A few weeks ago, we got a question in through IJPro. The agent was asking about the wisdom of having a customer change from a dwelling fire type policy form to a commercial property type of policy. Of course, my first inclination was to simply tell them that I thought that a commercial property policy would be better. That was my gut reaction. Of course, I didn’t go with my gut reaction. I asked a couple of questions and spent the next few hours pouring over forms to find out that my gut was right (within some limitations.) That did make me think that you might have a similar question. Before you send it to me, I thought I would help you by telling you about my process for comparing policies. Give it a try and if you have any questions, by all means, give me a shout.
Make sure you know which policies you are comparing.
There’s a big difference if you’re asking me to compare an ISO DP-3 to an ISO CP 00 10 or if you’re asking me to compare a carrier specific DP-3 (or state specific DP-3) to an ISO CP 00 10. I need to know what endorsements might be modifying the policies in question. I really need to know the edition dates of the policies. All of these details make a difference in making comparisons because every edition of every policy has differences. They may look huge or they may look small, but they’re usually significant in some way or another.
Knowing the specific details of the policies in question helps us to fully and accurately compare them. Think about it like this. What if your customer had a property written on a DP-3 with a personal liability endorsement attached and she was considering converting to a commercial property policy, what’s the big glaring hole that you have to advise her to fill? If you didn’t say get liability coverage, we need to have a conversation. Yes. It may seem obvious right now while we’re thinking about it, but that’s a real issue because the customer may not think about the liability component of the DP-3 policy, but you have to.
Make sure that you compare the definitions.
Here’s a simple one, comparing some parts of a state-specific dwelling property form and parts in an ISO commercial property form.
From the dwelling property form…
In this policy, “you” and “your” refer to the “named insured” shown in the Declarations and the spouse if a resident of the same household.
From the commercial property form…
Throughout this policy, the words “you” and “your” refer to the Named Insured shown in the Declarations.
Did you notice the difference? On the dwelling form, the definition of “you” is different than the definition of “you” in the commercial property form. Remembering that the insured is the same person on both forms, we immediately find a difference in coverage. We have redefined who is insured. Does that make a big deal? I don’t know, did the customer’s spouse get named on the policy? If not, it might make a difference. This is why we check these things.
Make sure you compare the coverages provided.
From the dwelling property form…
COVERAGE D – Fair Rental Value
If a loss to property described in Coverage A, B, or C by a Peril Insured Against under this policy makes that part of the Described Location rented to others or held for rental by you unfit for its normal use, we cover its:
Fair Rental Value, meaning the fair rental value of that part of the Described Location rented to others or held for rental by you less any expenses that do not continue while that part of the Described Location rented or held for rental is not fit to live in.
What about the ISO commercial property policy?
Here’s the thing; unless you get the customer a Business Income, without Extra Expense Coverage Form, a gap between the two policies will exist. Is it possible that the customer doesn’t care about this? Maybe they can survive if the rental home is damaged and can’t be rented out? That’s great. It’ll save them money. But if you miss telling them that there’s a difference here and don’t recommend that they take steps to close the gap, you might be dealing with this issue again later.
Make sure you compare the conditions.
When you compare two different policies, the conditions may be identical but it’s more likely that they’re not. I urge you to look at different conditions. You should consider how coinsurance applies on a personal property policy (like a dwelling property policy) and how it applies on a commercial property policy. There’s a difference and it can be significant.
Make sure you compare causes of loss.
Many personal property policies will provide open peril coverage for the dwelling and other structures but named peril coverage for the personal property. Many times, a commercial property policy includes one causes of loss form as part of the policy. You have to make sure you’re aware of what causes of loss apply to what property. Paying attention to that little detail may help, or harm the customer, when they have a loss to covered property.
There are more items that you need to consider, including what the exclusions look like, what endorsements you can get to cover any gaps that arise if you end up making the transition, is the property accurately valued and more.
What sounded like a simple question when this whole conversation got started turned into a multi-hour project. It’s a good thing that I enjoy reading insurance policies, otherwise that wouldn’t be much fun. Isn’t usually the case that when you thought you would get an easy answer, you got a lot more than what you bargained for?