Understanding Insurance Limitations vs. Exclusions

Before I get into specific limitations, it's important to distinguish between limitations and exclusions in insurance policies:

• Limitations are restrictions on the amount or extent of coverage provided for certain types of damage or losses.
• Exclusions, on the other hand, are specific events or types of damage that are not covered at all under your policy.

While this article focuses more or less exclusively on limitations, you need to be aware of both. (I've got another piece talking about common exclusions in commercial property insurance right over here.)

7 Key Limitations in Commercial Property Insurance

1. Policy Limits

The most fundamental limitation in any insurance policy is the overall policy limit. This is the maximum amount the insurance company will pay out for all covered losses during the policy period.

Example: If your policy has a $1 million limit and you suffer a total loss valued at $1.5 million, you'll be responsible for the $500,000 difference.

Tip: Regularly review and update your policy limits to ensure they align with the current value of your property and assets. Also, getting an umbrella insurance policy can provide you with coverage beyond these policy limits, which (especially in the case of liabilities) can be a life saver.

2. Sub-Limits for Specific Perils

Many policies have sub-limits for certain types of perils or damages. These sub-limits cap the amount you can claim for specific events, even if your overall policy limit is higher.

Example: Your policy might have a $1 million overall limit, but only cover up to $100,000 for flood damage.

Common sub-limits to watch for:

• Water damage
• Mold and fungi
• Theft
• Debris removal

3. Replacement Cost vs. Actual Cash Value

The method used to value your property and its contents can significantly limit your payout in the event of a claim.

• Replacement Cost coverage pays to replace damaged property with new items of similar kind and quality, without deducting for depreciation.
• Actual Cash Value coverage only pays the depreciated value of the damaged property.

Example: A 10-year-old HVAC system that would cost $50,000 to replace might only have an actual cash value of $20,000 due to depreciation.

4. Coinsurance Clauses

Many commercial property policies include a coinsurance clause, which requires you to insure your property for a certain percentage of its total value (often 80% or 90%). If you don't meet this requirement, you may face a penalty in the event of a claim.

Example: If your property is valued at $1 million and your policy has an 80% coinsurance clause, you need to insure it for at least $800,000. If you only insure it for $600,000 and suffer a $100,000 loss, the insurance company may only pay out $75,000 (minus your deductible) due to the coinsurance penalty.

5. Business Interruption Time Limits

If your policy includes business interruption coverage, it likely has a time limit on how long it will provide benefits. This is typically expressed in months or as a maximum dollar amount.

Example: Your policy might provide business interruption coverage for up to 12 months following a covered loss.

Tip: Consider your recovery time realistically when choosing business interruption coverage limits.

6. Ordinance or Law Limitations

While some policies exclude ordinance or law coverage entirely (as mentioned in our exclusions article), others may include it with significant limitations. This coverage helps pay for increased costs of construction due to changes in building codes since your property was built.

Example: Your policy might limit ordinance or law coverage to 10% of the building's insured value.

7. High-Value Item Limitations

Standard commercial property policies often have limitations on high-value items such as artwork, antiques, or specialized equipment. These items may have lower sub-limits or require separate scheduling to be fully covered.

Example: Your policy might limit coverage for any single piece of artwork to $5,000, even if you have several more valuable pieces on the premises.

How to Work Through Insurance Limitations

1. Thoroughly Review Your Policy: Understand all limitations in your current policy. Don't hesitate to ask your insurance provider for clarification.
2. Work with an Experienced Broker: Like our team at Janover Insurance Group, for example. A broker specializing in commercial real estate can help identify potential gaps in your coverage and suggest solutions.
3. Consider Endorsements or Riders: For many limitations, you can purchase additional coverage through endorsements or riders to your policy.
4. Regularly Update Your Coverage: As your property value changes or you acquire new assets, review and adjust your coverage accordingly. Do this at least once per year (or whenever anything major changes).
5. Implement Risk Management Strategies: Take proactive steps to reduce the likelihood and potential impact of losses.

Conclusion

Understanding the limitations in your commercial property insurance policy is crucial for protecting your real estate investments. While it might be tempting to opt for the cheapest policy available, doing so could leave you exposed to significant financial risks.

At Janover Insurance Group, we specialize in helping commercial real estate investors navigate the complex world of property insurance. Our team works with you to identify potential gaps in your coverage and find solutions that provide comprehensive protection for your valuable assets — all at a highly competitive price point.

Don't let insurance limitations leave your investment vulnerable. Contact Janover Insurance Group to review your current coverage and ensure you're fully protected against all potential threats to your commercial property.

In this article:

1. Understanding Insurance Limitations vs. Exclusions
2. 7 Key Limitations in Commercial Property Insurance
3. 1. Policy Limits
4. 2. Sub-Limits for Specific Perils
5. 3. Replacement Cost vs. Actual Cash Value
6. 4. Coinsurance Clauses
7. 5. Business Interruption Time Limits
8. 6. Ordinance or Law Limitations
9. 7. High-Value Item Limitations
10. How to Work Through Insurance Limitations
11. Conclusion
12. Get Financing

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