Key Insights on Commercial Property Insurance for Your Clients

Understanding Commercial Policy Coverages That May Affect Your Clients

When helping your clients with property insurance, it's vital to understand the nuances that can affect their coverage. Here are key areas to focus on:

Protective Safeguards

A "Protective Safeguard" clause in a property insurance policy often requires specific safety measures, like sprinklers or alarms. If these are missing, your client's claims might get denied—even if they weren't informed about this requirement. Imagine a retail store without a mandated sprinkler system; a fire could lead to uncovered losses. Always check for these endorsements and ensure compliance.

Importance of Regular Inspections

Of course, its not enough just to have these safeguards in place. It is usually mandated that the safeguards are inspected at least annually by a certified company and documented.

Consider a scenario involving a busy restaurant that has installed high-quality protective safeguards, such as fire alarms, sprinkler systems, and hood suppression systems. Although these systems are all in working order, the management has overlooked the need for an official inspection to be conducted and documented within the last year. Unfortunately, when a fire breaks out, causing significant damage, the insurance company denies their claim. Even if they activated to suppress the fire and prevented further damage.

This example underscores the crucial importance of not just having safeguards in place but also ensuring compliance with all policy stipulations through regular inspections.Always remember that the insurance policy is a binding contract, and Insurers are in the business of saving money. This event has happened many times, and if your client did not adhere to the policy conditions, it is more than likely that their claim will be denied.

Replacement Cost Coverage

This is one of the most important ednorsements that your client can purchase. This type of coverage ensures that your client receives full compensation to replace damaged properties with new, similar quality material. Without this, insurance may only cover depreciated values.

For example, a real estate investor acquires a 10,000 sf apartment building in a value depressed area for $2 million. The building suffers extensive damage from a fire. With replacement cost coverage, the settlement is based on the current cost to repair the damage. The repairs are valued at $5 million, but due to depreciation, the settlement is reduced to $1.8 million. Without a replacement cost endorsement, $1.8 million is the maximum payout. With the endorsement, investors can repair/rebuild with a $5 million budget or buy a new property. If costs exceed the actual cash value, the insurance covers the difference up to $5 million.

This endorsement provides greater flexibility and beneficial decision-making for large losses.

Tenants Improvements & Betterments

Tenant's Improvements and Betterments, often referred to as "I&B" or "BI," cover any renovations or repairs that your client has made to the structure they lease. Ensuring that your client is fully covered for these enhancements is critical since they may substantially increase the value and utility of the leased premises. However, some insurance policies only cover a proportion of the original cost if repairs are not carried out promptly after a loss. This coverage typically calculates the reimbursed amount by taking the original cost of the improvements, multiplying it by the number of days from the date of the loss to the end of the lease, and then dividing by the number of days from the original renovation date to the lease's expiration.

For example, imagine your client leased a commercial space and invested $500,000 in renovations. If a loss occurs 200 days before the lease's expiration, and those improvements were initially made five years before its end, the reimbursed coverage calculation might be as follows: ($500,000 * 200) / 1,825 (five years) = roughly $55,000. If your client does not have the replacement cost endorsement mentioned above, they are in serious trouble.

Remember, this is calculated based on the original cost of the renovations. By now, everybody is aware of the drastic spike in labor and materials post-Covid. This coverage will not account for any of the appreciation in cost and your client will be stuck with that measly settlement.

Coinsurance

Coinsurance clauses penalize clients who don't insure their property to the specified value. For instance, a policy demanding 80% insurance means that failing to meet this percentage could result in reduced claim payouts. By opting for an "agreed value" coverage, your clients can avoid these penalties.

Suppose a property is valued at $1,000,000, and the policy includes an 80% coinsurance clause. This means the insured is required to carry at least $800,000 in coverage. If the insured only purchases $600,000 in insurance and suffers a $200,000 loss, the payout would be calculated as follows: Coverage carried ($600,000) divided by required coverage ($800,000) equals 0.75. This ratio is then multiplied by the loss amount ($200,000), resulting in a payout of $150,000.

Therefore, the insured would face a $50,000 shortfall, having to cover this amount out of pocket due to not meeting the coinsurance requirement. Opting for "agreed value" coverage could help prevent such financial consequences.

Ordinance or Law Coverage

Suppose a bakery suffers a loss and local laws demand new safety features like hard-wired smoke detectors during repairs. Without Ordinance or Law coverage, your clients must shoulder these upgrade costs. This coverage, though inexpensive, is crucial for compliance-related expenses post-loss.

Loss of Income & Extra Expense

Typically referred to as "BI" coverage, Loss of Income insurance covers your client's lost profits when their business operations are halted due to a covered event. Extra Expense insurance helps with costs like renting a temporary office space. For instance, if a salon needs to continue serving clients while repairing its main location, these coverages become invaluable.

A local bakery faced a major flood that severely damaged its kitchen and storefront. Although insurance covered the costs for repairs and temporary operations, rebuilding their loyal customer base was tough. The renovation took two months, but winning back customer confidence required more time. Creative marketing efforts and community support played key roles in regaining their previous sales, highlighting the importance of comprehensive recovery strategies beyond insurance coverage. Their extension on loss of business income allowed them to claim revenue losses for a short time after reopening, ensuring a seamless transition.

This coverage will typically cover a specific timeframe or dollar amount. In many cases there can be extensions of this coverage that apply to a timeframe after your client is back in business.

Call to Action

Navigating the complexities of property insurance requires attention to key elements such as Protective Safeguards, Replacement Cost Coverage, Tenant's Improvements & Betterments, Coinsurance, and Ordinance or Law Coverage. Failing to adhere to these can lead to denied claims or limited payouts, impacting the financial stability of your client's investments.

Engaging an experienced public adjuster is crucial for successfully managing these insurance challenges. Public adjusters possess the expertise to interpret policy clauses, ensure compliance, and maximize claim settlements. They understand the intricacies of endorsements and can advise on maintaining safeguards to avoid claim denial.

For commercial real estate agents, CPAs, attorneys, and professionals working with large businesses or real estate investors, partnering with a knowledgeable public adjuster can lead to enhanced outcomes in insurance claims. Their expertise ensures that your clients receive the full benefits of their coverage, minimizing financial risks and providing peace of mind in the event of a loss.