The Restaurant Owner's Split Coverage Problem
Marta owns a 60-seat restaurant in a strip mall. Her building is valued at $1.2 million, contents at $180,000, and she carries a Businessowners Policy (BOP) with a building limit of $800,000 and contents limit of $120,000, both with an 80% coinsurance clause. A kitchen fire causes $300,000 in building damage and $90,000 in contents damage. Separately, a customer slips on a wet floor and sues for $250,000; her BOP has a general liability limit of $1 million per occurrence and $2 million aggregate. Marta also has a business income limit of $200,000 with a 12-month period of restoration; her monthly net income plus continuing expenses average $25,000, and she expects a 4-month shutdown. Her agent had recommended higher limits, but Marta chose lower premiums.
1. Calculate the coinsurance penalty on both the building and contents claims and explain which limit adjustment matters more to Marta's recovery.
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Building: required limit = 80% × $1.2M = $960,000. Carried $800,000. Recovery = loss × (carried ÷ required) = $300,000 × (800,000 ÷ 960,000) = $300,000 × 0.8333 = $250,000. Marta absorbs $50,000. Contents: required = 80% × $180,000 = $144,000. Carried $120,000. Ratio = 120,000 ÷ 144,000 = 0.8333. Recovery = $90,000 × 0.8333 = $75,000. She absorbs $15,000. Combined penalty = $65,000. The building underinsurance is the larger dollar exposure because the base loss is larger, even though both ratios are identical at 83.33%. The practical lesson: matching the coinsurance percentage to the same ratio on both property classes avoids disproportionate penalties, and raising the building limit to $960,000 would have eliminated $50,000 of the loss. Note that the penalty applies only when the carried limit is below the required amount; had she carried $960,000, full recovery up to the limit would apply.
2. Evaluate whether Marta's liability and business income coverages are adequate given the slip-and-fall suit and the 4-month shutdown.
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Liability: the $250,000 claim is well within the $1 million per-occurrence limit, so the BOP responds subject to the deductible and any exclusions. However, the $2 million aggregate could be eroded by multiple claims in a policy year; a single $250,000 claim leaves $1.75 million aggregate, which is likely adequate for a single-location restaurant but modest for a strip-mall exposure. Business income: 4 months × $25,000 = $100,000, within the $200,000 limit. The 12-month period of restoration is sufficient for a 4-month shutdown. The real risk is that the coinsurance penalty does not apply to business income, but the limit must be adequate for the actual restoration period; if repairs extend to 10 months, $250,000 would exceed the limit. Marta should consider increasing the BI limit to at least 12 months of income plus extra expense, and review the aggregate liability limit annually.