When business-owned property is insured under a commercial property policy, it may be subject to a specific limit or a blanket limit. A specific limit applies to one type of property while a blanket limit applies to multiple locations or types of property. A blanket limit affords better protection against losses than a specific limit, especially when property fluctuates in value.
A specific limit applies to a building or personal property at a single location. If that property is damaged or destroyed by a covered peril, the specific limit is the most the insurer will pay to repair or replace it.
For example, suppose you insure a commercial building and its contents (called business personal property or BPP) under a commercial property policy. You choose specific limits of $1 million for the building and $500,000 for the BPP. These limits are the most your insurer will pay if your building and its contents are destroyed by a fire or other insured peril.
A blanket limit may apply to more than one type of property at the same location or the same type of property at multiple locations. It can also apply to all types of property at all insured locations.
For example, suppose that you insure your building and BPP under a property policy that includes a $1.5 million blanket limit. The limit applies to two types of property: your building and your BPP. This limit will be available if your building, your personal property or both are damaged or destroyed by a covered peril.
A blanket limit can be used to cover property situated at different locations. For example, suppose your own two commercial buildings, one located at 2500 Main St. and another situated at 4500 Broad St. Each building contains business personal property. Here is a summary of your property values:
2500 Main St.: $2M for the building and $1M for the BPP
4500 Broad St.: $1.5 for the building and $800,000 for the BPP
If you decide on a blanket limit, you have three options:
- One blanket limit for your buildings and another for your BPP. You can choose a $3.5 million blanket limit for your buildings and a separate $1.8 million blanket limit for your BPP. Each limit applies to property at both locations.
- A separate blanket limit for each location. You can insure all of your property (building and BPP) at the Main St. location under a blanket limit of $3 million. Another blanket limit of $2.3 million will apply to your property at the Broad St. address .
- A single blanket limit for all property at both locations. You can choose a single blanket limit of $5.3 million that applies to all of your property at both locations.
Why Choose a Blanket Limit?
A major advantage of a blanket limit is that the entire limit is available if any covered property is damaged or destroyed. For example, in the previous scenario suppose that you select a single blanket limit of $5.3 million to cover all of your property at both locations. Your policy runs from July 1, 2019, to July 1, 2020. On October 1, you move a piece of equipment with a $100,000 replacement cost from the Broad St. building to the one on Main St. The cost to replace your personal property at the Main St. building is now $1.1 million.
Two months after you move the equipment a fire breaks out in your Main St. building. The building and all of its contents are destroyed. The value of your property at the Main St. location has increased since your policy began. Even so, the loss is covered. The amount of the loss is $3.1 million, which is less than the $5.2 million blanket limit.
A blanket limit is particularly beneficial if your property fluctuates in value during the policy period.
Why To Avoid Specific Limits
The following example demonstrates the primary disadvantage of specific limits. Suppose you had elected to insure your property with four specific limits:
- Building at 2500 Main St.: $2 million
- BPP at 2500 Main St.: $1 million
- Building at 4500 Broad St.: $1.5 million
- BPP at 4500 Broad St.: $800,000
When the fire occurs at your Main St. location, you own the same amount of property you owned when your policy began. You have transferred a machine worth $100,000 from your Broad St. location to the one on Main St. Unfortunately, the BPP limit at your Main St. location is only $1 million. Your personal property loss ($1.1 million) exceeds your limit by $100,000. You'll have to pay the $100,000 yourself.
If you choose specific limits, each must be adequate. You may need to adjust your limits if you acquire additional property, move it from one location to another, or make improvements to property during the policy period.
Cost, Coinsurance, and Deductibles
There are some additional things to consider when choosing property limits. First, property coverage that includes a blanket limit costs a bit more than the same coverage with a specific limit. Secondly, most insurers will offer a blanket limit only if you insure your property for at least 90% of its value. This means that if your building has a $2 million replacement cost, you must insure it for at least $1.8 million to obtain a policy with a blanket limit.
If your property sustains a partial loss and you have purchased less than the amount needed to satisfy the coinsurance requirement, you may be subject to a coinsurance penalty.
Thirdly, the loss calculations cited above have ignored deductibles. Yet, no matter which type of limit you choose, your commercial property insurance will likely include a deductible. Fourthly, a property policy may include both blanket and specific limits. For instance, you could choose a blanket limit for your buildings and specific limits for your personal property.
Beware the Margin Clause!
If your property insurance is subject to a blanket limit, your insurer may add a margin clause to your policy via an endorsement. This clause may reduce your recovery for a large loss so you should ask your insurer to remove it.