Commercial Property Insurance Basics: CP 00 10, Causes of Loss and Business Income

Commercial property insurance pays for physical loss to a business’s buildings and contents and, when business income coverage is added, for the income the business loses while it is shut down. In the ISO program, an adjuster reads three pieces together: the coverage form (usually the Building and Personal Property Coverage Form, CP 00 10), the causes of loss form that says which perils apply, and any business income form or endorsements. This guide uses the 2012 (10 12) editions of the ISO forms, so always check the edition on your file.

How a commercial property policy is built

A commercial property coverage part is modular. The declarations list each location and what is insured there (building, business personal property or both), the limit, the coinsurance percentage, the deductible and the causes of loss form. Then:

• Coverage form (CP 00 10): what property is covered, additional coverages, extensions, valuation and loss conditions
• Causes of loss form (CP 10 10 Basic, CP 10 20 Broad or CP 10 30 Special): which perils are covered and what is excluded
• Business Income form (CP 00 30): lost income and extra expense after a covered loss
• Endorsements: ordinance or law, spoilage, sewer backup, earthquake and many others

What CP 00 10 covers

Property Not Covered includes money and securities, foundations below the lowest basement floor, underground pipes, retaining walls that are not part of a building, and (except as an extension provides) outdoor fences, trees, shrubs and plants. Electronic data is covered only as the form allows.

Causes of loss forms compared

Basic and Broad are named perils forms, so the insured must show that a listed peril caused the loss. The Special Form covers risks of direct physical loss unless the form excludes or limits them, so the burden shifts toward the insurer to point to an exclusion.

Special Form exclusions and limits adjusters use most

• Water: flood, surface water, mudflow, underground water, and backup from sewers, drains or sumps. Sewer backup needs an endorsement.
• Earth movement: excluded, but fire or explosion that results is covered.
• Utility services: loss from a power failure that starts away from the premises is excluded unless it causes a covered peril such as fire.
• Governmental action: excluded, except destruction ordered to stop a fire from spreading.
• Wear and tear, rot, and continuous seepage or leakage over 14 days or more.
• Mechanical breakdown and explosion of steam boilers the insured owns or operates. This is the gap equipment breakdown insurance fills.
• Employee dishonesty: excluded, but destruction by employees is covered.
• Theft limits (part of, not in addition to, the limit): $2,500 for furs, for jewelry, and for patterns, dies, molds and forms; $250 for stamps, tickets and letters of credit.

Additional coverages and coverage extensions (2012 amounts)

Additional coverages come with the form automatically.

Debris removal example. A $200,000 building has a $120,000 fire loss and a $1,000 deductible, so the insurer pays $119,000. Debris removal costs $70,000. The basic amount is 25% x ($119,000 + $1,000) = $30,000, which still fits within the limit. Because debris costs exceed that, the additional $25,000 applies, for a total of $55,000. The insured absorbs $15,000.

Coverage extensions are available only if the declarations show coinsurance of 80% or more (or a value reporting symbol). They are additional insurance, and coinsurance does not apply to them.

The form also caps outdoor signs at $2,500 per sign per occurrence.

Coinsurance: the worked example

Coinsurance rewards carrying insurance to value. If the limit is below the required percentage of value at the time of loss, the insurer pays only a proportion.

1. Required insurance = value x coinsurance percentage
2. Ratio = limit carried / required insurance
3. Multiply the loss by the ratio
4. Subtract the deductible (the 2012 form applies the ratio first, then the deductible)

Example. A building worth $500,000 is insured for $300,000 with 80% coinsurance and a $1,000 deductible. A fire causes $60,000 of damage.

Had the owner carried $400,000 or more, the payment would have been $59,000. Note that the requirement is a percentage of value, not full value: a $400,000 store insured for $370,000 at 90% coinsurance needs only $360,000, so no penalty applies. Run your own figures in the coinsurance penalty calculator.

Valuation and loss conditions

• Actual cash value is the default. One exception: if the limit meets coinsurance and the building repair costs $2,500 or less, the insurer pays repair cost without depreciation.
• Replacement Cost option: no replacement cost is paid until the property is actually repaired or replaced. The insured may take ACV first and still claim the difference by notifying the insurer within 180 days of the loss. See the 80% rule calculator for the insurance-to-value idea.
• Agreed Value option: suspends coinsurance until the agreed value expiration date.
• Inflation Guard: raises the limit pro rata through the year. With a $400,000 limit and 6% annual increase, a loss on day 73 has a limit of $400,000 + ($400,000 x .06 x 73/365) = $404,800.
• Vacancy: after more than 60 consecutive vacant days, there is no coverage for vandalism, sprinkler leakage (unless protected from freezing), building glass breakage, water damage, theft or attempted theft, and other covered losses are cut by 15%.
• Duties: prompt notice, police report for crimes, protecting property, inventories, examinations under oath, and a signed, sworn proof of loss within 60 days after the insurer asks for it.
• Appraisal and abandonment: either side can demand appraisal of the amount (not coverage), and the insured can never abandon property to the insurer.
• Mortgageholders can still collect when the owner’s claim is denied for the owner’s own acts, if they pay any premium due, file proof of loss within 60 days of notice, and report known changes in risk.

Business income and extra expense

Under CP 00 30, business income is net income before taxes that would have been earned, plus continuing normal operating expenses, including payroll. Extra expense is the necessary extra cost to avoid or minimize a shutdown, such as renting a temporary location.

Example. A covered fire closes a print shop for exactly 10 days, and its loss is $3,000 a day. The first 72 hours are not covered, so the insurer pays 7 x $3,000 = $21,000.

Key additional coverages:

• Extended business income: after repairs are done and the business reopens, income loss continues to be paid until normal income returns or 60 consecutive days pass, whichever comes first. The Extended Period of Indemnity option lengthens this.
• Civil authority: when a covered peril damages nearby property and authorities bar access to premises within one mile, business income is paid starting 72 hours after the order for up to four consecutive weeks (extra expense starts immediately).

Optional coverages replace or relax coinsurance: Maximum Period of Indemnity (pays loss in the first 120 days, no coinsurance), Monthly Limit of Indemnity, and Business Income Agreed Value.

Businessowners policy (BOP) highlights

The ISO Businessowners Policy is a self-contained package of property and liability coverage for small and midsize businesses such as offices, apartments, shops and restaurants that meet size limits. Highlights of the BOP form (BP 00 03 07 13):

• Business income and extra expense are built in, paying actual loss sustained for up to 12 consecutive months, outside the property limits. Ordinary payroll is covered for 60 days unless more are shown, and the 72-hour rule still applies.
• There is no coinsurance clause, but full replacement cost requires a limit of at least 80% of replacement cost. A $400,000 building insured for $280,000 with a $50,000 repaired hail loss collects the greater of ACV ($35,000) or $280,000 / $320,000 x $50,000 = $43,750.
• Liability aggregates are each twice the Liability and Medical Expenses limit (for example, $2,000,000 aggregates with a $1,000,000 limit).

Equipment breakdown, crime and ordinance or law

Equipment breakdown (historically boiler and machinery) insurance covers boiler explosions and other sudden and accidental equipment breakdowns, the losses the Special Form excludes. Perishable stock losses from power outages or refrigeration failure need a spoilage endorsement.

Commercial crime coverage fills the gap left by excluded money and employee theft. Insuring agreements include employee theft and forgery or alteration, among others. A discovery form covers loss from any time if discovered during the policy period (plus 60 days); a loss sustained form requires the loss to occur during the policy period, with up to one year after it ends to discover it. Coverage for an employee ends once the insured learns of any dishonest act by that employee.

Ordinance or law (CP 04 05) covers what the base form’s code exclusion leaves out after a covered loss: Coverage A for the value of the undamaged portion that must be torn down, Coverage B for demolition and debris removal of that portion, and Coverage C for the increased cost to rebuild to code. Without it, the insured has only the small increased cost of construction additional coverage.

For the claim side of these files, read our insurance claim process guide, compare personal lines in the homeowners policy guide, and test yourself with the commercial property practice test.