Sprinkler Leak, Mold, and Business Income at a Bakery
A commercial property policy covers a Tulsa bakery with a building limit of $1,000,000, a business-income limit of $250,000, a $10,000 deductible, and an 80% coinsurance clause. A corroded sprinkler pipe above the ceiling leaked on a Saturday, closing the bakery for 18 days. The insured claims $180,000 for building damage, $90,000 for business income, and $25,000 for mold remediation. The building's replacement cost is $1,200,000. The policy excludes wear, tear, and corrosion, and excludes mold, but has an exception for ensuing loss caused by a covered peril; mold remediation has a $10,000 sublimit. The insured waited 10 days after the leak to begin drying and mold cleanup because the owner was negotiating with a contractor. The business-income claim is based on last year's revenue, not actual lost sales; the insured had $40,000 in continuing expenses and saved $12,000 in payroll. Extra expense of $6,000 for renting a temporary kitchen is documented.
1. How should you apply the corrosion exclusion, the mold exclusion, the ensuing-loss exception, and the mold sublimit?
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The corrosion exclusion bars the cost to repair the corroded pipe itself, but the water damage that resulted from the leak is a separate covered peril. The mold exclusion is broader, but the policy's ensuing-loss exception restores coverage for mold that results from a covered water loss, subject to the $10,000 mold sublimit. I would separate the claim into three buckets: pipe repair, which is excluded; building damage from water, which is covered subject to deductible and coinsurance; and mold remediation, which is covered as ensuing loss only up to $10,000 and only to the extent caused by the covered leak rather than by the 10-day delay. The insured's delay in drying may increase the mold loss; the policy's mitigation condition and the insurer's right to deny preventable damage apply. I would obtain moisture readings, a remediation protocol, and a causation report. If the mold is partly due to the delay, allocate the preventable portion to the insured.
2. How do the 80% coinsurance clause and the deductible apply to the building loss?
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Coinsurance applies to the building loss. The required limit is 80% of $1,200,000, or $960,000. The insured carried $1,000,000, which is about 104% of the required amount, so no coinsurance penalty applies. The $10,000 deductible applies once to the covered property loss. If the building damage is $180,000, the net covered building payment before mold is $170,000. The mold sublimit is $10,000; I would apply the deductible to the total covered property loss, not separately to the mold, unless the policy says otherwise. Because the deductible is already exhausted by the building damage, the mold payment could be up to $10,000, but I need to confirm the policy's sublimit language. I would also verify that the $180,000 estimate does not include the excluded pipe repair. If it does, subtract that amount before applying the deductible. The coinsurance calculation is a ratio test, not a penalty here, because the insured's limit is adequate.
3. How should you calculate business income and extra expense, and how does the insured's delay affect the period of restoration?
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Business income is based on actual lost net income during the period of restoration, not last year's revenue. The period begins when the loss occurs and ends when the property could be repaired with reasonable speed. The 18-day closure is the starting point, but the insured's 10-day delay in drying and mold cleanup may extend the period only if the delay was reasonable; the insurer is not obligated to pay for delay caused by the insured's negotiation with a contractor. I would request profit-and-loss statements, sales-tax reports, payroll records, and a month-by-month comparison. The claimed $90,000 is unsupported. Using the facts given, the insured had $40,000 in continuing expenses and saved $12,000 in payroll, so the net business-income loss depends on lost revenue minus saved payroll and other noncontinuing expenses. The $6,000 extra expense for the temporary kitchen is covered if it reduced the loss and is documented. I would calculate the actual loss for the reasonable restoration period, apply any waiting period, and add the extra expense. The business-income limit is $250,000, so no limit issue.