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What Is Covered Starts With What Isn’t –The Policy Exclusions!

15 October 2013 By In Blog style

Part 2 –Your Property Insurance

Congratulations! If you read the first installment of this continuing blog, then you have graduated kindergarten and are ready to begin Insurance grade school. I am often asked about what is or isn’t covered under a commercial insurance policy. Many times somebody will ask me, I was wondering if “blank” is covered under my policy.

When you drive past a property you own or manage and see something similar to this picture, are you 100% confident in the choices you made with your insurance contracts?

Sandy Damaged HomeThe answer typically is, “It depends”. The first thing you need to know is what type of policy did you purchase? There are three basic types of coverage forms for insurance as it related to property. The first is basic, or what was previously known as “named perils coverage”. In this instance, what is covered are only the items listed in the form. Things such as fire, lightning, explosion, theft, and vandalism are a few of the losses that the policy will cover as they are specifically listed (or named) in the policy. If what happened to you isn’t in that specific list of what is covered, then the simple answer is it isn’t covered. This is the bare minimum of coverage available and should be avoided at all costs. The only time you may find this coverage form in effect is if your company has experienced numerous property claims and cannot get either broad form or special form.

The second type of property coverage available is slightly broader than basic and hence its name, Broad Form Property Coverage. However, do not be fooled by the coverage name of “broad form” as this is only slightly better than basic coverage. It adds some additional causes of loss such as “falling objects”, “weight of ice, sleet or snow”, and “water damage”. This is better than the basic coverage form but really doesn’t give you “broad” coverage as the name implies (it should be titled Broader Form Property Coverage).

The last and best coverage form for property coverage is “special’ (previously known as all-risk) coverage which provides for risks of direct physical loss unless excluded or limited. If you have this type of property coverage, (which I strongly recommend) then to understand what is covered, you must first go to what isn’t covered, or the exclusions section. If you what just happened to you isn’t specifically excluded then chances are excellent that some type of coverage may exist.

Here is a list of what is considered “typical normal exclusions” such as

  1. “Ordinance or Law” (regulates the reconstruction, use or repair of existing property to meet current building standards),
  2. “Earth Movement” –earthquake, landslide, any earth sinking, if earth movement results in a fire then the ensuing loss from fire is covered
  3. Government Action
  4. “Nuclear Hazard”
  5. Utility Services – failure of power, communication, water or other utility service
  6. “War and Military Action”
  7. “Water “ –flood, surface water waves, tides and tidal water
  8. “Fungus”, “Wet Rot” “Dry Rot” and “Bacteria” (mold)
  9. As I have stated these are the most common t exclusions and for most of the coverages listed above, you can typically either purchase the coverage back or purchase a separate policy (such as flood) to protect your firm from these potential losses. So as to keep these articles “digestible” I will discuss these coverage options in greater detail when we get to Property Insurance 201.

Seaside FireThe next important thing about your property insurance that will affect whether or not “your loss” is covered is the way it’s valued. Do you have replacement cost or Actual Cash Value (ACV)? Replacement cost will in effect give you “new for old”, the cost to repair or replace your property with new, even if the item is years (or decades) old. This would be the preferred valuation to request. ACV gives you in effect “old for old”, if the desks in your office are ten years old and you have to replace them; the company will adjust it based on its depreciated value and not what it will cost you to replace today. This can leave you with a large gap in reimbursement at the time of loss. Some properties you own may even have outlived its anticipated “shelf life” and have no depreciated value available.

What about limits? “What is an appropriate limit for us to consider “is a question we frequently hear. It is very difficult for anyone other than your firm and perhaps your accountants to come up with an appropriate number. Do a quick inventory even it’s a mental one to try to get an idea of the value of your contents. The problem e most often see with content limits is the failure to update the limit from whenever the original number was decided upon.

If you chose a number of $125,000 four years ago, is that number still valid? Always assume the absolute worst; that your office now looks like the picture above and everything has been wiped out. You need furniture, desks, chairs, telephone systems, computers, servers, monitors, scanners, copy machines, stationary supplies, carpeting, file cabinets and the list goes on and on. What most people fail to recognize is that what you currently own is an accumulation of “things” over time. Perhaps you started out with 3 employees and their associated needs but have grown to 15 employees now. Chances are very good that you hired people and added things over a period of time making moderate acquisitions that have now accumulated in value. Limits chosen in prior years really have no bearing on the limit you need today to adequately protect your Property management firm.

Blanket Insurance is one way to assist you in providing more realistic limits in the event of a claim. The ideal blanket limit would include your contents, inventory, building limit (if applicable), improvements and betterments (which most people forget about completely) as well as your loss of income or extra expense. We will explore each of these in another issue. However a blanket limit would take the total costs of repairing or replacing all of your property damaged in one simple limit. For example, if you owned a

  1. Building and the cost to replace it was $250,000;
  2. Value of the improvements and betterments (floor coverings, wall paper, paint, etc.) was an additional $100,000
  3. Contents – all other items including electronics, phones, desks, furniture, file cabinets, stationary supplies etc. $250,000

Under the ideal blanket limit in the example above you would choose $600,000 blanket contents, building and improvement & betterments as one limit as opposed to separate limits. In the event you were off on the replacement of one of the items, the total limit of $600,000 would be available for any of the items. So, if you didn’t have to replace the whole building at time of replacing your contents the actual cost was $300,000 as opposed to the $200,000 limit, you would be able $300,000 of the blanket limit towards that loss. Scheduling it separately, you would be out of pocket $50,000 or the amount it actually cost versus the limit you purchased.

So, ideally after having read through this article, you can review your property portion of your policy and look for 3 simple things- Special Cause of loss, blanket property limit, and replacement cost. If you have these 3 basic things, you are better off than most. There are other exclusions and limitations in coverage but we will look at those in another issue.

Next week look for General Liability Insurance; as an additional named insured do I need to carry my own? (The answer as you will learn, is a most definitely yes).

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