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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8.5 reasons why land banks need insurance

Land Banks and Insurance

By Ken Kukral

With every downturn in the economy lurks another opportunity. Land banks are non profit organizations that help service communities through rehabbing of the cities. Land banks are springing up throughout the country at an outstanding rate and cannot be ignored as a viable source of improving our declining cities.

This emerging area has created unique insurance challenges that should be addressed by a specialist.  Redevelopment companies are giving back to communities but without the proper insurance they will not survive the long term battles of sustainability. Here’s 8.5 reasons why land banks need insurance:

  1. They have exposures for general liability, property and builders risk.
  1. Properties can be in many states of being, vacant, owner occupied, tenant occupied, under-going renovations, be a vacant lot or scheduled for demolition. (All of these can be addressed)
  1. Valuation may be a concern since writing these at replacement cost would present a significant “moral hazard”
  1. Municipalities are looking to land banks to provide solutions to housing condition problems and having a vacant, unsecured or damaged dwelling around present’s opportunities for crime, higher liability hazards, “eyesores” in the community and brings down values of surrounding homes. (By having insurance these can be dealt with quicker and more systematically)
  1. “Funding” for damaged homes does not become an issue. If a loss happens it can be immediately adjusted and repaired with insurance proceeds.
  1. Land banks need to be on secure legal footing. By having the proper insurance they can be around for a long time to come, providing solutions to the housing problems in that area.
  1. Housing is an “asset” of the community. The amount of property tax is many times dependent on the value of the homes and if homes are damaged or torn down the amount of property taxes is reduced.
  1. Insurance helps to bring homes up to code. In the event of a loss many times the insurance carrier must have the damage repaired meeting the updated building codes that are now in place.  More compliance with building codes makes for safer homes and reduced loss exposures.

8.5 Because insurance is affordable! Having proper coverage ensures the long term viability of the organization which ensures the long term vitality of our communities

Ken KukralWith over 25 years of experience in the insurance industry, Ken Kukral has developed expertise in the non for profit and land bank area. As land banks have expanded over the country, Mr. Kukral has pioneered coverages that meet the needs of land banks and provide the necessary coverage to meet government demands. For questions about this unique coverage, or to have an exposure looked at, contact Ken directly at kennethkukral@intlxs.com

The Difference in Conditions Insurance Coverage

One of the coverages that has traditionally remained in the excess and surplus lines market is Difference In Condition Insurance Coverage (DIC). This is defined as:

A property policy insuring “all risks” of physical loss or damage, excluding fire and extended coverage perils. Any cause of loss that would result in the property being left in a condition different from what it was prior to the occurrence of the loss event, except for those causes of loss specifically excluded. Such unnamed losses would include collapse, water damage, theft and (optionally) flood and earthquake. Often, this coverage is provided on an inland marine basis.

Or

DIC insurance provides coverage designed to close specific gaps in standard insurance policies and is usually available only for larger industrial or commercial risks. It allows coverage to be customized to extend to such exposures as water damage, flood, collapse, earthquake, landslide, etc., according to the insured’s needs. DIC coverage may be provided by means of a separate insurance policy or it may be added by endorsement to the basic policy.

ISO even came out with a form for this coverage in their inland marine coverage area and defines it as follows:
The Insurance Services Office (ISO) Difference In Conditions Coverage Form provides broader insurance coverages for insured property than the insurance provided by many conventional property coverage forms. While it does not provide excess limits for existing property coverages, it does provide coverages not found in the underlying coverage forms or policies. Its name arises from the different coverage provisions that exist between it and the underlying coverages. The more differences there are in coverage between the underlying coverage and the Difference in Conditions (DIC) form, the more coverage the DIC provides. This form supplements the underlying coverage forms by providing at least some additional coverage, such as Earthquake and Water Damage, including Flood. The DIC limits are usually equal to or less than the underlying limits because the underwriting intent is for the DIC to be a companion policy to the conventional property policy covering on the same property. However, is possible for a DIC to provide excess coverage for a cause of loss covered by the underlying or companion policy. The form provides coverage for risks of direct physical loss or damage, except as limited or excluded, including Earthquake and Water Damage, on covered property at described locations, at unnamed locations and while in transit.

Difference In Conditions coverage is not a controlled line of insurance and no standard form is available for use. In the past, each insurance company designed its own coverage form or policy and provided its own unique coverages and other features. However, ISO has a reputation for developing excellent inland marine coverage forms used in whole or in part by its members and subscribers. ISO’s coverage forms are used here as the model to analyze, evaluate and explain the Difference In Conditions Declarations and Coverage Forms.

With these multiple definitions what does an agent need to know about DIC Coverage?
1. Agents need to assess what the insured’s property exposures are and determine what coverage and limits their clients need. DIC coverage allows and agent to “fill gaps” in their clients program and not just settle for the coverage and limits provided by their carrier.
2. DIC Coverage can be used when a carrier sub-limits a specific peril due to comfort level with that exposure or reinsurance restrictions. A DIC policy can provide those excess limits that the insured needs to complete their insurance program at the limits they want. A good example of this is when using a DIC policy to provide excess flood limits over a NFIP flood policy. Also can be used when a carrier puts a theft sub-limit on an underlying policy and the insured wants higher limits.
3. Some agents will call DIC Coverage a “Property Umbrella” policy. This is because they may be using this “property umbrella” to eliminate coverage gaps or drop down when limits do not reach the levels needed to satisfy a client.
4. Although ISO came out with a coverage form for DIC, most carriers use their own form so there is little standardization with this coverage. A full analysis of the form needs to be done and not just the specific perils that are being covered.
5. Perils that can be covered? Just about anything but most commonly flood, earthquake, collapse, fungi, wet and dry rot, theft, unusual transit exposures, international exposures and unique burglary exposures.
6. Agents must review exclusions and policy conditions that might be different between a DIC policy and the insured’s standard fire policy.
7. Policy structure can be done one of three ways
– An “all risk” primary coverage form that excludes perils that are being provided by a standard policy
– A specified peril primary coverage form with only the perils that are to be covered on the DIC form listed
– An excess property form with underlying policies scheduled and standard property causes of loss excluded
8. DIC policies do not normally include coinsurance provisions.
9. It is important to review the definition of each peril since they can vary widely in DIC policies.
10. DIC policies usually have higher deductibles so those deductibles need to be reviewed closely with the insured to make sure they have a comfort level.

The final consideration in handling DIC insurance coverage for your clients is that you need to work with a carrier or a broker who will listen and help you tailor the coverage to your clients needs. Use a detailed application, provide loss runs and give a detailed narrative of what you are looking to do. Leave some lead time so you can negotiate with the underwriter to provide the most favorable program for your insured.

This is your time to be creative with your clients insurance program and help provide coverage that fits their needs. Your innovation and attention to detail in providing DIC will help to impress your client and will show them that you will not settle for “off the rack” coverage when a more tailored program is needed. Since very few agents propose DIC coverage to their clients, it will help you stand out and will show your expertise and professionalism.

If you have any questions, please contact me at: Ken Kukral 1-800-937-3497 ext 2079 kennethkukral@intlxs.com