COVERAGE CORNER

COMMERCIAL PROPERTY, THE “BIG ONE,” AND DEBRIS REMOVAL

By Kevin C. Amrhein, CIC

When chatting with agents about commercial property insurance, I’m often surprised at (and jealous of) how many have never had an insured experience a claim of significant damage – aka the “big one.” Unfortunately, such significant losses – caused by miseries like fire, wind, sinkhole, or explosion – are horrifying and necessary reminders of the value of adequate insurance.

My fear is that agents who have dodged the “big one” are poorly positioned to provide a proper property policy (alliteration is my jam). I’ll summarize my fear in a single word: debris. Debris – specifically, removing it from the premises after a loss – adds a cost factor that is less predictable/ quantifiable than the property values conjured up via the estimation software used to set policy limits.

In some cases, the ISO Building And Personal Property Coverage Form (CP 00 10 10 12) offers respectable cover for such costs under Additional Coverage a. – Debris Removal. It’s a hefty load of policy language, so please consider the following explanation as an oversimplification:

Provided all conditions are met (a few of which I’ll mention below), the policy allocates up to 25% of the paid-loss-plus-the-deductible to cover the cost of debris removal. For example, if a fire causes $200k of damage and the policy applies a $10k deductible, the insurer will pay up to $50k to the contractor providing the debris removal service (25% of paid loss plus deductible). Further, if the $50k is not sufficient to cover the contractor’s bill for service, the policy offers up to an additional $25k to cover the cost of debris removal. In this example, the insured could receive up to $75k to cover the removal cost of debris caused by a $200k fire loss. Sufficient? Hopefully!

AND HERE COMES THE PART WHERE I SCREW IT UP

The 25% factor explained above is subject to policy limits. Thus, if the $200k fire loss wiped out the full limit of insurance, the insured would no longer receive the $50k and would be eligible only for the additional coverage – up to $25k – as it is payable in addition to the limit. Sufficient? Hopefully … but how can we know?

What stuff became debris? Is heavy equipment or a special hazard team needed for removal? What is the current demand for removal services and its effect on cost? These and many other subjective factors validate agents’ concerns that, simply stated, there’s just no clear way to predict this cost.

EXAMPLES OF POLICY CONDITIONS THAT COULD LIMIT COVERAGE

• Debris must be created by a

Covered Cause Of Loss. What if the debris was created by flood or earth movement? What if a hurricane is the culprit and the policy is written x-wind?

• Debris must be property that is described in the policy as Covered

Property. What if the insured pays to remove all debris from the windstorm including some that used to be a fence on the abandoned premises next door?

• A lease requires the tenant to cover costs associated with the removal of damaged property owned by the landlord. Is the tenant required to insure the building he/she occupies, and was cost of debris removal considered when setting limit? • Debris cannot be property that is described in the policy as Property

Not Covered. What if the insured pays to remove debris of what used to be a functioning dock and watercraft prior to the windstorm?

TAKEAWAYS FOR THE AGENT

First, start with the basics: Review the commercial property policy forms offered by your insurers – not all of which will mirror the ISO conditions discussed previously – specifically for information regarding debris removal.

Second, review the following: What property does your insured have on the premises that does not meet the policy’s description of Covered Property or is specifically described as Property Not Covered?

Could there be property on the premises that could exponentially increase the overall removal cost? For example, many property owners have seen their bills skyrocket due to special services required for asbestos removal.

Is your insured reliant upon or subject to a lease of premises? If so, what responsibilities are imposed on the parties regarding property insurance? Consider debris removal coverage and if/how it’s addressed in the responsible party’s insurance policy.

Finally, consider options to increase coverage. In many cases, the insurer may offer an endorsement to increase the amount of the additional coverage.

That’s all for now. Until the next round … cheers! Kevin C Amrhein, CIC, is IA&B‘s education consultant. He works with our CISR and CIC programs, as well as our special topic seminars and live webinars. Catch him at one of our upcoming professional training offerings: IABforME.com/education.

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