E&O Insights: Insuring Commercial Property – What Could Possibly Go Wrong?

It seems that every year commercial property is one of the top three lines of business generating errors and omissions (E&O) claims against agents. Because most agents insure a fair number of commercial buildings, this is an area in which agents would be wise to dedicate time and resources. Each commercial building has its own complexity and uniqueness — and failing to address this could lead to E&O issues.

Occupancy

There is a lengthy list of possible occupancies, and vacancy is also a possibility. As a result, a personal visit by the producer, at minimum, is a must. This will enable the producer to walk through the building and ask the building owner whether there are plans for a change in the businesses occupying the building. If some areas are vacant, the producer should ascertain what percentage is vacant and what the plans are. If the building is undergoing renovations, what is the projected completion date, and who will be the tenant?

When completing the application for the carrier, provide a complete, unbiased narrative with these details. Misleading the carrier just to get the account written is not suggested. For example, calling a vacant building a “dead air storage facility” (a true story!) will backfire in more ways than one.

The following claim speaks to many of the problems that can arise when the producer doesn’t know the account being insured:

The agency secured coverage for a building owner, who leased part of the premises to a customer. The rest of the building was vacant. A vagrant sleeping in the vacant area knocked over a candle, causing a fire. The building damages were around $1 million. Following the fire, the carrier denied coverage and started a rescission action. The carrier claimed: 1) the application stated the building was fully occupied; 2) the square footage was twice as much as was reported on the application; and 3) the application noted the building was fully renovated, when it was not. The agent knew he lied about the square footage and the vacancy issue. The demand was $500,000, with the claim against the agency settled for $210,000.

Complete the App With the Prospect

The application is designed to address all pertinent underwriting and rating issues. Because the goal is to ensure a complete, thorough application, meeting with the building owner to ask the relevant questions and accurately record the responses is suggested. Without this process, it is realistic that you may not even know the correct name of the named insured. Getting that information correct is obviously important.

Building owners provide numerous services. Operations include rent collection, security, building maintenance, grounds keeping, accounting and advertising, to name a few. The producer should ask how these duties are performed. If contracted out, what are the insurance requirements expected of those firms? The carrier underwriter will want to know how these situations are handled.

Depending on the age of the building(s), the status of key building updates and fire protection should be well documented.

Given that a significant amount of information required, ensure you have recorded the details correctly by having the insured review and sign the completed application.

Is Building Ordinance or Law Coverage an Issue?

While property policies may provide some coverage for the increased cost of construction due to the enforcement of laws arising from a covered loss, coverage is typically limited in both scope and available limit. Broadening the coverage would require an endorsement. The additional coverage usually includes: 1) a limit for the value of the undamaged part of the building when a building code requires its demolition after a partial loss; 2) coverage for the expenses associated with the demolition of the undamaged property; and 3) coverage for the increased cost of the construction due to the building codes. The costs for these areas could be substantial.

Other Property Issues

Boiler and machinery/equipment breakdown is an area often overlooked, yet it has the potential to cause significant property damage in the event of an explosion, electrical surge or other equipment-related losses not covered by the standard property forms.

The time element can be an issue because if there is a loss, the building owner would have a loss-of-rents exposure and could incur extra expenses. Tenants Move Back Insurance provides coverage for a tenant who was forced to move out after a loss and is now looking to move back in.

Losses from earthquakes and floods can be significant. Does your client have this coverage now? Discuss these exposures and provide your client with a proposal.

Exposure Analysis Approach

The potential list of exposures building owners have is lengthy, so an exposure analysis checklist is a great way to ensure that the exposures have been identified and the necessary questions asked and answered.

Because no two building risks look the same, agents should have a detailed process to ensure the information presented to the carrier is current and correct. This is the best way to minimize the potential for errors and omissions litigation.