FAQ – Commercial Property

Inland And Ocean Marine

If your business operation includes sending and receiving goods, it’s likely that part of your insurance needs may be handled by Marine Insurance. This major and oldest type of coverage consists of Inland and Ocean Marine coverage.

Inland Marine is a varied and flexible line of business. While it shares elements that are found in Property, Automobile, Ocean Marine and Liability coverage, it also has features that are quite distinct from any of its peer lines of business. Inland Marine coverage protects a wide variety of property. It is used to protect portable commercial property such as many types of equipment used in construction as well as some types of property that are, for all intents, immovable, such as tunnels, bridges and other property that facilitates non-marine travel. For help in identifying inland marine exposures, insurance professionals use a standard called the National Association of Insurance Commissioners (NAIC). Nation-Wide Inland Marine Definition was last revised in 1976. It still acts as the major source used by states to guide their approach in recognizing what classes of property are members of the Inland Marine Family.

The oldest line of insurance is Ocean Marine. Merchants who traded goods over waterways developed the earliest concept of minimizing risk. A person sending goods along the Nile usually split-up their goods. His use of several barges meant that the loss of one shipment would not result in a total loss. Much later, coffee-loving businessmen in olde London discussed upcoming sea voyages and decided which they might partially sponsor against risk of loss.

Ocean Marine coverage protects interested parties against the financial consequences of direct damage or loss as well as from their legal liability related to owning or operating a vessel. Ocean Marine policies protect (usually larger) craft of many types such as cruisers, barges, tankers and tugboats that are used on either “blue waters” (oceans) or “brown waters” (lakes, rivers). The policies are also used to insure cargo while shipped between their destination points.

While inland marine policy language is very similar to other types of insurance, ocean marine is not. Maritime law still heavily influences the latter and its policy wording reflects that unique heritage. If you need such protection, talk to your insurance professional who should be able to provide access to a specialty insurance carrier.

Insuring Electronic Data Processing Equipment

So many businesses are computer-dependent. Only the smallest retailer can operate without a computer cash register. Embedded chips and computers operate manufacturing equipment, contractors’ equipment and are even becoming a critical part in hospital operating rooms. Rather than insuring the computers as pieces of office or manufacturing equipment, the Electronic Data Processing (EDP) form responds to the need to protect hardware, software, media and other exposures that are unique to this equipment. Coverage is available for hacking (unauthorized computer system access) and virus damage, power shortages, overload and outages.

There isn’t a standard form for providing Electronic Data Processing or Computer coverage. Because so many different forms are offered by many insurers, businesses seeking coverage must take extra care to understand what is covered.

Any commercial operation that owns and/or uses computers and other data processing equipment is eligible for EDP coverage. Commonly a policy covers hardware, media, programs/applications, data records, proprietary programs, loss of income and (on- or off-site) Website servers.

How the EDP’s coverage applies depends upon the policy definitions of key terms, including “computer hacking,” “computer virus,” “data records,” “media,” “telecommunications equipment” and others. EDP policies have many defined terms because technology is dynamic. Liberal use of specific policy language helps to preserve an EDP policy’s intended coverage.

Typically, coverage is provided against a specific list of events that can cause tangible loss to electronic equipment. Different coverage applies to major areas of EDP, such as hardware, software and Website servers. Covered businesses usually must comply with certain provisions to qualify for coverage, such as properly creating and storing back-up programs.

There are certain types of property that, generally, are ineligible for coverage under an EDP policy, such as:

  • Hardcopy accounts, bills, evidences of debt, records, abstracts, deeds, manuscripts, program documentation and similar property
  • Portable computers that are stolen or that disappear
  • Any property used for illegal transportation or that is contraband
  • Any property that is leased or rented to others
  • Currency, food stamps, lottery tickets, money, notes and securities
  • Property held for sale

One area that a business must pay attention to is how losses are settled. Are claims handled according to the current value of the lost equipment (Actual Cash Value – ACV) or according to what is necessary to replace the property? Settlement based on ACV can be a problem for companies that don’t regularly upgrade their EDP equipment. Technology changes so fast that payment for equipment purchased years ago is far less than what is needed to secure new equipment. On the other hand, replacement cost coverage would not be as critical for a firm that regularly changes equipment as damaged property would likely be newer.

Covering Your Signs

Nearly every business has signs that tell their customers their name, address, hours of operation and so on. Some of them are simple, while others are complex structures all their own. Many businesses typically use lighted signs. The Sign policy created by Insurance Services Office is available to insure against the loss or destruction of signs, including fluorescent, neon, automatic or mechanical sign. Coverage also extends to lamps. However, fixed, non-lighted signs (such as billboards) are not eligible under a sign policy, even if they are illuminated by separate electric lights.

A policy requires that, in order to be covered, each sign must be specifically described including lettering information, the sign’s location and then the limit. If the business buying the coverage wants to reduce its coverage cost by using a deductible, it has to accept a 5% deductible.

Example: An insured’s Sign policy has a limit of $10,000 and a 5% deductible applies. Later, the insured files a loss and the insurer determines total damages of $1,329. Because of the deductible and limit, the insured is paid $829 ($1,329 – $500 [10,000 X 5%]).

The policy protects against any risk of tangible damage that is not excluded or limited in the coverage form. Some of the events that could cause loss that is not covered include:

  • Governmental Action – such as property seized by authorities for emergency use
  • Nuclear Hazard
  • War and Military Action
  • Consequential (indirect) loss – such as a storm destroys a source of power and a company’s sign can’t be lit for several weeks
  • Any breakage that occurs during transportation, installation, repairing or dismantling
  • Dishonest acts – such as a custom sign made of expense, in-laid glass panels is stolen by an employee of the covered business
  • Short-circuiting or electrical surges
  • Tricks or fraud – such as crooks take the sign by posing as municipal electrical inspectors

The size, geographic location and specific location are all elements that an insurance company would study before deciding whether to provide sign coverage. The larger the sign, the more potential damage can occur. Signs that are located away from the main premises are more vulnerable to vandalism and theft. Signs are very easily damaged by windstorm and hail so geographic considerations must be made.

If your business has made a significant investment in its electric signs, be sure that they are properly covered.

The Standard Property Policy

What if you own a building that is used for business purposes? What if you weren’t able to buy a Commercial Package Policy (CPP) because of your building’s size, age, construction or because of its contents? Well, if your major concern is getting coverage for your building, a Standard Property Policy is an available coverage alternative.

What Is Your Building Covered For?

Besides the building described in the policy, the Standard Property Policy also covers completed building additions, property that is for maintaining or servicing the building (such as mowing or painting equipment), permanent fixtures (such as permanent shelving), machinery and material meant for construction or repairs to the covered building.

Can I Get Coverage For My Business Personal Property?

Yes, the Standard Property Policy can be used to cover furniture, fixtures (that aren’t permanently attached), machinery, equipment, stock, materials and even property that you lease or which belongs to a building (business) tenant. Further, you also have coverage for personal property of others that is under your care or on or near your insured building

Is any Type of Property Not Covered?

Of course some types of property are excluded. The Standard Property Policy doesn’t cover money, securities, deeds and similar property. Further, there’s no coverage for animals, illegal goods, parts of the building that are below the ground, cost of digging or excavating, property being transported by sea or air, or property that’s insured by another policy. There are other items that aren’t covered, but most of them fall into the categories of outdoor structures that are beyond the scope of the Standard Property Policy or items that should be covered by other types of policies.

What Types of Loss Are Covered?

The coverage provided by the Standard Property Policy takes care of losses from basic sources such as fire, lightning, and certain kinds of explosions. Further, you have the option of adding coverage for damage caused by wind, hail, smoke, aircraft, vehicles, hostile mobs, sinkholes, leaky sprinklers and volcanoes. The policy even offers several additional coverages to take care of your expense to remove debris, protect property, take care of pollutants or handle a fire department charging you to make a fire run.

There are also some handy coverage extensions available under the policy and, of course, the policy includes a group of exclusions that are common to most commercial insurance policies written to cover property. If you have a commercial building, then you have the need for protection. Talk to an insurance professional to see if the Standard Property Policy is a good way to protect your property.

Dealing With Indirect Loss

As a business owner who deals with protecting your company’s assets, it may seem logical to focus on handling threats to your physical assets, such a building, equipment, office furniture, etc. However, consider the following:

Example: Paula’s Dry Cleaning suffered a minor fire caused by a short-circuit in a dryer. However, a lot of smoke and residue accompanied the small fire. The dryer could be repaired and cleaned in a few days, but the premises would take three weeks to clean and decontaminate.

In this case, the business owner’s loss of use of her store was a far greater loss than the actual damage to the physical item (dryer). Depending upon the type of loss and the type of business you operate, intangible or indirect losses (also known as Time Element losses) may threaten your operation’s financial health as seriously as any direct loss.

Time Element describes losses to businesses that occur because of the time needed to repair or replace property that has suffered direct damage. The longer repairs take, the greater the amount of the time-related loss.

DIRECT VS. INDIRECT DAMAGE – Direct damage refers to tangible damage to property. A fire occurs to a warehouse. That warehouse has experienced direct damage. Time element damage is not as clear. It refers to property being damaged or destroyed and then the business must stop operations until the property is repaired/replaced and normal operations resume. The amount of the loss is not always dependent on the value of damaged property. Rather, it is related to the impact the loss has on regular operations.

INSURABLE VS. BUSINESS RISK – Tangible losses are not the sole cause of time element losses. Any event that interrupts operations causes a time element loss.

Example: A printing plant’s employees go on strike for two months, closing down operations.

Example: A local restaurant featuring Australian cuisine loses 80% of its business when customers’ tastes change.

However, these are business risks and are not eligible for protection under most insurance contracts.

SECURING COVERAGE – Should you begin your search for coverage against indirect loss, be sure that it addresses any loss of business income as extra expenses that are created by a direct loss. Getting adequate protection means you’ll have to determine the level of income coverage you may need, the likely length of business interruption you may suffer and the importance of continuing operations. Once you determine your priorities, you can find matching coverage.

Example: An insurance agent’s regular office is severely damaged by fire. She keeps a full set of backup files at a remote location. The agent will not actually lose any income because of the loss of her office, but she will need to rent temporary replacement space, furniture, equipment, communications services, etc. She will also incur significant costs to notify clients and insurers and other expenses to maintain her operation while she rebuilds or finds a new office.

You have invested a lot in your business. It is important to be sure that you take the steps to deal with both direct and indirect sources of loss. As usual, it is always a good idea to discuss your questions and needs with an insurance professional.

Additional Insured – Lessor of Leased Equipment

Eventually, every contractor or subcontractor faces a job where he needs to rent or lease equipment in order to complete the project. Securing the equipment usually involves a written contract in which the leasing company will ask the contractor to provide proof of insurance. This proof usually takes the form of a “certificate of insurance” and, in almost every case, the rental company wants to be named as an additional insured to protect their legal liability and interest in rented/leased equipment.

The above situation can be addressed by endorsing a version of the Additional Insured-Lessor of Leased Equipment form onto the contractor’s liability policy. The basic version specifically names the rental company. It is normally used for contractors who rent equipment only occasionally, or rent it without a written contract. The other form is for the contractor who frequently enters agreements to rent equipment. This form covers the interest of any leasing company from whom equipment is rented by the contractor when a written contract is involved, and it does so without having to endorse the policy each time to name the rental firm.

Because of various court decisions, the Additional Insured Lessor form was recently changed. A number of courts interpreted the form’s language quite broadly. Specifically, some courts found endorsed contractor policies obligated to provide defense coverage and indemnification to equipment lessors even when the lessee (contractor) had no responsibility for the loss that triggered the lawsuit. Removing some conflicting language changed the forms. The revised forms are written with a clearer intent. They should apply only in losses where there is, at least, some degree of fault or negligence on the part of the contractor.

A contractor and an insurance professional should approach this subject with a checklist to be sure that all the important items are handled. To start with, be sure that the rental company has its own liability insurance. This is suggested in case the contractor renting the equipment is not negligent or responsible for a particular job site incident involving the equipment and liability reverts back to the equipment’s owner. In this case, maybe get a certificate of insurance from them! Next, ask all relevant parties (contractor, rental company insurance agent, insurance company underwriter) to review the rental contract. This step assures that everyone is aware of its terms and conditions and how it matches up to the coverage and limitations of the additional insured form. Next, make sure to use the same language to add the rental company on the certificate of insurance and to attach the corresponding form to the policy. It is also important to understand that additional premium charges may be necessary. In such cases, be certain that all parties accept the reasoning for the charges. Finally, it is critical that al parties be aware that coverage ends when the work is done and the equipment is returned to the rental company.

This additional insured form can help a contractor out in special situations, but it is only useful when all parties take the time to use the form properly.

Functionally Valuing Older Business Property

Many firms have been in operation for decades and their longevity is usually the result of doing things the right way. Besides serving their clients well and operating profitably, there’s another area that veteran firms may have in common. They may be using machinery or equipment which, while still serviceable, may be very old. The aging equipment may have reached the point where it:

  • is functionally obsolete
  • no longer exists or
  • has been replaced with more effective, functional and technologically advanced equivalents.

The issue of functionally operating equipment is not a problem when the equipment continues to operate and can be maintained. However, the situation causes a problem when trying to insure such property. A typical insurance policy would not have the option to respond to the loss properly. However, a commercial property policy can be modified with a form that may make coverage more practical. One form, called “Functional Personal Property Valuation,” changes a policy so that the regular policy conditions on valuing a loss and coinsurance don’t apply. This is a significant change because those provisions work under an assumption that the insured properly may be routinely replaced.

Coverage that has been changed to deal with older equipment recognizes that the insured firm may have to be more concerned with repairing damaged, older equipment or finding an equivalent substitute. A policy with a functional valuation provision is likely to offer the additional option of paying an amount equal to the damaged or destroyed property’s market value that it held just before their loss. Other features are requirements that any repairs be done quickly and that any replacement property be at the same site and for the same use of the property that was lost or destroyed. A coverage modification is also likely to add terms with special definitions, such as “replacement” or “functional equivalent,” or “market value.”

A policy that has been altered in order to value certain property on a functional settlement basis should result in smoother claims handling and a better loss to post-loss transition. Arranging for such coverage may also spur a buyer to identify possible sources for replacing his vulnerable, older property.

If your concern is one that may be dependent on older equipment, it may be past the time that you need to discuss your particular coverage need with a knowledgeable insurance professional.

Commercial Output Policy

For certain businesses, it may not make much sense to buy a standard Commercial Property Policy which protects against routine building and business property loss exposures. For companies that deal with heavy retail sales activity, active product transportation, above average processing/manufacturing, or that are involved in equipment installation or repair, there’s another coverage alternative. Such businesses may want to consider a Commercial Output Policy or COP.

The COP is the modern version of an older coverage form called a MOP (Manufacturer’s Output Policy). The policy is very well suited to handling larger businesses, particularly ones that move property around to different locations. It is also a good coverage choice for businesses with high, fluctuating levels of stock or merchandise.

A COP provides flexible protection by combining broad commercial property and inland marine coverages in a single form. This approach reduces the potential for coverage gaps that could occur when commercial property forms are merely packaged with separate inland marine policies.

The COP can insure damage to stock (output) during the manufacturing process and while it is in transit. Coverage exists for a variety of property such as equipment used by contractors and computers. It can cover operations involving building and installation as well as offer equipment breakdown protection.

A COP typically offers a variety of optional features such as coverage for loss involving:

  • Crime
  • Employee Dishonesty
  • Spoilage (particularly of refrigerated products)

Another feature of a COP is the use of blanket coverage. In other words, a single, substantial limit of insurance may apply to several classes of property (buildings and business personal property, property in transit) and without a coinsurance provision.

The COP is flexible enough to provide coverage to most large commercial operations. It also offers limits that are much higher than what is generally offered by other types of commercial property policies. If you own a large business, it may be worth your while to call a COP.

The Commercial Property Program

Protecting your real and business personal property is a part of any insurance program, as even a small business may have most of its assets and resources tied to tangible property. A national standard for insuring property is the Insurance Services Office (ISO) Commercial Property Program.

The Insurance Services Office is the nation’s largest corporation that develops and maintains insurance forms many insurers in the property and casualty insurance industry. Companies may use ISO forms as is, modify ISO forms or create their own forms. Many companies use the ISO Commercial Property Program which may be written either as a single policy that covers only buildings and property or as a package that provides property, liability and, if you choose, crime insurance for your business.

Eligibility

Nearly any business may qualify for protection under the Commercial Property Policy. The exclusions that do exist usually involve the type of businesses that can qualify for lower rates. Otherwise, you could pick up a hundred different CPP policies and see a hundred different types and sizes of businesses covered, from bakery to insurance agency, from auto repair shop to a small, domestic brewery; the program is very flexible.

What Is In A CPP Policy?

A Commercial Property Policy is flexible because it consists of several basic parts or forms:

  • Declarations Forms – these tell you who is covered, the amount of insurance, the type of coverages written and other information about the business and other identifying details.
  • Conditions Forms – these documents contain sets of conditions that control how the policy operates such as the customer’s duties when a loss occurs, the method used for settling a loss or what steps to take when the customer and the insurer disagree over the amount of a loss.
  • Coverage Forms – which include descriptions of the type of property that is covered or excluded and it explains items such as coverages, insurance limits, definitions, deductibles and other important provisions.
  • Causes of Loss Forms – as you might expect, these forms describe the causes of loss (perils) that are insured against and any exclusions.
  • Policy Cover or Jacket – which is, literally, a cover designed by the company providing the policy and it usually includes a table of contents or an index.

The above, basic parts can be modified or supplemented to better fit different types of businesses by adding a wide variety of optional coverage forms called endorsements.

Causes Of Loss Forms

The following Causes of Loss Forms are available under the CPP:

  • BASIC – protects against Fire, Lightning, Explosion, Windstorm, Hail, Smoke, Aircraft or Vehicles, Riot or Civil Commotion, Sprinkler Leakage, Vandalism, Sinkhole Collapse, and Volcanic Action
  • BROAD – adds several additional covered causes of loss over the Basic Form, including Breakage of Glass, Falling Objects, Weight of Snow, Ice, or Sleet, and Water Damage.
  • SPECIAL – provides coverage on an “all risk” basis which essentially covers anything not otherwise excluded.
  • EARTHQUAKE – covers earthquake shocks or volcanic eruptions that occur within any 168-hour period.

What is Covered?

A Commercial Package Policy covers building, completed additions, fixtures, permanently installed machinery and equipment, personal property that is used to service or maintain the building or premises, and, under certain circumstances, construction equipment, material and supplies.

Under personal property, the CPP covers furniture and fixtures, machinery, equipment, stock, all other personal property owned by the insured and used for business, labor, materials, or services furnished or arranged by the insured on the personal property of others, any improvements and betterments made by or acquired by the insured (when a tenant), and any leased personal property the insured has a contractual responsibility for. The CPP also covers property that is outside if it is in the open or in a vehicle that is within 100 feet of the premises.

What Isn’t Covered?

Like any insurance policy, there are items that are not covered. A CPP does not provide coverage for accounts, bills, currency (and similar property), animals, automobiles held for sale, bridges, roadways, walks, patios, or other paved surfaces, contraband, property being transported by air or over waterways, land, crops, underground property, most vehicles, expenses related to replacing company records and other property.

Again, this is just a very brief discussion of the CPP. If you need more information, help is nearby. Contact an insurance professional to talk about coverages and your coverage needs.