A Statement of Values That Wins the Building and Loses the Contents
Ridgeline Fabrication insures its plant on a CP 00 10: blanket limit $1,500,000 on the building, $500,000 on business personal property, 80% coinsurance, $10,000 deductible per occurrence, replacement cost. The statement of values submitted at inception showed a building replacement cost of $1,800,000 and BPP of $750,000. In June a press-room fire caused $480,000 of building damage and $120,000 of BPP damage; both were repaired or replaced at full replacement cost. Production shifted to a sister plant for eleven weeks at an extra cost of $95,000, and lost gross profit was $290,000. Ridgeline bought no business income or extra expense form, insisting 'the fire is one loss and we are insured for the fire.' The agent never discussed time-element coverage with them.
1. Compute the building payment and explain why a building insured for less than its replacement cost still escapes a coinsurance penalty.
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The 80% test is the only test. Required insurance = 0.80 × $1,800,000 = $1,440,000. Carried = $1,500,000.
$1,500,000 / $1,440,000 = 1.04, and the carried amount exceeds the requirement - no penalty.
Payment: $480,000 − $10,000 deductible = $470,000, subject to the replacement-cost conditions (repair or replace, and claim within the form's time window).
The judgment trap: the building is genuinely underinsured by $300,000 against actual replacement cost, and a naive analysis applies the ratio $1,500,000/$1,800,000 = 83.3% and pays $400,000. That is wrong. Coinsurance measures the limit against the percentage requirement, not against full value. The consequence of the gap only appears if a total loss occurs (the insured eats $300,000) or if the limit drops below $1,440,000.
Watch for: the margin clause, found in some carrier manuscripts, which does penalize against the reported values and would change this answer. Check the form before committing.
2. Compute the personal property payment, and explain how the single deductible is applied across two coverage parts.
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Personal property fails the test. Required = 0.80 × $750,000 = $600,000. Carried = $500,000.
Ratio = $500,000 / $600,000 = 0.8333.
Penalized recovery = $120,000 × 0.8333 = $100,000. The insured absorbs $20,000 as the coinsurance penalty.
Deductible placement - the judgment point. The CP 00 10 applies one deductible per occurrence to the total adjusted loss, not separately to each coverage part. If applied per coverage part, the insured would lose $20,000 in deductibles; applied once, $10,000.
Combined payment: ($480,000 + $100,000) − $10,000 = $570,000.
Note the ordering question: some jurisdictions apply the deductible before the coinsurance ratio; the difference here is ($120,000 − $10,000) × 0.8333 = $91,667, about $8,000 less to the insured. Read the deductible and loss-payment conditions in the specific form and check state practice.
Advice to the insured: a blanket limit spread across two coverage parts is a common failure mode. Raising the BPP limit to $600,000 costs far less than the recurring 16.7% penalty on every future contents loss.
3. Ridgeline demands the $95,000 of extra expense and $290,000 of lost profit as part of 'the fire loss.' Evaluate that argument and identify what the broker should have done.
Read the worked answer
The argument fails.
- The CP 00 10 insures direct physical loss or damage to covered property. Lost gross profit and extra expense are consequential economic losses, not physical damage.
- Business income and extra expense are separate coverage parts (CP 00 30), separately rated and separately limited. Nothing in the property form produces them.
- There is no 'one loss' doctrine that converts a property policy into a time-element policy; the insured's single occurrence is still two different insuring agreements, one of which was never purchased.
What the insured actually recovers: $570,000 and nothing for the eleven weeks of disruption - an uninsured loss of $385,000 against $570,000 of property payment.
What a competent broker does:
- Quantify the business income exposure from gross profit and continuing expenses, not from property values.
- Set the period of indemnity to the realistic restoration time (eleven weeks here), remembering the 72-hour waiting period and that the period of restoration ends when the property could have been repaired with reasonable speed, not when the insured actually finished.
- Consider extra expense as the cheaper alternative for a business that can shift production to a sister plant - the $95,000 might have been covered for a modest premium.
- Document the declination in writing. Undiscussed time-element coverage is the single most common errors-and-omissions allegation in commercial property.