Property Insurance Unit 19

Businessowner’s Policy

Almost any business can buy a commercial package policy, however for certain small businesses, there is an alternative to the complex CPP. This small business policy is similar to the homeowner’s policy for individuals in that property, liability and other coverages are automatically included. In addition, there are some optional coverages a small business may need that can be added for a relatively small premium.

Eligible Risks

many types of small business are good candidates for a BOP. Each insurance company has its own underwriting criteria, however; there are some common requirements:

• less than 100 employees

• Revenues of $6 million or less

• Business occupying up to 35,000 square feet

The list of businesses that are eligible is extensive, so it is simpler to take a look at the classes of risks that may be underwritten. They include retail, office, and service businesses, apartments, wholesale distributors, contractors and small restaurants.

Property Coverage

the property coverage of the BOP includes 2 major coverages:

• Coverage A: buildings

• Coverage B: Business personal property

A limit of insurance must be shown in the declarations for each type of property covered. For example, an insured who is a tenant (renter) would not require building coverage.

Building Coverage

Applies to more than just the buildings and structures at the premises itself. Other items covered under the building coverage include:

• completed additions

• permanently installed machinery and equipment

• fixtures

• personal property used to maintain or service buildings, including portable fire extinguishing equipment

• additions under construction

• alterations and repairs to the buildings or structures

• materials, equipment, supplies, and temporary structures that are on or within 100 ft of the premises and being used for additions, alterations, or repairs

Business Personal Property Coverage

There are 5 different classes of business personal property covered:

• property owned and used by the insured in the business

• property of others in the insured’s care, custody or control

• tenant’s improvements and betterments (fixtures, alterations, installations, or additions that tenants make to rented buildings in which they operate their businesses. For coverage to apply, these items must be permanently attached to the building, acquired or made at the insured’s expense, and unable to be legally removed. (Ex: when tenants have new carpeting or light fixtures installed))

• leased personal property that the insured has a contractual responsibility to insure (examples include copy machines and computer equipment leased under contracts that require the lessees to insured the leased property.)

• exterior building glass (covered as business personal property for insureds who are tenants and do not have building coverage. The glass must be owned by the insured or in the insured’s care, custody or control.)

personal property is covered when it is located at the described premises and in or on a building, in a vehicle or in the open within 100 feet of the premises.

Property not covered

• aircraft

• motor vehicles & other vehicles subject to motor vehicle registration

• land

• contraband being illegally traded or transported

• outdoor fences, signs ($1,000 if attached to the building), trees, shrubs, plants*

• Outdoor radio or TV antennas, including satellite dishes*

• money and securities*

• watercraft while afloat, including motors, equipment and accessories

• outdoor signs not attached to buildings*

• accounts, bills, food stamps, other evidences of debt, accounts receivable, and valuable papers and records

• electronic data (except as provided under additional coverages)

• animals (unless owned by others and being boarded)

*except as covered under an optional coverage or coverage extension

Covered causes of loss

property coverage in the BOP is provided on an open peril basis. This means that the policy covers any causes of loss that are not specifically excluded or limited. An endorsement can be added to the policy so that coverage is provided on a named peril basis, meaning that the policy covers only the causes of loss specifically named in the endorsement.

Exclusions in the BOP

• losses resulting from the enforcement of a building ordinance or law

• earth movement (does not include a fire or explosion resulting from earth movement)

• government action (government ordering demolition of a building)

• nuclear hazard

• damage caused by failure of power or other utility services occurring away from the insured’s premises (does not apply to loss or damage to computers and electronic media and records)

• war and military action

• water, including flood, sewer backup, mudslides, or seepage of ground water

• mold, wet rot, dry rot, and bacteria except as provided as an additional coverage

• explosion or any steam boilers, pipes, engines or turbines

• dishonest or criminal acts of the insured or employees

• voluntarily parting with property if induced to do so by fraud or a trick

• pollution (unless the release, discharge or dispersal is caused by a specific cause of loss)

• damage caused by insects, birds, rodents or other animals.

additional coverages

provide coverage in specific situations. coverages may have a separate limit of insurance or require that certain conditions be met for coverage to apply. The additional coverages are automatically included, usually at no extra premium.

• debris removal

• collapse

• business income

• extra expense

• increased cost of construction

• civil authority

• forgery and alteration

• business income from dependent properties

• electronic data

• limited coverage for fungi, wet rot, dry rot and bacteria

• money orders and counterfeit money

• pollutant clean up and removal

• preservation of property

• fire department service charges

• water or other liquid materials

• glass expenses

• fire extinguisher systems recharge expense

debris removal additional coverage

pays for expenses to remove debris of covered property caused by a covered cause of loss during the policy period. The most the insurer will pay for the total of the direct physical loss or damage and the debris removal expense is the limit of insurance applicable to the property that was damaged.

subject to this limit, the amount reimbursed for debris removal expenses is 25% of the amount paid for the direct physical loss plus the deductible applicable to that loss.

an additional $25,000 of insurance for each location in any one occurrence is available or debris removal under the following circumstances:

• the direct physical loss and the debris removal expense together exhaust the limit of insurance

• the max amount collectible for debris removal (25% of the loss plus the deductible) is not enough to cover the debris removal expense

if either of these conditions applies, the total payment for the direct physical loss and the debris removal expense may be up to - but cannot exceed - the policy limit plus $25,000

For example, a building is insured for $500,000. A fire causes $200,000 damage to the building. In addition to the cost of repair ($200,000), the cost of debris removal would be covered up to the $50,000. $200,000 × 25% = $50,000. If the building had been totally destroyed by the fire, the policy limit of $500,000 would be paid plus an additional $25,000 for debris removal since the policy limit has been paid because of total loss. The total payment would then be $525,000.

Collapse additional coverage

Applies only when specific conditions are met

Collapse of a building, or part of a building, is covered only when it is caused by:

• building glass breakage

• hidden decay

• hidden insect or vermin damage

• weight of people or personal property

• weight of rain or snow

subject to the limits of insurance. Does not provide an additional amount of insurance.

Business income additional coverage

The insurance company will pay for loss of business income that occurs when the insured’s business operations have to be suspended after a covered loss and income cannot be generated.

For coverage to apply, there must be direct physical loss or damage to property at the described premises. This includes personal property in a vehicle or in the open within 100 ft of the premises.

The loss must be caused by or result from a covered cause of loss. Payment is for loss during the period the property is being restored that occurs within 12 consecutive months after the date of the direct physical damage.

Not subject to the limits of insurance

Extra expense additional coverage

allows reimbursement for additional costs an insured incurs to avoid or minimize spending business operations after a covered loss.

The insurance company will pay for extra expenses that occur within 12 consecutive months after the date of the direct physical loss or damage. This coverage is in addition to the insured’s limit of insurance. An example would be an insurance agency that has to relocate temporarily until damage to the agency building has been restored. Extra expensive would cover the relocation costs including rental of the temporary location

increased cost of construction additional coverage

Applies only to buildings insured on a replacement cost basis. If a covered cause of loss damages a covered building, the company will pay the additional cost required to comply with an ordinance or law in repairing the damage or replacing damaged parts. This additional coverage has a limit of $10,000.

civil authority additional coverage

available for losses that result from actions of civil authorities. Covered is business income an insured loses when a civil authority denies the insured access to the described premises because property NOT at the described premises was damaged by a covered cause of loss.

Coverage applies for a specific period. Coverage for business income begins 72 hours after the action by the civil authority and is effective for up to four consecutive weeks.

forgery and alteration additional coverage

applies to an insured’s loss that results directly from someone forging or altering checks, drafts, and similar items made or drawn by or on the insured or the insured’s agent.

if the insured is sued for refusing to pay any of these items because it has been forged or altered, and if the insured has the insurance company’s written promise to defend the insured, the company will pay for any reasonable legal expenses the insured incurs in that defense. However, the most that will be paid for a loss, including legal expenses, is $2,500.

business income from dependent properties additional coverage

covers loss of business income the insured sustains due to physical loss or damage at a dependent property from a covered cause of loss. A dependent property is a business that delivers materials or services to the insured, accepts the insured’s products or services, manufactures products for delivery to the insured’s customers, or attracts customers to the insured’s business.

Coverage is limited to $5,000 unless a higher limit is shown in the declarations. Coverage begins 72 hours after the loss at the dependent property and continues until the date the damage should be repaired, rebuilt, or replaced with reasonable speed and similar quality.

electronic data additional coverage

pays to replace or restore electronic data that have been destroyed or corrupted by a covered cause alf loss. Electronic data means information, facts, or computer programs stored, created, used on, or transmitted to or from computer software or hardware.

The most that will be paid under this additional coverage is $10,000 for all loss or damage sustained in any one policy year

limited coverage for fungi, wet rot, dry rot and bacteria additional coverage

provides limited coverage for fungus (i.e. mold), wet rot, dry rot, or bacteria that results from a specified cause of loss. The loss must occur during the policy period, and all reasonable means must have been used to save and preserve the property from further damage at the time of and after that occurrence. The insurer will pay for:

• direct physical loss or damage to covered property caused by mold, including the cost to remove it

• costs to tear out and replace any part of the building or other property if needed to gain access to the mold

• cost of testing performed after removal, repair, replacement, or restoration of the damaged property is completed, provided there is a reason to believe that mold is present.

Coverage is limited to $15,000 for all loss or damage arising out of all occurrences that take place in a 12-month period, regardless of the number of claims.

money orders and counterfeit money additional coverage

provides coverage for loss that results when an insured accepts these items in good faith and in exchange for merchandise, money, or services as part of normal business transactions. A $1,000 limit applies to this additional coverage.

pollutant clean up and removal additional coverage

does what the debris removal additional coverage does not do: provides limited coverage for costs to remove pollutants from land or water at the insured’s premises as a result of a covered cause of loss. There is a $10,000 limit for each separate 12-month policy period.

preservation of property additional coverage

covers direct physical loss or damage from any cause of loss if the property has been removed to another location to preserve it from damage by a covered peril. Coverage applies while the property is being moved or while it is temporarily stored at another location, but only for 30 days after the property is first moved.

fire department service charges additional coverage

applies when a fire department is called to save or protect covered property from a covered cause of loss. The standard limit for this coverage is $2,500, unless a different limit is shown in the declarations

water or other liquid materials additional coverage

covers damage to a building that indirectly results from the escape of these items (not flood). If the damage is otherwise covered, this additional coverage pays for necessary costs to tear out and replace any part of the building to repair damage to the system from which the material escaped.

glass expenses additional coverage

covers expense incurred to put up temporary plates or board up openings if repair or replacement of damaged glass is delayed

fire extinguisher systems recharge expense additional coverage

pays to recharge or replace the insured’s fire extinguishers and fire extinguishing systems if they are discharged on or within 100 feet of the premises. It also covers loss or damage to covered property caused by the accidental discharge of chemicals from a fire extinguisher or fire extinguishing system. This coverage has a per occurrence limit of $5,000.

Coverage Extensions

permit an insured to extend the insurance for other specified purposes. Unless otherwise provided, coverage extensions apply to property located in or on the building covered under the policy or to property located in the open or in a vehicle within 100 ft of the premises

Newly Acquired or constructed property coverage extension

if the insured acquires a building at another location or builds a new building on the described premises, the newly acquired or constructed buildings are covered under the policy’s building coverage for up to $250,000 at each location.

Business personal property coverage can be extended to property, including newly acquired property, at newly acquired or constructed buildings, or to newly acquired property at the described premises.

Coverage for newly acquired business personal property is $100,000 at each location.

Coverage applies for 30 days after the new premises or property is acquired or construction has begun on the new premises, until the policy expires or until the insured reports values to the insurance company, whichever occurs first

Coverage may be extended to apply to the insured’s covered property, other than money and securities, valuable papers and records, or accounts receivable, while it is in the course of transit or at a premises the insured does not own, lease or operate. The most the policy will pay for loss or damage under this extension is $10,000.

Coverage may be extended to apply to outdoor property, including outdoor fences, signs not attached to buildings, trees, shrubs, and plants, and radio and tv antennas, including satellite dishes. Coverage is limited to $2,500 and not more than $1,000 for any one tree, shrub or plant.

Business personal property coverage may be extended to include personal effects owned by the insured’s officers, partners, or employees. Th most the company will pay under this extension is $2,500 at each insured premises.

If the insured has business personal property coverage, the valuable papers and records coverage extension can be used to cover the costs to research, replace, or restore information on lost or damaged valuable papers and electronic or magnetic records for which duplicates do not exist. There is a maximum limit of $10,000 at each described premise.

Optional Coverages

a number of optional coverages are included in the business owners policy, but they apply only if so designated in the declarations. Optional coverages usually require an additional premium.

• employee dishonesty

• equipment breakdown

• outdoor signs

• money and securities

Employee Dishonesty optional coverage

Loss to business personal property and money and securities that results from dishonest acts of employees is covered by the employee dishonesty optional coverage. Coverage for an employee is canceled immediately upon discovery by the insured or any partners, members, managers, officers or directors of any dishonest act committed by that employee before or after he was hired by the insured.

The amount shown in the declarations is the most that will be paid for all loss or damage in one occurrence, whether one of more people or acts are involved. Only loss that occurs during the policy period is covered. The insurance company will not pay for a covered loss that is discovered after one year from the end of the policy period. This is known as the discovery period.

Equipment Breakdown optional coverage

Under this optional coverage, the insurance company will pay for direct damage to covered property (such as an air conditioning and heating system) caused by sudden and accidental breakdown, as defined by the policy, that damages the objects so it needs to be repaired or replaced. It must be at the described premises.

The policy definition of object lists equipment in two main categories: (1) certain boiler and pressure vessels and (2) certain types of air-conditioning units. The policy also defines exactly what is not considered an accident.

Outdoor signs optional coverage

provides coverage for direct physical loss or damage to all outdoor signs on the premises that are owned by or in the care, custody or control of the insured. The limit of insurance for this optional coverage is specified in the declarations.

Money and securities optional coverage

applies to loss of money and securities used in the insured’s business as a result of theft, disappearance, or destruction. Coverage applies while the money and securities are:

• at a bank or savings institution

• at the described premises

• in transit between any of these places

Deductibles

A base deductible applies to all building and business personal property coverages, including both mandatory and optional coverages. No deductible applies to the fire department service charge, extra expense, business income, civil authority, and fire extinguisher systems recharge expense additional coverage.

Standard deductible for the BOP is $500

business liability coverage

covers the insured’s legal liability that arises from bodily injury, property damage, and personal and advertising injury. Personal and advertising injury (not bodily) is injury that arises out of any of the following offenses:

• false arrest, detention or imprisonment

• malicious prosecution

• wrongful eviction from a place a person occupies, by or on behalf of its owner, landlord or lessor

• wrongful entry into a place a person occupies, by or on behalf by its owner, landlord or lessor

• invasion of the right of private occupancy of a place a person occupies, by or on behalf of its owner, landlord or lessor

• oral or written publication of material that slanders or libels a person or organization; disparages a person’s or organization’s goods, products, or services; or violates a person’s right of privacy

• use of another’s advertising ides in the insured’s advertisement

• infringement of copyright, trade dress or slogan

for a policy to cover any of the injuries or offenses described, the loss must take place in the coverage territory and occur during policy period. coverage territory:

• US, its territories and possessions (Puerto Rico) and Canada

• International waters or airspace between the United States, its territories or possessions and Canada

• all parts of the world if the injury or damage arises out of

  • goods or services normally made or sold by the insured in the US, its territories and possessions, and canada

  • activities of a person who is away from home on business in any of these places

  • personal and advertising injury offenses that take place through the internet or similar electronic means of communication

coverage also typically applies in all parts of the world if the insured’s responsibility to pay damages is determined in a suit filed in the US, its territories and possessions, or canada

As part of the liability coverage, the insurance company agrees to defend suits that seek damages under the policy. The insurance company has the sole with to investigate and settle claims and resulting suits. However, when the limits of insurance are used up in paying judgements, settlements, or medical expenses, the insure company’s duty to defend ends. For example, under the BOP, defense costs do not reduce the liability limit of insurance.

Supplementary Payments

the BOP includes the following supplementary payments. does not reduce the policy limit.

• expenses the insurance company incurs

• up to $250 for the cost of bail bonds

• Reasonable expenses the insured incurs at the insurance company request to assist in investigating or defending a claim or suit, including $250 a day for lost earnings because of time off work.

• Costs the insured is required to pay because a of a lawsuit

• Prejudgement interest the insured is required to pay

• Interest that accrues after a judgement and before it is paid

Medical Expenses Coverage

The BOP also covers specified medical expenses without regard to who is at fault.

The policy will pay reasonable expenses for the following within one year of the date of accident:

• first aid when an accident occurs

• medical services

• funeral services

medical expenses will generally not be paid for the following:

• any insured (does not include the insured’s volunteer workers)

• anyone hired to work for or on behalf of any insured or any insured’s tenant

• a person who is injured on a part of the premises the insured owns or rents and that the injured person normally occupies

• a person (whether or not an employee of the insured) whose injury calls for benefits payable under a workers comp, disability or similar law

Exclusions

For BI and PD liability losses, the business owner’s policy excludes liability:

• arising out of expected or intended injury

• assumed under contracts or agreements (does not apply to liability the insured would have had if there were no contract or agreement or to contracts that meet the policy definition of an insured contract)

• related to liquor, but only for insureds whose business is manufacturing, distributing, selling, serving, or furnishing alcoholic beverages

• for obligations under worker’s compensation, disability benefits, unemployment compensation, or similar laws

• for BI to employees that arises out of and in the course of their employment with the insured

• arising out of pollutants, including associated cleanup costs

• arising out of the ownership, maintenance, and use of aircraft, autos and watercraft

• arising out of the use of mobile equipment in, or while practicing or preparing for, any prearranged race, speed or demolition contest, or any stunting activity

• arising from rendering or failing to render professional services

• for damage to property the insured owns, rents, occupies, or property in the insured’s care, custody or control

• for business liability or medical expenses resulting from the hazardous properties of nuclear materials

The following exclusions apply specially to personal and advertising injury losses. Not covered are personal and advertising jury:

• that is intentional

• that arises out of oral or written publication of material that was first published before the beginning of the policy period

• that arises out of a criminal act committed by or at the direction of any insured

• arising out of the failure of goods, products, or services to conform with advertised quality of performance

• arising out of a wrong description of the price of goods, products or services

• committed by insureds in the business of advertising, broadcasting, publishing, telecasting, designing websites, or providing internet search, access, content or service

• arising out of infringement of copyright, trademark, patent, trade secret, or other intellectual property rights

• arising out of a criminal act committed by or at the direction of the insured

Who is an insured?

Depends on how the named insured is designated in the policy declarations.

Designation Who are insureds?

Individual named insured, named insured’s spouse

Partnership named insured, named insured’s partners & spouses

LLC named insured, members, managers

Corporation named insured, executive officers and directors

Others that are considered insureds under the BOP include:

1. named insured’s employees (other than executive officers and managers) when acting within the scope of their employment

2. if the named insured dies, insured’s legal representative while acting within the scope of those duties

Limits of insurance

the limits in the policy’s declarations are the most that will be paid under the circumstances described in the policy. These limits are the limits, no matter how many insureds, claims, suits, people or organizations are involved.

The following illustrates the most the insurance company will pay under the BOP in various circumstances.

Limit shown in the declarations max amount payable for

liability and medical expenses total of all damages that arise out of: bodily injury, property damage and medical expenses in one occurrence. personal and advertising injury to one person or organization

medical expenses medical expenses for bodily injuries to one person

under business liability coverage, property damage to premises the
damage to premises rented to you insured rents or occupies temporarily

with the owner’s permission that arises out of one fire or explosion

Policy also includes two separate aggregate limits: one for injury or damage under the products completed operations hazard and another for all other injury, damage, or medical expenses except fire legal liability losses. Both of the aggregate are two times the limit shown in the declarations for liability and medical expenses coverage.

Conditions in the BOP

There are several sets of conditions in the BOP. The conditions that apply to the entire policy are called the common policy conditions. There are two sets of conditions for the property coverage: the property general conditions and the property loss conditions. The liability conditions are called the liability and medical expenses general conditions.

Most of these are standard conditions that appear in other commercial property and liability policies.

Utility Services Endorsements

Endorsements for both the property and liability sections of the policy may be used to alter the coverage or to provide additional coverages.

Direct Damage and Time Element

Utility Services - Direct Damage Coverage Endorsement

covers loss or damage to property caused by an interruption in water, communication, or power supply service. For coverage to apply, the property must be scheduled for coverage on the endorsement and the service interruption must be caused by a covered cause of loss

example: the insured is a web site developer. when an electrical transformer is struck by lightning, a power surge results that damages the equipment. The BOP would cover this.

Utility Services - time element coverage endorsement

Pays for loss of business income or extra expense if damage to certain utility services property located outside the covered building by a covered cause of loss results in an interruption of utility service to the described premises.

Protective Safeguards Endorsement

requires the insured to maintain the protective devices or services listed on the endorsement on a specified property as a condition of the policy. Examples would be a sprinkler system or burglar alarm.

The insurer will not pay for fire damage or burglary losses if the insured failed to keep the protective safeguard in working order or did not notify the insurer within 48 hours that the device was not working properly.

Hired Auto and Non-owned Auto Liability

• bodily injury or property damage that arises out of the maintenance or use of a hired auto (leased, rented or borrowed) by the insured or the insured’s employees in the course of the insured’s business

• bodily injury or property damage that arises out of the use of any non owned auto in the insured’s business by any person (an employee using their own vehicle while performing work for their employer). This endorsement covers the business, not the employee. A pizza business owner would need this endorsement in case an employee is in an accident while delivering pizza. The owner of the pizza business could get sued even though the employee owned the car.

• Only available when the insured’s business doesn’t have commercial auto insurance