Property Coverage Forms: Commercial vs Personal — What Difference Does it Make?

commercial vs personal insurance

 By Ken Kukral

A very popular question is raised when an agent explores the possibility of moving their real estate investor clients to our exclusive commercial lines investor program.  Since a majority of agents are proficient at either personal lines (forms) or commercial lines (forms), they wonder what differences they should inform their clients of when making this switch.

A couple things to keep in mind:

  • Most dwelling fire policies are written on either the DP-1 or DP-3 form so I will concentrate on those two forms from the personal lines side.
  • We have the availability of Basic (CP-1010), Broad (CP-1020) and Special (CP-1030) forms and a majority of these will be issued on Special form so I will concentrate on that on the commercial side.

We find that a vast number of the accounts we see from a new business standpoint are written on individual dwelling fire policies.  Many of these individual policies are written on a DP-1 Form.  This creates a “tracking” nightmare as an investor continues to buy additional properties since they end up with multiple expiration dates they need to keep track of.  Miss one, and you may have an uncovered loss on one of their properties.  Our program is able to write these on a monthly reporting form with one single expiration date.  The higher number of properties lends itself to be scheduled on a commercial lines fire policy for ease of administration.

Advantages of the commercial lines form over a personal lines form (Keep in mind that some carriers may use their own form and not ISO forms so the differences “may” or “may not” apply):

  • Higher liability limits are usually available more on a commercial lines form than a personal lines form (DP-1 or DP-3)
  • Higher property limits are also usually more available over a personal lines form. Most carriers limit their exposures on dwelling fire forms (both from a minimum and maximum basis).
  • Personal and advertising injury is included on a commercial lines form where may times a personal lines carrier for multiple properties will exclude it.
  • Personal lines programs are limited to 4 family dwellings and we are able to write up to 6 family dwellings inside this program.
  • As mentioned above, the administrative workload is reduced by scheduling all the properties on one policy, with a single expiration date.
  • Business income coverage does not reduce the dwelling limit and is written as a separate limit. This can be a significant advantage on a loss that takes a significant amount of time to adjust.
  • Separate limits for adjacent structures does not reduce the dwelling limit.
  • Simplicity to add or remove properties or change occupancy. This prevents cancel/rewrite situations.
  • Many personal lines carriers will not write LLC’s or Corps on a personal lines form. The wording of personal lines form is geared towards an individual and not towards more sophisticated real estate investors.
  • The DP-1 (basic form) is normally written on an ACV basis, where we have the availability of offering coverage on an ACV, RC or agreed amount basis
  • The DP-3 (Special form) is normally written on a RC or ACV basis, where we offer both of those options AND an agreed amount option
  • Depending on coverage form, you may incur coinsurance penalties on some personal lines policies whereas our program gives the option of waiving coinsurance penalties.
  • Special form on a commercial basis has some broader perils than what the personal lines form offers.

Some of what you lose when you move from a personal lines policy to a commercial policy:

  • Ease of escrow billing with lenders since each policy stands on its own.
  • Automatic coverage percentages for items such as adjacent structures and rental income
  • Specific term policies for vacant dwellings
  • Total property limit may not be aggregated
  • Overall familiarity of personal lines producers with the use of personal lines forms.

This begs the question, which is better?  The politically correct answer… it depends….  Each situation needs to be looked at individually and see what best fits the client.  If the client has a handful or fewer properties, or is not a very sophisticated real estate investor, they may have more of a comfort level with personal lines policies.  A more sophisticated buyer with many properties is in need of a more tailored program with less administrative hassles and would do better moving to a commercial lines form.  Some other things to consider:

  • Do they just want to insure the properties for what they have invested? (in other words, do they not want the constraints of coinsurance)
  • Do they need more flexibility? (Buying properties and renovating them so they may be vacant, increasing in value during renovations or maybe being “flipped” and sold once the renovation is done.)
  • Are they not interested in some of the “bells and whistles” offered under a personal lines form? Do they just want liability coverage, property coverage to cover their investment and rents coverage to continue their income if they have a loss?  If so, the commercial lines policy may give them what they really want.

So what should you tell your client?

  1. We are not comparing “apples to apples”
  2. You are looking to assess their situation and provide the best program you can based on your needs and expectation
  3. You are looking to provide them with a tailored solution to address their risk in the most simplified and straight forward basis.
  4. With the pricing slowly increasing in the habitational sector, you want to provide them with a stable program while maintaining significant flexibility.

Bottom line, help provide your client with an insurance solution that helps them reduce administrative headaches and provides them with the coverage they are looking for.

Ken KukralKenneth Kukral, CIC – VP of Special Risks – That means, call me if you need help on placing a unique, difficult, large or more complex risk. Kennethkukral@intlxs.com  800-937-3497 ext 2079

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