Covered Causes of loss

Whether or not a property loss is covered depends upon the policy language, exclusions, and endorsements. You can choose the covered causes of loss in your property policy. Causes of loss are divided into two main categories: specified perils and open perils.

Specified Perils consist of a list of each peril to be insured against, such as fire, explosion, windstorm, vandalism, et cetera. You can usually request basic specified perils or broad specified perils coverage. Broad specified perils coverage adds to the list of covered perils found under basic specified perils.

Open Perils coverage covers all losses unless they are specifically excluded. Earth movement (including earthquake) and flood are two common perils that are excluded under open perils coverage. Since open perils coverage offers more comprehensive protection, it is more costly than a specified perils policy.

Valuation Types

Commercial property coverage will include a provision to determine what valuation method is to be used to pay the loss. The most common policy valuation method is Actual Cash Value (ACV). Unless otherwise defined in the policy, ACV is considered to be Fair Market Value in California. There are two other methods of property valuation: agreed value and replacement cost. Agreed value waives any coinsurance penalty and pays 100% of the stated amount (agreed upon amount) for any covered loss. Replacement cost covers the amount it takes to replace your property with new property of like kind and quality up to the limits of insurance. Like ACV, replacement cost is subject to coinsurance.

Coverage forms and Endorsements

There are various coverage forms and endorsements in addition to the basic property coverages already discussed that can customize coverage in a commercial property insurance policy. The following are the most common coverage forms and endorsements used in commercial property insurance:

•Builder's Risk - Added to a policy for a one-year minimum term to cover a new building or structure under construction or an existing structure undergoing additions, alterations, or repairs. Cancellation is allowed on a pro rata basis upon project completion; however, midterm cancellation will result in a short rate penalty. A reporting form or renovations form allows coverage to be carried according to the stage of completion (i.e., as more of the project is completed, more value is reported, resulting in the proper amount of coverage for each stage of construction

•Legal Liability or Fire Legal Liability - Covers your legalliability for loss or damage to real and personal property of others as the result of your negligent acts and/or omissions. The loss

or damage must be caused by a covered peril (including loss of use). The loss must be accidental and the coverage most often is purchased for tenants in commercial buildings .

•• Building Ordinance or Law - Provides coverage if the enforcement of any building, zoning or land use law results in loss to the undamaged portion of the building (Coverage A); demolition and removal costs of undamaged parts of the structure (Coverage B); or any increased cost of repairs or reconstruction (Coverage C). Replacement cost must be in effect for Coverage C to be applied .

•Improvements and Betterments - Usually added by a lienholder.

Covers all permanently installed improvements and betterments, which cannot be removed when a tenant vacates the building.

•Peak Season - An endorsement that provides additional limits on personal property inventory during a designated period of time. This is specifically used to cover fluctuating inventory values before and during peak shopping seasons.

•Inflation Guard - Automatically adjusts the limits of insurance to keep up with inflation. The adjustment can be tied to the construction cost index in a regional area or a specified percentage per year. This endorsement can be very important in helping to maintain adequate coverage limits, which can protect against potential coinsurance penalties in a property loss.

•Time Element - Insurance that covers other losses stemming from a direct loss by a covered peril to business property. Business interruption, extra expense, and loss of rents and rental value are the most common time element coverages. Business interruption coverage replaces lost business income after a covered loss. Certain key employees can be named, allowing the employer to continue to pay their salaries until the business restarts operations after a loss. Extra expense coverage mainly applies to service or product related companies where the business must continue to ensure the survival of the company. Extra expense can pay for office space, equipment rental, advertising, or most costs considered reasonable for keeping the company operating after a covered loss. Loss of rents and rental value cover loss of rental income to the property owner caused by damage or destruction of a building rendering it unfit for occupancy.

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When it comes to commercial property insurance, there are some common exclusions you should be aware of. These exclusions specify situations or risks for which your insurance coverage won’t apply. Let’s explore them:

1. Flood or Earthquake Damage:
   • Damage caused by floods or earthquakes is excluded under standard commercial property insurance. To protect your business from these risks, consider securing special commercial flood insurance or earthquake insurance.
2. Equipment Breakdown:
   • While commercial property insurance covers damage from covered perils (such as fire or explosion), it won’t cover damages caused by equipment breakdown or malfunction. If equipment breakdown insurance isn’t included in your policy, repair or replacement costs will come out of your company’s pocket.
3. Off-Premises Power Failure:
   • Utility failures affecting your business premises (such as electrical outages or water disruptions) are not covered under commercial property insurance. You may need to add an endorsement to your policy to address this type of loss.
4. Excluded Property Types:
   • Certain types of property are commonly excluded, including:
     • Money, security, accounts, and bills.
     • Land, piers, docks, and wharves.
     • Vehicles, aircraft, and watercraft (with certain exceptions).
     • Animals (other than stock).
     • Crops, hay, or grain located outside.
     • Costs related to excavation, grading, or backfilling.
     • Building foundations, walkways, roads, and other paved surfaces.
     • Electronic data and the cost of restoring information on valuable records.

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Commercial property insurance rates are determined based on several factors, ensuring that your coverage aligns with your specific needs. Here’s how it’s typically calculated:

1. Property Value: The value of your commercial property is a fundamental factor. Insurers consider the worth of the building and its contents.
2. Future Earnings Potential: Insurance providers also assess a property’s future earnings potential.
3. Building Construction: The construction materials used (especially fireproof materials) impact the premium.
4. Occupancy: The type of business and how the property is used affect the risk level.
5. Protections & Precautions: Security measures, fire alarms, sprinkler systems, and proximity to fire stations matter.
6. Exposure to Risk: Consider the location—whether it’s prone to severe weather or other risks.
7. Other Businesses in the Area: The neighborhood and nearby businesses influence rates.

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