The word “blanket” just feels good, doesn’t it?
It brings up images of security and comfort. It makes me think that everything insured under a blanket is covered, no need to worry, right? I wish it was that simple, but unfortunately, it seems insurance can never be that cut and dry.
Blanket coverage in terms of commercial insurance does offer broader protection in the event of a loss but requires a little more in-depth understanding to determine if it right for your needs.
On a commercial property insurance policy, each location a business owns or occupies is listed on the Declarations (Dec) page. Then each location can have multiple coverage types: Buildings, Contents (aka Business Personal Property), or Business Income. Then the limits of each of the coverages can be either specified or blanketed.
A specific limit is shown for each coverage at each location and an individual limit applies to each one. A blanket limit combines the individual amounts into one larger value instead of having each limit separate.
It can be blanketed in a variety of ways. A policy can have a building blanket, a contents blanket, a business income blanket, or a combination of any 2 or 3 depending on your needs. (While it’s uncommon for most blanket limits to include all 3 coverages, it can be found on some larger, multi-location property policies.)
Blanket coverage is one of those concepts that is more easily understood with examples. Let’s look at a couple of different claims scenarios and assume the policy had the coverage listed below:
- 123 Main St – Building: $1,000,000
- 123 Main St – Contents: $500,000
- 456 Market St – Building: $2,000,000
- 456 Market St – Contents: $500,000
- Combined Blanket Limit: $4,000,000
For example, If 123 Main Street had a fire, with a specific limit policy they’d have $1,000,000 in Building coverage and $500,000 in Contents coverage available to them to cover the fire damage. But if they had a building and contents blanket policy, they would have up to the whole $4,000,000 limit to use to replace or repair the building and/or contents.
Or, if a tornado came through and hit both buildings, while there would still be a $4,000,000 limit spread out over both locations, it is very specific in what applies to each location and coverage. However, with blanket coverage, if 456 Market actually had $750,000 of contents to replace instead of the listed $500,000 limit, they would be able to do that. With a specific limit, they are capped at the $500,000 limit.
Having a blanket limit is especially important to consider as industry studies show that 75 percent of commercial buildings are underinsured. The blanket limit aids in giving you a little “wiggle room” if the building isn’t insured to the full replacement cost. It's also helpful if you purchase new equipment or move contents between your locations. And in today's economy with material and construction costs constantly fluctuating, a blanket limit would be especially beneficial.
So if it’s better coverage, why isn’t every policy written on a blanket basis?
Below are some things to consider before determining if it is right for your business.
Blanket limits do tend to cost more than specified limits. If you look at the pricing of a policy, coverage for buildings usually costs less if broken down per hundred dollars of value than contents coverage. A separate building blanket and separate contents blanket will usually cost less premium overall than if both the building and contents are combined into one blanket limit.
The insurance company is going to typically require that the building and/or contents are insured to either 90% or even 100% of the estimated replacement cost to make sure you are not underinsured or underpaying for your risk. On a specified limits policy, the insurance company may consider 80% coinsurance so your values may not need to be as high,
A blanket limit is usually combined with an Agreed Value endorsement. This endorsement makes it so you do not have to worry about the coinsurance provision in the event of a loss. Agreed Value is usually good for a one year term. Then every year the insurance company will likely have you review the breakdown of the building and/or contents limit at each location and make sure the values are updated and accurate.
This breakdown is known as a “Statement of Values” and many insurance carriers will require it to be signed as part of your renewal. Many policies also contain an automatic inflation rider of between 2-4% to make sure the limits keep up with the cost of inflation to avoid being underinsured.
Beware of the margin clause endorsement! One way insurance companies make sure you are insuring your locations to the correct values is by adding a Margin Clause endorsement. This is can be added to property policies to limit how much they have to pay for a loss at each location. It usually will range between 110% - 125%.
Looking back to our scenario, let's now assume the policy had a 120% margin clause on it. In the event of the total fire loss at 123 Main St, they’d only be eligible for 120% of the $1,000,000 building and the $500,000 contents limits listed (or $1,800,000 total) for the loss instead of the $4,000,000 shown in the first example. While this limits the coverage substantially, it’s still broader than the $1,500,000 they’d have with specified limits.
The best course of action in determining if blanket coverage makes sense for your business is to have a detailed discussion with an independent insurance agent. They can run a replacement cost calculator to make sure your buildings are insured to the correct limits. They can price out the difference in specific or blanketed limits. And they can also make you are aware of any coinsurance or margin clauses included in the policy so you can be sure to understand the coverage you've got. This way you can rest easy and focus on your business and not worry about what might happen in the event of a claim because you'll already know.
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