PUBLISHED ON: August 4, 2023
Commercial property policies often cover more than just property damage. Most property policies cover a policyholder’s business interruption losses or lost rental income resulting from property damage, and may include numerous coverage extensions, like for debris removal and demolition costs. But property policies may also contain sublimits for certain perils, such as floods and earthquakes. The application of sublimits to losses can be confusing, leaving policyholders wondering about the extent of their ability to recover. For example, with respect to hurricane-related losses, do flood sublimits limit recoveries for property damage only, or do they also restrict the amount a policyholder can recover for business interruption and other non-property damage losses? The answer often turns on the fine print, which may be vague and can lead to coverage disputes.
Some policies expressly state that flood sublimits apply to more than just property damage. For example, the ISO Businessowners Flood Coverage Form, Form BP 10 79 07 13, states that “[t]he Limit of Insurance that applies to flood coverage under this endorsement also applies to the Business Income and Extra Expense Additional Coverages.” But other policies are much less explicit about whether flood sublimits extend to coverages other than for property damage. Thus, when a policy fails to unambiguously state that a sublimit applies to all losses or coverages, policyholders should take the position that such sublimit applies to property damage only. Numerous court decisions support this position.
Most recently, in the 2022 case, Hanover Casualty Co. v. Seven Acres Jewish Care Services, Inc., a Texas appeals court analyzed a commercial property policy with two coverage forms for 1) buildings and personal property, and 2) business income and extra expenses. Those forms had separate premiums and limits. A flood endorsement added flood as a covered peril. In concluding that the flood endorsement sublimit did not limit coverage for business income loss, the court relied on the fact that the policy provided two different limits for business income loss and property loss. It explained that the definition of flood related to direct physical loss to property, but that the business income coverage form covered lost earnings from the suspension of business operations due to loss caused by a covered peril.
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