Commercial Property Insurance Overview
Just as individuals and families buy homeowners insurance, businesses and other organizations buy commercial insurance. The distinction between personal insurance and commercial insurance is fundamental to property-casualty insurers. Some insurers provide only commercial insurance and some provide only personal insurance. Many insurers provide both, but typically do so through separate personal and commercial divisions. In general, the property-casualty insurance needs of businesses and other organizations are more complex than those of individuals and families. Accordingly, commercial insurance involves a far greater number of policy forms and endorsements than personal insurance. “Commercial Property Insurance” describes insurance covering commercial buildings and their contents against loss caused by fire, windstorm, and many other causes of loss, or perils. Policies may be purchased to cover only a single building at a location or many buildings at different locations (blanket).
Disclaimer: The information provided within this overview is not “all inclusive” concerning commercial property insurance. Insurer’s policy forms vary so you should always consult your agent regarding specific coverage questions. We hope the following information shows how endorsements may be used to add or remove coverage to address a business-owner’s specific needs.
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Commercial property insurance can be written by admitted carriers and Surplus Lines carriers who are authorized to conduct business in Florida. The major difference between the two is Surplus Lines carriers are not required to file their rates and forms with the Office of Insurance Regulation for approval. Another major difference lies in the fact Surplus Lines carriers do not participate in the Florida Insurance Guaranty Fund. This means if the company becomes insolvent, the policyholder is not protected under the fund. The forms used by Surplus Lines carriers can be very different from admitted markets with unique exclusions and policy conditions. Many policies also contain a minimum earned premium that is retained by the carrier regardless of when the policy was cancelled.
Commercial Property coverage can be provided through a stand-alone (monoline) policy or written as part of a package policy providing various types of coverage. The most common package policies providing commercial property coverage are the Commercial Package Policy (CPP) and the Business-Owners Policy.
The Business-Owners Policy combines, in a simplified manner, most of the property and liability coverage’s, other than auto and workers compensation, needed by small and medium sized businesses such as stores, offices, and apartment buildings.
The CPP includes several different commercial property coverage parts, many of which are selected by the insured. The basic components of the commercial property coverage part are:
- The Commercial Property Declarations
- One of more commercial property coverage forms
- One of more causes of loss forms
- Commercial Property Conditions
- Any applicable endorsements
The Commercial Property Declarations: This is a required commercial property coverage part component that provides basic information about the policyholder and the insurance provided. In contains the following information that specifically pertains to property insurance:
- A description of the property insured
- The kinds and amounts of coverage provided and the covered causes of loss (basic, broad, or special)
- A list of mortgagees, if any
- The deductible amount
- A list of the property coverage forms and endorsement attached to the policy
- The applicable coinsurance percentage(s)
- Any optional coverage’s
Commercial Property Coverage Form: These forms can be any of several commercial property forms containing an insuring agreement and related provisions. A Builders Risk Coverage Form may be added to provide broader coverage for buildings under construction. A Condominium Coverage Form may be used to provide coverage for Condominium Associations. Each commercial property coverage form contains the following elements:
- Insuring agreement
- Delineation of the property covered and not covered
- Additional coverage and coverage extensions
- Provisions and definitions that apply only to that coverage form
Cause of Loss Form: This is a required component of the commercial property coverage part that specifies the perils (causes of loss) covered. The three forms available, basic, broad, and special, allow the insured to select, or the underwriter to offer, a range of covered perils. The Basic Form covers the least number of perils and the Special Form covers all perils that are not excluded.
Commercial Property Conditions: This is a required component of the commercial property coverage part that contains conditions applicable to all commercial property coverage forms. They are printed as a separate form and apply to all coverage forms included in a commercial property coverage part; unless, a coverage form contains a condition to the contrary. The Commercial Property Conditions do not require reiteration in each coverage form.
Endorsements: Many endorsements are available to tailor commercial property coverage to meet the specialized needs of particular insured’s or to eliminate exposures that underwriters are not willing to insure. This is not a complete list of endorsements available. A few of the most common endorsements are:
Ordinance or Law Coverage: Endorsement that covers three types of losses resulting from the enforcement of building ordinances or laws: (1) the value of the undamaged portion of a building that must be demolished, (2) the cost to demolish the building’s undamaged portion and remove its debris, and (3) the increased cost to rebuild the property.
Spoilage Coverage: An endorsement that covers damage to perishable stock due to power outages; on premises breakdown; or contamination of the insured’s refrigerating, cooling, or humidity control equipment.
Flood Coverage: The National Flood Insurance Program writes most insurance in high risk zones. However, private insurers offer flood insurance by endorsement for some properties. In some cases, the private insurer may provide only excess flood insurance.
Manufacturers’ Consequential Loss Assumption: An endorsement that covers reduction in value of undamaged property due to physical loss to other property.
Brands and Labels: An endorsement that permits the insured, when the insurer takes damaged merchandise as salvage, to stamp the word “salvage” on the merchandise or to remove its brands or labels before sale.
Earthquake and Volcanic Eruption Coverage: Both endorsements extend commercial property coverage to include earthquake and volcanic eruption.
Coverage for Unattached Signs: Most commercial property policies do not cover or limit coverage on signs not attached to the insured structure. Coverage may be added by endorsement or may be purchased on a separate Inland Marine insurance contract. The Signs Coverage Form normally covers neon, fluorescent, automatic, or mechanical signs.
Utility Services Endorsement: Endorsements are available to provide coverage (some very limited) for losses due to the interruption of power, even away from the insured premises. In most cases, the cause of the power interruption must be covered by the policy and there is normally a waiting period.
Newly Acquired Locations: Extends coverage, at the option of the insured, to property at premises newly acquired during the policy period, if the required coinsurance is shown in the declarations. This coverage is normally limited, is an additional amount of insurance above the limit shown on the declarations page, and is not subject to the coinsurance provision.
Business Income Insuring Agreement: Insurance that covers the reduction in an organization's income when operations are interrupted by damage to property caused by a covered peril.
Extra Expenses Insuring Agreement: Covers Expenses, in addition to ordinary expenses, that an organization incurs to mitigate the effects of a business interruption.
Business income insurance can be purchased with or without an extra expense insuring agreement. Like many other forms of commercial insurance, additional coverage is available with the Business Income Insuring Agreement:
Expenses to Reduce Loss: coverage for necessary expenses incurred by the named insured to reduce business income loss, the expenses are covered only to the extent they actually reduce the business income loss.
Civil Authority: coverage for loss of business income that results when access to the insured's premises is prohibited by civil authority because of damage to property other than the insured's. The maximum period of coverage can normally be increased by endorsement.
Extended Business Income Additional Coverage: Coverage for business income losses that continue after the period of restoration ends; the coverage begins when the damaged property has been restored and ends when the insured's business returns to normal, subject to a maximum number of days.
Alterations and New Buildings: In most cases, business income losses result from the interruption of operations that are already underway. However, the form also provides coverage for the loss of income resulting from a delay in starting operations if the delay results from damage at the described premises by a covered cause of loss to any of the following:
- New buildings or structures, either completed or under construction
- Alterations or additions to existing buildings
- Machinery, equipment, supplies, or building materials located on or within 100 feet of the described premises (provided they are used in the construction, alterations, or additions or are incidental to the occupancy of new buildings).
Interruption of Computer Operations: This endorsement provides a very limited amount of coverage for loss of business income or extra expense when business operations are suspended due to an interruption of computer operations resulting from the destruction or corruption of electronic data caused by a covered cause of loss.
Utility Services: This endorsement extends the policy to cover loss of earnings resulting from off-premises interruptions of utilities and communications services.
Other Optional Coverage:
Maximum Period of Indemnity: An option that deletes the coinsurance clause while limiting loss payment to the lesser of (1) the amount of loss sustained during the 120 days following the beginning of the period of restoration or (2) the policy limit.
Monthly Limit of Indemnity: An option that deletes the coinsurance clause while limiting the amount recoverable during any month of business interruption to a stipulated fraction (1/6, 1/4, or 1/3) of the insurance amount.
Business Income Agreed Value: An option that suspends the coinsurance clause as long as the insured carries an amount of business income insurance that is equal to the value agreed on by the policyholder and the insurer.
Extended Period of Indemnity: An option that extends the duration of Extended Business Income coverage to include business income losses that continue for more than 30 days after the property is restored.
Business Income from Dependent Properties: There are a couple endorsements available to provide coverage for the insured's loss of income resulting from physical damage to property at other locations. Some provide broader coverage that others.
Ordinance of Law: Increased Period of Restoration: An endorsement that covers business income loss during the additional time required to comply with building ordinances or laws.
Commercial Property Insurance Rates are developed using several factors:
The Limit of Insurance: The Limit of Insurance applicable to the coverage.
The Covered Causes of Loss Selected: The selected Coverage Causes of Loss indicates the perils covered. They can range from very basic to broad.
The Coinsurance Percentage Selected: Many policies are rated with a "80 percent coinsurance rates." If a higher amount is selected, the premium will be less. If a lower amount is selected, the rate will be more.
The Deductible Amounts Selected: Policyholders willing to self insure some of the smaller losses by choosing a higher deductible, receive a lower premium.
The Optional Coverage Selected: The more optional coverage selected, the higher the premium.
The Construction of the Building: Some construction types are more fire resistive than others. In other words, a masonry noncombustible building would be cheaper to insure than a frame building.
The Occupancy of the Building: The Occupancy refers to the type of activity conducted inside the building. In other words, a building where fireworks are manufactured may cost more to insure than a building used to store nonperishable food.
Protections Installed: This would incorporate things like a sprinkler system or a burglar alarm.
The Exposure of the Building: The insurer will examine the potential risk of their insured regarding adjacent properties. As an example, if the insured manufactured fire-works and an explosion in the insured could catch the building next door on fire; this is an increased "exposure" for the insurer.
The Location of the Building: Where is the building to be insured located? As an example, a building along the coastline would cost more to insure than a building located inland, for windstorm coverage.
Also, with written consent of an insured an insurance company may use a rate in excess of the otherwise applicable filed rate on any specific risk. This is also referred to as A Rating or Excess Rates and is allowed under Section 627.171, Florida Statutes.
The signed consent form must include the rate filed with the Office of Insurance Regulation (OIR) and the excess rate for the risk insured. Also, the company must maintain documentation on each risk subject to individual risk rating. The documentation must identify the named insured and specify the characteristics and classification of the risk supporting the reason it was individually risk rated. A copy of the form must be maintained by the insurance company for 3 years and be available for review by the Department of Financial Services.
An insurance company may not use a consent to rate form for more than 10 percent of its commercial insurance policies written or renewed in each calendar year or for more than 5 percent of its personal lines insurance policies written or renewed in each calendar year.
An insurer's notice of cancellation or non-renewal must be provided to the first named insured only. The non-renewal or cancellation schedule for a Commercial Property policy is very specific according to Section 627.4133 or Section 626.9201, Florida Statutes, depending on the type of insurer:
- 45 days advance notice of non-renewal or cancellation - after policy has been in effect over 90 days.
- 10 days advance notice for non-payment of premium.
- 20 days advance notice if cancelled within the first 90 days.
After the policy has been in force for 90 days or more, the contract cannot be cancelled except when there has been a material misstatement, a non-payment of premium, a failure to comply with an underwriting requirement established within the first 90 days, or a substantial change in the risk. This does not apply to a policy having a term of less than 90 days.
Per Section 627.43141, Florida Statutes, a property and casualty contract renewal may contain a change in policy terms. If a renewal contains such a change, the insurer must give the named insured written notice of the change which may be included with the notice of renewal premium required by F.S. 627.4133 and F.S. 627.728 or sent separately within the specified timeframe. Some policies that fall within this category are: personal auto, commercial and residential property, worker's compensation, employer's liability, inland marine, personal liability and watercraft. The insurer must also provide a sample copy of the notice to the named insured's insurance agent before or at the same time the notice is provided to the named insured. The notice must be entitled "Notice of Change in Policy Terms."
A renewal policy, which includes the addition of optional coverage that increases the premium to a policyholder, may not use the "Notice of Change in Policy Terms" to add the optional coverage to the policy unless the policyholder affirmatively indicates to the insurer or agent that they approve the addition of the optional coverage. Optional coverage is defined as the addition of new insurance coverage that has not previously been requested or approved by the policyholder.
Although not required, proof of mailing or registered mailing through the US Postal Service of the "Notice of Change in Policy Terms" to the named insured at the address shown in the policy is sufficient proof of notice.
Receipt of the premium payment for the renewal policy by the insurer is deemed to be acceptance of the new policy terms by the named insured.
If an insurer fails to provide the required notice, the original terms remain in effect until the next renewal and the proper notice is given, or until the effective date of replacement coverage obtained by the named insured, whichever occurs first.
Please note: "Change in Policy Terms" means the modification, addition, or deletion of any term, coverage, duty, or condition from the previous policy. The correction of typographical or scrivener's errors or the application of mandated legislative changes is not a change in policy terms.
The intent of this law is to allow an insurer to make a change in policy terms without nonrenewing policyholders they wish to continue insuring. In addition, it alleviates concern and confusion to the policyholder caused by the required policy nonrenewal if the insurer intends to renew the insurance policy, but the new policy contains a change in policy terms and encourages policyholders to discuss their coverage with their insurance agents.
Underwriting guidelines vary between insurers. However, below are a few of the most common things an insurer reviews when determining whether to insure a new property or how much to charge. They also use this same underwriting to determine whether or not to offer a renewal policy.
The insurer may consider the age of the building, roof, plumbing, electrical wiring or the heat and air. They consider the condition and location of the property and who occupies it. They may refuse to insure certain types of businesses.
The loss history of the applicant is also considered. If the insurer does make an underwriting decision based on adverse information contained on a credit report, they must furnish the insured with a copy of the report or provide the name, address, and telephone number of the reporting agency.
If an insurer refuses to insure an applicant or if it decides to non-renew or cancel an existing property policy, it must provide advance notice to the insured and in most cases, provide the specific reason for their decision. This is discussed further in the nonrenewal – cancellation information.
Verify before you buy! Contact us to verify the license of the agent and the insurance company before you sign the application for a policy.
Make sure your business is insured properly! If you have a replacement cost policy and fail to maintain the proper amount of insurance, you may be penalized when filing a claim. Make sure your inventory is accurate. It the inventory fluctuates during the year, notify your agent.
Read your policy carefully! Insurance policies differ between insurance companies so you must review your own contract. Insurance policies do not cover everything, read the exclusions. Also, there are limitations on certain types of property. Talk to your agent about additional coverage.
Keep a copy of your important documents in another location! In the event your documents are destroyed, you would have copies of all your important documents including receipts you may need to settle a claim with your insurance company.
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