Property Insurance

Property Insurance covers the insured’s physical assets. In the insurance world, there are two types of property that can be insured: real property and personal property.

  1. Real Property refers to land and the physical structures built on it, namely buildings. Usually landlords will insure real property themselves. Vendors do not need this type of insurance and tenants almost never do.
  2. Personal Property refers to movable property that is not fixed to the building. Tenants and vendors are usually required to insure personal property.
    • In the case of tenants, personal property to be covered would include furniture, fixtures, betterments and improvements, equipment, and other property the tenant keeps on premises.
    • In the case of vendors, personal property to be covered would include tools, equipment, machinery or any other type of property the vendor brings on premises.

Typically, insurance buyers have a choice of three different levels of Property Insurance coverage: Basic, Broad and Special forms. The insurance industry has categorized these types of forms in an effort to make the distribution and underwriting of coverage more efficient and easily understood.

1. Basic Form Policies

Basic Form, as its name suggests, is the least comprehensive of the three policy options. Basic Form policies only cover specific types of exposure (otherwise known in the insurance world as “perils”). This means that if the peril is not specifically named in the policy, there is no coverage. If something happens to your contractor’s property that’s not on the list of covered perils, they are not covered.

    • Perils Covered: Fire, Lightning, Windstorm or Hail, Explosion, Smoke, Vandalism, Aircraft or Vehicle Collision, Riot or Civil Commotion, Sinkhole Collapse, Volcanic Activity

2. Broad Form Policies

Broad Form policies are more extensive than Basic Form policies. They cover all the perils included in Basic Form policies plus several additional perils which are expressly named. As with a Basic Form policy, a Broad form policy covers only named perils. Again, if a peril is not specifically named in the policy, that coverage is excluded.

    • Perils Added: Burglary/Break-in damage, Falling Objects (like tree limbs), Weight of Ice and Snow, Freezing of Plumbing, Accidental Water Damage, Artificially Generated Electricity

3. Special Form Policies

  1. Special Form policies are the most inclusive of the three forms.

In a Special Form, instead of the policy listing what perils are covered, it lists which perils are not covered. In this sense, it is the inverse of Anything that is not explicitly written as an exclusion then would be covered by the policy.

In this sense, a Special Form policy is the inverse of a Basic or Broad Form policy – all unlisted perils are covered except for those explicitly excluded.

This can be beneficial to the insured since Special Form policies can cover risks that are difficult to anticipate.

    • Perils Excluded: Ordinance of Law, Earthquake, Flood, Power Failure, Neglect, War, Nuclear Hazard, Intentional Acts.

A common source of confusion between property managers, tenants, and vendors comes from the fact that both Liability and Property Insurance insure against property damage. Many mistakenly believe the property damage portion of a General Liability policy would satisfy the requirement for Property Insurance.

The key difference between these two policies is who they insure:

  1. Liability Insurance is third party insurance. It covers damage that the insured may have caused to the property of another party.
    • Example: If ABC Construction accidentally damages the wall of a building owned by XYZ Realty, ABC Construction’s General Liability policy would cover the damages to XYZ Realty’s property.
  2. Property Insurance is a first party insurance. It only insures the policyholder’s own property. It will not cover damage to other parties.
    • Example: If ABC Constructions suffers damage to one of its machines while working on a project at XYZ Realty’s property, ABC Construction’s Property Insurance policy would covers the damages to ABC Construction’s own property.

Since a vendor or tenant’s Property Insurance cannot cover the landlord’s property, one might ask why landlords even require them to carry such insurance. What business does the landlord have in whether a tenant insures its own furniture or a vendor insures its own tools, for example?

First, let’s consider two key facts here:

  1. Property damage claims often could be covered a first party’s Property Insurance or a third party’s Liability Insurance. In other words, a first party’s property is damaged and a third party can be held liable for it. Who’s insurer pays up?
  2. Even if both parties carry insurance, both would like to avoid using it as much as possible because the premiums can rise with each claim making the insurance more expensive.

Now, Consider the following scenario…

A roof collapses under the weight of accumulated snow damaging the interior of Bob’s Burgers.

  • If Bob’s Burgers’ has Property Insurance, the damage to Bob’s Burgers’ personal property would be covered by the policy.
  • If Bob’s Burgers does not have Property Insurance, Bob’s Burger may decide to sue the landlord for the damages. After all, the landlord is responsible for maintaining the building, and it was a structural collapse that caused the damage. The landlord’s General Liability policy may have to pay out for the claim, causing the landlord’s premiums to rise.

As you can see, forcing its tenant to carry Property Insurance offers a layer of protection to the landlord. The same logic applies to vendors.

But there’s just one problem…

Even if the tenant or vendor’s Property Insurance pays out for a property damage claim, the insurer can still turn around to the landlord and try to recover the funds it paid on the claim by suing the landlord’s insurer for General Liability.

To avoid this from happening, landlords usually require that vendors and tenants get a Waiver of Subrogation from their insurers. A Waiver of Subrogation is a promise by the insurer that it won’t try to recover the funds it paid on a claim by suing a third party’s insurer.

In summary, landlords protect themselves from liability for damage to their vendors and tenants’ property by requiring their contractors to carry Property Insurance with a Waiver of Subrogation.

All Property Insurance is insured either on a Replacement Cost or Actual Cost Value basis. These are two different methods for valuing property. Replacement Cost is by far the most common.

On a Replacement Cost basis, the insurer agrees to pay up to the value of replacing the damaged property in the event of a qualifying claim.

On an Actual Cash Value basis, the insurer agrees to pay up to what the current value of the damaged property was at the time of the accident. This method takes into account depreciation.