A few key concepts can help you better understand how your commercial property insurance works. Reading insurance forms is challenging for all of us but understanding the concepts addressed by the forms make them more manageable.
The items below are terms and phrases used frequently in insurance to describe coverage or lack thereof.
Commercial Property Loss Exposures – what can be damaged to cause financial loss
- Real Property – this is property that is attached to the land or attached to a building that is attached to the land, like an office building or a piece of manufacturing equipment in a shop.
- Personal Property – this is property that can be moved without damage, like desks, chairs and small equipment.
- Personal Property of Others – this is property that can be moved without damage but is not owned by the owner of the policy. For whatever reason, possibly repair, the owner of the policy has items that do not belong to him/her but are his/her responsibility.
- Property Off Premises – this is property that is owned by the owner of the policy but does not reside on the insured location.
Causes of Loss – what happened that caused the damage which caused financial loss
- Natural Disasters – earthquake, flood, tornado, blizzard, hurricane
- Weather Conditions – hail, lightning, ice, snow
- Accidents – explosions, aircraft, falling objects
Consequences of Loss – what makes up the financial loss
- Reduction in value – property is not worth what it should be due to damage by a cause of loss
- Cost to repair or replace – property is not usable until it is functional again
- Loss of income – business loses sales because the property is not functional
- Insurable Interest – As it pertains to property insurance, insurable interest means that at the time of the damage, the damage must cause me financial loss. For example, a bank that has provided Mr. Smith a loan on his new office building has an insurable interest in the building.
- Insurance to Value – Simply put, this means insuring property for the correct value. The correct value can depend on the type of coverage provided by the policy. That is why it is important to understand the policy language. The correct value to you may not be seen in the same terms as what the policy lays out.
- Coinsurance – Coinsurance is displayed as a percentage. It is the percentage the policy requires the policy owner to carry of the insurance to value amount of the property. Failing to meet the coinsurance requirement results in a penalty and can reduce the amount the policy owner may receive in the event of a loss.
- Replacement Cost – Individual policies may tweak the wording but the generally accepted definition of this term is as follows: Damaged property will be replaced or repaired with materials of like kind and quality.
- Actual Cash Value – As with replacement cost, the wording can vary a bit but here is the consensus definition: Actual cash value is the amount determined by calculating replacement cost and decreasing that amount by depreciation due to age or usage.
These are just a few key terms and concepts that may better help when reading insurance policies or discussing insurance with an agent. As has been mentioned before, any time a term, concept, coverage, really anything about the policy is confusing, ASK!! An insurance agent will be able to explain the terms and offer options for coverage.