Commercial Property Coverage and Business Income
This domain tests commercial property forms, causes-of-loss options, coinsurance, and time-element coverage for lost earnings and extra expenses.
Commercial property structure
Commercial property policies use building and personal property coverage, causes-of-loss forms, and optional coverages. Causes-of-loss forms may be basic, broad, or special. Coinsurance requires the insured to carry a specified percentage of value; a penalty applies if the limit is too low. Blanket and agreed-value arrangements can change the calculation.
Business income and extra expense
Business income covers lost net income and continuing normal operating expenses during the period of restoration. Extra expense covers reasonable costs to avoid or minimize shutdown. Civil authority, contingent business income, and extended period of indemnity may be added. The period of restoration usually ends when the business could resume with reasonable speed using reasonable means.
Worked example
A building is valued at $1 million and the policy has an 80% coinsurance requirement, so $800,000 is required. The insured carries $600,000. A covered loss is $200,000, and the deductible is $5,000. The coinsurance payment is ($600,000 ÷ $800,000) × $200,000 = $150,000. After the deductible, the payment is $145,000, subject to the policy limit. Carrying the full $1 million would have avoided the penalty.
Traps
Do not calculate coinsurance from the policy limit alone; use the required value. Do not start business income before the policy's trigger or ignore the period of restoration. Do not assume extra expense is the same as business income. Do not overlook the deductible.