In a recent post, we warned about the increasing frequency of insurance carriers imposing limitations on the “loss of use” coverage in certain homeowner policies. We have yet another warning for you – this one involving time limitations in the “period of restoration” coverage for business owners.
We see a similar problem in a lot of Business Interruption (BI) claims, which often include a time limit, rather than a set dollar limit. At first, this might seem advantageous to you – ‘Hey, my coverage has no dollar limit – great!” But be careful: the limit on time might be a hidden problem.
In the standard business owners’ policy (BOP) that many small businesses get for their insurance coverage, everything is packaged together. This is appealing, as you don’t have to pick and choose different amounts of coverage for your commercial policy. The BOP typically has 12 months of BI coverage in the base policy, which includes the “Period of Restoration” clause – your BI coverage is limited to the time it should take to repair or replace the property. Generally speaking, this is fine – unless you have a major property loss. Then it can become a big problem.
Imagine you’re the owner of a dozen rental units within a residential building in the historic part of the city. If your building has a big fire, you will have a major reconstruction project on your hands. Can you realistically have it rebuilt in 12 months? Before you even undertake the process of lining up architects, builders, sourcing materials, etc. – and all of those elements may be delayed due to the pandemic – you have to deal with other players, like the Historic Commission. Such a reconstruction can take 24-28 months.
What’s more, your decades-old (or centuries-old) building likely enjoyed a number of waivers for code requirements that modern buildings must incorporate. When you rebuild, instead of being grandfathered in like you were before, you’ll suddenly have to comply with the newest code requirements. Your 12 months of BI coverage does NOT include the additional time it could take for code updates. Put another way, while you may have code coverage to pay for physical additions of the code, if complying with these codes adds to your overall timeline, your business interruption will not cover that additional time.
If you own a residential building, take this warning to heart. Your existing policy might not cover you for delay in reconstruction – whether for code compliance or for general building timelines. At first you might think you’re in good shape, but these instances could result in being underinsured.
You can also run into problems if you are the tenant. If you’re a business owner tenant in a commercial building, your landlord might have different priorities or timelines after a loss. Let’s say you own a clothing store in a strip mall that has a bad fire. Your space has water damage, and you think that the building repairs – which are the responsibility of the landlord – should only take about 3 months. Demo is done quickly, but then the landlord starts the repairs at the large anchor store in the plaza where most of the damage is located. Repairs there are going to take at least a year, and then construction will work its way down to your space. If you only have 12 months of business interruption coverage, you could find yourself under-insured.
Our suggestions: 1. Endorse your policy to include code as part of your covered period of restoration – for both BOPs and CPs. 2. Endorse your policy so that you have more than 12 months of BI for the period of restoration – you should have at least two years of coverage. We hope these tips help you ensure you have the coverage you need.