Insureds don't always quite understand the ins and outs of the various clauses and features in a Commercial Property insurance policy. Enter Katelynn Fellows, RPS area senior vice president, Property insurance broker, and Heather Velasquez, RPS area assistant vice president, Property insurance broker, to walk through some of the most important Commercial Property insurance policy components so agents can confidently explain coverages to clients — and guide better buying decisions.

How Coinsurance Works

One of the most misunderstood pieces of a Commercial Property policy is the coinsurance clause. This provision requires an insured to maintain coverage up to a certain percentage of the property's value, often 80%, 90% or 100%. If the insured undervalues their property, the carrier can significantly reduce the claim payout, even if the limit seems sufficient.

"Coinsurance is a clause inside the Property policy that requires policyholders to insure their property to a specific percentage of the total value," Fellows says. "Many insureds, however, assume that as long as they insure for the dollar amount they want (for example, $70,000 on a $100,000 building), they'll receive the full amount they selected. This isn't so if the coinsurance clause is included in the policy, as the insured will be penalized for insuring below the value."

Velasquez explains how a coinsurance clause works using an example of a $50,000 loss. Say a building is valued at $100,000 but the insured carried only $70,000 of insurance under an 80% coinsurance requirement. Because the policyholder failed to meet the minimum required value of $80,000, a penalty is applied. The carrier divides the insured amount ($70,000) by the required amount ($80,000), yielding 87.5%. That percentage is applied to the $50,000 loss, so instead of receiving the full $50,000, the insured would receive only $43,750 before the deductible is subtracted.

This clause is why both Fellows and Velasquez ask carriers to waive coinsurance whenever possible.

Replacement Cost vs. Actual Cash Value

In a total loss, an insured must understand whether a Property policy will pay to rebuild the property as it stands today or account for depreciation.

"You want the policy to be written on a replacement cost basis," explains Fellows. Replacement cost coverage pays to rebuild with current materials and labor, while a policy based on actual cash value (ACV) factors in depreciation and age.

"Older buildings may be placed on ACV unless replacement cost is specifically requested, and it may come at a higher premium," says Velasquez.

The Need for Ordinance or Law Coverage

Even if a building is adequately insured, rebuilding after a loss isn't always straightforward. Building codes evolve, municipalities require upgrades and partial losses can trigger demolition requirements. Ordinance or law coverage helps cover those additional expenses and typically includes three components:

  • Coverage A: Undamaged portions of the structure
  • Coverage B: Demolition of the damaged and undamaged portions
  • Coverage C: Increased cost of repair due to modern codes

"Together, all three components ensure that if the insured is required to tear down, rebuild or upgrade the building following a loss due to code requirements, the costs involved are covered, up to the policy sublimits, not just the damage itself," says Velasquez.

Blanket Limits vs. Scheduled Limits

When a client has multiple buildings, how they structure the policy has huge implications during a loss. Blanket limits afford the greatest flexibility. A blanket policy pays for the loss based on total values across locations, not building by building. With scheduled limits, each building is capped at its individual insured value.

As Fellows puts it, "You always want blanket limits because it's the best you can have. With scheduled limits, if one location is undervalued, even slightly, the payout is capped, with each location strictly limited by its own insured value."

Blanket limits allow the policy to respond to the full exposure across the portfolio. With today's softer Property market, blanket limits are easier to secure.

"We've been able to push blanket limits where we haven't been able to in the past," Fellows says.

Providing clients with a detailed look into the policy and options available helps ensure they actually get the protection they believe they are buying.

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