Many business owners insure company-owned buildings and personal property under a commercial property policy. The coverages and limits on the policy are typically selected based on the property the business owns when the policy is written. Many businesses acquire additional property after the policy inception date. Fortunately, most commercial property policies afford some coverage for property the insured purchases or constructs during the policy period.
Businesses grow and change over time. When a business expands, it often requires new property. Here is an example:
Denise owns Divine Delights, a retail bakery business. Divine Delights operates out of a small building Denise purchased six years ago. Denise wants to expand her business, but her current location is too small. Divine Delights needs additional space, so Denise is purchasing the building next door. She plans to use her current location for production purposes. Denise intends to divide the new building into two sections. One will house a small cafe and the other will contain a retail store.
The bakery's existing building is insured under a commercial property policy. Denise knows that the policy covers the current structure and its contents. Will the policy automatically cover a building she acquires during the policy period?
Newly Acquired or Constructed Property
Most commercial property policies include a coverage called Newly Acquired or Constructed Property. This coverage is usually afforded as an extension of your existing Building and/or Business Personal Property coverage. That is, if your policy already covers a building, you may extend your Building coverage to cover a building you acquire during the policy period. Likewise, if your policy currently covers Business Personal Property, you may extend that coverage to include personal property you acquire during the policy period.
Property policies don't define the word acquire. Presumably, the property you acquire includes the property you purchase, rent, inherit or receive through other means (such as a gift).
The coverage provided for a newly acquired property is a temporary safeguard. This coverage ends once you have contacted your insurer to have the new property added to your policy.
Newly Acquired Buildings
Many commercial property policies automatically cover the following types of buildings:
- A new building in the course of construction A new building being built is normally covered only if it is located at the premises described in the declarations. For example, suppose that Denise doesn't buy the building next door. Instead, she constructs a new building on the same lot as her existing building. Since the new structure is located at the same premises as the old one, it should be covered automatically.
- A building you acquire at a different location A building you acquire at a location other than the one described in the declarations may be covered, depending on the manner in which it is used. Under many property policies, the building must be used either as a warehouse or for a similar purpose as your existing building. Otherwise, the building won't qualify for coverage as Newly Acquired or Constructed Property.
Newly Acquired Business Personal Property
Under a typical property policy, you may extend your existing coverage for Business Personal Property to cover property:
- At a newly acquired location. For example, you purchase a new building located two blocks away from your existing building. Your policy will automatically cover personal property located in the new building. This includes personal property you acquire after the policy inception date.
- In a new building at your existing location. If you decide to add a new building to your existing location, your policy will cover your business personal property that is situated in the new building. This includes personal property you have acquired since the policy inception date.
- At your existing location. The policy covers new business personal property located at the described premises. For example, you buy new office furniture for your existing building.
Time and Value Limitations
Under some commercial property policies, the Newly Acquired or Constructed Property extension is provided only if you have fulfilled certain insurance to value requirements. These requirements may include a coinsurance percentage of at least 80% or insurance that is written on a value reporting basis.
Under most property policies, Newly Acquired or Constructed Property coverage is subject to a time limitation. Generally, such property is covered only if you report the acquisition to your insurer within a specified number of days. You must also pay whatever additional premium your insurer charges to insure the new property. Otherwise, the property will not be covered.
The coverage period for newly acquired property varies from one policy to another. This period may be as little as 30 days or as much as 180 days. Coverage typically ends after the specified number of days have passed since you acquired the property or started to construct it.
The coverage provided for a newly acquired property is not additional insurance. Rather, it is an extension of your Buildings and/or Business Personal Property coverage. This extension is usually subject to special limits. These typically range from $250,000 to $1 million for newly acquired buildings and $100,000 to $500,000 for newly acquired personal property.
Suppose that your policy provides a $250,000 limit for newly acquired buildings. Even if your policy includes a $1 million limit for Buildings, any newly acquired or constructed building will be subject to the $250,000 limit until you report the new building and its value to your insurer. Once you have notified your insurer, it will add the building to your policy. The building will now be covered at the limit on your policy.
When you report a newly acquired property to your insurer, remember to increase your Buildings or Personal Property limit, whichever applies. For example, if you purchase new furniture worth $500,000, you may need to increase your Personal Property (or blanket limit) limit by $500,000.
Buildings Under Construction
As noted above, the extension provided for Newly Acquired or Constructed Property applies to a building under construction at the described premises. This coverage is intended as a stopgap only and should not be used to cover a construction project.
Suppose that Denise decides to construct a new building on her existing lot rather than purchase the building next door. Before construction begins, Denise (or the general contractor she hires) should purchase builders risk coverage. This coverage is designed to cover construction projects. A builders risk policy typically covers damage to property under construction whether it is owned by the project owner, the general contractor or any subcontractor involved in the project.