Coinsurance, Business Income, and a Vacant Wing in a Commercial Property Loss
Northside Tooling insures its 40,000 sq ft plant under a commercial property policy, special form, replacement cost, $5,000 deductible, 80% coinsurance, building limit $1,200,000. The building's replacement cost is $2,000,000. Business income is written on an actual-loss-sustained basis with a 72-hour waiting period; extra expense is included. On March 4 a fire destroys the east wing: $400,000 in building damage. Production stops for four months. Net income loss is $150,000, continuing expenses $30,000, and it costs $30,000 to rent a temporary shop. The east wing's last tenant moved out 100 days before the fire; the wing has been empty and unheated since.
1. Compute the building payment, showing the coinsurance penalty.
Read the worked answer
Paid: $296,250.
- Requirement: 80% × $2,000,000 replacement cost = $1,600,000.
- Ratio: did carry $1,200,000 ÷ should have carried $1,600,000 = 0.75.
- Loss less deductible: $400,000 − $5,000 = $395,000.
- Penalty: 0.75 × $395,000 = $296,250.
The deductible comes off before the ratio is applied; applying it after would understate the penalty. Note what the insured gave up: it paid for $1.2M of coverage and received three-quarters of a $395,000 net loss - a $98,750 self-inflicted shortfall on top of the deductible.
Replacement cost is conditional on repair or replacement. If Northside takes the cash and walks away, the loss settles at actual cash value with depreciation applied, and the coinsurance ratio is still applied to that lower figure.
2. How is the business income and extra expense claim handled?
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Pay both, but shorten the indemnity period by three days and keep the two coverages separate.
- Period of restoration begins 72 hours after the loss and ends when the property could reasonably be repaired or operations resume. Deduct roughly 3/120 of the loss for the waiting period: $180,000 × (117/120) ≈ $175,500.
- Business income = net income loss $150,000 + continuing expenses $30,000 = $180,000, less the waiting-period share. The coinsurance condition attaches to the building limit, not to the business income limit, so the $296,250 penalty does not reduce the BI payment.
- Extra expense $30,000 is paid in addition and does not reduce the business income limit; it is designed to shorten the shutdown, which also shrinks the BI exposure. Verify the extra expense was actually incurred and did not merely duplicate continuing expenses.
- The four-month shutdown is well inside a 12-month actual-loss-sustained period, so no limit issue - but the insured must document the continuing expenses it paid while idle, or the adjuster will strip them.
3. The east wing was empty for 100 days. Does the vacancy provision defeat the fire claim? Would a frozen pipe have been treated the same way?
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Fire is paid; a frozen pipe would not be.
The vacancy condition suspends coverage after the building has been vacant for 60 consecutive days - and it suspends only specific perils: vandalism, sprinkler leakage, building glass breakage, water damage, and theft. Fire is not on the list, so the $400,000 fire loss is payable in full (subject to the coinsurance penalty above).
A burst pipe is different. Water damage is one of the suspended perils, and 100 days of vacancy with no heat is textbook exposure. That claim would be denied outright - not reduced.
Two distinctions worth arguing:
- Vacant vs. unoccupied. "Vacant" means empty of contents and people with no intent to return; a building full of machinery shut down for a remodel is merely unoccupied, and the limitation does not apply. Here the wing really was vacant.
- Notice. The insured had a duty to report the change in occupancy. Whether the insurer can use that to void depends on the policy's concealment/fraud condition; the vacancy limitation alone is the cleaner defense.