Commercial property: build the package, classify the loss

Introduction

Commercial property insurance pays for physical damage to the things a business uses to operate, such as its building, its equipment and goods, and sometimes items that customers have left with it. A package policy puts several kinds of business insurance into one policy, but only the kinds the business chose.

When a business reports damage, three questions do most of the sorting:

1. Which parts did the business buy? (What is actually in the policy?)
2. What kind of property was damaged? (Building, the business's own movable property, or someone else's property?)
3. Does the policy cover what caused the damage? (Is the cause on the policy's list, or is it excluded?)

These are general insurance-policy concepts, not rules from a Nevada statute. Every business, item, and policy clause in this lesson is invented for practice, and each assumption is stated. A real policy is decided by its own wording.

What you will be able to do

• Explain how a commercial package policy combines separately chosen coverage parts, and why the word "package" does not tell you which parts are inside.
• Sort damaged property into building, business personal property, or personal property of others, and name the fact that decides each one.
• Read a supplied causes-of-loss clause and decide whether its basic, broad, or special option covers a described cause.
• Recognize that coverage for physical damage does not, by itself, mean lost income is covered.

Before you start

This lesson builds on:

• Contract formation and the policy map, which covers where coverage appears in a policy.
• Who and what is covered—and what changes it.
• Calculate deductibles, limits and coinsurance. This lesson stops before calculating a payment.

It also helps to remember from Read a loss scenario: peril, hazard and cause that a peril is the cause of a loss, such as fire or windstorm.

Monoline or package: one coverage line, or several chosen parts

A coverage part is one self-contained section of business insurance aimed at one kind of loss. Three examples:

• Commercial property pays for damage to the business's property.
• General liability responds when someone claims the business injured them or damaged their property.
• Commercial auto covers business vehicles.

A monoline policy ("single-line policy") contains just one of these lines. A policy that contains only commercial property is monoline.

A commercial package policy (CPP) combines two or more coverage parts into one policy. The key point is that the business chooses each part separately. Calling the policy a package does not add any part automatically.

To find out what a package contains, read the declarations. These are the policy pages that list the insured, the coverages bought, and their limits.

Worked example: what is in this package?

Desert Pine Guitars is a fictional shop that repairs and sells guitars and owns its one-story building. Stated assumption: its CPP declarations list two parts:

• Commercial property
• General liability

Two coverages are not listed: commercial auto and business income coverage.

Here is how three events line up with those parts:

• A fire damages the workshop. Start with the commercial property part, because the loss is physical damage to the business's property.
• A customer trips over a cable and says they were hurt. This is a claim against the business, so the general liability part is where to look. Recognize negligence and other bases of liability explains that kind of claim.
• The shop's delivery van is damaged in a collision. No auto part was selected, so the package does not include one. The word "package" cannot supply a part the business never bought.

Change one fact. At renewal, Desert Pine adds the commercial auto part. The van now has a part to examine. Whether this particular collision is paid still depends on that part's own terms. Adding the part gives the van somewhere to look for coverage, but it does not promise payment.

Physical damage is not the same as lost income

After the fire, Desert Pine closes for six weeks. That creates two different losses:

• The damaged things, such as the walls, tools, and guitars. The commercial property part addresses these.
• The money the shop could not earn while closed. This is a different kind of loss.

The second loss belongs to time element coverage. That means insurance for losses that build up over time after covered physical damage, such as lost business income or the extra cost of staying open somewhere else. It is a separate coverage that is added to a policy. Desert Pine did not select business income coverage in this example, so the property part's promise to pay for damaged property does not answer the lost-income question.

Business income and extra expense: trace the interruption teaches how that coverage works.

Tempting mistake: "We bought a package, so we're covered for everything." The name describes how parts are bundled, not which parts were chosen. Check the declarations.

A businessowners policy (BOP) is a different kind of package built for small businesses. BOP or CPP: match the package to the business compares the two.

Check 1

Two Rivers Landscaping (fictional) has a policy whose declarations list only commercial property.

1. Is this a monoline policy or a package policy?
2. The owner says: "My cousin's business has a commercial package policy, and it covers their trucks. So package policies cover trucks." What is wrong with this reasoning?
3. A Two Rivers employee damages a customer's patio while working. Does Two Rivers have a liability part to examine?

Building, business personal property, or property of others: what was damaged?

Commercial property coverage sorts property into three categories. Each category answers a different question about the item.

• Building means the structure listed in the declarations and its completed additions, plus fixtures, machinery, and equipment that are permanently installed. In plain terms, it is the structure and the things built into it.
• Business personal property (BPP) means property the business owns and uses in the business that is not permanently installed. That includes furniture, movable machinery and equipment, and inventory (goods held for sale). In plain terms, it is the business's own movable things.
• Personal property of others means property that belongs to someone else but is in the business's care, custody and control. That phrase means the business is holding the item and is responsible for looking after it for now. In plain terms, it is other people's things that the business is keeping.

Three questions, in order

1. Who owns it? If someone else owns it and the business is holding it, it is personal property of others.
2. If the business owns it, is it the structure or permanently installed in the structure? If yes, it is building.
3. Otherwise, is it owned by the business and used in the business? Then it is business personal property.

Ownership comes first because it decides whose property it is. Installation comes second because it separates the structure from the movable contents. Where the item happens to be does not decide anything on its own.

Worked example: sorting Desert Pine's fire damage

Stated assumption: Desert Pine owns its building, and each item is described exactly as listed.

Change one fact, twice:

• Replace the wired ceiling lights with a plug-in floor lamp. The purpose (lighting) is the same, but the lamp is movable, so it is BPP. Installation changed the answer.
• Suppose Desert Pine buys the customer's guitar to resell. It sits in the same spot on the same bench, but the shop now owns it as inventory, so it is BPP. Ownership changed the answer, and location did not.

Tempting mistake: "It's inside our building, so it counts as building property." Almost everything in the shop is inside the building. Ask whether the item is built in, and who owns it.

A word that causes confusion: "fixtures" appears in both the building definition and the BPP definition. The word alone does not settle the category. Whether the fixture is permanently installed does.

Comparing the three side by side

• Building asks: Is this the structure, or permanently part of it?
• Business personal property asks: Does the business own this movable item and use it in the business?
• Personal property of others asks: Does someone else own this while the business holds it?

These are three labels for property within one coverage part. They are not three separate policies.

What classification does not decide

Putting an item in a category is a first step, not a payment decision. You still need to know whether that category is included in the coverage the business bought, whether the cause of loss is covered, and how limits, deductibles, and valuation apply. Value damaged property correctly covers valuation.

Two more facts can change the answer:

• Property of others depends on what the business bought and on the policy wording. Whether a business needs this coverage depends on what kind of business it is. One package format describes covering others' property only to the extent the business is legally responsible for it.
• Renting changes who insures what. If the business rents its space, the lease may say who must insure the building. A tenant may also pay for permanent additions to the space, which are called improvements and betterments (for example, built-in counters or installed fixtures). Whether those are covered, and under which coverage, depends on the actual lease and policy wording. The category name alone does not settle it.

Check 2

Lakeside Phone Repair (fictional) owns its building. Classify each item and name the deciding fact.

1. A customer's tablet waiting for a new screen.
2. Security cameras permanently wired into the walls.
3. The laptop the shop uses for billing.
4. Boxes of phone cases the shop sells.
5. Change one fact: Lakeside rents its space instead, and the owner paid to install permanent built-in display counters. What do you need to read to know whether those counters are covered, and under what coverage?

Basic, broad and special causes of loss: which events are covered?

Covered causes of loss are the perils the policy agrees to pay for. Property policies use two different approaches to describe them, and the business chooses which option it buys.

Named perils (also called specified perils) means the policy lists the causes it covers. A loss is covered only if its cause is on the list. The question to ask is: Is it listed?

• Basic is the shorter list.
• Broad is everything on the basic list, plus more perils. Broad is still a list.

Special (also called open perils) means the policy covers loss from any cause unless the policy excludes it. The question to ask is: Is it excluded?

Special is not unlimited. Its exclusions still remove causes from coverage. Examples of excluded perils under this approach include earth movement (such as earthquake) and flood. Those topics are covered in Earthquake and windstorm: find the coverage gap before calculating a payment and NFIP flood insurance: separate the event, property and limit.

How the three options relate:

• Basic vs. broad: same method (a list), but broad's list is longer.
• Broad vs. special: different methods. Broad covers only what its list names. Special covers everything except what its exclusions name.

The practice clause

Practice clause. Invented for this lesson; not wording from any real policy form.

Basic option: We pay for physical damage caused by fire, lightning, windstorm, or vandalism (deliberate damage by someone).

Broad option: We pay for everything in the Basic option, plus physical damage caused by falling objects or by water leaking from a burst indoor pipe.

Special option: We pay for physical damage from any cause unless it is excluded. Excluded causes: flood, earth movement, and wear and tear.

Real policies define their own lists and exclusions. Use this clause only for these exercises.

Worked example: applying the clause to Desert Pine

The steps are the same each time:

1. Name the cause.
2. For a named-perils option (basic or broad), look for that cause on the list.
3. For the special option, look for it among the exclusions.

Change one fact. Compare the burst-pipe row with the flood row. The damage is water in the shop in both cases. The source of the water is what changes the answer. Under the practice clause, the burst pipe is on broad's list and is not excluded from special. Flood is on no list and is excluded from special.

Two tempting mistakes:

• "Broad means the broadest." Broad is a longer list, but it is still a list. In the display-case row, special covers an accident that neither list names.
• "Special covers everything." Special removes whatever its exclusions name, as the flood row shows.

One more caution: a covered cause means the loss passes this one test. Payment still depends on the property category, limits, deductible, valuation, and the policy's other terms.

Check 3

Use the practice clause. For each event, which options cover it, and which is the narrowest option that does?

1. Lightning strikes the building and burns out the electrical panel.
2. A roof membrane wears out over years and starts to leak.
3. A visiting contractor's forklift accidentally hits a wall.
4. Someone breaks in and deliberately smashes the display cases.

Put it together: independent practice

Work through this case on your own before opening the answer.

Mesa Bike Works (fictional) owns its building. Stated assumption: its CPP declarations list a commercial property part using the broad option of the practice clause, and a general liability part. Not listed: commercial auto and business income coverage.

A pipe in the ceiling bursts overnight. The water damages:

• (a) lights that are permanently wired into the ceiling,
• (b) new bicycles for sale, and
• (c) a customer's bicycle in for a tune-up.

The shop closes for ten days while it dries out.

1. Classify items (a), (b), and (c), and name the deciding fact for each.
2. Does the broad option cover this cause? Would the answer change if Mesa had the basic option?
3. Mesa's owner expects the policy to replace the income lost during the ten days. Based on these declarations, what is the problem?
4. For item (c), what else must you check besides its category?
5. Mesa's delivery van is also hit by a falling branch outside. The owner says, "Broad covers falling objects, so the van is covered." What is missing from this reasoning?

What to remember

• Commercial package policy (CPP): one policy made of separately chosen coverage parts. Read the declarations to see which parts are inside. A monoline policy has a single line.
• Physical damage is not lost income. Income protection is a separate time element coverage that must be added.
• Sort property by ownership first, then installation. Someone else's property in the business's hands is property of others. The business's own structure and permanently installed items are building. Its own movable property and inventory are business personal property. Location alone decides nothing.
• Classification is a first step. Coverage terms, causes of loss, valuation, limits, and deductibles still apply. For renters, the lease and policy wording also matter.
• Basic and broad are named-perils lists: ask "Is it listed?" Broad is the basic list plus more.
• Special covers any cause unless excluded: ask "Is it excluded?" Exclusions such as flood and earth movement still remove coverage.
• Practice next: take any business loss and ask, in order: Which part was bought? What category is the property? Is the cause listed (named perils) or not excluded (special)?