There are multiple lines of coverage that are necessary to carry in order to protect your investment. Commercial Property coverage is one of your primary and most important lines of coverage and can include a multitude of options and sub-limits of coverage.
The key parts to your Commercial Property coverage will typically consist of:
- Buildings ‘Real Property’ [Excluding Land]
- Business Personal Property
- Business Income & Extra Expense
- Boiler and/or Machinery Equipment Breakdown
- Ordinance & Law
Many additional coverage’s are often times included in your policy such as: Backup of Sewers & Drains, Valuable Papers & Records, Debris Removal, Trees & Shrubs, Pollution Cleanup & Removal, Lock & Key Replacement, and Terrorism just to name a few examples.
General Liability Coverage
Although the Property coverage typically draws the most attention, the General Liability coverage is also a very important coverage to carry when owning and operating apartment buildings. While the Commercial Property covers physical damage to your owned assets, the General Liability covers bodily injury and/or property damage you are responsible in causing to people outside of your organization. This can include your renters and the general public.
The key parts to your General Liability coverage will typically consist of:
- General Aggregate
- Products & Completed Operations Aggregate
- Each Occurrence Limit
- Personal & Advertising Injury
- Fire Legal
- Medical Payment
- Hired & Nonowned Auto
On occasion you may find some insurance carriers that exclude Medical Payments. This pays for small medical bills (Typically a limit of $5,000 applies), without regard to fault.
Umbrella & Excess Liability Coverage
An Umbrella or Excess Liability is extended liability coverage that goes over and/or above and beyond the limits of your Primary General Liability coverage. So for example, the standard General Liability limit for Each Occurrence is $1,000,000. If you carry a $5,000,000 Umbrella policy your total liability limit is now $6,000,000.
What’s The Difference? The basic difference between Umbrella & Excess Liability is Excess Liability simply increases the limit of liability whereas an Umbrella can potentially increase AND broaden coverage. Either way, it is never a poor decision to purchase additional liability coverage in our litigious society.
Flood insurance is almost always a separate line of coverage as it is typically excluded from your Property coverage or policy. Depending on the circumstances flood can be added back into coverage or you can purchase coverage as a separate policy. Either way, it is wise to discuss this with your agent or broker and have them run a flood zone determination.
The biggest factor in determining the need for flood coverage is what flood zone your property falls into. Flood zones are geographic areas that the FEMA has defined according to varying levels of flood risk. These zones are depicted on a community’s Flood Insurance Rate Map (FIRM) or Flood Hazard Boundary Map. Each zone reflects the severity or type of flooding in the area. Reference: https://snmapmod.snco.us/fmm/document/fema-flood-zone-definitions.pdf, https://www.fema.gov/flood-zones
If your property falls in a high-risk zone, typically defined as Zone A or V, you may not have any choice but to purchase coverage through the National Flood Insurance Program (NFIP). The NFIP is a Federal program, managed by the Federal Emergency Management Administration (FEMA), and has three components: to provide flood insurance, to improve floodplain management and to develop maps of flood hazard zones. The official NFIP website is found at: https://www.floodsmart.gov/
Your lender will have a big part in determining the need to carry flood coverage and will conduct their own due diligence to make a final determination.
Currently, the maximum limit for all one- to four-family residential buildings is $250,000, and contents coverage is limited to $100,000.
The maximum coverage limit for non-condominium residential buildings with five or more units (classified as Other Residential) is $500,000 with a contents maximum limit of $100,000 (Apartment buildings fall into this category).
For Non-Residential Business and Other Non-Residential buildings, the maximums are $500,000 each for building and contents.
In regard to apartment buildings, your lender may require more than $500,000 per building and may also require you to carry loss of business income which is not covered under an NFIP policy. As a result, you will need to obtain excess flood coverage through a private market/carrier. There are also private insurance carriers that offer alternate coverage options to the NFIP.
Similar to flood insurance, earthquake is almost always excluded under your property coverage but can be added back for additional premium or a separate stand-alone policy can be purchased to cover this exposure. FEMA also provides earthquake zone determinations, see: https://www.fema.gov/earthquake-hazard-maps
Private carriers readily offer stand-alone earthquake coverage using similar underwriting methods as your primary All-Perils policy. The biggest difference is the deductible is usually based off a percentage of the total building value, with 10% being the most common. Example: a $10M building with a 10% earthquake deductible = $1M deductible.
Difference In Conditions (DIC) Insurance
Difference in conditions (DIC) insurance is a type of policy that provides expanded coverage for some perils not covered by standard insurance policies. DIC insurance is designed to fill in gaps in insurance coverage and is most frequently used by larger organizations, looking for protection from catastrophic perils.
BREAKING DOWN ‘Difference In Conditions (DIC) Insurance’
Difference in conditions insurance provides expanded coverage for perils not covered by standard insurance policies. Insurance companies typically offer policies that cover perils that are well-defined and predictable. They are less willing to underwrite policies that cover infrequent and severe perils, as these are more difficult to account when setting the premium that should charged. Thus, most policies cover higher frequency, lower severity perils. However, this does not mean that the insured party is fully insulated from risks of catastrophes. It does mean that many insurers shy away from providing coverage for catastrophes.
DIC insurance is designed to increase coverage for perils that can result in severe losses, such as floods, earthquakes, and other catastrophes. As a gap filler form of insurance, DIC insurance is designed to provide coverage that the broader insurance market won’t provide. This type of coverage goes beyond the purchase of additional coverage limits, since standard coverage typically excludes certain perils. The insured purchases this coverage in addition to a standard insurance policy, though some standard policies allow the purchase of a policy endorsement that may provide for much of the same needs.
To determine if you need DIC insurance, the best course of action is to review your situation with your agent or broker, who will look at your current policy levels and determine whether they are satisfactory for your insurance needs. DIC insurance isn’t like auto insurance, where everyone needs to have it. DIC policies are fluid, with the ability to change them and to tailor-make them. If, for example, you need more coverage for property out in the open, for spoilage, for flood or earthquake, than your primary carrier is able to cover, then DIC might be an answer.
Difference in Conditions Insurance in Action
An example of a company that might buy a DIC insurance policy would be a firm with a property insurance policy that excludes flood coverage. They may purchase DIC insurance that specifically covers floods. Similarly, a construction company may purchase DIC insurance to bridge the coverage gap between a contractor’s policy and its own policy. In some cases, multinational firms will purchase DIC insurance to fill in coverage gaps between their master policies and local policies.