What Is Difference in Conditions Coverage?
Difference in conditions insurance covers flood, earthquake and perhaps a few other perils that are excluded from standard commercial property policies. It is often referred to as DIC coverage. This coverage is purchased in addition to a commercial property policy. It is intended to supplement, but not replace, standard commercial property insurance.
Who Needs It?
Most businesses that buy DIC coverage have a significant flood or earthquake exposure. A business typically buys this coverage for one of the following reasons:
- Its commercial property insurer is unable or unwilling to provide earthquake or flood insurance.
- Its commercial property insurer is willing to provide flood or earthquake insurance, but the premium is more than the business wants to pay.
- The business has purchased flood or earthquake insurance but needs additional limits.
DIC insurance is typically provided as a separate policy. It is a type of inland marine insurance. Most states do not require DIC insurers to file their rates or policy forms with insurance regulators. Thus, insurers are generally free to use whatever forms and rates they choose. Standard DIC forms are available, but most insurers that offer DIC insurance utilize their own proprietary forms. Consequently, DIC policies vary from one insurer to the next.
May Be Primary or Excess
A DIC policy may apply on a primary or excess basis. If a business has no other flood or earthquake insurance, the DIC policy should serve as primary insurance. If the business has some flood or earthquake coverage, the policy will provide excess coverage.
For example, suppose that ABC Manufacturing owns a warehouse situated in an area that is prone to flooding. ABC purchases a flood policy through the National Flood Insurance Program (NFIP). The flood policy provides maximum limits of $500,000 for building property and $500,000 for personal property. However, the value of the warehouse and its contents is approximately $8 million. ABC Manufacturing purchases a DIC policy that provides a $7 million limit for both the building and its contents.
Note that some DIC insurers will provide flood insurance on properties situated in flood zones only if the properties are already covered under the federal flood program.
Features of DIC Policies
While DIC policies vary, they have many common features. Here is a general overview of DIC coverage.
Some DIC policies are written on named perils forms. These policies limit coverage to the perils specified (typically flood and/or earthquake). Other policies are written on all-risk forms. They cover direct physical loss or damage to covered property by any cause of loss that isn't specifically excluded. "All-risk" wording can be deceptive since the policies typically exclude perils (other than earthquake or flood) that are covered by the policyholder's commercial property policy.
Before you buy a DIC policy, look at the definitions of flood and earthquake. These terms may not have the same meaning in a DIC policy as they do in a standard commercial property policy. Moreover, definitions in the DIC policy may conflict with those in a flood or earthquake policy.
For example, suppose your business is insured for flood under both an NFIP policy and a DIC policy. The federal flood policy covers mudflow via its definition of flood. However, your DIC policy specifically excludes mudslide and mudflow. While it does cover flood, its definition of this term does not include mudflow. The conflict between your flood and DIC policies could be problematic if your business sustains a loss caused by mudflow.
Most DIC policies exclude losses caused by the enforcement of building codes. Building codes set minimum standards that must be met when a new building is constructed. These codes often apply to existing buildings that are repaired or reconstructed after sustaining severe damage. They can significantly increase the cost of repairing a building. Fortunately, some DIC insurers offer building ordinance insurance as a coverage option.
Limits and Deductibles
DIC policies typically contain separate limits for flood and earthquake. The types of limits vary from policy to policy. Some contain both per occurrence limits and aggregate limits. Others contain only aggregate limits.
All DIC policies contain deductibles, and they are usually larger than those found on standard commercial property policies. Like deductibles found in earthquake policies, DIC deductibles are often based on a percentage of insured values. For example, suppose the insured value of a building is $1 million and the deductible is 10 percent. If the building sustains $300,000 in damage, the insurer will pay only $200,000 for the loss. It will subtract a $100,000 deductible ($1 million X .1 = $100,000) from the $300,000 loss amount.
Depending on the policy, a deductible may apply separately to each building, to each location, or to all property at all locations. Generally, a deductible that applies to each building is preferable since it may be smaller than a deductible that applies to all insured property.
Depending on the policy, DIC insurance may pay losses based on the actual cash value or the replacement cost of damaged property. Generally, you should purchase a DIC policy that pays losses in the same manner as your commercial property policy.
Most DIC policies do not contain a coinsurance clause. This enables policyholders to insure their property for less than its full value without fear of a penalty for underinsurance. It also enables insurers to cover property at less than its full value. The same is true of properties located in areas that are highly prone to earthquakes. A DIC insurer may be willing to cover a building for earthquake losses but only for a portion, such as 50 or 75 percent, of its replacement value.
Business Income and Extra Expense
Finally, a DIC policy may cover income losses and extra expenses that result from physical damage to covered property by a flood or earthquake. If your company needs business income and/or extra expense insurance, be sure those coverages are included in any DIC policy you purchase.