One of the costs of owning commercial property is insuring it. A commercial property policy has a number of standard clauses that define the insured property's value and the types of coverage, including damage, theft, fire and liability. Policies may also include clauses such as the margin clause, which are not standard on every policy but greatly affect the amount you can collect.
When you take out a commercial property insurance policy, you create a statement of values containing a price tag for each location. The values included cover the building or other structures, the land and the contents of the building. For example, if you own a store, you’ll put a value on the store fixtures, the merchandise, the cash registers and anything else of value. The margin clause says that you can collect more than the stated values, up to some maximum. For example, your store might have a margin clause that shells out 125 percent of the values stated in the policy.
Other clauses might apply to your commercial property insurance. If you are insuring more than one location, the policy might include a per-location limitation clause. This clause restricts the amount of coverage at any one location to 100 percent of the stated values at that location. You can then add a margin clause for each property location that overrides the per-location limitation. This allows you to customize the coverage so that certain locations have coverage that exceeds 100 percent. The combination of the two clauses lets you keep your premiums in check by only buying the coverage you actually need.
Unless you require different coverage percentages for each location, you might buy a policy that has a blanket limit. This percentage or dollar figure caps the amount covered by the policy and applies to all locations. Blanket limits can actually work in your favor. Suppose you have three properties, each with a stated value of $2 million. Your policy sets a blanket limit at $6 million. One building burns down, and the replacement cost is $3 million. The policy will cover the replacement cost because it is less than the blanket limit. If the policy had a per-location limit instead, you would recover only $2 million.
Deductibles and Coinsurance
Deductibles are the amount you must pay out of pocket before your insurance coverage kicks in. You can choose higher deductibles to help keep your premiums down. Coinsurance is a clause that reduces your loss recovery based on the ratio of the insurance limit to the property’s stated value. Normally, you must buy enough insurance to cover 80 percent to 90 percent of the property’s value. If you buy less, you are the coinsurer for the percent not covered, even if the damage is less than the location limit. For example, if you buy insurance for 50 percent of the property's stated value, the insurer only pays for half the damages, even if the entire amount of damage is less than the location limit. This can cut your premiums but can prove costly if you suffer a loss. You might be able to negotiate an agreed value coverage provision that suspends the coinsurance limitation until a set date.
- International Risk Management Institute: Margin Clause
- International Risk Management Institute: Per Occurrence Limitation of Liability Provision
- Property Casualty 360: That Blanket May Not Be as Warm as You Think
- International Risk Management Institute: Coinsurance Provision
- International Risk Management Institute: Agreed Value Coverage Option or Provision
Based in Greenville SC, Eric Bank has been writing business-related articles since 1985. He holds an M.B.A. from New York University and an M.S. in finance from DePaul University. You can see samples of his work at ericbank.com.