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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The Policy

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, including general liability 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, other than auto and workers compensation, needed by small and medium sized businesses such as stores, offices, and apartment buildings.

The Commercial Package Policy 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 or more commercial property coverage forms
One or more causes of loss forms
Commercial Property Conditions
Any applicable endorsements

The Commercial Property Declarations: This is a required 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 endorsements attached to the policy
The applicable coinsurance percentage(s)
Any optional coverages

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 specifically 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 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: An endorsement that generally covers three types of losses resulting from the enforcement of building ordinances or laws: (1) the rebuild cost of the undamaged portion of a building that must be demolished, (2) the cost to demolish the building’s undamaged portion, 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: This endorsement is typically used to cover the reduction of value of the undamaged stock when a portion of the stock is damaged from a covered cause of loss.
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 to mitigate the possibility of injury to the insured’s business reputation resulting from the sale of salvaged goods by the insurer.
Earthquake and Volcanic Eruption Coverage: Both endorsements extend coverage to property from earthquake and volcanic eruption.
Coverage for Unattached Signs: Most commercial property policies do not cover or provide limited 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 if the interruption occurs 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: Automatically extends coverage, to property at premises newly acquired during the policy period for a certain number of days, during which the policyholder must inform the insurer of the acquisition. Often this coverage is limited to a specified amount and for a specific number of days, is an additional amount of insurance above the limit shown on the declarations page, and is not subject to the coinsurance provision.

Business Income & Extra Expense Coverage

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 continue their normal operations after a loss.

Business income insurance can be purchased with or without an extra expense coverage. Like many other forms of commercial insurance coverages, 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 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 some endorsements available that provide coverage for the loss of income resulting from physical damage to property at other locations. Some provide broader coverage than 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.

Rating Factors

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 selections offer several sets of covered causes of loss or perils, generally classified as Basic, Broad or Special forms. The Basic form covers 11 perils. The Broad form adds an additional 6 perils that would be covered. The Special form does not specifically list the perils. Instead, it provides an “all risk” coverage unless specifically excluded.

The Coinsurance Percentage Selected: Many policies are rated with an "80% coinsurance clause." 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 coverages are 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 systems like a sprinkler or a burglar alarm system.
The Location of the Building: The location of a building also impacts the rates. As an example, for windstorm coverage, a building along the coastline would cost more to insure than a building located inland.

Also, with written consent of an insured, an insurance company may use a rate in excess of the otherwise applicable rate filed with the Office of Insurance Regulation (OIR). This is on any specific risk. This is allowed under s. 627.171, F.S.

The signed consent form must include the rate filed with the 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 OIR.

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.

Cancellation and Nonrenewal

An insurer's notice of cancellation or non-renewal must be provided to the first named insured. The non-renewal or cancellation schedule for a Commercial Property policy is specified by s. 627.4133 or s. 626.9201, F.S., depending upon whether the policy is issued by a surplus lines company or an authorized carrier, and whether the policy is written for a commercial risk or a commercial residential risk. Additional provisions apply to policies underwritten by the Citizens Property Insurance Corporation.

For Commercial Property Policy Not Covering Commercial Residentials Risks:

An admitted insure must provide a:

45 days advance notice of non-renewal or cancellation - after policy has been in effect over 60 days.
10 days advance notice for non-payment of premium.
20 days advance notice if cancelled within the first 60 days.

After the policy has been in force for 60 days or more, the contract cannot be cancelled except when there has been a material misrepresentation, a non-payment of premium, a failure to comply with an underwriting requirement established within the first 60 days, or a substantial change in the risk. This does not apply to a policy having a term of less than 60 days.

For Citizens Property Insurance Corporation:

The same provisions as above apply, except for risks that prior to the date of application that were most recently insured by an insurer that has been placed in receivership. Citizens Property insurance Corporation may immediately cancel a policy that has been in effect for 90 days or less for material misrepresentation or failure to comply with the underwriting requirements.

For Commercial Residential Policies Underwritten by Authorized Insurers:

Examples of such risks are buildings that are owned by a residential condominium association or an apartment building. For these risks, an admitted insurer must provide a:

120 days advance notice before the effective date of the nonrenewal or cancellation.
10 days advance notice for non-payment of premium.
20 days advance notice if cancelled within the first 60 days.

For commercial policies underwritten by surplus lines (non-admitted) insurers:

The insurer must provide a:

45 days advance notice of non-renewal or cancellation - after policy has been in effect over 60 days.
10 days advance notice for non-payment of premium.
20 days advance notice if cancelled within the first 90 days.

"Policy Change" Notice Requirements

Per s. 627.43141, F.S., 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. This notice may be included with the notice of renewal premium required by ss. 627.4133 and F.S. 627.728, F.S., 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 and policies issued by Surplus Lines companies. 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 the insured, may not use the "Notice of Change in Policy Terms" to add the optional coverage to the policy unless the insured 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, a 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 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 considered a change in policy terms.

The intent of this law is to allow an insurer to make a change in policy terms without having to nonrenew the policies. In addition, it alleviates concern and confusion to the insureds caused by the required policy nonrenewal notices if the insurer intends to renew the insurance policy, but the new policy contains a change in policy terms. This notice also intends to encourage the insureds to discuss their coverage with their insurance agents.

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