than the coinsurance percentage of the property’s value.
- Builders risk covers a building under construction for its completed value. In the standard form, coverage ends, among other triggers, 90 days after construction is complete or 60 days after the building is occupied in whole or in part, or put to its intended use.
- Business income pays the actual loss of net income and continuing expenses during the period of restoration, which begins 72 hours after the loss. Extended business income adds up to 60 consecutive days after operations resume.
- The Legal Liability Coverage Form pays damages the insured is legally obligated to pay for loss to property of others in its care, custody or control, and includes defense.
- The Extra Expense Coverage Form pays the extra cost of staying in operation, has no waiting period, and limits payment by percentages tied to the length of the period of restoration.