What Policyholders Don’t Know Can Hurt Them
James Rode
What policyholders do not know about their commercial property insurance policies may hurt them. Two issues MLA personnel frequently find that policyholders misunderstand are co-insurance and protective safeguard endorsements.
Co-insurance
Many property insurance policies contain co-insurance clauses that require policyholders to purchase an amount of insurance that accurately reflects the value of their insured property. If less than a certain percentage of the accurate value is purchased, policyholders may not be able to fully recover in the event of a loss.
If a building valued at $1,000,000 to replace is insured with a policy containing an 80% co-insurance clause, the policyholder must purchase at least $800,000 in replacement cost coverage. If the amount of insurance purchased is less than $800,000, the policyholder would be financially responsible for a proportionate share of the loss.
Co-insurance Formula
The basic co-insurance formula for determining whether a policyholder has enough coverage is outlined below. In this example, let’s assume that after a fire it is determined the building would cost $500,000 to replace, but only $300,000 of the replacement cost of insurance was purchased. With an 80% co-insurance clause and a $200,000 loss, the co-insurance would be applied as follows:
In light of the above, in this theoretical co-insurance case, the policyholder would not collect 25% of the loss.
Protective Safeguards Endorsements
Protective safeguards is a property insurance endorsement that makes it a condition of coverage that the protective safeguards cited in the endorsement (such as an automatic sprinkler system or night watch guard) be in operation at all times except when the insurer has been notified of the impairment in protection. Failure to maintain the protective safeguards in good working order or failure to notify the insurer of even a temporary impairment in protection suspends coverage until the protection is restored.
While protective and safeguard seem like positive words to purchase with an insurance policy, this endorsement on a property policy can exclude coverage in certain scenarios. Protective safeguards that are sometimes endorsed to property insurance policies include, but are not limited to, the following:
An automatic sprinkler system (P-1)
An automatic fire alarm (P-2)
A security service (P-3)
A security contract (P-4)
An automatic commercial cooking exhaust and extinguishing system (P-5)
Any other protective safeguard that could be specifically described on the endorsement (P-9)
If a policyholder fails to adequately maintain any of the above protective safeguards and suffers a fire loss, coverage for that loss could be denied by the insurance company. Additionally, if a policyholder knowingly turns off or suspends any of the above protective safeguards, even if for routine maintenance, and does not notify the insurance company of this suspension, a loss caused by fire during this suspension can be denied. As is typically the case with insurance, there’s an exception to these provisions.
What is clear to MLA, however, is that many policyholders should ascertain a better understanding of co-insurance and protective safeguard endorsements to ensure they are being fully protected by their commercial property insurance policies.
ABOUT THE BLOGGER
Bob Landow specializes in resolving complex commercial property losses stemming from catastrophic events such as fires, hurricanes, earthquakes, and floods across the country, throughout the Virgin Islands, Mexico, and in Puerto Rico.
Bob has handled all types of claims for clients ranging from small businesses to Fortune 500 companies and large municipalities. Bob’s experience includes handling a mine collapse for an energy company, a power failure for a major acute care hospital, and a hurricane that caused wind and/or flood damage to hundreds of city-owned properties including office buildings, fire and police departments, and waste water treatment plants for one of our nation’s most populated cities.
Bob has adjusted over $1,000,000,000 in commercial property claims including over $350,000,000 in business interruption losses. Bob reached a $264,000,000 settlement relating to damage resulting from Hurricane Katrina to three separate hospital campuses in New Orleans, Louisiana.
Bob is a licensed public insurance adjuster in over 30 states and jurisdictions. Bob earned a B.S. in Consumer Economics from the University of Maryland and an MBA from Georgetown University’s McDonough School of Business. He lives in Villanova, PA with his wife, Arlyn, and their three daughters.
For further inquiries or to schedule a free consultation, please contact MLA Claims via e-mail adjuster@mlaclaims.com or via telephone 610.940.4400.