It’s after the wind blows or the fire burns. The insured is sifting through the rubble of what used to be his commercial building, looking for any savable scraps of what used to be.
The good news is that the loss is covered and the insured will be getting a check for the cost to replace the building. The better news is that the policy limit was adequate and the insured will not suffer the consequence of coinsurance. But it’s not over.
The insured discovers that, due to increased demand resulting from widespread damage, hiring a contractor to remove the debris will be more expensive than anticipated. But that shouldn’t be a problem because the policy limit is adequate…right?
Most commercial property policies will cover the cost to remove debris resulting from a covered cause of loss. However, coverage may be limited or excluded depending on a few important factors addressed in the policy.
Factor #1 – How much is enough?
First, consider that it is not cheap to remove certain types of debris. For example, removing debris of an old frame building may be less labor-intensive than debris of a building with substantial masonry or steel. Removing such items will likely require the use of a contractor and heavy equipment. Also consider that high demand brought on by widespread damage will likely increase the contractor’s fee for service.
Second, consider how the policy calculates coverage to remove debris. Most policies say that the insured will have access to a stated amount—typically $10,000—plus the lesser of:
• 25% of the paid loss plus the deductible, or
• The remainder of the policy limit minus the paid loss.
For example, consider a loss to a building valued at $1 million. If the loss amount is $100,000 and the deductible is $5,000, coverage would be determined as follows:
• 25% times the paid loss ($95,000) plus the deductible ($5,000) = $25,000, or
• The remainder of the policy limit ($1 million minus $95,000) = $905,000.
In this claim, the insured has access to $25,000 plus the stated amount of $10,000 to clean up the mess.
Now consider the same building, only this time it is a much greater loss of $900,000. Coverage would be determined as follows:
• 25% times the paid loss ($895,000) plus the deductible ($5,000) = $225,000, or
• The remainder of the policy limit ($1 million minus $895,000) = $105,000.
In this claim, the insured has access to $105,000 plus the stated amount of $10,000 to clean up the mess. In the event of a total loss, it’s likely the policy won’t pay more than the stated amount of $10,000. The purpose of these examples is to show that the more severe the loss, the less money the policy includes for cleanup.
Factor #2 – What is ‘covered property’?
Most commercial property policies will pay only the cost to remove debris of “covered property.” This definition includes items specifically listed as such in the policy. The policy also lists items that are defined as “property not covered.” Items meeting this definition may also require cleanup, and the cost associated will not be paid by the insurance company. Examples of these items include pieces of the parking lot, building foundation, landscaping, and items that end up on your property from somewhere else.
Factor #3 – Pollutants
If a building is damaged and the site must be cleared, items defined in the policy as “pollutants” may require special care. For example, consider a print shop that catches fire, releasing highly toxic inks and dyes into the ground. Local engineers may require you to extract those pollutants from the site. If so, the cost may be substantial and is typically not covered by a commercial property policy or is limited to a specified dollar amount that may not be enough, such as $10,000.
What’s the Solution?
The best solution to this potentially large gap in coverage is to call your Trusted Choice® insurance professional. We can help you amend your existing policy to offer more coverage for the cost to clean up debris. We can also help you minimize your exposure by amending the policy to cover items that are currently excluded, such as those examples listed above. Further, we can help you understand the meaning of “pollutants” in your policy and determine if your property contains items that may require special care to remove.