Commercial Property and Business Income Coverage
Commercial property and time-element losses
Commercial property forms use coinsurance to discourage underinsurance. The insured must carry a limit at least equal to the coinsurance percentage times the property’s replacement cost at the time of loss. If it does not, the loss payment is reduced by the ratio of carried limit to required limit. Blanket limits apply one limit across multiple locations; specific limits apply separately. Agreed value suspends coinsurance when the insured submits a statement of values. Business income covers lost net income and continuing expenses during the period of restoration; extra expense pays costs to avoid or shorten shutdown. Civil authority, contingent business income, and leasehold interest are separate extensions. A waiting period, often 72 hours, may delay business income payment.
Worked example
A building has a replacement cost of $1,000,000. The policy has 80% coinsurance, a $600,000 limit, and a $5,000 deductible. The required limit is $800,000. Because $600,000/$800,000 = 0.75, the coinsurance penalty applies. A $200,000 covered loss pays $200,000 × 0.75 = $150,000, minus $5,000 = $145,000. If the insured had carried $800,000, the payment would be $195,000, subject to the limit. The coinsurance test uses replacement cost, not book value or market value.
Traps
Do not apply coinsurance after subtracting the deductible in a way that changes the ratio. Do not use tax value. Do not treat business income as gross sales. Do not assume extra expense reduces the business income limit; check the form.