Limit of Insurance
The “limit of insurance” is the most the insurer will pay for loss or damage in any one occurrence, as stated in the policy declarations.
The deductible is the amount the insured person/entity will have to pay before the insurance company pays on a claim. Most commercial insurance policies have a standard deductible of $1,000. However, different coverages within the policy may have separate deductible amounts. The deductible applies once per claim/loss, not once per policy term.
Most building and business personal property polices have a coinsurance clause that requires the insured to carry insurance equal to at least a specified percentage of the actual cash value (ACV) of the property. For example, if the ACV of the property is $1 million and the coinsurance clause says the insured must carry insurance that covers 80% of the ACV of the building, the insured must have a policy that covers at least $800,000. If a loss occurs, and it is determined that the amount of insurance carried is less than the amount required, a penalty could be placed on the insured.
Causes of Loss
The term “peril” is used when discussing losses. A peril is a cause of loss. Basic form property insurance policies typically cover the perils of fire, lightning, explosion, windstorm, hail, smoke, aircraft or vehicle damage, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action.
Broad form property insurance policies often add coverages for water damage, weight of snow, ice or sleet, breakage of glass, and coverage for falling objects.
The broadest coverage is the special form, most often referred to as the all-risk form. All risk covers all causes of loss, except those specifically excluded from coverage. It is possible for a commercial property policy to have more than one cause of loss form.
Replacement Cost and Actual Cash Value
Property can be valued in several different ways. Insurance companies commonly use two approaches to determine value, which also determines how a loss will be paid: the replacement cost method and the actual cash value method.
Replacement cost of a property item is the cost to replace it with new property of like kind.
Actual cash value is replacement cost minus the accumulated depreciation for age and condition.
The agreed value option is used to remove the coinsurance requirement from a policy, in which case the insurer agrees to cover losses for the “agreed value.” For example, suppose a person has their property insured for $100,000, and the agreed value is also $100,000. In this case, losses up to $100,000 would be covered 100%. When this option is used the insured and the insurance company agree on the value of the property before the policy is issued. This option is usually assigned to one-of-a-kind property.
Buildings can (and hopefully do) increase in value over time. While a building might have been insured to its full value at the beginning of a policy term, by the end of the term the coverage may be insufficient. This is where “inflation guard” coverage comes in. Inflation guard gradually increases the policy limit during the policy term in order to achieve a desired percentage increase by the end of the policy term.
The general aggregate limit is the maximum amount the insurer will pay during the policy term for all coverages, including bodily injury, property damage, advertising injury, etc.