A commercial property policy should ensure tenants are covered adequately. Property owners need to be aware of policy details to avoid possible future litigation. The myCOI team specializes in details. Read more here!
As one commercial property owner recently learned the hard way, property damage insurance is a critical component of owning any kind of property. Nationwide Insurance defines “property” as any item that has value, and is classified as real property, such a building, or personal property, such as a computer. Basic property insurance policies typically cover explosions, fire, lightning, windstorm, hail, smoke, aircraft or vehicle damage, vandalism, sprinkler leakage and sinkhole collapse. Additional coverage can be added for water damage; damage from the weight of snow, ice or sleet; breakage of glass; and falling objects.
For property managers, it’s critical to understand what kind of commercial property policy coverage your tenants have, along with any exceptions, to make sure that no circumstance leaves you with an unwelcome surprise.
What is a Commercial Property Policy?
Before we dig into the details of whether or not a commercial policy will really cover the property at hand, it’s important to first start with the definition.
According to IRMI, a commercial property policy is defined as an insurance policy for businesses and other organizations that insures against damage to their buildings and contents due to a covered cause of loss, such as a fire. The policy may also cover loss of income or increase in expenses that results from the property damage (PD). Commercial property policies may be written on standard or nonstandard forms.
A Case Study: Emerald Coast Finest Produce Co. Inc. v. Alterra American (sic) Insurance Co.; BancorpSouth Insurance Services Inc.
A Business Insurance article outlined a recent case, which highlights the danger of coverage missing from tenants’ property policies (article components via BI, but summary, outline, and commentary our own):
- Background: Pensacola, Florida-based Emerald Coast Finest Produce Co. Inc. entered into a lease agreement with Pensacola-based Sunrise Fresh Produce L.L.C. in 2013 that required Sunrise to obtain fire and extended coverage property damage insurance on the premises equal to 100% of its replacement value.
- What Happened: Sunrise’s vice president and chief financial officer informed Sunrise’s insurance agency, BancorpSouth Insurance Services, a unit of Tupelo, Mississippi-based BancorpSouth Inc., that this leased building had a value of about $5 million. Bancorp added the warehouse insurance policy to Sunrise’s existing property damage insurance policy with Alterra America, a unit of Glen Allen, Virginia-based Altera America Insurance Co., including the $5 million limit on the warehouse. An endorsement added Emerald to the policy as a “mortgagee.”
In April 2013, three months after the parties entered into the lease agreement, a fire broke out in the warehouse that substantially damaged the building, according to the ruling. Emerald believed the fire was caused by Sunrise’s improper installation of two 48-volt forklift chargers in the warehouse.
- The Details: After the fire, Alterra hired a company that determined the warehouse’s replacement cost was $15.3 million, far exceeding the $5 million in coverage. Another report said repairs would cost $10 million.
Emerald received coverage under the $5 million policy, but claimed the defendants should have placed $15 million in coverage. It filed suit in October 2014 in U.S. District Court in Hattiesburg, Mississippi, charging BancorpSouth and Alterra with negligence for failing to procure the proper amount of insurance for the warehouse. It also filed suit against Sunrise, but that litigation was subsequently settled.
- The Ruling: The District Court ruled in the insurer’s and agency’s favor, which a three-judge appeals court panel affirmed on appeal.
“Emerald was added to the policy as a mortgagee by an endorsement that became effective the same day Sunrise and Emerald entered into the lease agreement.
“Emerald concedes that no Mississippi case recognizes a duty owed by an agent to a party in Emerald’s position when the agent procures insurance for its insured. Emerald nevertheless argues it was owed such a duty,” the ruling said.
“Even in the context of the insured’s relationship with the agent, the agent’s duty is limited. The agent, for example is under no ‘affirmative duty to advise buyers regarding their coverage needs,’ as ‘insurers are in a better position’ to make that assessment,” said the ruling, in quoting an earlier case
“Emerald’s claims have other shortcomings,” said the ruling. “It received a certificate of insurance that listed the $5 million coverage limit on the warehouse, yet Emerald never questioned the amount of coverage,” said the panel, in affirming the lower court’s ruling.
Missing the details on an insurance certificate or policy (such as the case above), can cost organizations millions of dollars—let alone a significant loss of time dealing with legal issues. Property managers have the responsibility of ensuring their tenant’s commercial property coverage is adequate, regardless of what their agent tells them.
Make Sure Your Commercial Property Policy Has Your Tenant’s Covered
Insurance tracking services like myCOI exist to help you handle the everyday tasks of managing certificates of insurance and protecting your company against underinsured claims, costly litigation and failed audits. The software is an easy-to-use, cloud-based solution developed and supported by a team of insurance professionals and is built on a foundation of insurance industry logic to automate the COI communication process and ensure you remain protected.
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