Insuring Property That Belongs to Someone Else
Many businesses use, service or repair property that is owned by someone else. If this property is damaged or destroyed, the business may be obligated under a lease or other agreement to repair or replace it. Even if no contract exists, the business may be liable for the damage as a result of a lawsuit filed by the owner. Consequently, businesses that use other people's property should make sure that property is adequately insured.
Commercial Property Policies
Most commercial property policies, including the ISO policy, provide some automatic coverage for personal property that is owned by someone else. Only personal property is covered. No coverage applies to real property (buildings) owned by someone other than the named insured.
This article will explain how non-owned property is handled under the standard ISO property policy. Most property policies drafted by insurers provide coverage that is equivalent to, or broader than, the ISO form.
The ISO form covers two categories of property that belongs to someone else:
- Leased Personal Property: This is property you have leased and are required to insure under the terms of the lease.
- Property of Others: This is non-leased personal property owned by someone else. This category also includes leased property you are not required to insure.
Leased Personal Property
Like many businesses, your company may lease property to use in your day-to-day operations. Examples are copy machines, office furniture, and construction equipment. In some cases, the property owner may require you to insure the property against physical loss or damage.
For instance, suppose you lease two copy machines for your accounting business. You are responsible under the lease for any loss or damage the machines sustain during the term of the lease. The lease also requires you to insure the copiers under an all-risk property policy for their replacement value.
Leased personal property that you are contractually required to insure is automatically covered as Your Business Personal Property. This property is covered under the limit that applies to Your BPP. If your commercial property policy includes, say a $100,000 limit for BPP, that limit will apply to both of the following:
- personal property owned by your business
- leased personal property you are obligated to insure under the terms of the lease
If leased property is lost or damaged, the loss will be valued in the same manner as losses to personal property you own. That is, losses involving leased personal property will be valued based on replacement cost or actual cash value, whichever valuation method applies to Your BPP.
If you lease property for your business, be sure to read the lease carefully. The contract may hold you responsible for damage that is not covered by your property policy. For instance, a lease could state that you are liable for loss or damage "by any and every cause whatsoever".
Property of Others
The ISO property policy covers a second category of non-owned property called Property of Others. This category includes both of the following:
- property that belongs to someone else but isn't subject to a lease. An example is a copy machine you have borrowed from the business next door.
- property you lease but aren't required to insure. An example is office furniture you have leased but are not required to insure under the terms of the lease.
Unlike leased personal property, Property of Others is not covered in conjunction with personal property you own. Rather, Property of Others is a separate category of Covered Property. It is covered only if a separate limit of insurance is listed on your policy for Property of Others. If no limit appears, your policy may provide little coverage for Property of Others. The standard ISO property policy includes a very low ($2,500) limit for such property. This limit is not extra insurance but is included in the limit shown in your policy for Your Business Personal Property.
Unlike leased property, Property of Others is valued based on its actual cash value. Even if you have purchased replacement cost coverage for Your BPP, the value of Property of Others will be calculated according to its actual cash value (not its replacement cost). You can purchase replacement cost coverage for Property of Others for an additional premium.
Need Separate Limit
If you use property that meets the description of Property of Others, your policy should include a separate limit for that property. This is particularly important if the property you are using could be costly to repair or replace. Consider the following example.
Mark owns Marathon Machining, a company that repairs and reconditions metalworking equipment. A Marathon employee is repairing a lathe owned by Larry's Lathing when he accidentally causes a fire. The machine is destroyed. Mark soon learns that the lathe is a top-of-the-line model that will cost $75,000 to replace. Mark's machine shop is insured under a commercial property policy. The policy declarations show a $25,000 limit for Property of Others. Even if Mark has purchased replacement cost coverage for Property of Others, his policy will pay only a third ($25,000) of the $75,000 loss.
Commercial property policies are designed to cover property at fixed locations. Most provide only a small amount of coverage for property that is away from your premises. The ISO property policy covers property situated in a building at (or within 100 feet of) a premises described in the declarations. It provides only $10,000 for Off-Premises Property. The limit applies to property owned by you or someone else (whether you lease it or not) while:
- temporarily at a location you don't own, lease or operate
- at a storage location leased by you
- at a fair, trade show or exhibition
If you use other people's property away from your premises, you may need to purchase extra insurance. Your insurer may be willing to increase the limit in your policy for Property Off-Premises.
Insurance for Movable Property
Some businesses lease or borrow property for use away from their premises. Here are some examples:
- A building contractor rents a bulldozer to use in a construction project.
- An accounting firm rents laptop computers to use in an off-site training program.
- An architectural firm holds a social event for clients in rented space away from its premises. The firm decorates the space with artwork borrowed from artists.
A separate branch of property insurance, called inland marine insurance, is designed to cover movable property. There are many types of inland marine insurance, and each is intended to cover a specific type of property. Many inland marine policies automatically cover property owned by someone other than the insured.
In the above examples, the contractor could insure the rented bulldozer under a contractor's equipment policy. The accounting firm could insure the rented computers under an electronic data processing policy. To insure the borrowed artwork, the architectural firm could purchase fine arts coverage.
If your business uses leased, rented or borrowed property away from your premises, you may need inland marine insurance. Ask your insurance agent or broker what type of insurance will best suit your needs.
Not Covered by Liability Policies
Lawsuits arising from damage to other people's property that you use in your business are unlikely to be covered by your liability policy. In the Marathon Machining example described above, suppose that Marathon's insurer pays Larry's Lathing $25,000 (the limit for Property of Others) for the damage to the lathe. Larry's Lathing sues Marathon Machining for the remaining $50,000 to replace the lathe.
Marathon Machining is insured for liability under the standard ISO general liability policy. If Marathon submits the claim to its insurer, the insurer will likely deny coverage. Liability policies exclude property damage to personal property in the insured's care, custody or control. The lathe was in Marathon's custody when the fire occurred. Thus, the damage to the lathe would be subject to the exclusion.