A margin clause limits the amount you can receive for a loss if a property that's subject to a blanket limit is damaged or destroyed. A blanket limit applies one limit to several properties or to several types of property, and many commercial policies include them.
A margin clause eliminates much of the benefit of a blanket limit when it's included in property insurance coverage.
What Is a Margin Clause?
A margin clause is added to a commercial property policy by an endorsement. It states that your insurer won't pay more than a specified percentage of the value of the damaged property if a loss occurs.
The endorsement includes a schedule of the insured property that lists each type of property that's insured under a blanket limit. Each is identified by a premises number, a building number and description. A margin clause schedule would look something like this:
Building # 1
Margin Clause: 120%
Description of Property:
Building located at: 125 Market St., Pleasantville, CA
How a Margin Clause Works
The building and personal property located at 125 Market Street in this example 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've provided to your insurer.
Let's say you've purchased a property policy with a $3 million blanket limit. Your policy is based on the following values which you submitted to your insurer:
- 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.
Your insurer won't pay more than $1.2 million ($1 million times 1.2) to replace the building at Premises #1 if it is completely destroyed in a fire. Likewise, the most your insurer will pay to replace your personal property is $600,000 ($500,000 times 1.2) if the property at Premises #1 is destroyed.
How Blanket Limits Work
A blanket limit helps ensure that you have enough coverage if some of your property increases in value during the policy period. The limit can apply to more than one type of property, such as buildings and personal property. It can 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 would be available.
A blanket limit provides a cushion that protects you if a portion of your property increases in value unexpectedly. For example, you might have added new equipment at one of your locations after your policy was issued. The value of your personal property increases from $500,000 to $650,000 as a result. The $3 million blanket limit would be available if all your personal property was destroyed in a fire.
Your limit would have been exceeded if you had insured that personal property under a $500,000 specific limit. You would have had to pay the remaining $150,000 out of pocket.
A blanket limit is often combined with agreed value coverage. You must submit a statement of insured property values to your insurer before your policy begins if you elect this coverage. The statement represents an agreement between you and your insurer that the values you've listed are the actual values of the insured property.
The coinsurance clause in your policy will be suspended when your insurer receives the statement. Your insurer will pay up to the limit of insurance that applies to the damaged property if a loss occurs.
A coinsurance clause would normally state that you and the insurer will share the cost of a claim.
Disadvantages of Margin Clauses
Margin clauses are designed to benefit insurance companies, not policyholders. The amount payable for a loss can be significantly less than the blanket limit when a margin clause is included in a property policy. 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.
Suppose you own two buildings at separate locations. All 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%. You submitted a statement to your insurer before your policy began, showing that the value of each building was $1.5 million, and 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'll 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.
How Much Will This Cost Me?
These calculations ignore deductibles and coinsurance, which don't affect the calculation of the maximum loss payable, but your insurer will reduce any loss paid by the amount of your deductible. Your insurer will reduce your loss payment if the damaged property is underinsured and your policy includes a coinsurance clause.
- A margin clause puts a cap on how much you can recover from insurance, even when the covered property is covered by a blanket limit.
- A blanket limit is normally beneficial because it covers you if your property increases in value, but a margin clause negates this.
- The payout is arrived at by multiplying the margin clause percentage by the value of the damaged property.
- A margin clause can be as much as 120%, so your insurance payout on a $1 million property would be $1.2 million ($1 million times 1.2).