So for example, if a blanket limit of $200 million is on the policy and a loss occurs that is $200,000, then the insurer will use the $200 million limit to determine if that amount meets the 90% full replacement value of all of the buildings, multiplied by the $200,000 loss. A blanket limit allows more room for error – if some of the buildings are a bit underinsured but others are over insured, the chance of applying the coinsurance penalty is reduced. See coinsurance explanatory example in the Q&A section below.

Replacement Cost

An insured has the option to insure the following types of property on replacement cost valuation:

• Buildings and permanent machinery, fixtures, and equipment  that are covered with the building
• Business personal property including furniture, fixtures, machinery and equipment
• Merchandise and stock if the "including stock" option is shown as applicable in the declarations, and
• Tenants improvements and betterments are not considered the property of others. Since these items become the property of the landlord, a tenant who has purchased this coverage will receive replacement cost coverage for the improvements made to a building.

The replacement cost optional coverage does not apply to personal property of others; contents of a residence; works of art, antiques, or rare articles; or stock unless the "stock" option is shown in the declarations.

Sometimes when replacement cost valuation is added to property under a blanket limit, the insurer may add a margin clause to the policy.

Margin Clause

ISO has a margin clause endorsement, CP 12 32 Limitation on Loss Settlement – Blanket Insurance (Margin Clause). What a margin clause does is to limit the payout to no more than the values that were last reported to the insurer for each building, multiplied by the percentage shown in the margin clause endorsement. The percentages may range from 105% to 130%.

For example, assume an insured blanket limit of $200 million, and a margin clause of 120% is applicable to each of two buildings on a policy, and the values last reported were $3 million for building one and $7 million for building two. In this example, the effect of the margin clause would be to limit those values to no more than $3.6 million for building one and $8.4 million for building two – these two buildings would not receive the benefit of the full $200 million blanket limit. An insurer may add this endorsement if they have reason to believe the values reported could be under-insured. If an insured has a recent appraisal that shows the values reported are appropriate, they may submit the appraisal to get the insurer to remove the margin clause endorsement.

What is Agreed Value?

When an insured selects agreed value, this optional coverage provides for a predetermined amount to be paid in the event of a total loss to the described property. For example, if a building is insured on an agreed value basis for $200,000 and is totally destroyed by fire, the insurer would simply write the insured a check for $200,000.

The insured may choose this optional coverage for less than the entire policy period, choosing when to make this option effective and when to terminate it. When the insured chooses this option, the coinsurance condition does not apply, reason being that the insurer believes the values reported for each building is a reasonably accurate estimate of the full replacement value.

For agreed value, the ISO rules state that the insured must agree to carry an amount equal to 90 percent for risks written on a blanket basis. The insured and agent must complete the Statement of Values endorsement, CP 16 15. Property written on a reporting basis is not eligible for agreed value, nor are builders risk policies. Replacement cost values are used if the insured has purchased replacement cost coverage.

Questions & Answers

Now for the real-life Q&As:

Blanket Limit on Condominium Policy with Replacement Cost Option:

Recently a fire destroyed one of the buildings in the complex. On the statement of values the replacement cost for this building was shown as $250,000. As it turns out, the insured will need about $300,000 to replace the building, haul away the debris, and do some code upgrades. We told him that there was no problem because of the blanket limit.

However, the adjuster and his supervisor are adamant that the $250,000 shown on the statement of values is the most they will pay. When we put blanket coverage on this complex, we did it for just this reason—to make sure that a building would be truly replaced in the event of a total loss.

We think that the adjuster and his supervisor are reading the policy incorrectly and would like your opinion.

Alabama Subscriber

You are correct. When a blanket limit applies to buildings on a policy, that amount is the total available for any loss—whether it is a loss to one building or to all buildings. Since code upgrades and debris removal are included in the limit of insurance, those costs are also included in the $1.3 million.

By including the statement of values that lists the buildings, their description, and an amount for each one, you were not requesting that amount of coverage for each building. That list was a guide for the underwriter. Its intent is to help the underwriter price the risk and to let the insurer know exactly what its total exposure is.

The most important thing to remember about blanket coverage is this: in the event of a loss to the property covered under the blanket amount, that entire amount applies to the damaged property, whether one building is damaged or all of them are damaged.

Blanket Limit and Coinsurance Penalty:

Our policy provides a blanket limit for two buildings at different sites. In the event a loss was to occur to one of the buildings and it is determined that the blanket insurance limit for both buildings is inadequate, however more than sufficient if applied to the damaged building, would the co-insurance penalty still apply?

California Subscriber

According to the Coinsurance section in the ISO CP 00 10, Building and Personal Property Coverage Form, the limit would apply to the total of all property, so the coinsurance penalty would still apply. Here is the provision and an example from the policy:

b. If one Limit of Insurance applies to two or more separate items, this condition will apply to the total of all property to which the limit applies.

Example 3

When: The value of the property is:

Building at Location 1: $75,000

Building at Location 2: $100,000

Personal Property at Location 2: $75,000

Total Values: $250,000

The Coinsurance percentage is: 90%

The Limit of Insurance for Buildings and Personal Property at Locations 1 and 2 is: $180,000

The Deductible is: $1,000

The amount of loss is:

Building at Location 2: $30,000

Personal Property at Location 2: $20,000

Total Loss is: $ 50,000

Step (1): $250,000 x 90% = $225,000 (the minimum amount of insurance to meet the Coinsurance requirements and to avoid the penalty shown below)

Step (2): $180,000 ÷ $225,000 = .80

Step (3): $50,000 x .80 = $40,000

Step (4): $40,000 – $1,000 = $39,000

We will pay no more than $39,000. The remaining $11,000 is not covered.

Blanket Property Coverage and Insurance to Value:

I believe the loss should be adjusted at actual cash value because the complex is not insured at 80 percent of its value as required in the policy for replacement cost. Others in my office, however, argue that the full $9.5 million blanket limit should apply to this one building. They believe that replacement cost is payable.

My argument is that when the coverage is written on a blanket basis the loss of one building is a partial loss to the entire complex. I think that the blanket limit on the entire complex must meet the 80 percent coinsurance requirement in order to trigger a replacement cost settlement. Can you shed some light on this debate?

Kansas Subscriber

The 80 percent coinsurance requirement should be applied to the entire blanket amount, meaning that the insured should have carried $12 million (80 percent x $15 million) as a blanket limit. Since the insured carried only $9.5 million of coverage, he is entitled to either an ACV settlement on the destroyed building or 79 percent of the $2.3 million replacement value ($1.82 million), whichever is greater.

If the insured had carried the required $12 million as a blanket limit, it would not matter whether the value of the destroyed building was accurately reflected in the submitted values or not. In other words, once the coinsurance requirement is met, the entire blanket amount is available for any covered item of property that is damaged.

If this complex were insured on a blanket basis with an agreed value endorsement, the answer would differ. In that case, even if the blanket limit was rated at 80 percent coinsurance, the agreed value endorsement suspends the coinsurance clause. The insureds would then be paid the entire replacement cost in order to rebuild the destroyed building.

Blanket Limit on Building or Building and Business Personal Property?

Is there anything we can do in this case to get the loss paid for our insured?

Florida Subscriber

Your client has no coverage for his business personal property the way the policy was written. The Declarations of his commercial property policy clearly indicates building coverage only.

The insuring agreement of form CP 00 10 says that it covers "the following types of property for which a Limit of Insurance is shown in the Declarations." It then lists the three categories of: building; business personal property; and personal property of others. Since the only category for which a limit is shown is the building, that is the only item of property covered by this policy.

However, since it appears that the limit of insurance, $5.6 million, would be enough to cover the building and contents in the event of a total loss that may indicate the intent to cover both under the blanket amount. You should review the application and your notes from conversations with the insured and the underwriter. You should also go over the pricing of the insured's risk exposures with the underwriter.

It may turn out that the omission of business personal property from the Declarations was just a mistake. If it was and the insured paid for building and contents coverage, there's a good chance that he can collect for both.

Blanket Coverage and Statement of Values:

Connecticut Subscriber

All properties that are to be insured within a blanket should be listed on the statement of values with their respective values shown either on an actual cash value or replacement cost basis. If owned properties are not to be insured within the blanket, they should be listed with either "nil" or "0″ in the value column.

If owned properties are omitted from the applicable statement of values, they are not insured on the policy.

These types of blanket coverage policies usually list a blanket value with either a specific list of properties on the policy or a notation stating the coverage is according to a statement of values on file with the company. In either instance, the coverage is based on the values listed on the statement. By signing the statement, the insured attests to the fact that the properties and values listed are accurate and are the only properties to be insured. Various courts have held that separate documents that are attached to or referenced in the policy are to be considered a part of the policy.

Blanket Limit and Valued Policy Laws:

Indiana Subscriber

This excerpt from an FC&S article titled Valued Policy Laws provides some guidance:

The valued policy laws of four states—Florida, Georgia, Louisiana, and New Hampshire—specifically exempt blanket insurance from the application of the law. In these states, total loss under a blanket policy—even if the entire property subject to the blanket insurance is destroyed—does not invoke the valued policy provision; only the actual amount of the loss is payable.

In other states with valued policy laws it would seem that for the law to apply the coverage must be only on buildings and all buildings insured under the blanket item of coverage must be totally destroyed. But this question does not appear to have been resolved one way or another in the courts.

As you can see, other than in the states mentioned—which do not include Texas or Arkansas—it would appear that all buildings under the blanket limit must be totally destroyed, but courts have not weighed in on this subject.

Conclusion

While policyholders should strive to provide the insurer with complete and accurate values for buildings (and business personal property), agents should encourage every policyholder to read their insurance policy. If needed, the agent can provide additional explanation to make sure that policyholders understand the basic workings of the coinsurance condition, including the potential penalties for under-insurance, as well the purpose of the agreed value option, blanket limits and margin clauses, if applicable. However, no special skill or expertise in insurance is needed to make sense of the coinsurance illustrations – if nothing else, the policyholder should take a few minutes to read the examples provided in the ISO Building and Personal Property Coverage Form.