Coverage you buy
Introduction to Commercial Insurance
Whether you are contemplating starting
a new business, are a new business owner, or have owned a business
for many years, commercial insurance can be one of the most important
ongoing financial investments you make in the life of your company.
Operating a business is extremely challenging without having to
worry about suffering significant financial loss due to unforeseen
circumstances. Commercial insurance can protect you from some of
the most common losses experienced by business owners such as property
damage, business interruption, theft, liability, and worker injury.
Purchasing the appropriate commercial insurance coverage can make
the difference between going out of business after a severe loss
or recovering with minimal business interruption and financial impairment
to your company's operations.
What Kind of Insurance Do I Need to Purchase
for My Business?
Building coverage includes buildings or structures
and any completed additions, which are listed on the declarations
page of a commercial policy. Permanently installed fixtures, machinery,
and equipment are also insured as a part of building coverage. The
limit of insurance is the estimated amount needed to rebuild your
building and to replace permanently installed fixtures, machinery,
and equipment in the event of a total loss. You are required under
the insurance policy to fully insure the value of your buildings.
If a building is not insured to value, you can be subject to a monetary
penalty at the time of a loss. This penalty is commonly referred
to as "coinsurance." It is important to read and understand
the coinsurance clause of your commercial property policy and to
discuss any questions with your broker-agent.
Business Personal Property consists of furniture;
fixtures, machinery, and equipment not permanently installed; inventory;
or any other personal property owned by and used in your business.
Personal Property of Others refers to property that is in your business¡¯s
care, custody, and control. The type of business you operate will
determine if you need to protect the personal property of others.
Coverage Forms and Endorsements
There are various coverage forms and endorsements in addition
to the basic property coverages already discussed that can customize
coverage in a commercial property insurance policy. The following
are the most common coverage forms and endorsements used in commercial
- Builder's Risk - Added to a policy for a one
year minimum term to cover a new building or structure under construction
or an existing structure undergoing additions, alterations, or
repairs. Cancellation is allowed on a pro rata basis upon project
completion; however, midterm cancellation will result in a short
rate penalty. A reporting form or renovations form allows coverage
to be carried according to the stage of completion (i.e., as more
of the project is completed, more value is reported, resulting
in the proper amount of coverage for each stage of construction).
- Legal Liability or Fire Legal Liability -
Covers your legal liability for loss or damage to real and personal
property of others as the result of your negligent acts and/or
omissions. The loss or damage must be caused by a covered peril
(including loss of use). The loss must be accidental and the coverage
most often is purchased for tenants in commercial buildings.
- Building Ordinance or Law - Provides coverage
if the enforcement of any building, zoning, or land use law results
in loss to the undamaged portion of the building (Coverage A);
demolition and removal costs of undamaged parts of the structure
(Coverage B); or any increased cost of repairs or reconstruction
(Coverage C). Replacement cost must be in effect for Coverage
C to be applied.
- Improvements and Betterments - Usually added
by a lienholder. Covers all permanently installed improvements
and betterments, which cannot be removed when a tenant vacates
- Glass - Basic specified perils for glass coverage
include any resulting damage to other property from broken glass
due to vandalism and also vandalism to glass building blocks.
Broad and specified perils covers $100 per pane of glass up to
$500 per occurrence. A glass form must be added for scheduled
glass coverage when there is a significant glass exposure to insure.
The glass form includes the number of panes, dimensions, location,
lettering, and ornamentation. A separate glass deductible may
be scheduled as well.
- Peak Season - An endorsement that provides
additional limits on personal property inventory during a designated
period of time. This is specifically used to cover fluctuating
inventory values before and during peak shopping seasons.
- Inflation Guard - Automatically adjusts the
limits of insurance to keep up with inflation. The adjustment
can be tied to the construction cost index in a regional area
or a specified percentage per year. This endorsement can be very
important in helping to maintain adequate coverage limits, which
can protect against potential coinsurance penalties in a property
- Time Element - Insurance that covers other
losses stemming from a direct loss by a covered peril to business
property. Business interruption, extra expense, and loss of rents
and rental value are the most common time element coverages. Business
interruption coverage replaces lost business income after a covered
loss. Certain key employees can be named, allowing the employer
to continue to pay their salaries until the business restarts
operations after a loss. Extra expense coverage mainly applies
to service or product related companies where the business must
continue to ensure the survival of the company. Extra expense
can pay for office space, equipment rental, advertising, or most
costs considered reasonable for keeping the company operating
after a covered loss. Loss of rents and rental value cover loss
of rental income to the property owner caused by damage or destruction
of a building rendering it unfit for occupancy.
Commercial General Liability
One of the key concepts of liability coverage is that it is comprehensive
in nature. What this means is that the policy (insuring agreement)
covers all hazards within the scope of the insuring agreement that
are not otherwise excluded. It is likewise comprehensive in that
it provides automatic coverage for new locations and activities
of your business, which come about after policy inception and throughout
the policy term. Commercial General Liability (CGL) is the standard
commercial liability policy used to insure businesses.
There are three primary coverage sections that make up a CGL policy:
premises liability, products liability, and completed operations.
Premises liability covers liability for accidental injury or property
damage that results from either a condition on your premises or
your operations in progress, whether on or away from your premises.
A products liability hazard exists for any business that manufactures,
sells, handles, or distributes goods or products. The hazard being
the potential liability for bodily injury or property damage that
arises out of your goods or products. Completed operations covers
your potential liability for bodily injury or property damage that
arises out of your completed work.
The major exclusions under a CGL policy include: intentional injury;
insured contracts; liquor liability; workers compensation and employers
liability; pollution; aircraft; automobile; watercraft; mobile equipment;
war; care, custody, and control; damage to your work; impaired property;
sistership liability; and failure to perform. It is always important
to read and understand all coverage exclusions; however, it is particularly
critical in a liability policy. If you do not understand the coverage
exclusions or limitations of the CGL policy, then contact your broker-agent
and discuss completely until a working understanding is achieved.
The type of business you run determines how a CGL policy is classified.
Generally speaking, a specific code or codes (in some situations)
are assigned based on exposures that are common to your type of
business operation. The way a business risk is classified is the
first step to determine premium and an important part to the rating
formula. Commercial rating and premium computation will be covered
later in this brochure.
Limits of Insurance
The CGL policy has separate limits of insurance for general liability,
fire legal liability, products and completed operations liability,
advertising and personal liability, and medical payments. An aggregate
limit of liability is in force for the general liability, fire legal
liability, advertising and personal liability, and medical payments
claims. When total claims for all these areas exceed a stated annual
aggregate limit of liability, the policy limits are exhausted and
no more claims will be paid from the policy for the duration of
the policy period. There is also a separate aggregate limit of liability
in force for products and completed operations liability claims.
When an employee suffers a work related injury or illness, workers
compensation insurance steps in to provide benefits based on the
type of illness or injury sustained. Workers compensation is based
on a no-fault system, which means that an injured employee does
not need to prove that the injury or illness was someone elsei's
fault in order to receive workers compensation benefits for an on-the-job
injury or illness.
As a California employer you are required under California Labor
Code Section 3700 to provide workers compensation benefits for your
employees. You can purchase workers compensation insurance from
a licensed insurance company or through the State Compensation Insurance
Fund (SCIF). Employers may also have the option to self-insure.
Your broker-agent can assist you with purchasing workers compensation
insurance from a licensed insurance company and can assist you with
information on SCIF and self-insurance.
SCIF is a state-operated entity that exists in order to transact
workers compensation insurance on a non-profit basis. SCIF competes
with private workers compensation insurance companies for business,
and it also operates as the insurer of last resort if private insurance
companies are not willing to offer workers compensation insurance.
If you are interested in SCIF, you can contact SCIF directly. See
the "Resources" section of this brochure for contact information.
To become self-insured, you must obtain a certificate from the
California Department of Industrial Relations, Office of Self-Insurance
Plans. Private employers have to post security as a condition of
receiving a certificate of consent to self-insure. Self-insurance
is only a viable option for very large, stable employers due to
the large amounts of security required to be posted. For complete
information on workers compensation self-insurance, contact the
California Department of Industrial Relations, Office of Self-Insurance
Plans. See the "Resources" section for contact information.
Workers compensation insurance is divided into two coverage sections.
In workers compensation part one the insurance company agrees to
promptly pay all benefits and compensation due to an injured worker
by workers compensation laws of the states listed on the declarations
page of the policy. In employers liability part two the employer
is protected against situations where an employee can sue for injuries
suffered under common law liability (i.e., consequential bodily
injury, loss of consortium, dual capacity, or third party over actions).
These types of injuries in the course of employment are not covered
under workers compensation law and are therefore not compensable
under the workers compensation part one.