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There are many factors to consider when crafting a commercial property insurance policy that will fit your company’s needs in the wake of a loss. We recommend reviewing your policy provisions in advance to reduce uncertainty. Careful planning and structuring of the policy can set the stage for the recovery process in the event of a claim. Below are four key components of the commercial property policy that will come into play at the onset of the claims process.
Limits of Liability
Property policies can be written on either a scheduled or blanket basis, with reference to
stated values, locations, and/or coverages. A scheduled policy sets forth a specific individual limit of liability for a specified property location. In the event of loss, the Insured can recover no more than that set limit for that property. The alternative is a policy written on a blanket basis. This contract insures multiple locations at a limit that approximates the aggregate values of the properties. Should a loss occur, the policyholder may recover up to this aggregate limit at any one location.
Named Storm Deductible
Commercial property insurance policies typically contain separate deductibles to be applied specifically to losses resulting from Named Storms. Furthermore, it is not uncommon for the deductible amount to be based upon a percentage of Total Insured Values on the policy rather than a stated dollar amount. Policy language should dictate the method of calculation; however, some policies can be ambiguous in this regard. Considering the critical role the deductible amount can play in post-loss decision-making, we recommend reviewing your policy language in advance of a Named Storm to make sure the provisions are understood, and a plan is in place to quickly calculate the applicable deductible in the event of a loss.
Basis for Valuation
If the property is insured at replacement cost, it is to be valued generally at the cost to repair or replace it with materials of “like kind and quality” for the “same or similar purpose” at the location of the loss (specific policy language will differ). Oftentimes, the insurance policy will allow the Insured to replace the property in a different manner if the Insured spends the insurance recovery on the insured asset. Should the Insured decide not to replace, the policy will apply the actual cash value amount to the claim. Actual Cash Value is generally defined as replacement cost less physical depreciation. However, policies may differ, and state insurance laws may further define actual cash value.
Demolition and Increased Cost of Construction
Most property policies exclude coverage for any increased cost of construction occasioned by law or ordinance (e.g., building and safety codes). Oftentimes, the state of the law and regulations has changed dramatically from what was in effect at the time the property was constructed. Consequently, after a loss, compliance with new codes may be required before an owner can receive a building permit to repair or replace the property. The cost of these changes is often substantial, and many times it can be equal to or exceed the amount of loss and damage. The most effective way to avoid this problem is to purchase a separate endorsement to the insurance policy providing for law and ordinance coverage. Careful attention should be paid to the limits of liability to avoid under-insuring your property.
Written by Lisa Talley. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com