If you own a business, understanding insurance helps you best protect your company and its assets.
Property and liability insurance are two types of insurance that protect against different business risks. Almost all the coverage you will need for your business falls within the scope of these two, but do you understand how they differ?
Property insurance: protects against loss or damage to tangible property, such as a building or its contents. It typically covers damage caused by fire, theft, and natural disasters.
Liability insurance: protects against financial loss from legal claims made against the policyholder. It typically covers costs associated with legal defense and any damages or settlements that may be awarded due to a lawsuit. Common types of liability insurance include general liability insurance, which covers a wide range of risks, and professional liability insurance, designed for specific professions such as doctors, lawyers, and accountants.
In summary, property insurance protects the policyholder’s property, and liability insurance protects the policyholder from financial loss from legal claims.
Let’s dive deeper into each of these and review some common policies for business owners, beginning with property insurance.
Property insurance is first-party insurance, meaning that it applies to the insured’s property or person.
There are many types of property insurance and some of the most common are:
Building and Contents Coverage
This is a standard part of a commercial property policy for businesses that insures against damages to their buildings or contents. With this type of coverage, the damages must have occurred from a covered cause of loss, such as a fire.
Business Income Coverage
Next on the list of commercial property insurance is the ever-important business income coverage. This covers a loss of income sustained by a business due to damage to its premises by a covered cause. You may also hear business income coverage referred to as business interruption coverage.
It can provide coverage when a cause of loss results in a suspension or slowdown of operations. Coverage applies to loss suffered during the time required to repair or replace the damaged property. It may also be extended for a specified number of days after the completion of repairs.
Waiting periods also often apply to business income coverage, commonly ranging from 24-72 hours after damage.
One example of this type of coverage in action is the California wildfires of 2018, which caused widespread disruption and damage to property. Many of the claims we facilitated relied on their business income coverage to replace lost income while shut down.
As a side note, civil authority coverage also applied for many of our clients because, although their business did not sustain direct damage, they were located in evacuation zones and could not operate. Civil authority insurance paid for loss of income after a 72-hour waiting period.
Improvements and Betterments
Many businesses lease space from a landlord and pay for permanent additions or changes to the area. However, these additions or changes cannot be removed and require this kind of insurance to cover them.
Some insurance carriers assign improvements and betterments values to building coverage, whereas others assign the values to contents coverage. In some cases, carriers may list improvements and betterments coverage separate from buildings and contents. It is vital to set these values correctly.
Difference-in-Conditions (DIC) Insurance
Difference-in-Conditions insurance, otherwise referred to as DIC, is purchased in addition to a commercial property policy to cover perils not insured in that policy. The two most common hazards covered under a DIC policy include earthquakes and floods.
Other Coverage Forms to Consider with Commercial Property Insurance
You may also want to consider the following coverage types in mind when purchasing commercial property insurance:
Equipment Breakdown Insurance
Ordinance or Law Insurance
Debris Removal Insurance
Next, let’s review some liability insurance examples and discuss how they protect businesses.
Commercial General Liability (CGL) Policy
Commercial General Liability, or CGL, is the backbone of most businesses’ liability protection. CGL is a standard policy to protect business organizations against liability claims for bodily injury (BI) or property damage (PD) arising from premises, operations, products, and completed operations.
An example of this policy in action is a recent general liability claim we filed for our painting contractor client. Our client’s employee mistakenly left a paint rag in the client’s garage overnight, causing it to combust spontaneously. The fire caused nearly $500,000 in damages to the home.
Product Liability Insurance
Product liability insurance can protect a business against financial loss due to legal liability for damage or injury resulting from use of a specific product. It also protects contractors from the liability incurred after a job is completed, known as completed operations coverage.
Professional Liability Insurance
Professional liability is designed to protect traditional professions, such as accountants, attorneys, real estate agents, and engineers. The coverage provides protection against liability incurred as a result of errors and omissions in performing their professional services.
There are a few exceptions, but most professional liability policies only cover financial or economic losses that a third party suffers due to the error or omissions. However, some professional liability policies written for physicians, architects, and engineers cover bodily injury and property damage claims. Most commonly, though, a general liability policy is needed to cover these kinds of liability claims.
Professional liability insurance differs from CGL, which is primarily written on an occurrence form policy, meaning it provides coverage for incidents in the policy period, regardless of when they occur. Most professional liability policies are written with claims-made triggers, meaning the policy only covers claims that occur and are reported within a specific time frame.
It’s also important to note that most professional liability policies contain ‘shrinking limits,’ meaning defense costs reduce available policy limits. Again, this differs from the CGL policy, where most times, defense costs are in addition to the policy limits.
An example of this policy in action is a recent claim for one of our clients in the financial advisory business. With investment losses mounting, they were sued for failure to trade out of an investment when requested by their client. This oversight led to losses and a professional liability claim.
Management Liability Insurance
Management liability has become a hot topic over the last few years because it covers exposures faced by directors, officers, managers, and business entities that arise from governance, finance, benefits, and management activities.
Policy types under management liability lines include director and officers’ liability (D&O), employment practices liability insurance (EPLI), fiduciary liability insurance and crime insurance. Crime insurance includes covering kidnap, ransom, and extortion exposures.
Recently, we helped a client file an EPLI claim with their insurance company because an ex-employee sued them for wrongful termination and failure to pay correctly. Unfortunately, these types of lawsuits are becoming more burdensome for our clients across all industries.
What can FOA do for you?
We have the knowledge and product offerings to partner with you and help protect your business. Text or call us any time at (858) 384-1506.
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