Business Insurance
Property Insurance Coverage and Risks
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Insurance must be included in the operating expenses of any business. In fact, a property or business owner may have an obligation to buy and maintain certain kinds of insurance. Mortgage or bank loan terms often require the property owner to maintain certain kinds of insurance, like fire and liability. Failure to do so is a violation of the loan agreement, and may result in penalties, or the cancellation of the agreement. At the very least, a bank will place "forced insurance" on the property than costs the property owner several times as much as normal property insurance.
Additionally, there are so many risks related to the management of rental properties that a lack of insurance would in itself be considered negligent.
Property Insurance
Types of Property Coverage and Risks.
Amount of Insurance
Named Peril vs. All Risk Insurance
Named Peril Coverage
All-Risk Coverage
Occurrence of physical damage
Difference in Conditions Coverage
The Business owners' Standard Property Coverage Form
Principal Covered Perils and Exclusions
Debris Removal
Lost Income
Lost Information
Optional Coverage
Liability Insurance Basic Coverage
Property Insurance The insurance portfolio starts with "first party coverage". A policy covering the insured's own property against the common perils of fire, wind, flood and glass breakage. Types of property coverage, and risks against which the property owner may wish to insure, include the following:
- Natural disaster: fire, wind, flood, earthquake;
- Crime: assault, theft or embezzlement by employees;
- Special coverage for mechanicals like transformers, boilers and furnaces; plate glass, doors and and other things excluded from regular coverage;
- Business interruption insurance for lost rents and other income when the property is inoperable or untenable.
- Some courts have recently held landlords liable for crimes committed on a property. Many policies exclude assault and battery from coverage, so you may have to negotiate to have coverage for violence against tenants or visitors.
Most property owners purchase a commercial property policy when they can. However, insurance companies are reluctant to offer a commercial policy that covers anything less than five unit buildings. Although there are variations from company to company, and sometimes individualized policies are sold to deal with unusual circumstances, real property insurance is highly standardized.
Insurers usually follow standards created by the Insurance Services Office (ISO), a voluntary industry group.
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Amount of Insurance
Insurance premiums are a significant cost of property management, but insufficient insurance can result in financial disaster. Therefore, property owners must strike a balance between over-insuring and under insuring. An experienced insurance broker can help decide the most important kinds of coverage, how high a deductible is acceptable to the property owner, and how large the policies should be. The overall net worth of the property owner may help determine the amount of liability coverage that is prudent. As net worth grows, you make a more tempting target, and insurance amounts should be adjusted upwards.
to top Named Peril vs. All Risk Insurance
First party property insurance is usually available in two types of coverage, named peril and all-risk. The basic differences between the two types of policies are that a property owner must prove entitlement to collect under a named peril policy; owners are assumed to be entitled to coverage under an all-risk policy, unless the insurer can prove that there is some reason why coverage can legitimately denied.
to top Named Peril Coverage. Named peril coverage relates to direct physical loss caused by a particular, named peril, such as fire, hail, lightning, wind or water damage. When there is an occurrence of a named peril, the coverage includes removal of debris. to top All-Risk Coverage. An all-risk policy (also called an "open peril" policy) covers all forms of direct physical loss that are not explicitly excluded from coverage, as opposed to coverage of a single peril or a combination of perils written as single coverage's. Four elements have to be proven for the insured to be entitled to benefits under an all-risk policy:
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Occurrence of physical damage;
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Damage occurred during the policy period;
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Insured or covered property was damaged;
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A covered peril caused the damage.
to top Occurrence of physical damage. Damage occurred during the policy period; Insured or covered property was damaged; A covered peril caused the damage. The insurer investigates to see if there are any limitations on the coverage; if the actual cause of the loss was excluded under the policy; or if the insured person violated any policy conditions (e.g., failed to make a necessary report) to the extent that the coverage can legitimately be denied. to top Difference in Conditions Coverage.
On occasion, a property owner may wish to add a peril to the policy. In this case, the business can use DIC (difference in conditions) coverage to add additional perils to a named peril policy, or to turn a named peril policy into an all-risk policy.
to top The Business owners' Standard Property Coverage Form
The Insurance Services Office has drafted a standard policy for small business, called the Business owners' package. It combines property and liability coverage.
The property portion of the Business owners' form covers both buildings and business personal property. Business personal property means property owned by the insured and used in business (for instance, the furniture in an office). to top Principal Covered Perils and Exclusions. There are twelve covered perils under the first-party section of the Business owners' form:
(1) Fire.
(2) Lightning.
(3) Explosion.
(4) Windstorm or hail (but not frost or ice; damage to canopies or awnings outside the building; or rain or snow damage unless the damage was made possible by wind-induced damage to the structure of the building, allowing snow to enter).
(5) Smoke.
(6) Collision of an airplane or vehicle with the premises (unless the vehicle was owned or operated by the insured as part of its business).
(7) Riots and looting (including acts committed by strikers who occupy the building).
(8) Vandalism and damage caused by burglars breaking into the premises (but not damage to glass, or other damage caused by theft).
(9) Sprinkler leakage, including the cost of repairing the sprinkler and structural repairs after the leak.
(10) Damage caused by the sudden collapse of land into an underground sinkhole.
(11) Volcanic actions.
(12) Damage to covered business property when it is being transported, caused by vehicle accident or collapse of a bridge.
The Business owners' form excludes earth movement; costs of complying with laws or ordinances; seizure or destruction of property as ordered by the government; nuclear hazards; power failure; acts of war; floods and other water damage (including burst pipes and water discharge other than sprinkler leakage); electrical damage (but electrical files are covered). to top Debris Removal. The Business owners' form also covers debris removal- but not the cost of removing pollutants from land or water, or moving or replacing polluted land or water. For this purpose, pollutants are defined as any "solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids alkalis, chemicals and waste." The definition of waste is broad enough to encompass materials for recycling, reconditioning or reclamation.
However, the policy has a separate provision permitting payment of up to $10,000 per year for pollution removal, provided that the pollutants were discharged or otherwise moved by a covered cause of loss occurring during the policy period. to top Lost Income. Another policy provision is very important for small businesses: the policy covers lost income during the period after a covered lost (e.g., repairing and cleaning up the premises after a disastrous fire). It also pays normal expenses that continue even though no income is coming in, e.g., payroll. But consequential losses, such as cancellation of a lease because the property owner is unable to provide possession, are not covered. Lost income caused by computer failure is covered, but only to a limited extent. to top Lost Information. Coverage extends to direct physical loss or damage of information (for instance, during a fire, a beam lands on the computer and the computer and information stored inside are lost), but only for sixty days after the date of the accident causing the damage, or the period of time needed to repair the damage, whichever is longer. to top Optional Coverage. Optional coverage can be purchased, covering mechanical systems, outdoor signs, exterior and interior glass under circumstances that would otherwise be included. Coverage can also be augmented or enhanced for damage caused by crime like: burglary, robbery, and employee dishonesty. to top
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