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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 property insurance:

  • 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 the building.

  • 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 loss.

  • 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

Coverage
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.

Classification
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.

 

Workers Compensation

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.

Coverage Sections
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.

 

 

 
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