Ten Top Pitfalls in Your Commercial Property Insurance Policy

In the past two years, only about 25% of companies have tested how their property policies would respond to a loss suffered during a major catastrophe, according to a survey conducted during a recent Marsh webcast.

Nearly 150 risk professionals responded to the statement: “My organization has run a drill or exercise in order to understand how our property insurance policy would respond to a major catastrophe.”

• 24.8% said they had run such a drill within the last two years.
• 11% said they had run a drill in the last five years.
• 36.6% said they had never conducted such a drill.
• 27.6% said they were not sure if such a drill had ever been conducted.
  

Such a drill would involve running through a scenario with your insurer and other key stakeholders to:

• Understand what coverage would be triggered by a loss.
• Clarify the various policy definitions that would come into play.
• Determine what information would need to be collected before and after the event.
  

Review Your Policies Before a Loss

It’s common for insureds to review their policies in the wake of a loss. But the most important time to review the policy and understand the scope of coverage is before a loss happens.

For example, after Hurricane Katrina, which occurred 10 years ago this summer, many businesses were surprised to learn that despite having windstorm coverage, they weren’t covered for storm surge. Many of those cases wound up in court. But even if you win in court, think about all the time and resources that need to be devoted to litigation.

Watch Out for Trouble Spots

Here are ten potential pitfalls that could arise following a major loss *:

1. Limits and sublimits: How can policy sublimits limit your overall recovery?
2. CAT deductibles: What is the dollar equivalent of your CAT deductible?
3. Flood loss deductibles: How are they applied? By occurrence? By location? Separate deductibles for property damage and time element?
4. Policy time and distance limitations: If your business experienced a significant interruption, how long would it take to get all your customers back?
5. Business interruption and third-party locations: How broad is your business interruption coverage?
6. Extra expense and expediting expense: What additional costs would you have to keep your business going following a loss?
7. Flood coverage: What are the coverage limitations in your policy?
8. Global exposure: What impact could your overseas suppliers and customers have on your contingent business interruption exposure?
9. Valuations: How will your property and business interruption claim amount be determined?
10. Concurrency: How will your property claim be adjusted if more than one policy applies?
    

Many insureds don’t answer these questions until after a loss. But by figuring out these issues in advance, you take a critical step toward being prepared for the next Katrina, Superstorm Sandy, or other disaster.

*This is not an exhaustive list of potential issues that could arise in the claims process.