Coverage Corner

WHAT DO YOU MEAN THAT ISN’T COVERED?!? PROPERTY INSURANCE FOR COMMERCIAL TENANTS

By Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP

When many agents approach a commercial insured who is a tenant, they ask about the value of personal property. To explain what should be included, the agent may ask, “If you turn the building upside down, how much would it cost to replace everything that falls out?”

The answer becomes the limit of insurance, and the conversation ends there. There is so much more, though, to discuss.

Your Business Personal Property in a property policy or Business Personal Property in a businessowners policy (BOP) covers much more than personal property used in the business. Both policies cover the insured’s interest in tenant improvements and betterments (TIB). Many tenants make improvements to their rented space, adding floor and wall coverings, ceiling and wall fixtures, and sometimes even walls themselves.

These improvements must be made or acquired at the tenant’s expense but become part of the building and cannot legally be removed. Failure to ask about and include the value of TIB in the limit of insurance could result in inadequate coverage. Know, too, that if the value of TIB is significant, many insurers will agree to break out the value and apply a lower rate than applies to other types of personal property. On an ISO property policy, Your Business

Personal Property – Separation of Coverage Endorsement CP 19 10 06 95 can be used for this purpose. For insureds with BOPs, insurers may have similar solutions available. Don’t be afraid to ask!

Many insureds are responsible for paying for damage to or even insuring the building. If the tenant is required to insure the entire building, this problem is easily solved. One simply adds building coverage. It is not uncommon, though, for a tenant to be required to insure parts of the building – the building glass or certain equipment such as an HVAC unit. While many BOPs include coverage for exterior building glass for which the tenant is responsible, most property policies do not. And although some insurers have enhancement endorsements that provide some coverage for building components the tenant must insure, most do not.

There is a solution, though, for tenants insured under an ISO property policy. ISO has two endorsements that allow a tenant to insure specific parts of the buildings they rent. The endorsements are Scheduled Building Property Tenant’s Policy (CP 14 01 09 17) and Unscheduled Building Property Tenant’s Policy (CP 14 02 09 17.) As the names suggest, one requires that each item insured be scheduled with a separate limit, while the other does not. With the CP 14 02 09 17, one simply chooses limits for building glass and/or property other than building glass. As long as the tenant is contractually responsible to insure or to pay for loss or damage to the property, coverage applies. For insureds with BOPs, insurers may have similar solutions available.

What about the tenant who is responsible for paying for damage it causes to the rented space? The commercial general liability policy (CGL) includes some coverage for Damage to Premises Rented to You, but this coverage typically applies only if the insured has caused fire damage to the space. In addition, the limit is usually low – $100,000 is common. While some insurers will add additional perils and increase the limit, perhaps even to equal the CGL’s each occurrence limit, one important fact is often overlooked. The Damage to Premises Rented to You coverage is part of the CGL’s each occurrence limit. If the insured causes fire damage to rented space, and the entire $1,000,000 CGL limit is used to pay for fire damage, what will happen when liability claims come in from those injured in the fire? There is no coverage left, and once the limit has been paid, defense coverage ends.

A better solution is the Legal Liability Coverage Form (CP 00 40 10 12), a property form that has features of both property and liability coverage. The tenant insures the building using Basic, Broad or Special Form Causes of Loss. Coverage only applies, though, if the tenant has somehow caused the damage to the building. Simply being contractually liable will not be enough. This useful form is not considered nearly often enough!

Insuring tenant property exposures is not as simple as asking what falls out if one turns the building upside down. Knowing what questions to ask and what solutions to recommend is a win-win for the insured and the agent.

Til next time!

Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP is IA&B's commercial lines education consultant. She works with our CIC and CISR programs, as well as our live CE webinars. Catch her at one of our upcoming courses: IABforME.com/education