Commercial Package: Coinsurance Penalty, Additional Insured Tender, and Business Income
Marisol owns a 40-seat café in a leased building. Her commercial property form has a $400,000 business personal property limit with an 80% coinsurance clause and a $2,500 deductible; an appraisal places the replacement cost of her contents at $800,000. A Saturday-night grease fire destroys $200,000 of contents. The café is closed for 14 weeks. Her CGL has $1,000,000 per occurrence / $2,000,000 aggregate, standard ISO wording, and the lease requires her to add the landlord as an additional insured. Three weeks after the fire a customer sues both Marisol and the landlord for $250,000, alleging a slippery floor near the entrance; the landlord tenders the suit to Marisol's CGL and asserts that Marisol must indemnify it for everything.
1. Compute the property payment and explain what the coinsurance clause is actually doing to Marisol.
Read the worked answer
Step 1 - Required limit. 0.80 x $800,000 = $640,000.
Step 2 - Ratio. $400,000 carried / $640,000 required = 0.625.
Step 3 - Payment. 0.625 x $200,000 = $125,000, less the $2,500 deductible = $122,500.
What the clause is doing: she is a coinsurer for the shortfall. She carried 62.5% of what she agreed to carry, so she absorbs 37.5% of every loss - $75,000 here - plus the deductible. Total out-of-pocket on a $200,000 loss: $77,500.
Judgment points the exam rewards:
- The penalty is not a one-time surcharge; it applies to every loss, scaled to the size of the loss. A total loss would be catastrophic.
- If she had carried $640,000 she would have collected the full $200,000 (less deductible). If she carries more than required, the ratio is capped at 100% and she is not penalized for over-insuring.
- The valuation basis matters: where the form settles at replacement cost, the coinsurance percentage is applied to replacement cost value, not depreciated value. Valuing at ACV to lower the requirement usually is not permitted under an RC form.
- Remedy for the agent: an annual insurance-to-value review and, where the client cannot fund the limit, a higher deductible or agreed-value/blanket approach rather than a knowingly inadequate limit.
2. The landlord tenders the slip-and-fall suit to Marisol's CGL. Analyze whether the additional insured endorsement responds, what the duty to defend requires, and whether the lease's indemnity language changes the outcome.
Read the worked answer
Analyze the tender in two layers: duty to defend, then duty to indemnify.
1. Is the landlord an additional insured for this claim? Almost every AI endorsement extends status only for liability arising out of the named insured's operations or the insured's negligence in the leased premises. The complaint says the floor was slippery 'near the entrance.' If that area is within Marisol's exclusive control, the claim arises out of her operations and the landlord is an AI. If the entrance is a common area the landlord maintains, there is no nexus to Marisol's operations and the endorsement does not respond - the landlord's own CGL defends.
2. Duty to defend is broader than the duty to indemnify. It is measured by the four corners of the complaint. If any allegation is potentially within coverage, the insurer must defend the entire suit, for the insured and the AI, under a reservation of rights, and may seek a declaratory judgment. Defense costs are supplementary payments outside the $1M limit. The insurer may not refuse to defend merely because it believes the claim is groundless.
3. The landlord's own negligence is not automatically covered just because it is an AI. Status as an AI does not erase the requirement that the liability arise out of Marisol's operations, and the endorsement does not insure the landlord for its independent acts.
4. The lease's indemnity clause is a contract between landlord and tenant, not an insurance contract. It cannot expand the policy; it can only make Marisol personally liable for amounts the policy does not pay. The insurer owes nothing on the strength of the lease alone, though a contractual-liability analysis may come into play if Marisol is sued for breach of the indemnity promise.
3. The café is closed 14 weeks. What drives the business income payment, and what could shrink it?
Read the worked answer
Measure the loss, then police the period.
- Period of restoration runs from the date of loss (after any waiting period - commonly 72 hours) until the damaged property could with reasonable speed and similar quality have been repaired or replaced - not until Marisol chooses to reopen. If she uses the shutdown to remodel or delays for permits, that tail is not covered absent an extension endorsement.
- The measure is lost net income plus continuing normal operating expenses (rent, utilities, key payroll), not lost gross sales. Marisol must substantiate the projection with prior-year financials.
- Business income has its own coinsurance clause (often 50%, 60%, 80%, or 100%). If her annual BI limit was set below the required percentage of projected 12-month net income plus continuing expenses, a second, separate penalty applies on top of the property penalty.
- Extra expense is usually a separate additional coverage for costs to continue operations (renting a food truck, temporary space) and is not subject to the same limit.
- Watch the interaction: the fire destroyed only part of the contents, but the café cannot operate without the kitchen. Coverage is driven by the suspension of operations, not by the percentage of property destroyed.
- If the lease has a rent-abatement or lease-termination clause, the landlord's cooperation and the tenant's continuing occupancy rights affect how long the restoration period can realistically run.