Commercial Property Insurance: What It Covers and How the Forms Work

Commercial property insurance will pay for direct physical loss or damage to covered property located on your described premises that has been caused by a covered cause of loss. The definition of "covered property", is found in a policy coverage form, typically the Building And Personal Property Coverage Form, whereas the definition of those events that may be considered a "covered cause of loss," is provided in a separate causes of loss form: either the Basic, Broad, or Special Causes of Loss form. Those two forms, plus your valuation options and your choice of coinsurance, will determine how much of your claim you can recover, and this guide identifies the places in your claims process where the surprise may occur.

What does commercial property insurance cover?

The coverage form, usually the Building And Personal Property Coverage Form, CP 00 10, sets what property is insured, while a separate causes of loss form sets which perils. Covered Property splits into three categories, each with its own limit:

• Building: the described structure, its fixtures and permanently installed equipment, and property used to service it.
• Your Business Personal Property: furniture, machinery, stock, your interest in tenant improvements, and leased property you are required to insure.
• Personal Property of Others: property of others in your care at the premises, covered when a limit for it is shown in your policy.

The 100-foot rule catches insureds: business personal property located in an unscheduled shed is not covered even within 100 feet of the described building. Schedule all buildings that contain this type of property. All property under construction should also be listed on a builders risk policy.

What are the Basic, Broad, and Special causes of loss forms?

A Causes of Loss (CoL) form is included in every Commercial Property Policy. In both the "Basic" and "Broad", the insured must show that one of the listed "Named Peril(s)" was the cause for their loss. With the "Special" CoL form anything not excluded or limited is covered, and the burden of proof is reversed to the insurer.

The Special Forms (CP 10 30), are covered based on what they exclude. Windstorms, Vandalism, Sprinkler Leaks, Theft may each be removed from a policy using an endorsement. Flood and Earth Movement remain as exclusions on all three forms. An average sized building with only one inch of water inside would cost about $25,000 to repair, according to the National Flood Insurance Program.^[1]

How does coinsurance work, and how does the penalty bite?

Coinsurance penalizes underinsurance at partial losses. An owner's assumption is that the limits of insurance on their policy will be paid out for each claim. However, if an owner carries less than the required percentage of value at the time of loss, usually 80 percent, then the pay-out will be reduced according to a formula known as "Did Over Should," which involves taking the amount that was carried divided by the amount needed multiplied by the loss. For example, if a building valued at $100,000 has an 80 percent clause, the required limit is $80,000, so if only $40,000 is carried, then a $10,000 loss would be halved to $5,000. Under-insuring is very common. Marshall & Swift/Boeckh, now part of CoreLogic, estimates that approximately 75 percent of all U.S. businesses have a level of under-insurance of 40 percent or greater.^[2] Because the test applies at the time of loss, rising construction costs can drift you into a penalty mid-term, so track values yearly or suspend coinsurance with the Agreed Value option.

Actual cash value vs. replacement cost: which valuation applies?

Actual cash value, or ACV, is replacement cost minus depreciation and applies by default if Replacement Cost is not marked with an "X" on the Declarations page. Therefore, depreciation will be deducted from every payment. When Replacement Cost is triggered, it will pay the lesser of the Limit, comparable replacement cost, or the amount you actually spend. Code upgrades still need ordinance or law coverage.

What does commercial property insurance not cover?

The base policy does exclude coverage for "flood", "earth movement" and "code driven upgrades". However, the condition that most well-built programs do not anticipate is "vacancy." Once a building has been vacant more than 60 consecutive days before a loss occurs, then there will be no coverage at all for six perils including "theft", "vandalism", and "water damage", and every other loss will be reduced by 15 percent. The treatment also mirrors the fire exposure: the United States Fire Administration reported approximately 23,800 fires annually in vacant residential structures from 2013 to 2015, and 34 percent of those were intentionally set on fire.^[3] The Vacancy Permit endorsement (CP 04 50) waives it between tenants. Two exposures need separate placement: lost income belongs to business income insurance, and liability to others to your general liability policy.

This guide is for educational purposes and summarizes standard ISO policy language. Your policy's specific terms, conditions, and endorsements control. Talk to a licensed broker about your actual exposures.

The Bottom Line

Commercial Property Insurance pays for direct physical loss to covered property at your premises from an insured event. However, how much money will be paid in the case of a claim depends upon the type of Coverage Form you have purchased, the Causes of Loss Form(s), and the details of your valuation and Coinsurance requirements. Vacancy and underinsured situations are often where "good" programs quietly fail, so pull your Declarations, confirm the Values reflect the current Rebuild Cost, and ask your Broker whether Agreed Value and Replacement Cost options have been activated.