Commercial Property and Business Income Insurance
Commercial property insurance covers direct damage to buildings, business personal property, and personal property of others; business income insurance replaces lost earnings during the period of restoration. The exam tests causes-of-loss forms, valuation methods, coinsurance penalties, and time-element coverage.
Causes of loss
- Basic: fire, lightning, explosion, windstorm, hail, smoke, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action.
- Broad: basic plus breakage of glass, water damage, and weight of ice and snow.
- Special: risks of direct physical loss unless excluded - the broadest form and the one that shifts the burden of proof to the insurer.
Valuation and coinsurance
- Replacement cost pays new for old without depreciation; actual cash value subtracts depreciation. Functional replacement cost may be elected for older buildings.
- Coinsurance requires a limit of at least a stated percentage of value (commonly 80% of replacement cost) or the insured shares the loss.
- Agreed value suspends the coinsurance condition; reporting forms adjust premium to actual values through periodic reports and a year-end audit.
- Blanket coverage applies one limit across multiple locations and properties.
Business income
- Covers lost net income plus continuing operating expenses during the period of restoration.
- Extra expense pays costs to avoid or minimize shutdown, and is often the only way to fund a temporary location.
- Civil authority, contingent business income (dependent properties), and extended period of indemnity are separate extensions that must be purchased.
Worked example
A building with $1,000,000 replacement cost is insured for $600,000 under an 80% coinsurance clause when a $200,000 fire loss occurs. The required limit is $800,000, so recovery is ($600,000 ÷ $800,000) × $200,000 = $150,000, less the deductible. Had the insured carried $800,000, the full $200,000 would have been paid.
Traps that cost marks
- Applying coinsurance to agreed-value policies.
- Measuring business income by the lease term rather than the period of restoration.
- Overlooking that extra expense is separate from business income.