Insurance for your building can get pretty complex. There are so many different pieces to understand that even the experts can get confused! Below is Part 1 of our 3 Part Series on Building Insurance. We hope it answers some of your nagging questions on insurance for your building.
Property Policy
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.
Other Factors
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.
Stay tuned for Part 2 and 3 of our 3 Part Series!
Content written by Edward J. Mackoul, President of Mackoul & Associates, Inc.
