There is a difference between an insurance policy and an insurance coverage. A policy is a group of documents forming the contract of insurance. Within any policy, there may be numerous different kinds of coverages. In this series, we discuss some of the most common types of policies, and the different coverages each policy typically provides. This first installment discusses different kinds of property coverages.
Property coverages cover the insured’s interest in property. Depending on the policy, it can cover real property, personal property, or both. Property coverages typically apply only as between the insurer and the insured; there is no third-party claim involved in property coverages. For this reason, property insurance policies are sometimes called “first-party” policies. However, I strongly discourage use of this designation because it often gets confused with “first-party claims,” which (sometimes, but not always) refers to a dispute between an insured and an insurer on any kind of coverage. This is contrasted with a “third-party claim,” where someone other than the insured seeks to recover from the insurer. Best practice is to always refer to the kind of coverage itself and not generalize coverages as first-party or third-party coverages. There are numerous different subsets of property coverage you are likely to come across in a commercial litigation practice.
Commercial Property. Commercial property coverages typically cover – that is, pay the cost to repair or replace – physical damage to buildings or personal property. Most commercial property coverages do not cover damage to land or water. They also do not typically cover damage to impaired property, which is real or personal property that is not physically damaged (e.g., a defective widget that was defective from its inception, but never suffered or caused damage due to some outside force, is “impaired property”). Other common exclusions in commercial property coverages include exclusions for defective workmanship, rot, decay, and insect damage.
Inland Marine. Because commercial property policies typically cover personal property in certain named locations, businesses wishing to obtain coverage for personal property regardless of location often purchase an inland marine policy. Sometimes the covered personal property is “scheduled,” meaning it’s only covered if it’s identified on the policy specifically; other inland marine coverages are more broad and provide “blanket” coverage to certain categories of items, such as tools or trade show displays, regardless of whether they are specifically identified in the policy.
Boiler & Machinery. Most commercial property policies contain an exclusion for damage to and by boilers and machinery. For this reason, you may often see separate boiler and machinery coverage in an insurance policy.
Pollution/Environmental. Most commercial property policies contain exclusions for mold, pollution, and environmental damage. Therefore, many companies purchase separate pollution policies to cover this risk and close that coverage gap. Pollution and environmental policies typically cover not only damage to real and personal property, but also often provide coverage for land and water. Notably, many pollution and environmental policies also provide liability coverage, promising to pay when the insured damages another person’s property by pollution.
Business Interruption. A common feature of commercial property policies is business interruption (often referred to as “BI”) coverage. This coverage recognizes that, when there is a covered loss to property, payment of the cost of repair alone isn’t necessarily enough to cover the entire loss where that property damage also causes financial losses to the business. Therefore, BI coverage is often included in commercial property policies to allow the insured to recoup not only repair costs from a covered loss, but also the resulting loss in business income.
In the next installment, we’ll address liability coverages.