Commercial Property: For reference to this section, see glossary.
1. I use water, wind, or solar power in my business. Alternative sources of power
2. I have boilers, pressure vessels, mechanical or electrical equipment which could explode or break down during operation. Boiler and Machinery
3. If my business were damaged due to an insured loss, I could not continue to create an income or pay extra expenses because my business was not open. Business Interruption
4. I am involved in plastics, pharmaceuticals, paints, solvents, or adhesive manufacturing and have specialized processing operations. Chemicals
5. I own a condominium. Condominium
6. I farm and have crops that could be damaged. Crop Hail
7. I use a computer in my business that could be damaged by outside perils. Data Processing
8. I am involved in energy or petrochemical businesses. Energy and Petrochemical
9. My property could be damaged by a flood or earthquake. Flood and Earthquake
10. I foreclose or repossess property. Repossessed Property
11. I own a freestanding sign or have glass exposure in my building. Glass and Sign
12. I manufacture products and need coverage to protect the selling price of my finished stock. Manufacturers Output
13. I do research and development work in the oil and gas industry and have property undergoing development. Oil and Gas Development Property
14. I own oil equipment out in the field. Oil field Equipment
15. I own or operate utility (power generating) equipment. Utility Equipment
Commercial Property provides coverage for buildings, business personal property, business income, extra expense and other coverage detailed below.
Alternative Sources of Energy
provide coverage for hydroelectric, wind and solar sources.
Boiler & Machinery
provide coverage for pressure, mechanical and electrical equipment owned, operated or controlled by the insured. Coverage is tailored to insure loss to electrical systems, operating equipment for manufacturers, perishable goods, changes in temperature, and other related perils. Coverage is designed to reduce-through periodic inspection-the chance of malfunction among boilers, pressurized vessels, electrical and electronic machinery.
provide coverage for business interruption and extra expense losses. Business Interruption pays for lost net income, while Extra Expense pays for expenses that are incurred due to the insured loss. "All risk" coverage includes perils of earthquake, flood and windstorm and can include difference in conditions coverage, accounts receivable, valuable papers, contingent business interruption, and off-premises' power interruption.
provide coverage for plastics, pharmaceuticals, paints and coatings, solvents and adhesives.
covers all property held in common by condominium associations.
covers loss to crops as a result of hail damage
Data Processing (computer)
covers electronic data processing equipment, media, and loss of income due to EDP damage.
Energy and Petrochemical
provide coverage for petroleum related manufacturing and production, ethylene and all related carbon based processing, cracking and refining, as well as downstream processes such as plastic manufacturing, injection molding, detergents and polymers.
Flood and Earthquake
covers on a manuscript, "all risk" or named peril basis, including flood and earthquake. Coverage is provided for buildings and contents, and includes business interruption, loss of earnings and extra expense on a mono line basis.
Foreclosed or Repossessed Property
can also include Mortgage Impairment coverage that responds to governmental agency requirements.
Glass and Sign
covers loss to building glass (external or internal) as well as free standing signs.
Manufacturer's Output provides coverage for manufacturers and offers all forms of Commercial Property and Inland Marine policy forms. Endorsements include Manufacturers Selling Price Clause, Difference-in-Conditions, Contractors Equipment, Motor Truck Cargo, Electronic Data Processing and other coverage especially designed for manufacturing risks.
Oil & Gas Research & Development
provide coverage for synthetic fuel development and research facilities.
Oil & Gas Storage
Tank farms, salt domes, natural caverns.
Oil Lease Property
covers production equipment other than rigs, pump jacks, tank batteries, storage of petroleum and gas products, petrochemical stock and related products.
provide coverage for local and regional power providers.
Contingent business interruption insurance: Does your company need it?
Just a few years ago, many U.S. companies wouldn’t have thought that a flood in Australia or a warehouse fire in Germany could impact their business. But most of today’s companies rely on suppliers or customers abroad to produce and purchase their products and services. A loss to one of these key partners can have nearly as much impact on an organization’s ability to continue operations as if it experienced the loss itself. Complex supply chains and global products sourcing have made it more difficult for businesses and their risk managers to identify loss exposures and put in place the necessary mechanisms to provide adequate financial protection. Many organizations look to contingent business interruption insurance as this mechanism and, increasingly, to newer products like supply chain coverage to provide this necessary protection.
What is contingent business interruption insurance?
Contingent Business Interruption (CBI) insurance reimburses a company for lost profits and other possible transferred risks, such as necessary continuing expenses, due to an insurable loss suffered by one or more of its suppliers or customers. Unlike traditional business interruption insurance that compensates the policyholder for a loss resulting from damage to its own property, CBI lets you transfer risk of certain losses to the property of a third party. Also commonly referred to as dependent properties coverage, CBI insurance is triggered if there is:
1. Direct physical loss or damage to a dependent property (supplier or customer); 2. The loss or damage is caused by a covered cause of loss; and 3. The loss results in a suspension of operations at a covered location.
CBI insurance is purchased by a company as an extension to the time element coverages in its property policy when there is no CBI included in the policy. It can be written on a standard industry policy, a company’s proprietary policy or a manuscript policy form. Commonly, larger organizations with more complex exposures rely on company or manuscript forms since they are broader and more comprehensive, whereas a standard policy form is typically sufficient for small to mid-sized organizations.
CBI coverage is provided for a covered loss during what is called the “period of restoration.” This is what is considered by the insurer to be the reasonable amount of time it should take the dependent property to repair the damage and resume its normal operations. But the CBI coverage is still subject to the applicable deductible stated in your policy.
The concept of contingent business interruption insurance is fairly straightforward, but determining what is a covered cause of loss is rarely black and white. For example, during the earthquake and subsequent tsunami in Japan earlier this year, one challenge was determining the event that caused the loss. Was the loss caused by the earthquake or by flooding as a result of the tsunami? Or should all of the claims be considered earthquake losses due to the fact that the earthquake was the proximate cause of the tsunami? These are valid questions, and the answers can vary depending on the breadth of coverage and how the policy was structured. These issues can be the difference as to whether or not the CBI policy is triggered and coverage is provided.
Who needs CBI insurance?
Global commerce has increased competition, resulting in businesses looking for ways to keep their competitive advantages. In order to sustain growth and boost margins, foreign suppliers and customers have become essential for many companies. This has created new contingent business interruption exposures that didn’t exist before. But even if all of a company’s suppliers, business partners and customers are local, CBI exposures can still exist.
In evaluating whether your company needs CBI, you should start with a thorough understanding of your contingent business interruption exposures in order to determine if insurance coverage is necessary and to what degree. Most manufacturing companies have CBI exposures, but retailers, hospitality companies and even professional services firms also can be exposed to serious financial consequences as the result of the loss of a supplier, a business partner or a key customer. A solid understanding of your critical third party partners is essential in helping minimize any contingent business interruption loss.
You should start by identifying all of your suppliers and customers and determine their impact on your operations. You should ask yourself the following questions:
• If there is a temporary production stoppage by one or more suppliers, can I survive and for how long? • Do I have alternative suppliers? • Do I rely on one or a few customers to purchase the bulk of my products? • Do I rely on a neighboring business to attract customers to me?
Coverage challenges and issues
The breadth of CBI coverage can vary among policy forms, but even with the broadest of coverage forms, there are still causes of loss to suppliers or customers that are not automatically covered. For example, earthquake or flood losses are typically not covered under a CBI policy since these are usually not covered in an underlying property insurance policy. The insured would need to request and purchase this type of coverage separately. You should work closely with your broker to be certain you are purchasing the best coverage for your specific exposures.
Identifying other potential coverage restrictions is also important, especially for organizations with complex global supply chains. Two areas that may need to be addressed are “direct” versus “indirect” suppliers or customers, as well as “named” and “unnamed” suppliers or customers. Often policies will only provide coverage for suppliers or customers that the organization has a “direct” relationship with for receiving or selling products. This can create a gap in coverage for companies involved in multi-tiered supply chains. For example, if the supplier or customer of one of your direct suppliers or customers has a loss resulting in an interruption to your direct supplier/customer and this, in turn, causes a business interruption to your business, the coverage could be excluded. If this type of exposure exists, coverage for indirect suppliers or customers can often be added to the policy at the request of the insured.
Identifying every supplier is a challenging task, and sometimes insurance buyers may be unable or unwilling to name every supplier in a multi-tiered supply chain. If this is the case, you can request that the scope of coverage be expanded by endorsing the policy to include the “unnamed” suppliers or customers.
Another issue to consider is that most CBI coverage comes with a specified limit. Therefore, it’s important to carefully identify your exposures and evaluate how high of a limit you need.
Finally, the lack of control you have over all of your third-party partners in the event of a contingent business interruption loss can cause many a sleepless night. It can be difficult for you to know whether a loss to a supplier or customer is being handled adequately and effectively. The insured and insurer are often left in the dark about the extent of the damage and what is considered a reasonable “time of restoration.” This can lead to an insured being penalized for decisions made by a supplier or customer located halfway around the world. As a way to help mitigate this lack of control, it’s a good idea to develop pre-agreed crisis management processes with their suppliers or customers.
Contingent business interruption insurance, along with up-to-date business continuity planning, is taking on new importance in today’s business environment. The disasters of the past decade including the 9/11 terror attacks, Hurricane Katrina and the earthquake/tsunami in Japan have brought CBI to the forefront, due to the many unprepared organizations left in dire financial straits. That’s why it’s more important than ever to identify your potential for a contingent business interruption loss and work closely with an experienced broker, as well as your underwriter, to assure that the coverage in your policy properly addresses your exposures at an appropriate limit and price.
Understanding the Need for Leasehold Interest Protection
Christopher J. Boggs, CPCU, ARM, ALCM January 25, 2010
Commercial property vacancies remain high across the country. Economists and commercial real
estate professionals paints a less-than-pretty picture for commercial property owners and
landlords in the near future.
Empty or partially empty buildings produce no income (and create other claims problems that arise
out of vacancy). Tenants, like buyers on the residential side, are in control right now; and may
remain in control through 2010 and into 2011. To entice tenants and generate some level of
income, landlords may be willing to offer extremely attractive lease rates until the economy
Clients able to take advantage of these "deals" by locking in favorable long-term leases will not
only save now, but will enjoy a better-than-market lease arrangement when the market does turn.
Landlords will not think well of these generous lease arrangements in the middle of the next boom
- even though necessary right now.
Property owners know the commercial real estate market will eventually bounce back, just not
when. Lease agreements generally allow the landlord the option to cancel a lease should a
specified event occur, such as direct property damage. These cancelation options are likely being
reviewed and strengthened while the market is down.
The Need for Leasehold Interest Protection
Leasehold interest coverage (CP 00 60) protects the insured tenant from the potential of an
additional financial catastrophe due to the loss of a favorable lease arising out of the
inability to occupy the leased space following a covered cause of loss. A lease is considered
favorable when the rate per square foot, or however the rent is calculated, is somewhat or
substantially less than comparable space available in the local commercial real estate market. In
broader terms, the tenant is paying less than "market rates" for the space.
There are many reasons for the existence of a favorable lease. Beyond the current situation where
property owners are offering favorable leases to attract or retain tenants as detailed above;
some insureds have occupied space as a tenant for so many years that the periodic increases have
not kept up with the local real estate market; or the property owner wanted to keep a strong
relationship with the tenant.
Another consideration is a change in property ownership. The new owner may not have the same
operating mentality as the prior owner. The property may also be passed to the next familial
generation, and the new generation may not have as strong a relationship with the tenant or is
more interested in getting the highest price possible.
Regardless the reason, the tenant has a lease rate that cannot be replicated in the subject real
estate market should the need to find another location arise. And losing a favorable lease
following a specified event can result in an unplanned increase in operational expenses for years
following the actual damage and the business' return to operational normalcy.
Consider the insured whose lease is canceled in the first of a five year agreement because the
building suffers "major" property damage ("major" is a subjective term, but in this context it
signifies enough damage to allow the landlord to cancel the lease). The insured is forced to
either find a new location from which to operate or accept a renegotiated lease at a higher cost.
Market prices in the area of this example insured are $15 per square foot rather than the $10
they were paying under the current lease. To lease an equivalent 20,000 square feet, as
previously occupied, the monthly lease jumps from $16,667 to $25,000. The difference in monthly
rent translates into $100,000 in additional annual operating costs due solely to increased lease
payments. Even an insured occupying only 2,000 square feet, applying the information surrounding
this sample market, would experience an increase in annual lease expenses of $10,000. This
example is referenced throughout this three-part series.
Leasehold Interest Coverage
Like business income, leasehold interest coverage protects against the financial consequences of
an indirect loss arising out of a direct loss. Three conditions apply to leasehold interest
protection: 1) there must be direct property damage; 2) resulting from a covered cause of loss;
3) directly leading to the cancellation of a favorable lease. The policy responds only if all
three requirements are met.
(Note that leasehold interest coverage does not pay the cost to rent an alternate location while
the building is being repaired, that's the job of extra expense coverage (included with or
separate from business income protection).)
Tenants lease interest, bonus payments, tenant's improvements and betterments and prepaid rent
are the four exposures insured by leasehold interest coverage. Insureds may or may not be subject
to all four expense classes.
Tenants Lease Interest (TLI). TLI is the primary leasehold interest exposure. Tenants lease
interest is the difference between the rent/lease actually paid by the tenant and the market
value of the premises. In the above example the monthly TLI (or "gross leasehold interest") is
$8,333 ($100,000 per year). If, at the time of the loss, the insured has 30 months remaining in
its lease, the insured's total TLI is $249,990. Total TLI is not the amount of coverage
purchased; only the "net" TLI is insured. The "net" TLI is a function of the time value of money
(discussed in a later section).
Bonus Payment. Tenants may offer to or landlords may suggest the "purchase" of a favorable lease.
A bonus payment is nonrefundable money paid by the tenant to acquire the reduced lease (this is
not equivalent to a security deposit). For instance, the property owner in the previous example,
though aware of the premise's current market value, agrees to lease the space to the tenant at
$10 per square foot rather than the market value $15 per square foot for an upfront payment of
$100,000. The property owner gains an immediate infusion of revenue and a long-term tenant in a
previously unoccupied (thus unprofitable) space; and the tenant gains a favorable lease that
saves them $200,000 over the term of the lease (not accounting for the time value of money and
the required internal rate of return).
Improvements and Betterments. These are additions and upgrades made to the "real property" by the
tenant. Once made part of the building (real property), they cannot be removed and thus become
the property of the building owner. This coverage part protects the tenant for its loss of use
interest in the property, again, if the favorable lease is canceled and the insured does not
return to the property following a covered direct loss. However, the leasehold interest coverage
policy does not respond if the improvements and betterments are separately and specifically
insured on the property policy (as that would constitute multiple payments for the same
Prepaid Rent. As the name suggest, this is rent the tenant pays in advance that is not returned,
even if the lease is canceled.
Following the direct property loss and the resulting loss of the favorable lease terms insured by
the leasehold interest policy, the amount of the insured's loss is calculated based on the number
of months left in the lease at the time of the loss.
Please review carefully!
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