Specific Limits Versus Blanket Limits
When property owned by a business 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 properties or types of property. A specific limit is lower than a blanket limit, so it affords less protection against losses, particularly when property fluctuates in value during the policy period.
A specific limit is an individual limit that applies to a certain type of property. 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 that property.
For example, suppose you own a commercial building that contains furniture, equipment, and other business personal property (BPP). You have determined that the replacement cost of the building is $1 million while the cost to replace your BPP is $500,000. You insure the property under a policy that includes a $1 million specific limit for the building and $500,000 specific limit for the BPP.
A blanket limit applies to more than one type of property at the same location, or to the same type of property at multiple locations. It can also apply to all types of property at multiple locations.
In the previous scenario, 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. You have calculated the cost to replace your property as follows:
2500 Main St.: $1 million for the building and $500,000 for the BPP
4500 Broadway Ave.: $1.5 million for the building and $700,000 for the BPP
You have decided to insure your property using a blanket limit. You have three options.
- One blanket limit for your buildings and another blanket limit for your BPP. You could choose a $2.5 million blanket limit for your buildings and a separate $1.2 million blanket limit for your BPP. The $2.5 million limit will apply to both buildings. The $1.2 million limit will apply to your BPP at both locations.
- A separate blanket limit for each location. A second alternative is to insure all of your property (building and BPP) at the Main St. location under a blanket limit of $1.5 million. A separate blanket limit of $2.2 million would apply to all of your property at the Broadway Ave. address.
- A single blanket limit for all property at both locations. A third option is a single blanket limit of $3.7 million that applies to all of your property (buildings and BPP) at both locations.
Why Choose a Blanket Limit?
A major advantage of a blanket limit is that the entire limit is available for a loss that involves any property subject to the limit. This is important if the damaged property has increased in value since your policy was written. For example, suppose that you select a single blanket limit of $3.7 million to cover the buildings and personal property at both the Main St.and Broadway Ave. locations. Your policy runs from July 1, 2018 to July 1, 2019. On October 1, you move a piece of equipment with a $150,000 replacement cost from the Broadway Ave.
building to the Main St. location. The cost to replace the personal property at your Main St. building is now $650,000.
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 $1,650,000, which is less than the $3.7 million blanket limit.
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.: $1 million
- Building at 4500 Broadway Ave.: $1.5 million
- BPP at 2500 Main St: $500,000
- BPP at 4500 Broadway Ave.: $700,000
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 $150,000 from your Broadway Ave. location to the one on Main St. Unfortunately, the $500,000 BPP limit at your Main St. location is only $500,000. Your personal property loss ($650,000) exceeds your limit by $150,000. You'll have to pay the $150,000 yourself.
If you choose specific limits, make sure each is adequate. Be sure to increase your limit if you acquire additional property, move it from place to place, or make improvements to property during the policy period. Otherwise, your limit may be insufficient to cover a loss.
Cost, Coinsurance, and Deductibles
There are other things to consider with regard to a blanket limit. First, property insurance that includes a blanket limit is a bit more expensive than coverage based on specific limits. Secondly, most insurers will offer a blanket limit only if you insure your property for at least 90% of its value. If your building has a $1 million replacement cost, you must insure it for at least $900,000 to obtain a policy with a blanket limit. If you insure your property for less than the required amount and a loss occurs, you may be subject to a coinsurance penalty.
Thirdly, the loss calculations cited above have ignored deductibles for the sake of simplicity. Yet, commercial property insurance is normally subject to a deductible. This is true whether you choose a specific limit or a blanket limit. Fourthly, a property policy may include both blanket and specific limits. For instance, a blanket limit may apply to buildings while a specific limit applies to 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 reduces the amount you will receive from your insurer if your property sustains a large loss. If you find a margin clause attached to your property policy, ask your insurer to remove it.