Difference-in-conditions coverage is a type of insurance that expands coverage beyond what is typically covered by a standard property policy. It is intended to supplement—but not replace—standard property insurance.
Here, you'll learn what this type of insurance covers and whether you should consider buying it.
What Is Difference-in-Conditions Coverage?
Difference-in-conditions coverage is an insurance product that provides extended coverage for property owners. While the details of the policies depend on the insurance company providing them, this coverage generally offers protection against major natural disasters, such as flooding, mudslides, and earthquakes.
- Acronym: DIC
How Does Difference-in-Conditions Coverage Work?
DIC insurance is typically provided as a separate policy. This type of insurance may be less regulated than others, and insurers may not be required to file their rates or policy forms with insurance regulators. Thus, insurers are generally free to use whatever forms and rates they choose. Consequently, DIC policies vary from one insurer to the next. Still, there are some general features you can look for.
Some DIC policies are written on named perils forms. Named perils limit coverage to the perils specified (such as "flood and 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 some perils, especially perils that are covered by a 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.
For example, suppose your business is insured for flood under both a National Flood Insurance Program (NFIP) policy and a DIC policy. The federal flood policy includes mudflows in its definition of "flood." Your DIC policy covers floods, but it specifically excludes mudslides and mudflows. The conflict between your flood and DIC policies could be problematic if your business sustains a loss caused by a 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%. 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 0.1 = $100,000) from the $300,000 loss amount.
A deductible may apply separately to each building, to each location, or to all properties at all locations. Generally, a deductible that applies to each building is preferable—breaking up the coverage into smaller, separately insured values can reduce your deductibles.
DIC insurance may pay losses based on the actual cash value or the replacement cost of the damaged property. You may find it beneficial to 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. For example, in an area that's highly prone to earthquakes, a DIC insurer may only be willing to cover a building for earthquake losses up to 50% of its replacement value.
Business Income and Extra Expense
A DIC policy may cover extra expenses like income losses that result from physical damage to covered property by a flood or earthquake. Your company can use a DIC policy to insure business income or any other extra expenses, but you must ensure that the DIC policy you purchase covers those situations—not all DIC policies will.
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 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.
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.
Do I Need Difference-in-Conditions Coverage?
DIC coverage is most common among businesses with commercial property that's significantly exposed to flood or earthquake risks. DIC coverage might be good for you if:
- Your commercial property insurer is unable or unwilling to provide earthquake or flood insurance.
- Your commercial property insurer is willing to provide flood or earthquake insurance, but the premium is more than you're willing to pay.
- You've purchased flood or earthquake insurance, but you need additional limits.
- Difference-in-conditions (DIC) coverage is an insurance policy that typically extends coverage beyond what a standard policy would cover.
- DIC coverage usually covers major events like flooding or earthquakes.
- DIC coverage can be used to cover what your standard policy doesn't, or it can be used to increase your coverage limits.