commercial property insurance
Protect Your Business With Commercial Property Insurance
Running a business is challenging, while protecting the business assets is even more difficult for many business owners, but it is necessary.
To understand how insurance can protect business assets, many turn to business insurance to mitigate the risk, but unfortunately, they are not easy to understand like any legal contract. This article will simplify the complex nature of business property insurance contracts.
Commercial contract insurance will protect the assets of a business in an unforeseen situation. But as all Insurance nature as a contract, one needs to understand what is covered by understanding the Policy Forms, Additional Coverage available, and Miscellaneous Property Forms.
Breaking them into the following sections helps anyone quickly understand the commercial property insurance contracts in-depth.
Property Insured Under Insurance Policy
There are 3 classes of property in a standard insurance policy.
The Building Coverage
- Assembly for people gathering for entertainment, worship, such as community hall
- Business where services are provided such as bank and accountant office.
Unlike non-mercantile that are for services, the classification under this group are stores or markets with display and sale of wholesale or retail goods or merchandise.
Manufacturing and Industrial
Coverage defined under 'Building'
- Fixed Structures, such as the building that located within property lines (premises)
- Building Addition and Extensions, to any building.
- Permanent Fitting and Fixture attached , and forming part of the building
- Materials Equipment and Supplies - Only for maintenance, repairs or minor alteration to the building
- Plants, trees, shrub or flowers inside the building and must be the same owner
- Structures must be linked to the business.
- Additions and extensions must be in contact with & communicate with the building
- Permanent fittings/fixtures are covered only above conditions a met.
- Flora and Fauna used only for own decorations are covered, not for commercial or resell purposes.
The Equipment Coverage
Definition of "Equipment Coverage" in the insurance contract means
1.) All contents that are "usual" to the business belong to the business, such as machinery, furniture, furnishings, fixtures, utensils, fittings, appliance and tools other than stock or building
2) Property belonging to others but insured is legally liable. Under certain circumstances, this group may include properties that belong to others but held by the insured (such as machinery on lease). Insurance should have these assets covered as long as it is declared and described in the policy. One way to ensure the equipment belonging to others is declared correctly in the insurance policy is by requesting an insurance certificate separately.
3) Tenant's improvements. It may sound weird insurers would categorize renovation or improvement on building under "equipment coverage." Still, the improvement is a permanent fixture on the building. Should the insured's a tenant, alternation or renovation on the building that doesn't belong to the insured would deem "no insurable interest" due to the ownership. If the insured is the building owner, then the renovation cost will insure under "Building."
The Stock Coverage
The part of property insurance will protect the insured if the stock related to business sales parished. It may not apply to the service industry, such as accountants or office administration. Most stock coverage defined in Insurance as the following:
- Merchandise of every description "usual" to the insured business that all stocks to sell as part of the insured's business.
- Please note that the Insurance will emphasize the term "usual', and under the policy, the stock must declare and what isn't.
- Packing and shipping material and all other advertising material, if, for example, wrapping material used in shipping, are covered under stock coverage.
- Similar Property belonging to others which insured is responsible and legally liable to take good care as their stock. With the following conditions:
- It must be similar to the insured. Typically a manufacturer puts their stock to insured on a consignment basis or credit until the good is sold.
- Insured must have an obligation to keep the stock insured. Most creditors may have a contractual or written agreement outlining the value extended to the insured, with the obligation to maintain Insurance on the goods.
- Insured must have legally liable to the stock. For example, if the stock is stolen from an unsecured area due to negligence, it will not be covered.
Determining Each Payout Values
A broker provides advice, directions and guidance to the insured on meeting the insurance obligation of insuring to value. There are three ways insurance will use to determine the value to insure and the pay-out.
Actual Cash Value (ACV)
Formula or cost approach
- Straight Line Depreciation calculates on a standard accounting method on the number of years used divided by estimating the property life expectancy.
- Plateau Accelerated depreciation is often used on assets with high productivity in the early years, making them worthless after. Things such as restaurant equipment, production machine are good examples. It will highly depreciate but became plateau after few years
Market Value/Direct Sales
True Value to Owner
Insurers may challenge this approach as it leads to a higher pay-out for an older property. The method requires property replacement valued on the same utility function before the loss. A typical case example, a 60 years old storage warehouse that burned down, and should it suggests that otherwise bulldoze with no value after years of depreciation? Or build so that it will function as before fire loss, as a storage warehouse?
Broad Evidence Rule
All prior four ways and conclude. Factors to consider including
- Replacement value less depreciation
- market value
- rental value
- use of building
- assessed valuation
- Resale success.
Calculate with no depreciation when repairing/replacing. The replacement value requires an appraisal when a building is insured with this basis.
Book value is the price expended at the time of purchase and reduce by depreciation or other write-offs. It is not appropriate to use this as an insurance replacement cost as it does not include the inflation factor, and sometimes, it has no value after years of depreciation.
Standard Description of Contract
- Composite Policies (Package Deal)-
To make it easier for the insured, the insurer will often combine a few insurance contracts and packages as a combo. A lot of commercial small business packages are part of such an all-in-one policy.
- Manuscript Policies-
The insurance contract is a legal document highlighting what will cover and how it will pay-out when losses. There could be circumstances where a standard wording does not satisfy clients' needs. The manuscript policy is then written for specialized risks that need tailored wording by lawyers. These policies are often set up by large brokerage for large clients, especially cross-border trade.
Risk or policy insurance takes but ceded risk/premium to other insurers, where a primary insurer will take the lead. It has the characteristic of
- all insurer split the premium and losses
- the contract is only between the primary insurer and other insurers
- The policy is control by the primary insurer and control by it.
Under a subscription policy, a risk is covered by multiple insurers. Unlike reinsurance, there is no primary, and each insurer will each take a piece that they like with the biggest acts as the leader.
It has to negotiate with all insurers separately, and all are agreeing to share both premium and losses.
Subscription policy is written due to any of the following
- line of business is not on the insurer's reinsurance treaty
- the insurer does not want the type of risk to expose to reinsurance
- limit is within the insurer's retention limit but beyond the exposure of a single claim
- broker wants to spread risk among markets
- Minimum Premium-
An insurer may impose a minimum premium from time to time, so if bargain hunter is looking for the lowest premium, this amount may stop them from initiating underwriting dialogue. These amount varies and may base on the risk.
- Minimum Retained Premium-
Underwriting and issuing insurance policy take time, and it cost both the broker and insurer. Should a policy get cancelled by the insured for any reason, there are costs involved. Thus, to recover the issued policy's cost, the minimum retained premium amount is set on premature policy cancellation. It can be around 25% of the total premium. Should an insured cancel the policy on day 3, the minimum they have to pay is still 25% of the total premium. For the bargain hunter, it is advisable to seek the policy before the renewal effective date to avoid this charge.
The clause explains how the insurer pay-out in the event of a claim. It is usually not exceeding the least of:
- ACV of the Commercial Property at time of loss.
- Loss amount of insured property based on the portion of interest.
- The amount specified on the Declarations Page
- Should the property has more than one individual's interest, the insurer will pay up to the Declaration Page's total instead of the same amount to all individuals.
Coinsurance is the amount, generally expressed as a fixed percentage, an insured must pay against a claim after the deductible is satisfied.
Having coinsurance ensures the insured carries enough coverage (usually 80% of ACV) Since most claims are small, they can't take advantage of companies.
Waiver of Co-Insurance: when there are circumstances where insurer realizes to have the following two conditions to waive,
- loss is not greater than 2% of the amount of insurance
- not greater than $5,000
Commercial Insurance Property will have an exclusion that the policy is not covering. The exclusion clause will define the property excluded or the Perils excluded with some of the reasons detailed below
- Losses that are generally considered commercially uninsurable.
such as war/rebellion/nuclear hazard
- Losses that are potential to be catastrophic
Earthquake/Flood/landslide (except by separate policy)
- Losses that more specialized policy available
Car/plane/pressure vessels/boilers (except by extra policy)
- Losses that in control by insured
wear and tear/application of heat
- Losses not common to others and may increase potential claim
stock by salesman, outside antenna (except by extra premium)
- Losses that involved in illegal activity
The permission clause allowing changes on policy for the property insured. Permission is granted for:
- For other insurance concurrent with the insured property (when there are more than a policy is placed and one having coverage and the other may not. The clause allow managing all insurance need)
- To make additions, alterations, or repairs (Insured are entitled to make changes to the insured building property, but they are to tell the broker to update)
- To do such work & to keep & use such articles, materials, and supplies in such quantities as to do business (no permission need to do work, but needed to go beyond stated activities)
Breach of Conditions
Insurance policies contain various conditions ranging from statutory condition (to deal and imposed by law) to policy, other and additional conditions imposed by the insurer. It is placed upon the insured, making them do or do not act.
- The insurer can refuse to pay if the condition is breached unless the breached condition did not cause loss or a breach occurred out of the insured's control.
The insurance contract's subrogation clause refers to the insurer's right "to step into the party's shoes" to whom it has compensated. The clause allows the insurer to sue any parties responsible for the loss for recovering the amount they paid out. In other words, The insurer has the power to go after third parties as the insured to recoup losses.
Even the rights exist for the insurer to sue, the Insured can sign away rights under Certain Parities protected. Thus, the insurer agreed not to exercise the right of subrogation on a third party. (Which may include a corporation, individual, banks, business partners and subsidiary firms, and generally any entity providing evidence of insurable interest.).
Property Protection Systems
Insurance companies encourage the insured to participate in any measure that would help prevent or reduce loss. In exchange for installing any such system, the insurer will offer a discount or lower premium rate. The property protection systems clause define the obligation of insured when they have taken advantage of such system and expect insured to notify insurer any of such situation immediately
- Notify the insurer if interruption/cancellation of alarm/fire system
- A change in any monitored system
- If 'suspension of police services' is in effect
It is challenging to project and estimate stock/inventory value. It is important to get sufficient stock insurance on what the business anticipates to be the maximum limits on hand at any one time. Doing so will ensure the business is not under-insured in the event of a loss. However, should the insured estimate is too high, the insurer will refund the excess premium but need to meet the following conditions:
- request for refund no later than six months after the policy expiry
- Amount presented on Premium Adjustment Form showing the actual inventory stock cost on the last day of the month. An accountant must verify the form.
The insured gets a maximum refund of up to 50% total premium paid when provided with these. The refund of up to 50% prevents deliberate excessive insurance, which can otherwise lead to fraud.
Verification of values
It is reasonable for the insurer to be given rights to conduct on-site inspection on property they insure. The clause indicates the inspection intention is for verifying values only and permits the agent, appraisal company, representative of insurer access to the property at all reasonable times (short notice, midnight or holiday would not be reasonable). The clause does indicate things like allowing the insurer to confirm any of the following:
- values insured are reasonable and exist,
- right to inspection to determine values on hand at the time of previous loss (extends to a year after the expiry, and
- to determine the existence of other policies to share in the payment of a previous loss
- On a commercial property insurance policy, it is important to provide a definitive outline of the basis of the valuation of losses. Consideration should be made on others' property such as repair shop, tenant's improvement or renovation, and its depreciation by remaining years on the lease agreement, electronic business record, storage media, data entry work, and most sophisticated work, stock losses. Any unsold stocks are restricted to ACV at time of loss (repaired if cheaper), and any stocks that are sold but not delivered should be calculated on sold price
Special Basis of Settlement
- In the event of a loss, tenant improvements and Records are subject to a special settlement basis. The consideration of either renewing the lease or relocating to another new location may arise on the tenant improvement claim. Should damage on a tenant improvement repair? And to what extent the depreciation would calculate? Should the remaining lease term coming to an end and not renewing the lease, it makes no sense for the insured to claim. As for Records, what is the cost for data entry? Note that the insurer will not cover for gathering or assembling of data from other sources. All the settlements above should strictly be based on book value only.
Property of Others
- When there is a loss to others' property, should it covers under the policy, the insurer will pay the insured, and it is up to the insured to settle with others.
Locked Vehicle Warranty
Equipment and stock stolen from a vehicle are covered under commercial property insurance, but this clause stated the condition that allows a property claim.
- The property insured is within a fully enclosed body or compartment of the vehicle. Theft coverage is not provided for property removed from the open box of a truck.
- Doors and windows are securely locked and closed.
- Must have visible evidence of forced entry to access the property insured.
Insured should take caution that new technology and tools allow theft access to a vehicle without forceful entry nowadays. In such instances, there will be no coverage for insured property.
The insured needs to understand that Insurance contracts are contracts of utmost good faith. These contracts impose a higher standard of honesty than required by other contracts. Condition outline under The Insurance Act relates information disclosure by applications when getting insurance and the penalties if failed to comply.
Please refer to your provincial Insurance Act to get the full detail of each province's statutory conditions.
Insured should note the few of the important conditions that identify a breach of good faith as these will void their insurance contract:
"No false description
of the property to the prejudice of the insurer." The breach is related to any insured statements that serve to mislead the insurer as the quality of the risk being presented. Put it as "should an insured lie on the condition of the property or lead the insurer into believing something that is not true with an intention to claim later."
"No misrepresentation of a material fact"
"." The incident occurs when the insured form is completed. These can be incurred when
- Matters inherent in the property being insured. For example, a hazardous or large quantity of highly flammable material is stored, or processes on the premises are considered a material fact. Other information including building construction, electrical services, or heating.
- Incorrect response to the question contained on the Application. The insurer requires full disclosure of information about the financial status, any ongoing mortgages, previous claims, use of premises by anyone else, the existence of other insurance, fear of damage from known persons towards insured, vacancy or previous non-renewal, refusal or cancellation.
"No fraudulent omission of a material fact."
Insured who deliberately withhold information on previous claims or refusals of insurance because such information might impair their ability to obtain insurance are considered a breach of the requirement for utmost good faith. Other withhold of information such as knowingly not disclosed a non-working sprinkle or monitor alarm etc.
The consequence of misrepresentation in insurance can be considered insurance fraud, resulting in the insurer void the insurance contract. Once an insurance contract is voided, it is deemed to have " no legal or binding force and incapable of being enforced by law." in short, decline the claim.
The statutory condition under material change defines the insured to make full disclosure of all material facts. Should there be any material facts change within the insured knowledge and control that could increase the chance of loss, the insured must report it when the policy is in-forced. The insurer will have the right to either
- cancel the policy and return all unearned premiums.
- Increase the premium due to higher risk and allow insured fifteen days to make payment.
Important: Any loss out of unreported material change, there is no coverage provided by the policy.
Apart from the statutory condition, the insurer generally imposes additional conditions on the insurance contract. Most often, the conditions are:
Notice to Authorities
where insured is obligated to report to government authority in the event of a lost cause by an illegal act. As filing a false report is considered an offence under the law, the condition checks and control against insured moral hazard.
Sue & Labour
The condition explains how an insured duty is to protect insured property from further damage above the statutory conditions required under the salvage section. Insured is obligated to vigorously pursue all reasonable means available to them in the recovery of lost property.
No benefit to bailee
When the insured property is under the custody of another party, cases like demo stock for sales, consignment to agents are commonly known as "property under custody of bailee." Should there be any property loss under the bailee's care, the condition does not remove the insured's responsibility from the bailees. The insurer can subrogate all losses from the bailee of the insured's property. Should there be any agreement between the bailees that contradict this position, this condition will preclude it.
Pair & Set
: For property loss that is in pair or set, although they may have more value than its counterpart of accompanying piece, any loss or damage to the only item of a pair or set does not constitute a loss to entire, so this condition will allow insurance to deduct the value from the amount of the claim payment. If a single earring is damaged from the pair, it will only get a 50% value.
Similar to pair and set, part of property loss such as a portion of the carpet, this condition will determine only the portion of the damaged carpet be replace instead of the entire building.
What it takes to issuing a policy?
Getting an insurance policy involves multiple stages. It started by identifying a risk that needs to be managed, selecting the insurance company that offers the coverage, completing a risk assessment to drafting, issuing the insurance contract, and delivering and accepting contracts by the client. It generally involves the insurance broker, the underwriter and issuance of the policy by the insurance company.
The Role of the Broker in Underwriting
As the insurance company's first line of sales, a broker will initiate the first contact, qualifying the risk and presenting it to the insurer. The process of analyzing the risk is known as the underwriting process. It is worth noting that the insurance contract is between the insurance company and the insured. The broker serves as an intermediary in the insurance process and has no rights under the contract. Brokers are required to exercise utmost good faith in dealing with the insurer and are obligated to advise everything they learned from the insured about the risk. Brokers are required to deal in an honest and forthright manner. Should the broker possess any information that does not support the applicant's claim on the application form, the broker must advise the insurer
- an application,
- verbal information,
- additional written information (history/financials/claims)
Insurance broker usually performs the following steps to ensure everything for a successful insurance policy write up:
Performing a Survey
During this stage, the insurance broker will do the following
- assists in the identification of loss exposure
- determine coverage and eliminates redundant coverage
- help develop underwriting information needed by the insurer.
It is common for a broker to run through a checklist with a prospect. Doing the work helps the broker in some of the following areas:
- check for possible risk exposure.
- Advise and remind prospects on needed coverage and possible gap.
- Helps broker eliminate error and omission claims.
Seek Interested Insurer
The stage is also referred to as market the risk or shopping. One of the advantages of using a broker is that they would request multiple insurers and compare coverage and recommend the prospect with the best value choice.
Arrange Meeting with Prospect
Upon finding a few interested insurers, a broker will try to get the client's business by offering if the proposed insurance is a good fit in the insurance coverage and its value. The broker will usually make a pricing comparison of each coverage and its premium to the client.
Request to bind
Once the client decided to proceed, the broker will instruct the insurer to bind and issue the contract.
Review and deliver
When the brokerage receives the policy, the broker will thoroughly review it to ensure it is issued as requested. The broker will then deliver the policy to the client and explain important coverage, limitation and exclusion.
Most often, the broker will collect payment during the visitation, or a payment plan is arranged. If needed, the broker will take the opportunity to validate some of the client's risks, including any of the following, but should the insurer require detail, especially some of the older buildings, bad neighbourhood, or any doubt, an independent inspection may call in for detailed assessment.
Determine Building Construction is any of the five classes:
- fire-resistive- passed minimum standards of heat
- Non-combustible- material that can't burn but falls short of the fire-resistive classification.
- Heavy Timber – rare, old buildings
- Ordinary – brick/joist and or block/wood (exterior can't burn)
- Frame – supporting walls are wood
For buildings over 25 years of age, for example, the insurer will require additional information. It is common to request an inspection on the roof as there will be chances for water damage from the ceiling, wiring inspection to check any sign of wire fault that could result in fire, over-current protection and plumbing.
When a broker does the survey or review, it is essential to be aware of some of the common hazard as following:
Recognizing Common Hazards
The type of heating appliance, fuel source, and chimney are important as they cause fire loss. Pay particular attention if there is a wood, fuel or gas burning furnace. Open fire furnaces are at high risk to the insurer. Small spark to carpet, gas poisoning if the wrong material is used. If a chimney is in place, ensure it is clean or has a contractor maintaining it properly and routinely.
- Electrical Service
Electrical wiring is one of the reasons for a building fire. There has been a period when copper prices were high, materials such as aluminum were used as an alternative to copper. When it gets overloaded, it melts the covering shield and results in a short circuit and burn. Other reasons, such as pests, may chew away the rubber, exposing the inner wire that results in a short circuit. As technology advancement, using copper with automatic circuit breaker, higher power (amp) breaker is now used as standard, other worth inspection including available of conduits to protect the wire from the rodent. (All superior risks have enclosed wiring in conduits)
Should a neighbouring shop attached to the insured building, what material has been used to segregate them? These are the questions to ask if a neighbouring shop get into fire or break and entry into, will it cause damage to the insured? How close is the insured to other commercial-rated buildings?
When in need of security or Fire Protection protection, it is being categorized as private or Public protection. A broker will have to observe if the property has been equipped with a fire extinguisher, alarm, sprinkler and always check for a Fire Department issued certificate attached to the alarm console or fire extinguisher and when it last inspected.
When arriving at the property, always look for the fire hydrant near the property if they are around 100 metres, 500 meters or not available. Check on the local online map if there are any fire and police departments nearby, especially in the rural area. Also, check if they are volunteer firefighters.
The building's occupancy by both the insured and others is extremely important information as it will greatly influence the insurance company to accept the risk.
Occupants like nightclubs, restaurants, auto garages in the same building will make the risk less appealing as these occupants would have less desirable clients or visitors damaging the property nearby.
Identifying Nature Hazard
Not all businesses are created equal, and so is their risk. When underwriting a business, it is important to consider the risk exposure specific to its nature. A typical example
With heavy lifting machinery, high-pressure compressor sprays paint, all of these types of equipment or operation would damage others' property if not carefully operate.
A young church with youth demographics would have kids activities, volunteer child care during services, and sometimes, burning candles
May have malfunction ovens, deep-frying stove, malfunction fire extinguisher.
Completing Broker Statement and Supplementary
Once the broker understands the business's nature and assesses the risk, it would be good to collect more information and write about the business on the insurance application. Take, for example of a church risk. Broker may found out that there are no child care services as most people are older and will help insurers reach a quicker decision not to worry about child injury and ask the caregiver if they have proper training. Such knowledge of risk assessment on knowing what to ask that would assist the underwriter's decision. The insurer may have the supplement form for each business nature specific to the business line. If there is a higher risk on the questions answered, the insurance rate may increase or decline outright. Some information on property most underwriter request are
- The physical condition of premises quality would prevent injury
- Bad quality of maintenance may result in deterioration of property and may cause injury.
- Housekeeping can tell if the owner cares about it,
- photos a picture show a thousand word,
- financials report if the owner may not be running the business,
- claims history.
The broker may need to complete a section on what they feel and comment on the property's observation from time to time.
Role of Underwriter in the Underwriting Process
Rating & Rate Making
How Insurers Evaluate Hazard?
A hazard is a condition that may cause peril to happen. In other words, this is a situation when insurers believe they are likely to pay for a loss. To evaluate a hazard, the insurer will examine the physical and human sides of the business. The evaluation process may involve examining the building, property and people who use it. The insurer will generally inspection the following:
Physical hazards are analyzed of the conditions relating to property use, looking at characteristics of risk and environment where it is located. They include:
Type of building construction
Consider the type of construction material if the building would withstand hailstorms, earthquakes and others. These are the factors insurers consider the main criteria as physical risk selection.
The occupant or tenant of the building will make a difference in the insurance rating. For example, an accountant's office will have a lower risk of claim compare with a restaurant. Deep fryer and stove may cause fire, the number of visitors may result in broken glass, for example.
Accumulation of building wastes, garbage and not proper upkeep would result in a liability claim against the applicant. When an observed property with poor housekeeping and maintenance, the insurer would be likely to reject the risk or insist the premises be in a reasonable standard before they consider underwriting.
The location of a property may have a potential for loss. For example, a neighbour with high-risk exposure, a warehouse with highly flammable goods in a bad or high crime neighbourhood, could result in a claim.
Any known location prone to earthquake, flood, forest fire, land-fill site, steep, sandy hillside and hurricane may cause building damage.
Location of property in an area without fire fighting would increase the chance of total loss. There could be public and private protection. A property owner could install a bugler alarm, sprinkle system, fire extinguisher, and others to prevent a loss. As for public protection, the Insurance Advisory Organization provided the insurer with a rating of various fire fighting of Canada's major location. Other considerations including the crime rate with police protection.
Moral hazard is more difficult to detect. Due to the increase in the number of fraudulent claims, it became necessary to seek assurance that the applicant will not cause a loss. The conditions of indicating a moral hazard can be observed with the following:
Businesses that are not performing well may lead the applicant to consider the benefit of a 'planned fire'. Cash flow situation may lead to poor machines maintenance, upkeep of vital service, cut corners that could lead to a liability claim.
The open associates of the applicant with felons, when undesirables frequent business, all indicate potential risk of moral hazards.
Questionable business ethics and history of confrontations with police, questionable insurance losses, and suspected inflating insurance loss are likely, not acceptable by underwriters.
The morale hazards deal with the attitude of the applicant.
Indifference to loss
When an applicant is trying to remove themself from the responsibility of a loss under the insured property's assumption, it is very likely to claim.
The management with an attitude of not keeping standards aiming at loss prevention indicates morale hazards. Some examples including, i) failure to service fire extinguisher on a scheduled basis, ii) improper accounting, iii) not keeping inventory count. These are all strong indications of a Morale hazard.
Developing Additional Underwriting Information
Getting from External Sources:
- The Insurance broker
Insurance Broker is the front line of contact and the best source to obtain accurate information.
- Government records
There is information available from the government, such as corporate registration, insolvency report, available to look at clients' finances.
- Financial rating services
Such as Equifax's credit check will tell about the business owner's financial position.
- Consumer investigation reports
These records for company's products if they may have to do a recall or other potential liability
Pulling from Internal Sources:
- Loss experience data
The insurance company has past claims history from all classes of risk on a regional or national basis available for rating.
- Inspection reports
The Insurance company could order an independent inspection on a property to understand the risk better. During the inspection, the inspection company will access the property's physical condition, the co-operation, the moral tone, and the general attitude towards the property to support the underwriting decision. One other duty of the risk inspector is to advise improvement on the property to reduce risk exposure. These suggestions include mandatory improvement and recommendation, and suggested recommendations reflect the applicant's level of co-operation underwriter expect of the applicant.
- Field representatives.
The insurer may have sales and marketing representative to provide information that are important to underwriting decision.
- Claims history
If the applicant's previous claim is with the insurance company, the underwriter may check the frequency, severity, type or cause.
- Broker's Production records
Substandard risks present a likely claim to the insurance company. However, sometimes it may be considered if the broker's production record submitted to the insurer is profitable. The substandard risk is considered accomodating business.
- Guides and manuals
Insurance companies rely on data from the industry. There are a wide variety of industry-produced technical resources available for use by the underwriter.
- Other underwriters
Underwriters may talk to each other to discuss certain risks, brokers and submissions they received.
Making the decision
To accept the submission on the basis presented.
To decline the risk.
- Accept with Rating
When certain risks are considered substandard, the underwriter will increase the premium, also known as "rated risk."
- Accept at a higher deductible
Sometimes, when the applicant has a history of minor claims or the risk may deem frequent in minor risk, the underwriter may increase the deductible to consider before submitting small claims.
The Policy Forms of Commercial Property Insurance
Wording on Various Policy Form
Issuing the Policy – The Declarations Page (IBC 4000) includes:
Names of parties to the contract
Loss payable or payee, if any: list of people loses are payable to
Types of Insurance coverage(s) and amounts insurer is liable
Rate and Premium charged (sometimes broken down in parts, or not)
The subject matter of insurance
The Fire Policy (IFC 10010)
– 70,000/year/ 1Bil$
Main causes: mechanical. Failure/electrical, arson, misuse of ignition fuel
Basic Coverage Legislated – must cover lightning, and gas/coal explosion
Exclusions – To devices from power surge caused from lightning
- Damage/loss of goods from the application of heat
- Loss/damage from war/riot/invasion/etc.
- Any damage from nuclear device/incident
- Money, bullion, stamps, securities
- Property at locations which insured knows are vacant/shut down (30 days)
- Loss due to enforcement of law or change in by-law
Extensions of Coverage
1) Removal: if moved to protect, then covered for 7 days
2) Debris Removal: is covered.
Fire and Extended Coverage
1) Fire & Lightning: extended to cover devices that suffered from a surge
2) Explosion Exclusion
: Portions containing steam/water under pressure
: Piping & apparatus normally containing steam/water under pressure
: The combustion chambers/fire Boxes in boilers
: Smelt dissolving tanks
: Other vessels/apparatus/pipes operating over 103Kpa (15/lb sq.inch)
: Moving/rotating machinery or parts when loss/damage caused by centrifugal force, mechanical breakdown
: Any vessel/apparatus/pipes damaged during pressure tests
: Gas turbines
3) Impact by Aircraft, Spacecraft, Land Vehicle
: if impact caused by insured, or employee, or own car = no coverage
: impact losses covered only
: includes damage caused by shit dropped by aircraft/spacecraft
4) Riot, Vandalism, or Malicious Acts : riot includes striking workers inside and outside premises
- due to cessation of work or interruption to process or business operations
- due to flood, or release of water impounded by the dam, or due to explosion
- due to theft or attempt theft
5) Smoke: only sudden, unusual, and faulty operation of any stationary furnace
6) Leakage from Fire Protective Equipment: when water leaks from the system
7) Windstorm or Hail: no $ for
a) interior contents, unless happened concurrent to hole
b) snow-load, ice-load, tidal wave, flood, landslip
Named Perils Form (IBC 4036)
mostly same as Fire & EC
Commercial Building, Equipment, and Stock: Broad Form (IBC 4037): all risks basis
Property Excluded: Loss or damage to/from;
Sewers/drains/water mains outside bearing walls/foundations. Communications towers, antenna, and equipment. Street clocks, exterior signs, exterior glass and lettering. But the damage is covered if caused directly by named perils.
The property at locations, which to the insured's knowledge, are vacant for 30 straight days.
Electrical devices/appliances/wiring damaged from a surge.
Plants/trees/shrubs/flowers (except if provided in Extensions of Coverage Clause 7e)
Animals, fish, birds – must schedule if rare &/or valuable
Money, bullion, platinum and other precious shit
Automobiles, watercraft, amphibious, air cushion, trailers, planes, helicopter, except if held for sale or business
Furs, jewels, pearls, watches..etc. But not to first 1,000$ of loss or directly lost from named perils.
Property while waterborne, except on regular ferry/railroad
Property on loan, rented, sold on credit – if insured lends it, no coverage
Property in the custody of sale agent outside premises (can get at extra premium)
Property illegally acquired (nice necklace Shari)
Vessels over 15 lbs per square inch (exception; domestic hot water tank under 24" diameter)
Perils Excluded: Not insured against loss by;
Earthquake, except for enuing loss/damage which resulted by fire/explosion/smoke/leakage (separate quake from rest is really hard)
Flood, including waves/tides/tsunami/overflow of a body of water, but loss/damage which results from fire, explosion, smoke, leakage from the system is covered.
Seepage, Leakage, the influx of water from natural sources, and the entrance of rain, sleet, snow through windows and roof openings
Centrifugal force, mechanical force, or electrical breakdown.
Dampness/dryness of atmospheric changes of temperature.
By smoke from agricultural smudging or industrial operations.
War, invasion, foreign enemy, civil war, rebellion
Any nuclear/radioactive incident
Any dishonest/criminal act by the insured or interested party
By enforcing a by law or law enforcement
Wear/tear, gradual deterioration, latent defect
Mysterious disappearance or shortage of equipment – must prove no peril caused the loss.
Loss/damage sustained to equipment/stock while being worked upon – trade hazard.
Disturbance/erasure of electronic recordings by electric/magnetic injury (except lightning)
Extensions of Coverage
Provides coverage that would otherwise be denied.
Removal – if u took it away to protect
Debris removal – clean your shit and other shit that blew on your premises.
Personal Property of officers and employees – 250$/per, and at 1 location
Building damaged by theft – 2,500$ max., not glass/lettering (must be the owner)
Plants, trees, shrubbery, flowers in the open – 500$ a piece
Commercial Insurance Package Policies
Named perils and broad form are popular but nowadays losing out to package policies. Package policies are multi-peril, multi-line, and if done right, will not require additional coverage. They usually have property insurance, business interruption, liability insurance, and crime insurance.
- Buildings after 1945 - Sprinklers
- Sole Occupant - Increased deductibles
- Claims free with same insurer - Ground floor under 279m2 (3000sqf.)
Brokers like package policies because it's a simple application form, costs are determined on the spot, extensive expertise is not required, and eliminates many claims problems of limited forms.
The Additional Coverage of Commercial Property Insurance
Dealing with policy Exclusions
Extended by endorsement, rider, or a separate policy
2. Broadening on Premises Coverages
Direct Damage Forms
· Sign Form: limited to losses caused by named perils only, exterior signs are more expensive than interior signs
· Glass Rider: Scheduled coverage needs type/size of glass, location of glass (exterior is more$), description of lettering, ornamentation, tape and foil. But no coverage for fire, war, during construction, and if vacant for more than 30 days.
· Accounts Receivables: All risks covering; Amounts that can't be collected as a direct result of loss/damage to accounts receivables. Interest charges on any loan to offset impaired collections pending repayment of such sums made uncollectible by loss/damage. Collection expense over normal collection costs and made necessary because of such loss/damage. Other expenses reasonably incurred. Exclusions: caused by electrical and/or magnetism (lightning is covered) and only at specified locations.
· Valuable Papers and Records Insurance: Not money or Securities; it's an 'all risks' basis, a blanket policy. It covers transported papers and those away from a specific location. Exclusion is electrical/magnetism (lightning is covered)
· Electronic Data Processing Policy: Most insured have this coverage, no standard form, 3 components A) Loss to Data Processing and Equipment: the blanket is easier than scheduled. Coverage is beyond all risks, covers almost anything but only on-premises B) Active Data Processing and Media Programs: Media=disk/tape/cards, Data=software, and coverage are the same as under part A in the above section C) Extra Expenses that occur in a continuing business, maximum for 2 weeks.
· Boiler and Machinery Policy:
Named Perils and Broad Form do not cover –boilers/vessels owned by insured over 15lb/inch sq, mechanical/electrical breakdown (can get a special policy)
Coverage for losses arising out of accidents to objects while in use or connected at a covered location, the property of insured, or property of others in the care of the insured
A) Limited – explosion only
B) Comprehensive – explosion, electrical, mechanical breakdown
Basis of Settlement: lesser of repair/replace, and no payment for obsolete crap.
Losses Excluded: Fire, nuclear, war, costs of toxic contamination, earthquake, flood, delay/interruption of business.
Expediting Expenses: the insurer pays for necessary temporary repairs to the property. The amount payable is the least of $5,000 or property damage due to the incident.
Unique Features: inspection before and after policy issued, all claims investigated by tech. Guys. And can suspend insurance if deemed to be in serious condition.
· Earthquake Endorsement: Occurrence basis (all quakes in 72hrs. are covered)
Coverage period restricted, no coverage before endorsement or after expiry, the deductible is usually 10%, and this endorsement does not cover fire/explosion/flood/theft caused by the quake.
· Water Escape Endorsement: loss/damage caused by the sudden back-up or escape of water from a sewer, sump, septic tank, eavestrough or downspout. ACV usually
· Flood: $1,000 - $10,000 deductible, covers flood, waves, tidal water, rising/overflowing lakes, rivers, reservoirs by wind or not.
· Consequential Loss Assumption Clause – Cold Storage
Loss due to temperature change. It only kicks in when direct damage occurs to the insured's refrigeration system and on the premises. But not if a loss of power causes loss.
· By-Laws Coverages: Costs to comply with by-laws is insurable. The increased cost of construction, loss of value to a portion of a building, and demolition costs are covered. A broker must have deep knowledge of local by-laws.
Insuring Off-Premises Exposures
· Temporary Locations: Equipment and stock but only at a location not owned by the insured. Usually for the property being repaired, being held for pick-up, or being examined.
· Newly Acquired Location: Equipment/stock at any location owned or controlled by the insured. Opposite of temporary locations coverage. Covers vehicles within 100m of location.
· Parcel Post: Any stock/equipment in any 1 package in case of transit by Canada Post. This is cheaper than insuring each package individually with Canada Post.
· Other Transit: Equipment/stock in non-post transit. Things shipped directly from the manufacturer. Virtually all firms need this.
· Sales Representative: Equipment/stock in transit or not, but controlled by a salesman (custody) is covered.
Miscellaneous Endorsement Forms
· Installment Sales Contract Floater: coverage for the single interest of the seller or dual interest of vendor/vendee. Coverage is done when payments are made.
· Peak Season Endorsement: an increase in stock values for set periods, like Xmas. Save in premium because of only a few big weeks/months, not all year.
· Replacement Cost Endorsement: for building/stock/equipment, hard to get, must qualify. It must be on the same site, only paid after items actually get replaced.
· Inflation Protection Endorsement: building value on policy is adjusted for inflation. At no charge, but renewals have increased too.
· Fire Department Charges: the insurer will pay the costs of the department.
· Vacancy Permit: can cover empty buildings/property. Permit No. 1: if a building is occupied but wants to empty for a short time. No. 2: 3/5 value if already empty.
Miscellaneous Property Forms
Bailee has temporary custody of the property of another for purposes other than sale. Bailee is responsible for 'ordinary care,' which is the same as a prudent/competent person would give. Bailee is liable when 'ordinary care' is breached, and a bailee can assume even greater liability under contract (having extra coverage makes customers comfortable)
Two Types: - legal liability ensuring bailee's liability
- property policy insuring direct loss/damage to customers' property regardless of fault.
Inland Transportation Insurance
Insurance other than marine, against loss/damage while in transit, or delay incidental to transit. The insurable interest lies with the property owner and carrier of the property.
Liability of Common Carriers: airlines/rail/trucking (not acts of God, public enemies, inherent vice, etc.) A "Bill of Landing" shows the extent of liability. A standard bill shows mount per kg/parcel. The valued bill reflects the value of goods. And a Released bill releases the carrier of liability.
Liability of Contract Carriers: carries goods for only certain customers rather than for the public at large.
Liability of Private Carriers: those who carry their own goods, or goods entrusted to them as bailee, is responsible for losses.
Insurance for Owners of Property in Transit
Transportation Floater (Broad Form): Can be 'all risk' or 'named' perils. The property must be owned by the insured, insured must be responsible for it, and/or sold but not delivered.
Transit of Property not restricted to insureds vehicles (rail/freight)
Selecting amounts insured – insured selects amounts for each trip
Description of Coverages – from the start – to delivery
Property Excluded – jewels/furs/manuscripts/paintings/livestock
Perils Excluded – gradual deterioration/inherent vice, moths/rodents/vermin, atmospheric/temperature changes
Transportation Floater Rider (limited Form)
Named perils basis, one notable exclusion is the collision of trucks/cars/railcars during coupling/uncoupling.
Motor Cargo Rider: owners own vehicles, can be a broad form or named peril.
Trip Transit Policy
Trip Transit Policy: Transit exposure for a single trip, either 'all risks' or named perils.
Insurance For Carriers
Tool Floater Rider
· Tool Floater Rider: Off-premises coverage for tools, mostly 'all risks.' Exclusions are loss/damage to electrical apparatus caused by artificial currents and any mysterious disappearance—Paid ACV on scheduled or blanket coverage.
Contractors Equipment Floater
· Contractors Equipment Floater: All movable equipment owned, rented or leased by the contractor. Limited or all risks basis and scheduled or blanket coverage. 90% co-insurance is needed, and a catastrophic loss limit will apply. Automatic coverage for newly acquired equipment but must be scheduled after 30 days. Exclusions: weight at the time of loss isn't over the manufactures recommended load. Waterborne/airborne equipment. Mechanical/electrical breakdown. While underground or in muskeg. Loss by dynamite/blasting. Extreme temperatures, rust, and corrosion. Loss/damage to crane/derrick while operated.
Builders Risk Insurance
* Broad Form – Property Insured: all materials owned by the insured or that will enter.
- All landscaping, flowers, trees
- Temporary building, scaffolding, and shit necessary, but not included
in the outcome.
Exclusions: Contractors tools/equipment (covered elsewhere)
Cost of making good faulty materials/designs/workmanship
Extensions: In transit in Can./USA
Any other location except building site
The limit of Insurance is based on the completed value of a project.
* Named Perils – same as above, except no in-transit, and any other location
Installation Floater Rider
Specialized Dealers Policies
1. Jewelers Block – all-risks basis, very detailed application
2. Furriers Block, fine arts, Stamps/Coin, Automobile, Camera/Music/Instrument.
All these policies are very detailed, as the high value and relatively easy of the transfer.