TWFG Commercial Business School – Commercial 103

Commercial 103

Glossary

Frame Construction:Typical wood construction, including wood frame with stone, brick or stucco veneer.

Joisted Masonry Construction: A mixture of wood and masonry construction, usually only seen in older structures from the 40’s and 50’s. The walls are masonry or solid brick with wood joists supporting floors and roofs.

Non-Combustible Construction:Any type of non-combustible (not wood) non-masonry construction. The examples include metal shop buildings with steel framing, mini-self-storage units, and auto-body shops.

Masonry Non-Combustible Construction:Exterior walls are masonry (solid masonry, concrete, solid brick) but the floors and roof are made of metal or some other non-combustible material.

Fire Resistive Construction: May be solid masonry for all components or a mixture of solid masonry and heavy, protected steel, such as a high-rise. Depending on the fire-resistive rating of the materials, these structures are classified as modified non-resistive (1 hour rating) or fire-resistive (2 hour rating).

Property Protection Class (PPC): Assigned by the ISO office, it is a measure of a community’s fire response. It includes available water sources (like a fire hydrant), ability to deliver specific volumes of water at any one location (through water pressure, type and availability of fire engines), number of responding fire engines and other factors. A PPC rating of 1 is the best. 10 means completely unprotected. Most carriers consider PPC ratings 8, 9, and 10 as unprotected. Property coverage is usually not available for frame structures in these areas.

COPE: An acronym for the 4 major categories of property exposures evaluated. C= Construction type; O= Occupancy (how is the building used); P= Protection (PPC, distance to fire hydrant, sprinklers) E= Exposures (surrounding, such as nearness to tall grasses and dry trees, structures close by).

Permanently Installed Equipment: This is usually means something that is bolted to the ground or to the wall. In reality, the insured has the option to include such equipment in either the building or business personal property limit. Since the building coverage is often broader than the business personal property coverage, including permanently installed equipment under building can be very advantageous for some risks, such as a manufacturer who has a lot of equipment.

Additional Coverages: 6 coverages with a separate, nominal sub-limit for items such as debris removal and increased cost of construction. These additional coverages are sub-limits of the Building limit, and payments here reduce the Building limit. The limits automatically included under the policy need to be evaluated for sufficiency for each risk. If higher limits are needed, they should be requested.

Coverage Extensions: 6 coverages with separate limits for items such as newly acquired buildings and property off-premises. These items are NOT sub-limits of the Building limit, so payments here do NOT reduce the Building limit. The limits automatically included under the policy need to be evaluated for sufficiency for each risk. If higher limits are needed, they should be requested.

Electronic Data Processing (EDP) Coverage: A form of Inland marine coverage to address computers and software. The CPP provides only very limited coverage ($2500) for computers and equipment. EDP forms typically provide broader coverage in addition to higher limits. Business Interruption coverage from EDP losses can also be selected. Coverage is typically scheduled by location with Hardware and Software limits. There is also a Blanket Coverage option.

Cause of Loss Form: A cause of loss form determines the covered perils under a property policy. Although three cause of loss forms are available, 99% of what is written in admitted commercial lines is the Special Form, which is open perils (if it’s not excluded, it’s covered). Some forms of Inland marine will use a Named Perils form.

Valuation Method: This determines the basis of value in the event of a loss. The insured selects this. There are several, but the most common are Replacement Cost Value (RCV) and Actual Cash Value (ACV). The vast majority of risks today are written on an RCV basis, which replaces with like kind and quality at the going rate at the time of the loss. In other words, with what it actually takes to replace the item or do the repairs. The exception to this is Inland Marine, where most contractors’ equipment is written on an ACV basis. RCV can be chosen, but it is quite pricey. Depending on the item, the carrier may not even offer RCV. ACV is replacement cost less depreciation based on age and wear. This is usually chosen when the insured does not intend to replace the item if it were damaged or destroyed.

Blanket Coverage: Blanket insurance combines a number of separate property coverages and/or coverages at two or more locations under a single limit of insurance. This is useful, for example, when BPP (typically stock) fluctuates at each specific location, but the total amount of stock remains fairly stable. Choosing the single limit allows the specific location limit to vary and not create an underinsured event which would trigger a coinsurance penalty. Whenever Blanket Coverage is selected, the insured must provide a Statement of Values (SOV) stipulating the values at each location at the onset of the policy. Here are other examples of where Blanket Coverage is used:

  • The insured has a number of buildings or a number of locations where the business personal property values fluctuate or move between the buildings or locations. A good example is a manufacturer where raw stock enters one building, is processed, moves to the next building or location for the next processing step, and so forth. As the stock moves from one building or location to another, the limits move as well but the total business personal property limit is essentially unchanged. This type of situation is a perfect candidate for blanket coverage. If the stock limit in this example fluctuates, the best approach may be to cover it under a reporting form.
  • The insured has equipment and machinery that is difficult to categorize as building property or personal property. Large machinery may not actually be attached to the building but is extremely difficult to move and categorizing it properly is difficult. A possible solution is to cover this kind of property under a blanket building and personal property approach.

Coinsurance and the Coinsurance Penalty:When selecting coverage limits, the insured also selects a coinsurance %. (Technically it is optional, but most carriers will require a minimum 80% coinsurance value.)The purpose is to encourage insureds to select coverage limits that accurately reflect the value of the property. There are credits involved for choosing a coinsurance credit. However, there is a penalty for not carrying adequate limits. Let’s say for example that an insured selects a building value of $100,000 with a coinsurance value of 80%. A loss occurs and the building suffers $20,000 in damages.Upon inspection, the actual value of the building turns out to have been $150,000. With the 80% coinsurance, the insured would have been required to insure that building for at least 80% of its replacement cost which comes to $120,000 ($150,000 X .80). Therefore, the building was underinsured by $30,000 ($150,000 - $120,000). The way the penalty applies follows a simple formula: “Did” divided by “Should” times the actual loss = loss payment. In this case, the insured “did” carry $100,000 of coverage and “should” have carried $120,000 and the loss was $20,000. So, the payment would be $100,000/$120,000 x $20,000 = $16,667.It is essential that the insured understand the consequences of not insuring property at an adequate level to meet the coinsurance requirements.

Builder’s Risk: A policy designed to meet the specific property needs for a building under construction. It may be purchased by the builder or the building owner. Many carriers will not write a BR policy if construction is already underway. In addition, the carriers will expect construction to be completed in a timely manner. Renewals are difficult to get approved.

Business Income Coverage (BIC): A form of coverage for lost income and continuing expenses (such as utilities, taxes, mortgage payments, and payroll) as a result of a covered loss under the policy which requires the business to have a suspension of operations. The option of Extra Expense may be selected to cover costs incurred to minimize BI losses during the suspension of business. For example, a business may temporarily relocate in order to continue operations during the time in which the main location is being repaired. The extra expenses (moving costs, utility costs, etc.) associated with the temporary relocation would be covered.

Equipment Breakdown Coverage: Covers losses resulting from mechanical breakdown or electrical arcing affecting machinery and equipment. , both excluded under the property form. Some carriers are including this coverage in their property forms or by automatically attached enhancement forms.