Transitioning Apartment Building Coverage to the Excess and Surplus Lines Insurance Market

Last week, I moved a client who owns a five-unit apartment building in San Francisco from the ‘standard’ or ‘preferred’ market to the ‘surplus’ or ‘non-admitted’ market. Like many policyholders in California and other states, my client was non-renewed by their carrier because of the age of the structure and the increased hazard of habitational exposures. Many buildings in San Francisco are old, challenging property owners seeking coverage. My client’s structure was built in 1901. Luckily, improvements were made to the property within the last 20 years with updates on electrical, HVAC, roofing, and plumbing systems.

Monthly Limit of Indemnity for Business Income Insurance

As property markets in the insurance world continue to harden, policy non-renewals will force apartment building owners to move from the safe and sound protections of a Business Owners’ Policy (BOP) to a Commercial Package Policy or a standalone Commercial Property Policy with limits and clauses that were previously of no concern. Today, I share my thoughts on business income coverage and the monthly limit of indemnity, which you may find listed alongside the business income limit of insurance.

Business Income Actual Loss Sustained Versus Monthly Limit of Indemnity

My client became accustomed to a Business Owners’ Policy (BOP) that included Business Income coverage on an “Actual Loss Sustained” basis. Below are the primary advantages of this coverage.

• Comprehensive Coverage: ALS insurance compensates for lost income, ensuring reimbursement for businesses according to their specific financial circumstances instead of a fixed limit.
• Flexibility is critical: the coverage adapts to a business’s unique needs and circumstances, reflecting actual losses incurred during the period of interruption.
• Compared to policies with predetermined payout limits, an ALS policy covers all actual income losses incurred during the restoration period up to the policy’s time limit, offering more extensive coverage.
• Covers Fixed Costs: ALS policies generally provide coverage for continuous fixed expenses like rent, utilities, and salaries, aiding businesses in fulfilling their financial commitments even during income interruptions.
• Supporting Recovery: ALS aids in businesses’ smoother and swifter recovery by covering actual losses and offering financial support until they can resume normal operations.
• Tailored for Business Operations: The coverage is determined by the company’s specific financial records, ensuring greater accuracy and a true reflection of the loss’s impact.
• Peace of Mind: Understanding that the policy will compensate for sustained losses gives business owners confidence and assurance against unforeseen disruptions.

Actual Loss Sustained (ALS) coverage is typically lost when shifting from a BOP to the E&S market. Instead of ALS, insureds receive a set limit for business income insurance. And with the set limit comes a coinsurance clause or a monthly limit of indemnity. In this post, I will discuss the ladder.

Understanding the Monthly Limit of Indemnity

The Monthly Limit of Indemnity refers to an option within the Business Income coverage that allows a business to choose a factor (such as 1/3, 1/4, or 1/6) to determine the maximum payment for loss of Business Income for each 30 days after the start of the “period of restoration.” This option is an alternative to coinsurance and can help avoid a coinsurance penalty (discussed in other BLOGS), especially when a business’s financial outcomes are unpredictable.

In my client’s case, we opted for a 1/3 Monthly Limit of Indemnity, with a policy limit of $150,000. Here is an example of how the limit will apply to a loss:

WHEN	THE LIMIT OF INSURANCE IS:	$	150,000
	The fraction shown in the Declarations Page is:		1/3
	The most the carrier will pay for a loss in each period of 30 consecutive days is:	$	50,000
	($150,000 x 1/3 – $50,000)
	If, in this example, the amount of loss is:
	Days 1-30	$	55,000
	Days 31-60	$	25,000
	Days 61-90	$	60,000
	TOTAL LOSS	$	140,000
	The insurance company will pay if a covered loss:
	Days 1-30	$	50,000
	Days 31-60	$	25,000
	Days 61-90	$	50,000
	TOTAL PAID	$	125,000
	THE AMOUNT OF UNCOVERED LOSS	$	15,000

The Significance of Business Income Worksheets

A business income worksheet is a valuable asset for companies grappling with the level of protection required. I employed such a worksheet to assist my client in determining a $150,000 limit and a one-third Monthly Limit of Indemnity. This tool can be instrumental in making decisions about crucial protections.

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