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In insurance terms; what is considered a commercial property?
A commercial property is a property used entirely, or at least primarily, for commercial purposes. The term will also usually incorporate the buildings and improvements on the property.
A domestic dwelling is not a commercial property; even if a domestic dwelling has a business operate within in it, such as a home office or doctors rooms etc’ – if the primary use of the dwelling is as a residence then it still couldn’t be considered a commercial property for insurance purposes.
In that case, the property/domestic dwelling and business would have to be insured under a ‘combined home & home business package’.
While in some cases, especially in rural areas, commercial properties may contain a domestic dwelling within the property’s confines; for use by such persons as a site manager and/or the business’s owner.
In that case, if the property is primarily used for commercial purposes it would be considered a commercial property for insurance. However, an endorsement to the policy would probably have be added to cover the domestic dwelling or, depending on the type of insurance taken out – either an Industrial Special Risks ‘ISR’ cover –or- a Defined Perils cover; it may be necessary to take a separate cover for the dwelling.
A residential block of apartments or townhouses rented to individual tenants would not ordinarily be considered a commercial property risk as residential tenancy is the primary usage of the property thus; a combined multi-peril insurance cover ‘All Risks’ including Landlords insurance might be more appropriate.
It can be tricky getting the right level of cover.
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So, what’s the key differences between an Industrial Special Risks ISR policy – a Defined Perils policy – and an All Risks policy?
Well in simplistic terms an Industrial Special Risks ISR policy will respond to any physical loss or damage to property; including an interruption to a business from causes other than those causes specifically excluded under the policy.
Whereas; a Defined Perils policy only covers the specific perils defined in the policy
such as for instance; fire, storm, tempest, burglary etc’. Simply put, if the loss isn’t the result of a defined peril you probably won’t be covered.
Some of these products are called 'all risks' policies due to their broader coverage however, that description is inaccurate because such policies still contain defined perils and exclusions which limit the cover.
Interestingly, all these policies contain exclusions to the cover, many of them very similar however, in practical terms it is far more desirable to insure a commercial property for the wider cover available under an ISR policy than under a policy limited to a set of defined perils.
But, a lot depends on the type of the property to be insured and its value.
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Will an ISR’ or Defined Peril policy cover every risk affecting the property?
Neither ISR’ or Defined Perils polices cover every risk associated with a commercial property’s uses.
Depending on the client’s relationship to the property, ie;
- Owner/landlord;
- Owner/Occupier;
- Tenant/Lessee;
it may be necessary to supplement the property cover with additional insurance for legal liability, product liability, machinery breakdown, marine transit, electronic equipment, aviation/marine-hull, vehicles & trucks or mobile machinery and/or for any other associated risks which relate to the property’s uses.
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Is an ISR Policy suitable for every Commercial Property’s Insurance?
It used to be that just about every commercial property bigger than a shop-front had an ISR insurance cover. However, over the past decade more and more insurance companies have introduced policies with broader ‘defined perils’ cover pitched at lower value properties; at a lower premium reflecting a perceived lower risk.
As mentioned earlier; some of these products are called 'all risks' policies due to their broader coverage however, that description is inaccurate because such policies still contain defined perils and exclusions which limit the cover.
We recommend insuring any commercial property with a value of $2,000,000 or more with an ISR policy cover. Generally speaking however, there are occasions where due to the nature, situation and use of a lower value property we will still recommend taking out an ISR policy cover.
But in general; smaller commercial properties with non-complex usages and easily identifiable risk profiles can usually be adequately covered with a defined perils cover – retail shops for instance.
An ISR policy typically covers the following:-
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Loss and/or damage to buildings, plant and machinery, contents, stock, raw materials, unregistered vehicles and the property of directors and employees;
- Loss of profits, revenue or rentals and/or increased expenses caused by damage to insured property and also by contingent damage to property at the premises of suppliers, customers and utilities;
- Burglary, theft of money and employee dishonesty;
- Accidental damage and glass breakage;
- Removal of debris, extra costs or re-instatement, re-writing of records and professional fees
Note:- The ‘typical cover’ mentioned above is a standard list of typical cover afforded under many ISR policies. An ISR policy wording will not usually specify the actual perils which must occur to cause the losses mentioned above – just so long as the cause isn’t excluded you’ll most likely be covered.
However; it’s not always as easy as that because ‘disclosure’ is fundamental to an insurers willingness to admit a claim – this is where it becomes imperative to have an expert insurance broker such as RGIB arrange your commercial property’s insurance; we’ll make sure every necessary detail concerning the nature, situation and uses of your commercial property is disclosed to the insurer before they choose whether or not to issue the insurance cover thus, minimizing the potential for a claim to be denied on non-disclosure grounds.
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Is an ISR Policy more expensive than a Defined Perils policy?
Generally yes, because the cover under an ISR policy is substantially wider than a Defined Events cover as mentioned above. However, not all commercial properties need the wider cover afforded under an ISR policy.
Indeed, smaller commercial properties with values of say, less than $2.00M can usually obtain sufficient insurance cover at a more affordable cost under a defined perils policy which can usually be purchased at a cheaper premium.
But, it is important to ensure that a policy’s terms of cover are not overly restricted – as a general rule, the more restrictive cover, the cheaper the premium; and that can be a trap for the inexperienced.
Determining if an ISR policy is recommended will largely depend on the type of commercial activity carried on at the property. For instance; a saw-mill’s activities would likely include a lot of things ordinarily not covered and otherwise excluded under a ‘defined perils’ policy; whereas, a commercial property used as a warehouse or storage facility of furniture or whitegoods could probably obtain enough cover under a defined perils policy reflecting the lower general risk.
So, it comes back to analysing your commercial property’s perils risk profile; it’s our job as professional insurance brokers to determine what type of insurance cover will best address the risks most affecting your property. It is important to strike the right balance of insurance cover against the reality of affordability.
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Can I get an insurance policy tailored for my particular needs?
Absolutely yes, however this is where it can become a bit more tricky if you try to do it yourself; after all putting together insurance cover for your commercial property is not like assembling Ikea furniture, it’s a bit more of a Rubics Cube proposition requiring the skill of a professional insurance broker with a high degree of knowledge about commercial property risks.
The first thing to do is assess the risks affecting the commercial property’s usage, situation and construction in order to determine what policy exclusions are undesirable for the particular client’s requirements.
After considering the risks and working out which underwriters policies best address those risks we’ll make recommendations to the client about what insurance covers provide the best solutions.
No one policy offers a comprehensive level of protection for every commercial property because, every property’s insurance requirements are different thus, in many cases we have to negotiate with underwriters to have them waive certain standard policy exclusions and/or add endorsements to a standard policy cover so as to address a particular property’s requirements.
To have separate insurance policy wordings for every type of commercial property would be an impracticable proposition because for one thing there are hundreds, if not thousands of different variations of a commercial property’s uses many of which have diametrically opposed risk profiles; ie, a metal foundry to that of a storage warehouse.
The variations are generally addressed by way of policy ‘endorsements’ specified in an attachment to an insurance policy’s wording; and in the ‘schedule of cover’ which also sets out the key points of the insurance cover including specifying the type of commercial property, it’s situation, construction, it’s floor ratio’s and the limits of the cover together with any special terms and conditions.
For instance; ‘spontaneous combustion’ is a standard exclusion on most policies but, such an exclusion remaining on an insurance policy for a farmers produce & supplies store containing hay and other stock feeds containing volatile concentrates of nitrogen and other combustibles would render the client’s cover useless for the higher possibility of their most significant risk – ‘spontaneous combustion’ – we have to find an insurer willing to cover that risk by waiving the exclusion.
This is where we really earn our fees and commission.
- I only have a small retail shop, do I really need an ISR policy?
Not likely; we’re pretty sure we could arrange a defined perils cover for you at a lower cost than otherwise charged for an ISR cover.
However; because of our knowledge of the insurance market we’ll strive to ensure you get the widest ‘perils’ coverage available at the best price manageable so as to ensure you’ll be covered.
RGIB keeps its finger on the pulse so to speak; we know which underwriters to approach and which ones want your business enough to offer discounts on your premium.
- Does an ISR or Defined Perils policy include Legal Liability Cover?
No. Legal liability insurance is a separate insurance cover however, it is usually possible to have the same insurance company as the one providing the property cover to also provide the legal liability cover.
Insurance companies often combine a number of ancillary insurances to their commercial property insurance products into a convenient type of ‘package’. Often theses products are given catchy names like ‘Biz Pack’ or ‘Comm Pack’ or ‘Farm Pack’ however, for the reasons mention earlier not every underwriter’s product will cover every risk associated with a commercial property.
However, in most cases where the property has a value of less than $2.00M and/or is considered a complex risk then, the simplest and most effective insurance cover can usually be provided under an insurance package.
Legal Liability insurance; sometimes referred to as Public Liability Insurance and/or Third Party Liability Insurance and/or Broadform liability Insurance, is an essential part of any property insurance program, especially for a commercial property and the business carried on at the property.
Your insurance broker; hopefully you will choose RGIB, will analyze the potential liability exposure your have and recommend the most appropriate legal liability cover to cover it. This could also include ‘product liability’ and ‘product recall insurance’.
Some of the other insurances it may be necessary to obtain to supplement your property and legal liability insurance cover might be:
- loss of profits;
- machinery breakdown;
- motor vehicles & trucks;
- electronic equipment;
- machinery & plant;
- marine & road transit;
- and/or for any other associated risks which relate to the property’s uses.
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What sought of Exclusions are in an ISR policy?
Remembering every underwriter’s policy is different; but, most will exclude claims for physical loss, destruction of or damage to the Property Insured caused;
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directly or indirectly occasioned by or happening through or connected with war, invasion, act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped power;
- or resulting from confiscation, nationalisation, requisition or damage to property by or under the order of any Government or Public or Local Authority;
- or as a result of any legal liability of whatsoever nature directly or indirectly caused by or contributed to by or arising from:-
- ionising radiations or contamination by radio activity from any nuclear waste or from the combustion of nuclear fuel; - usually this exclusion shall also include any self-sustaining process of nuclear fission.
- nuclear weapons materials;
- by flood, which shall usually mean the inundation of normally dry land by water overflowing from the normal confines of any natural watercourse or lake (whether or not altered or modified), reservoir, canal or dam.
- by water from or action by the sea, tidal wave or high water; however, usually these exclusions 3 (a) and 3 (b) will not apply if loss, destruction or damage is caused by or arises out of an earthquake or seismological disturbance.
- by moths, termites or other insects, vermin, rust or oxidation, mildew, mould, contamination or pollution, wet or dry rot, corrosion, change of colour, dampness of atmosphere or other variations in temperature, evaporation, disease, inherent vice or latent defect, loss of weight, change in flavour texture or finish, smut or smoke from industrial operations (other than sudden and unforeseen damage resulting therefrom);
- from wear and tear, fading, scratching or marring, gradual deterioration or developing flaws, normal upkeep or making good;
- from error or omission in design, plan or specification or failure of design;
- from normal settling, seepage, shrinkage or expansion in buildings or foundations, walls, pavements, roads and other structural improvements, creeping, heaving and vibration;
- faulty materials or faulty workmanship; however, usually these exclusions will not apply to subsequent loss, destruction of or damage to the Property Insured occasioned by a peril (not otherwise excluded).
- through incorrect sitting of buildings consequent upon;
- error in architectural design or specification;
- faulty workmanship;
- non compliance by the Insured (or anyone acting on behalf of the Insured) with the necessary permit issued by Government, Public or Local Authorities;
- through demolitions ordered by Government or Public or Local Authorities due to failure on the part of the Insured or their agents to obtain the necessary permits required;
- or as a result of theft or property (other than Money in Transit) in the open air;
or as a result of unexplained inventory shortage or disappearance resulting from clerical or accounting errors, shortage in the supply or delivery of material or accounting errors, shortage in the supply or delivery of materials to or from the Insured.
- by spontaneous combustion; and/or
- spontaneous fermentation or heating or any processing involving the direct application of heat however, usually these Exclusions (i) and (ii) will usually be limited to the item or items immediately affected and shall not extend to other property damaged as a result of such spontaneous combustion, fermentation,heating or process involving the direct application of heat;
- from fraudulent or dishonest acts, fraudulent misappropriation, embezzlement, forgery, counterfeiting data corruption, unauthorised amendment of data and erasure by electronic or non-electronic usually always means involving the Property Insured by the Insured or any employee(s) of the Insured acting alone or in collusion with any other person(s);
- access by any person(s) other than the Insured or the Insured’s employee(s) to the Insured’s computer system via data communication media that terminate in the Insured’s computer system; however, usually this exclusion will not apply to theft consequent upon forcible and violent entry upon premises or felonious concealment upon premises committed by an employee of the Insured or theft of money whilst in transit.
- by the cessation of work whether total or partial; and/or
- the cessation, interruption or retarding of any process or operation as a direct result of strikes, labour disturbances or locked out workers; however, usually these (i) and (ii) will not apply in respect of physical loss, destruction or damage directly caused by strikers, locked out workers or similar persons;
- from erosion, subsidence, earth movement or collapse resulting therefrom;
- from kidnapping, bomb threat, hoax, extortion or any attempt thereat;
- from any legal liability of whatsoever nature other than as herein provided;
- from consequential loss of any kind including consequential loss due to delay, lack of performance or loss of contract or depreciation in the value of land or stock.
- from registered motor vehicles, trucks and mobile machinery;
- from watercraft and aircraft;
Note: These exclusions are commonly contained in most ISR policies as well as in most Defined Perils policies. The exclusions mentioned herein are not an exhaustive list of all the exclusions found in all ISR and/or Defined Perils insurance policies.
Every exclusion is affected by the particular terms, conditions, limitations of the commercial property insurance policy provided.
In every case; and under every circumstance policyholders should take the necessary time to read their insurance policy’s terms, conditions, limitations and in particular the policy exclusions to ensure the insurance cover they have covers the risks they wish to have covered.
RGIB Insurance Broking is expert in arranging commercial property insurance and can ensure the cover we recommend and arrange for clients will be the right cover every time.
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