Commercial Property Insurance

The standard building and personal property form insures three categories, each with its own limit on the declarations page:

• Building. The structure, completed additions, permanently installed fixtures, machinery and equipment, outdoor fixtures, and the personal property you use to maintain or service the building, such as fire extinguishing equipment, floor coverings and the appliances used for cooking, laundry, refrigeration and ventilation.
• Business personal property. Furniture, fixtures, equipment, stock and supplies you own, plus the improvements and betterments a tenant has paid for in space it occupies.
• Personal property of others. Property belonging to someone else that is in your care, useful for a business that holds guest or customer property on site.

Which causes of loss are covered depends on the causes of loss form attached. The basic form names a short list: fire, lightning, explosion, windstorm or hail, smoke, vehicles and aircraft, riot, vandalism, sprinkler leakage, sinkhole collapse and volcanic action. The broad form adds falling objects, the weight of snow and ice, and water damage from a system that leaks or breaks. The special form, which most commercial owners should carry, covers any direct physical loss that is not excluded. The difference matters at claim time: on a named peril form the owner has to show the loss fits a named cause, while on the special form the carrier has to show that an exclusion applies.

The form also carries additional coverages that pay on top of or within the limit. The ones that matter most are debris removal, which pays to clear the site and is capped at a percentage of the loss plus a modest additional amount; preservation of property while it is moved to protect it; the fire department service charge; a small, annual limit for pollutant cleanup; and increased cost of construction, which is a token amount unless ordinance or law coverage is added. Coverage extensions give limited cover for newly acquired buildings, outdoor property such as signs, fences and trees, valuable papers and property off premises.

The exclusions on the special form are where most claim disputes start, and several of them remove perils that owners assume are covered:

• Flood and surface water. Flood, surface water, mudflow, water that backs up through sewers and drains, and underground water are all excluded. Flood is bought separately, through the National Flood Insurance Program or a private flood market, and sewer backup is usually added by endorsement.
• Earth movement. Earthquake, landslide, sinkhole outside the narrow sinkhole collapse cover, and settling are excluded, with fire that follows still covered.
• Ordinance or law. The extra cost of rebuilding to current code, the value of an undamaged portion the city orders torn down, and the cost of demolishing it are all excluded unless the ordinance or law endorsement is added.
• Mechanical and electrical breakdown. The failure of a boiler, chiller, compressor or switchboard is excluded, as is damage from artificially generated electrical current unless a fire results. That is the job of breakdown cover written alongside the property form.
• Wear and deterioration. Wear and tear, rust, corrosion, decay, settling and cracking, and the continuous or repeated seepage of water over fourteen days or more.
• Utility failure away from the premises. Loss from an interruption of power, water or communications that starts off site, unless the utility services endorsement is added.
• Faulty work. Defective design, materials or workmanship are excluded, although resulting damage from a covered cause is paid.

Two conditions sit alongside the exclusions. The vacancy condition removes cover for vandalism, glass breakage, water damage, theft and sprinkler leakage once a building has been vacant for more than sixty consecutive days, and reduces any other loss payment. And the form does not cover the land, the cost of excavation, underground pipes and foundations below the lowest floor unless they are scheduled, or property that is more properly insured elsewhere, such as vehicles and property under construction.

Property premium is rated as a rate per hundred dollars of insured value, built from four factors underwriters call COPE: construction class, occupancy, protection (the fire protection class of the location plus sprinklers and alarms) and exposure from neighboring buildings. Catastrophe exposure is then loaded on top from the carrier's models, which is why a building in a hail or named storm area can pay a far higher rate than the same building elsewhere. The deductible structure moves the number further. Most programs carry a flat all other perils deductible and a separate wind, hail or named storm deductible, which in catastrophe areas is often a percentage of the building's insured value rather than a dollar amount.

The limit should be the full cost to rebuild at today's prices, not the market value or the purchase price. Two provisions punish a limit set too low:

• Coinsurance. Most policies require the limit to be at least a stated percentage of the building's value, commonly 80, 90 or 100 percent. If it is not, every claim is reduced in the same proportion as the shortfall, including a partial loss far below the limit.
• Blanket limits and the statement of values. A blanket limit covers several buildings under one number, which is flexible, but carriers often attach a margin clause that caps any single building at a percentage of its scheduled value. In Missouri, where a 2021 statute ties total loss payment to the statement of values (Missouri Revised Statutes section 379.140), an understated building on the schedule caps the recovery even when the blanket limit is far higher.

Valuation is the other half. Replacement cost pays to rebuild with like kind and quality without a deduction for age. Actual cash value deducts depreciation, which on an older building can be most of the claim. Agreed value suspends coinsurance for the policy term once the carrier accepts a signed statement of values. Carriers increasingly split the difference on roofs, settling them at actual cash value above a certain age even on a replacement cost policy.

A property submission is read in a fixed order, and a gap in any of these items is priced against the account rather than in its favor:

• A statement of values listing each building's address, construction class, year built, square footage, number of stories, occupancy, and building and contents values.
• The year each roof, electrical system, plumbing system and heating and cooling system was last replaced, with the roof covering and deck type.
• Fire protection: sprinklers and their coverage, central station alarms, distance to a hydrant and to the responding fire station.
• Five years of loss runs from every prior carrier, with a note on what was done after each large claim.
• Occupancy detail, such as vacancy, commercial tenants in a residential building and any cooking or hazardous operations.
• For catastrophe areas, wind mitigation features, roof attachment, opening protection and elevation.

Underwriters test the values before they price them. A replacement cost figure that works out well below current construction cost per square foot for the class and region is either corrected by the carrier, with a higher premium, or the account is declined as underinsured. Commissioning an independent valuation before renewal is usually cheaper than arguing with a carrier's estimate after a loss.

After a loss the policy requires prompt notice, reasonable steps to protect the property from further damage, and records of the costs of doing so. Emergency repairs, board-up, water extraction and tarping are part of the claim. The carrier assigns an adjuster, and on a large loss usually a building consultant and a forensic accountant for the income side. The owner may be asked for a sworn proof of loss, an inventory of damaged contents, and the invoices, photographs and records that support the figures.

On a replacement cost policy the carrier first pays actual cash value, the cost to repair less depreciation, and releases the withheld depreciation once the work is completed. The owner generally has to repair or rebuild within a reasonable time to collect it. Where the owner and the carrier agree on the cause but not the amount, the appraisal clause lets each side appoint an appraiser, with an umpire to settle the difference. Where they disagree on whether the loss is covered at all, appraisal does not apply and the dispute goes to negotiation or the courts. Any mortgage holder named on the policy is named on the claim payment, and a lender will often control how repair funds are released.

State law changes the settlement in some places. Several states have valued policy statutes that pay the stated limit on a qualifying total loss. They cannot turn an excluded cause into a covered one: Louisiana courts held after the 2005 hurricanes that the statute does not convert an excluded flood loss into a covered one. On catastrophe deductibles, a Florida named storm deductible set as a percentage of insured value can be a larger retention than many owners realize until the claim is adjusted.

Every owner of commercial real estate needs this line, but what the form has to do varies by class.

For multifamily owners with a schedule of buildings, the questions are blanket limits against per building values, water damage from unit plumbing, roof age across a portfolio and the loss of rents that follows a fire. Associations insuring buildings under a master policy first have to establish what the declaration requires them to insure, since bare walls, single entity and all-in coverage give very different limits. Senior living communities, where residents cannot simply be moved, need property limits paired with extra expense to relocate residents and keep care going.

Hotels and their furniture, fixtures and equipment carry large contents values and frequent renovation, so values change between renewals. Car wash sites, where the equipment is worth more than the building, need tunnel and wash equipment on the schedule at replacement cost and breakdown cover alongside. Dealers with inventory on an open lot insure the building on the property form and the machines on a dealers form, because the property form treats property in the open narrowly.

In hail country the roof terms deserve as much attention as the rate. In Colorado, with cosmetic exclusions and roofs settled at actual cash value, carriers have shifted real money back onto owners through percentage wind and hail deductibles and those two roof provisions.

The same gaps appear in most programs we review:

• Stale values. Building limits indexed from an old appraisal rather than priced against current construction cost, which triggers coinsurance on a partial loss.
• No ordinance or law. Older buildings rebuilt to current code with the upgrade uninsured.
• No income cover, or too little. The building is repaired but the rent or revenue lost while it is closed is not insured. Income and extra expense cover set on the rebuild time belongs on every schedule.
• Flood assumed. Owners outside a mapped zone assume a water loss is covered, and it is not.
• Construction on the wrong form. A major renovation or a building under construction written on the ordinary property policy rather than on a builder's risk policy for the project.
• Excluded ground. Earth movement is excluded everywhere, and in West Virginia, where a state mine subsidence program fills the gap, collapse into old mine workings needs its own cover.