At first glance, a commercial property policy seems straightforward. It lists the property covered, what causes of loss are covered, and how much it’s covered for. But did you know that there are many ways a property policy’s coverage can be restricted? If an insured is not fully aware of the limitations of their property policy, they may find themselves with a denied claim or a much smaller payout than they expected.
It's a trap!
Here are a few of the common restrictions that may be hiding in your property policy.
A MARGIN CLAUSE can severely limit how much your blanket property coverage pays out. Instead of having the full blanket amount available at each covered location, the margin clause endorsement imposes specific limits to each location within the blanket. This endorsement nullifies one of a blanket property limit’s most valuable advantages, allowing property limits to move between locations fluidly.
Example of Margin Clause: You have three buildings valued at $2 million each that are covered by a blanket limit of $6 million. One of your buildings suffers a total loss and it costs $2.6 million to rebuild. Under an unrestricted blanket the full $6 million is available to cover the loss. If there was a margin clause that limited the payout to 110% of the building’s value, you would only have $2.2 million available to you.
Insureds should always be aware of how their policy determines the value of the covered property. A property policy written on an ACTUAL CASH VALUE (ACV) basis applies depreciation to the value of the property. Put another way, ACV factors in the value a piece of property loses over time. A property valued using the ACV method can leave an insured short of the funds it would take to replace the damaged property, especially in the event of a total loss.
The VACANCY PROVISION on a property policy defines a building as vacant after only 60 days without a regular occupant. Once a property is considered vacant, it loses a lot of the coverage that would otherwise be in place, including losses caused by theft, vandalism, and glass breakage. The provision also reduces the property value by 15%.
Property DEDUCTIBLES can be modified in ways that are not in the insured’s favor. Deductibles can be increased for specific causes of loss (i.e. hail or wind) or with respect to specific parts of the covered property (i.e. roof damage). Deductibles can also be applied to each covered building rather than once per an occurrence, meaning three buildings damaged by the same storm would result in the deductible being paid three separate times.
These are only a few of the many restrictions or exclusions that can be found within a standard commercial property policy. The HJI Real Estate & Hospitality Group can help review your policies and identify potential coverage gaps that are leaving you vulnerable to reduced or nonexistent coverage.
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