Introduction to Commercial Insurance
Introduction to Commercial Insurance
Whether you are contemplating starting a new business, are a new business owner, or have owned a business for many years, commercial insurance can be one of the most important on going financial investments you make in the life of your company. Operating a business is extremely challenging without having to worry about suffering significant financial loss due to unforeseen circumstances. Commercial insurance can protect you from some of the most common losses experienced by business owners such as property damage, business interruption, theft, liability, and worker injury. Purchasing the appropriate commercial insurance coverage can make the difference between going out of business after a severe loss or recovering with minimal business interruption and financial impairment to your company's operations.
How Can I Purchase Commercial Insurance? (Contacting a Broker-Agent) One of the first steps in purchasing small business insurance is to contact a licensed insurance broker-agent who specializes in commercial coverage. Beginning a working relationship with a reliable, competent broker-agent can be as crucial to your business plan as getting professional advice from an accountant, banker, human resources analyst, payroll specialist, lawyer, or a trusted business mentor.
Business contacts that you have made are excellent referral sources for recommending a commercial lines broker-agent, especially if the contacts are in the same industry as your business or in a closely related industry.
Univision Insurance Service is professional associations that can assist you in getting commercial. Please see the "Business Insurance" section of this website if you would like to contact Univision Insurance by phone 310-299-5555. Also, looking through the local yellow pages under the insurance section can aid you in locating the phone numbers for those broker-agents specializing in commercial insurance.
What Should I Expect from a Broker-Agent Who Specializes in Commercial Insurance? When conducting your broker-agent search, it is important to verify the broker-agent's insurance license with the California Department of Insurance (CDI). The CDI is responsible for licensing all broker-agents who sell or market insurance in California. A broker-agent is issued a fire and casualty license, which enables him/her to sell commercial property and casualty insurance. A fire and casualty broker-agent is required under Section 1725 of the California Insurance Code (CIC) to prominently display his/her license in his/her office. CIC 1725.5 further requires a licensee of the CDI to prominently print his/her license number on all business cards, written price quotations for insurance products, and print advertisements for insurance products distributed in California.
Brokers and agents act in different ways to secure insurance for consumers. Brokers may sell for many insurance companies. Agents are appointed by insurance companies and are paid a commission by the insurance company with which business is placed. It is possible to approach several agents for quotes on your commercial insurance business since any particular agent may represent a limited number of insurance companies.
Initially a broker-agent will meet with you to discuss your business operations and the exposures (the possibility of loss) that are specific for your industry and business type. If you currently have business insurance, the broker-agent will ask to review your current policy. This is a standard practice used to determine the current coverage you have. The broker-agent is comparing limits, exposure bases, business classifications, exclusions, and endorsements in order to analyze any gaps, errors, or overlaps that may exist in your current commercial policy. It is not necessary to share the premiums you have paid for your current or prior business insurance, but you should be forthcoming with any other information that affects your business operations. The more credible information you provide to the broker-agent in the application process, the better the broker-agent can assess specific insurance needs and provide you with the best options to satisfy those needs and protect your business from loss.
What Kind of Insurance Do I Need to Purchase for My Business? Depending on the individual risk characteristics of your business, the broker-agent will present you with different coverage options for purchasing commercial insurance. A broker-agent's proposal is just that, a proposal. When all is said and done it is your responsibility to make an informed decision and choose the insurance that best fits your business plan. The relationship that you build with a broker-agent is extremely valuable in this critical decision making process. An experienced broker-agent has dealt with hundreds of businesses similar to yours. Since commercial insurance can be complicated, you should feel free to discuss any terms, conditions, or concepts that are unclear to you with your broker-agent. It is part of a broker-agent's service to answer your questions and help you understand the insurance you are purchasing.
While your business may not need all commercial coverage lines, it is a good idea to have a basic knowledge of the types of insurance coverage available. As your business changes and expands you will have the necessary knowledge to purchase insurance coverage as new exposures arise. The following commercial lines of insurance cover broad areas of exposure common to most business operations:
Property Insurance Commercial insurance is divided into two main categories: property insurance and casualty insurance. Property insurance provides coverage for property that is stolen, damaged, or destroyed by a covered peril. The term "property insurance" includes many lines of available insurance. Commercial Property, Inland Marine, Boiler and Machinery, and Crime are the most common com-mercial property coverage lines. Each of these property coverage lines is described below.
Commercial Property Coverage Sections, Limits of Insurance, and Coinsurance
Buildings you own or lease as a part of your business, your business personal property, and the personal property of others make up the basic coverage sections of commercial property insurance. Commercial property insurance can be sold separately as an individual line policy (referred to as a mono line policy), or it can be sold as part of a Commercial Package Policy (CPP), which combines two or more commercial coverage parts such as commercial property, general liability, and commercial auto.
Building coverage includes buildings or structures and any completed additions, which are listed on the declarations page of a commercial policy. Permanently installed fixtures, machinery, and equipment are also insured as a part of building coverage. The limit of insurance is the estimated amount needed to rebuild your building and to replace permanently installed fixtures, machinery, and equipment in the event of a total loss. You are required under the insurance policy to fully insure the value of your buildings. If a building is not insured to value, you can be subject to a mone-tary penalty at the time of a loss. This penalty is commonly referred to as "coinsurance." It is important to read and understand the coinsurance clause of your commercial property policy and to discuss any questions with your broker-agent.
Business Personal Property consists of furniture; fixtures, machinery, and equipment not permanently installed; inventory; or any other personal property owned by and used in your business.
Personal Property of Others refers to property that is in your business's care, custody and control. The type of business you operate will determine if you need to protect the personal property of others.
Covered Causes of Loss
Whether or not a property loss is covered depends upon the policy language, exclusions, and endorsements. You can choose the covered causes of loss in your property policy. Causes of loss are divided into two main categories: specified perils and open perils.
Specified Perils consist of a list of each peril to be insured against, such as fire, explosion, windstorm, vandalism, et cetera. You can usually request basic specified perils or broad specified perils coverage. Broad specified perils coverage adds to the list of covered perils found under basic specified perils.
Open Perils coverage covers all losses unless they are specifically excluded. Earth movement (including earthquake) and flood are two common perils that are excluded under open perils coverage. Since open perils coverage offers more comprehensive protection, it is more costly than a specified perils policy.
Valuation Types
Commercial property coverage will include a provision to determine what valuation method is to be used to pay the loss. The most common policy valuation method is Actual Cash Value (ACV). Unless otherwise defined in the policy, ACV is considered to be Fair Market Value in California. There are two other methods of property valuation: agreed value and replacement cost. Agreed value waives any coinsurance penalty and pays 100% of the stated amount (agreed upon amount) for any covered loss. Replacement cost covers the amount it takes to replace your property with new property of like kind and quality up to the limits of insurance. Like ACV, replacement cost is subject to coinsurance.
Coverage Forms and Endorsements There are various coverage forms and endorsements in addition to the basic property coverage already discussed that can customize coverage in a commercial property insurance policy. The following are the most common coverage forms and endorsements used in commercial property insurance:
Builder's Risk - Added to a policy for a one-year minimum term to cover a new building or structure under construction or an existing structure undergoing additions, alterations, or repairs. Cancellation is allowed on a pro rata basis upon project completion; however, midterm cancellation will result in a short rate penalty. A reporting form or renovations form allows coverage to be carried according to the stage of completion (i.e., as more of the project is completed, more value is reported, resulting in the proper amount of coverage for each stage of construction).
Legal Liability or Fire Legal Liability - Covers your legal liability for loss or damage to real and personal property of others as the result of your negligent acts and/or omissions. The loss or damage must be caused by a covered peril (including loss of use). The loss must be accidental and the coverage most often is purchased for tenants in commercial buildings. Building Ordinance or Law - Provides coverage if the enforcement of any building, zoning or land use law results in loss to the undamaged portion of the building (Coverage A); demolition and removal costs of undamaged parts of the structure (Coverage B); or any increased cost of repairs or reconstruction (Coverage C). Replacement cost must be in effect for Coverage C to be applied.
Improvements and Betterments - Usually added by a lien-holder. Covers all permanently installed improvements and betterment, which cannot be removed when a tenant vacates the building. Glass - Basic specified perils for glass coverage include any resulting damage to other property from broken glass due to vandalism and also vandalism to glass building blocks. Broad and specified perils covers $100 per pane of glass up to $500 per occurrence. A glass form must be added for scheduled glass coverage when there is a significant glass exposure to insure. The glass form includes the number of panes, dimensions, location, lettering, and ornamentation. A separate glass deductible may be scheduled as well. Peak Season - An endorsement that provides additional limits on personal property inventory during a designated period of time. This is specifically used to cover fluctuating inventory values before and during peak shopping seasons. Inflation Guard - Automatically adjusts the limits of insurance to keep up with inflation. The adjustment can be tied to the construction cost index in a regional area or a specified percentage per year. This endorsement can be very important in helping to maintain adequate coverage limits, which can protect against potential coinsurance penalties in a property loss. Time Element - Insurance that covers other losses stemming from a direct loss by a covered peril to business property. Business interruption, extra expense, and loss of rents and rental value are the most common time element coverages. Business interruption coverage replaces lost business income after a covered loss. Certain key employees can be named, allowing the employer to continue to pay their salaries until the business restarts operations after a loss. Extra expense coverage mainly applies to service or product related companies where the business must continue to ensure the survival of the company. Extra expense can pay for office space, equipment rental, advertising, or most costs considered reasonable for keeping the company operating after a covered loss. Loss of rents and rental value cover loss of rental income to the property owner caused by damage or destruction of a building rendering it unfit for occupancy.
Inland Marine Without prior knowledge of inland marine insurance, it is easy to assume that this insurance line has something to do with boating transportation. In fact, inland marine insurance can cover a variety of transportation exposures; however, it does not cover boating transportation, which is covered under ocean marine insurance. Inland marine is a specialized type of property insurance that primarily covers damage to or destruction of your business property while in transport. Inland marine also covers the liability exposure for the damage or destruction that may occur to property in your care, custody, or control during transport.