Insurance for your building can get pretty complex. There are so many different pieces to understand that even the experts get confused! Below is my overview of Everything You Need to Know About Building Wide Coverage. I hope it answers some of your nagging questions on insurance for your building.
Edward Mackoul, CIC
Mackoul & Associates, Inc.
Everything You Need to Know About Building Wide Coverage
The three ‘main’ components of a Commercial Property policy are Building, Contents, and Business Income. Building covers what you as the owner are responsible for in the building.
Insurance can be written various ways and each way covers different perils. One of the broadest and the most common forms available is Special Form, referred to by some as ‘All Risk’. Special Form means that unless a peril is excluded, coverage is provided. Typical perils that are covered are fire, wind, lightning, and burst pipes. The building or contents can be insured for Replacement Cost or Actual Cash Value (ACV). Replacement Cost means that the insurance company will pay for like kinds of material, without considering depreciation. ACV is replacement cost minus depreciation. Replacement Cost is not guaranteed Replacement Cost. Most people assume that since they have Replacement Cost, the insurance company is going to pay whatever it will cost to rebuild, repair, or replace the building/contents. That is not true. If you have Agreed Amount, the insurance company will only pay up to the limit indicated in the policy. If your policy contains Coinsurance, it is possible that you might be penalized in the event of a claim, as Coinsurance is a penalty. If your policy includes 80% Coinsurance, you must insure the Building, Contents, or Business Income for at least 80% of its replacement value.
Difference in Conditions
Flood/Broad Form Water/Back-up of Sewers & Drains all provide coverage for water damage related claims. Depending on the coverage maintained, coverage can be limited to only a back up of a sewer or drain, or can be as broad to include back up, as well as flood. Flood is usually defined as surface water, waves, overflow of a body of water, and/or the spray from the water leakage or seepage into the building. This will sometimes include coverage for underground water mains. Earthquake Coverage provides for Earthquake and Volcanic Eruption claims. Ordinance or Law provides coverage in the event of a claim for the undamaged portion of the building, the cost to demolish the undamaged portion of the building if required by code, and lastly, the cost to bring the building up to code in the event of a claim. This could include wheelchair ramps, sprinkler systems, and emergency lights. These are very important coverages and are generally excluded, unless endorsed back on to the policy.
Mold: In a Property policy, Mold provides coverage for the clean up of mold when related to a covered claim.
Terrorism: Provides coverage for losses resulting from acts of terrorism.
Systems Breakdown (Boiler & Machinery): Most people assume it covers just the boiler and will provide coverage in the event the boiler stops working and needs to be replaced. Nothing could be further from the truth. Covered equipment includes heat and hot water boilers, air conditioning systems, electrical distribution systems, elevators, and security systems. Coverage is provided for physical and financial damage from covered equipment failure, such as the cost to repair, time and labor, work done to limit the loss, and recovery expenses. Normal wear and tear, as with all insurance, is excluded.
General Liability provides coverage for Bodily Injury (injury to someone) and Property Damage (damage to someone’s property). Coverage usually includes Personal & Advertising Liability, which covers libel, slander, or defamation of character, and Products & Completed Operations, which covers a defective product or faulty workmanship. Contractors doing work in the building must have this last coverage. General Liability policies also include Fire Damage or Tenants Legal Liability. This coverage does not apply to a co-op or condominium, so it should not be taken into consideration when comparing quotes. It covers liability to others for damages resulting in the space you rent or lease. Medical Payments provides for medical expenses resulting from bodily injury on premises.
General Liability—Optional Coverages
One of the most confusing coverages is Hired/Non-Owned Auto Liability. It provides for lawsuits resulting from an injury or damage caused by an auto that the building does not own or one that they hired. An example of a non-owned auto would be the super getting into an accident while driving to the store to pick up supplies for the building. An example of a hired auto would be a contractor that the building hires gets into an accident. The coverage is usually inexpensive and is a requirement if the building has a Commercial Umbrella. Employee Benefits Liability covers lawsuits for negligent acts or omissions in regards to employee benefits such as health or dental insurance. Garage Keepers Legal Liability provides coverage for automobiles left in custody of the insured or their employees. If you have valet parking, this coverage is a must.
General Liability—Other Factors
Mold in a General Liability provides coverage for lawsuits resulting from a covered incident. Is coverage for Lead Paint important? In a rental building, it might be, but it might not necessarily be in a co-op or condominium.
Terrorism is not as much of a necessity in a General Liability policy as it is in a Property policy. The building would have to be sued because of a terrorist attack for coverage to apply.
A Commercial Umbrella provides excess insurance over the General Liability, Directors & Officers Liability, and Workers Compensation policies. Coverage is provided when the Occurrence Limit is exceeded or the Aggregate Limit is exhausted. A Commercial Umbrella generally has a Retained Limit, which is not a deductible, though it resembles one. The Retained Limit turns into a deductible when the General Aggregate has been exhausted as the Commercial Umbrella drops down and provides coverage.
Directors & Officers Liability provides coverage for the Board of Directors while acting in their capacity as board members. A comprehensive policy will provide coverage for lawsuits such as discrimination, wrongful termination, and non-monetary damage lawsuits. The policy should include coverage for the property management firm, as their contract indicates the building will be responsible for their legal fees in the event they are named in a lawsuit along with the board.
Crime/Employee Dishonesty/Fidelity Bond
This coverage provides for theft of the building’s funds or personal property by an employee or board member. Coverage can usually be endorsed to include theft by an employee of the property management firm.
An Environmental policy can be extremely broad and provide coverage for all types of pollution claims, including Lead Paint and Asbestos, or it can be limited to clean-up costs and any liability claims resulting from an oil leak. Having an Environmental policy is a must, especially if you have an underground storage tank.
Workers Compensation & New York State Disability
Workers Compensation and New York State Disability are both required by New York State in the event there are employees on payroll. Workers Compensation provides coverage for an employee who is injured or becomes sick on or as a result of the job. The premium is based upon payroll and job classification. Disability provides coverage for an employee who is injured or becomes sick off of the job. The premium is based upon the number of employees and the gender of each.