Insure This

by Various Authors

Q. General Form, Special Form—what is it? Is it worth it?

A. Insurance is a contract between you, the named insured, and the insurance company, covering an agreed upon property for certain types of losses. The causes of loss, also known as the covered perils, determine if the insuring contract or policy will pay for any claim. The events a policy will pay for are referred to as Coverage Form. Every property policy must have a Coverage Form declared, and the covered causes of losses outlined within the policy.

The causes of loss are categorized in two primary forms: General Form (Basic Form) and Special Form. General Form (Basic Form) coverage will pay for the basic types of losses that an investment property owner will be concerned about. Examples of covered causes of loss are: fire, lightning, windstorm, hail, aircraft, riot, vehicles, explosion, smoke and other similar causes. Always refer to your policy for the exact covered causes of loss.

Special Form coverage contains the same causes of loss as the General Form but also includes water damage to the property. Special Form can also be stated as “losses caused by direct physical loss except as specifically limited or excluding.” To simplify and address the needs of the investment property owner, Special Form coverage will pay for losses resulting from water damage caused by a leaking roof, windows, broken pipes/plumbing and other similar types of water damage. Again, always refer to your policy and insuring contract for the exact covered causes of loss.

So which coverage form is for you—General Form or Special Form? Let’s consider price first. General From can be less expensive than Special Form by 10% or more. In these turbulent times for insurance premiums, you may elect to forego the more comprehensive Special Form policy for the less expensive General Form policy. Many investors realize water damage can be inexpensive to repair and choose to pocket the additional premium. However, some investors prefer to have coverage for any possible circumstances, and the additional premium spent for the Special Form policy is worth the peace of mind.

Eligibility is a factor for Special Form coverage, too. Insurance companies do not step in front of moving trains. If your building has limited updates in regard to plumbing, the carrier may not offer Special Form coverage. Typically, carriers would like to see copper plumbing and updates to the building and maintenance systems in order to offer the Special Form coverage. In some cases, the carrier will offer Special Form after the inspection has taken place.

With many new insurance companies entering the commercial property market in California, now is the time to review your options. You may be able to improve your coverage and/or reduce your premiums. At my firm, we specialize in investment-property insurance by working with building owners and carriers to determine the optimal solution for both. Call us today for a quick evaluation of your current policy and a complete review of your options.
– P.J. Tradelius

Q. How do I know if I’m paying too much for insurance?

A. The simple answer is obviously to shop around and get some competitive bids from various brokers. But let’s look a little deeper at where you should go for quotes, what to ask for and what pitfalls can throw you off when doing your research.

Since you are shopping for apartment-building insurance, don’t waste your time with the Internet. The market for commercial-habitation risks is small and specialized. There are so many variables involved in underwriting these risks that this type of insurance does not lend itself well to any kind of automated Internet comparison rating.

Details such as prior losses, distance between railings, presence of dogs, swimming pools and other situations create havoc for automated-rating programs, making Internet rating impractical. There are just too many variables. Instead, seek out specialists in apartment-building insurance.

Second, the more important question for you to ask is what to look for specifically when you get a quote. Your broker should know what coverage is appropriate for your specific building. Also allowing your broker to offer the quote rather than specifying particular coverages may prove informative. A complete quote will include several things you need to know to make an educated decision. If the broker you are calling does not bring these things up, this quote likely does not include many of the needed coverages. Therefore, one of your considerations, beyond checking out the price, should be the thoroughness of the broker.

Unlike auto and home policies that are fairly generic, apartment-building packages vary greatly in their coverage. Here are just a few of the items that should be specified in a complete quote. If you keep the following items in mind when evaluating your coverage, you will know if that great price represents a great product or just a bare bones policy:

• the type of coverage should be Special Form, which means all risk is subject to certain exclusions (the basic form, broad form and general form are all sub-standard coverage forms);
• valuation should be Replacement Cost not Actual Cash Value;
  
• unlimited or very high limit-per-building are the best forms available in the market—the equivalent of guaranteed replacement cost; and also there are several programs with limits of $250,000,000 and higher per building, taking the guesswork out of how much coverage to have (it’s not worth much to get a low price if the coverage limit is low);
• loss of rental income should be at least enough to cover your exposure for a year, but the best policies have unlimited coverage for as long as it takes to rebuild after a loss—not just for 12 months;
• the quote for buildings more than 10-years old should include Building Ordinance and Laws coverage to rebuild to code;
• liability should include wrongful-eviction and other personal-injury coverages, and trip-and-fall coverage, non-owned auto coverage to cover the exposure of any of your employees who drive their own cars at your business;
• liability limits should be at least $1 million per occurrence;
• you should be given options for higher limits via an umbrella; and
• the carrier should be “A” rated so it will be accepted by all lenders.

In addition to providing quotes for the right coverages, the broker you consult with should have cleared the building for underwriting. You should have been asked the age of the building, the number of stories, loss history and any other pertinent information. If in doubt, ask if there is a possibility that you may be turned down once your information is submitted to the carrier or if you have been preapproved. Most carriers inspect buildings after they are written, and you don’t want to be canceled just because your broker did not prequalify you properly.

Commercial policy pricing often varies as much as 100%, so comparison shopping is valuable, but you are likely to find that you are getting quoted very different products, so make sure to get all the details. All commercial policies are certainly not created equal.
– Dave Gordon

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Consult the advice of an insurance agent for any specific problem. To submit questions for this column, please email them to editor@sfaa.org. David Gordon is with Gordon Associates Insurance Services, Inc., 877-877-7755, gordon-insurance.com. P.J. Tradelius is with Cal North Insurance Brokerage, 415-863-1111 ext. 10, www.calnorth.com. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.