What Is a Margin Clause?
As a business owner, the last thing you need after a property loss is the surprise that your insurance does not cover you due to a margin clause in the policy. Many commercial property policies include a blanket limit that applies one limit to several properties or to several types of property. Your insurer may have also added a margin clause to your policy. A margin clause eliminates much of the benefit of a blanket limit. Thus, it is important to understand what it is and how it affects your property coverage.
A blanket limit helps ensure that you have enough coverage if some of your property increases in value during the policy period. The limit may apply to more than one type of property, such as buildings and personal property. It may also apply to property at multiple locations. For example, suppose your property policy includes a $3 million blanket limit that covers buildings and personal property at two locations. If a loss occurs at either location, the entire $3 million limit will be available.
Unlike a specific limit, a blanket limit provides a cushion that protects you if a portion of your property increases in value unexpectedly. For example, suppose that you add new equipment at one of your locations after your policy is issued. As a result, the value of your personal property increases from $500,000 to $650,000. If all of your personal property is destroyed by a fire, the $3 million blanket limit will be available. If you had insured that personal property under a $500,000 specific limit, your limit would have been exceeded. You would have had to pay the remaining $150,000 out of pocket.
A blanket limit is often combined with agreed value coverage. If you elect this coverage, you must submit a statement of insured property values to your insurer before your policy begins. The statement represents an agreement between you and your insurer that the values you have listed are the actual values of the insured property. Once your insurer receives the statement, the coinsurance clause in your policy will be suspended. If a loss occurs, your insurer will pay up to the limit of insurance that applies to the damaged property.
A margin clause is added to a commercial property policy by an endorsement. It limits the amount you will receive for a loss if the property subject to a blanket limit is damaged or destroyed. If a loss occurs, your insurer will not pay more than a specified percentage of the value of the damaged property.
The endorsement includes a schedule of the insured property. The schedule lists each type of property that is insured under a blanket limit. Each is identified by a premises number, building number and description. A sample of a margin clause schedule is shown below.
Premises # 1
Building # 1
Margin Clause: 120%
Description of Property:
Building located at 125 Market St., Pleasantville, CA
How It Works
In this example, the building and personal property located at 125 Market St. are subject to a margin clause percentage of 120%. The insurer uses this percentage to calculate the maximum loss payable for each type of property. The maximum loss payable is the most the insurer will pay for a loss involving that property. The insurer calculates the maximum loss payable by multiplying the margin clause percentage by the value of the damaged property. That value is based on the latest statement of values you provided to your insurer.
For example, suppose that you have purchased a property policy with a $3 million blanket limit. Your current policy is based on the following values you submitted to your insurer (assume limits and values represent replacement costs):
- The building at Premises #1 (125 Market St.): $1 million.
- Business Personal Property at Premises #1: $500,000.
- The building at Premises #2 (250 Market St.): $1 million.
- Business Personal Property at Premises #2: $500,000.
If the building at Premises #1 is completely destroyed in a fire, your insurer will not pay more than $1.2 million ($1 million times 1.2) to replace the building. Likewise, if all of your personal property at Premises #1 is destroyed, the most your insurer will pay to replace it is $600,000 ($500,000 times 1.2).
Margin clauses are designed to benefit insurance companies, not policyholders. When a margin clause is included in a property policy, the amount payable for a loss may be significantly less than the blanket limit.
A margin clause will have the most impact when:
- Your property sustains a large loss.
- The damaged property has increased in value since your policy began.
- You have not reported the increased value to your insurer.
For example, suppose that you own two buildings at separate locations. All of your property at both locations is insured under a $4.5 million blanket limit. Your property is subject to a margin clause percentage of 115%. Before your policy began, you submitted a statement to your insurer showing that the value of each building was $1.5 million. The statement showed that the value of your personal property at each location was $750,000.
A fire breaks out at one of your locations, severely damaging the building and its contents. The damage amounts to $1.8 million for your building and $900,000 for your personal property. The total amount of the damage is $2.7 million, which is considerably less than your blanket limit. Even so, your insurer will pay only $1.75 million for the damage to your building ($1.5 million times 1.15) and $862,500 for your personal property ($750,000 times 1.15). You will have to pay the remaining loss yourself. Your out-of-pocket loss is $50,000 for the damage to your building and $37,500 for the damage to your personal property.
Coinsurance and Deductibles
For the sake of simplicity, the calculations outlined above have ignored deductibles and coinsurance. These do not affect the calculation of the maximum loss payable. However, your insurer will reduce any loss paid by the amount of your deductible. If your policy includes a coinsurance clause, your insurer will reduce your loss payment if the damaged property is underinsured.