CPCU 551 - Managing Commercial Property Risk
CPCU 551 tests commercial property coverage forms, valuation mechanics, coinsurance, time-element exposure and catastrophe perils. Underwriters are expected to compute a recovery, not merely recognize that coverage exists.
Building blocks
Covered property includes building, business personal property, personal property of others, and improvements and betterments. Causes-of-loss forms run basic, broad and special; special is open peril subject to exclusions. Flood and earthquake are excluded and require separate coverage or endorsement. Terrorism is handled under TRIA. Valuation is actual cash value or replacement cost; coinsurance penalizes underinsurance; agreed value suspends coinsurance; a margin clause caps recovery at a percentage of reported value. Time element is business income plus extra expense, measured over the period of restoration with a 72-hour waiting period, and can extend to civil authority and dependent properties.
Coinsurance math
Required insurance = coinsurance percentage × replacement cost at time of loss. Payment = (limit ÷ required) × loss, capped at the limit, less deductible.
Worked example
Building replacement cost $1,000,000; 80% coinsurance; limit $600,000; fire loss $200,000; $5,000 deductible. Required = $800,000. Limit ÷ required = 0.75. Covered loss = 0.75 × $200,000 = $150,000. Less the deductible, $145,000 is paid. With an $800,000 limit the payment would be $195,000.
Traps
Applying a coinsurance calculation to an agreed value policy; insuring to actual cash value when the form is replacement cost; assuming special form covers flood; forgetting ordinance or law, which funds the extra cost of rebuilding to current code; confusing business income with extra expense; overlooking that blanket limits still must satisfy the coinsurance test.