When a commercial property is damaged, it can cause a large amount of undue stress on its owners. Even if only a portion of the property seems affected, all areas of the property should be inspected so the insurance claim is comprehensive and accurate. In order to do this effectively, business owners should know how to calculate the value of a commercial property damage claim.
Valuing Commercial Property Damage Claims
Calculating the value of a commercial property loss is similar to the process involved in determining a loss payment for a residential property. Although they have similar procedures, calculating a commercial loss often requires more time and steps to complete. When calculating the value of a claim, business owners will need to obtain a few pieces of key information regarding the damage, including:
- The total amount of damage for both the property and its contents
- Any applicable policy limits for each type of insurance coverage
- The coinsurance percentage
- Any applicable deductibles
- Whether or not the property is insured on a replacement cost or actual cash value basis
- The value of the covered property at the time of the loss
Establish the Total Amount of Damage
When a commercial structure is damaged, the insurance carrier will supply the policyholder with a proof of loss form. This should provide the insurer with the specifics of the loss as well as a detailed breakdown of the amount of loss being claimed. Once the proof of loss form is filed with the carrier, the total damage amount can then be determined.
While the total amount of damage may exceed the policy limits, the limits must be included to calculate any coinsurance penalties that may apply because the final payout cannot exceed these limits. It’s important that commercial property owners do not lower the total damage amount to match the policy limit, as they could eventually be penalized once any applicable deductibles are subtracted.
Note Any Excluded Properties
Not all aspects of a commercial property are covered by a commercial policy. In fact, the Insurance Services Office specifically notes that money and securities, food stamps, animals, piers, docks, crops and grain, excavation costs, building foundations, and paved surfaces are commonly excluded. Electronic data, such as personal and business information stored on a hard drive, is also often excluded. This means the cost to restore valuable digital information is often not covered by a standard commercial property policy.
Despite these exclusions, various policy endorsements can add on coverage for some of these items; however, the applicable endorsements must be in place prior to the loss. In the event an excluded item is included in the total damage amount reported on the proof of loss form, its value must be deducted from the insurable loss value in assessing the actual insurable damages.
Coinsurance is the act of splitting or spreading the amount of risk among multiple parties. With commercial insurance, this applies to both the property and contents coverage following a loss. Coinsurance ensures policyholders insure the property for an appropriate value and insurers receive fair premiums in exchange for the risk. Most coinsurance clauses require policyholders to insure 80%, 90%, or 100% of a property’s actual value. For instance, if a building is valued at a $1,000,000 replacement value with a coinsurance clause of 90%, it must be insured for no less than $900,000. The same building with an 80% coinsurance clause must be insured for no less than $800,000.
The formula for calculating coinsurance is fairly simple. Insureds should begin by dividing the actual amount of coverage on the property by the amount that should be carried (80%, 90%, or 100% of the property value). Then, multiply that amount by the amount of the loss to determine the amount of reimbursement. If this reimbursement value is greater than the specified limits of the policy, a secondary coinsurer can supply the remaining funds.
Determine the Deductible
The deductible is the amount that must be paid by the policyholder before an insurance provider will pay any expenses. Though a commercial property policy may have different deductibles for different covered losses, in most cases, only one deductible can apply to a single loss event. When a loss involves damage to more than one covered property and separate limits apply, the losses cannot be combined when determining the application of the deductible, rather, the deductible is applied once per occurrence.
For instance, if an insured has a commercial property policy with one limit for the building and another for its contents with a $1,000 deductible, the amount will only be deducted once for both types of damage as long as the damage is caused by the same loss event.
Determine the Amount of Eligible Loss
Once the deductible is subtracted from the amount of insurable damage, the amount of eligible loss can then be calculated and compared against the policy limits. If the limits are greater than the amount of eligible loss, only the amount of loss should be paid. However, if the loss amount exceeds the policy limits, only the amount of coverage purchased can be obtained.
Because of this, it’s important for policyholders to remember to add in any applicable additional coverage beyond the limits of their commercial policy. These amounts can be paid out in addition to what is available under the base policy and can include debris removal, reasonable repairs, increased cost of construction, fire department service charges, and pollutant cleanup, among other items.
Knowing how to accurately calculate a property damage claim is incredibly important, but it is a complex process with many moving parts. Policyholders should consult with legal counsel to ensure they purchase and maintain proper and comprehensive insurance coverage for their property.
Commercial Property Damage Attorneys
The insurance coverage attorneys at Raizner Law are well versed in the claims process and have represented thousands of clients against major insurance providers in commercial property damage disputes. If you need assistance with a business insurance claim, contact Raizner Law today.
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