DC Property Insurance 2 — Questions and Answers
Question 1: What does 'extra expense' coverage provide in a DC commercial property policy?
- Coverage for additional profits lost during shutdown
- Payment for expenses above normal operating costs incurred to continue operations after a covered loss (Correct answer)
- Coverage for extra inventory needed after a loss
- Reimbursement for employee overtime wages unrelated to a loss
Correct answer: Payment for expenses above normal operating costs incurred to continue operations after a covered loss
Extra expense coverage pays for additional costs above normal operating expenses that are necessary to continue or resume operations after a covered loss.
Extra expense is distinct from business income. While BI covers lost income during shutdown, extra expense covers abnormal costs (renting temporary space, expediting repairs, renting substitute equipment) incurred to keep the business running or minimize the interruption period.
Question 2: Under DC property insurance rules, what is 'subrogation'?
- The right of the insured to sue the insurer for bad faith
- The insurer's right to recover from a negligent third party after paying the insured's claim (Correct answer)
- The transfer of a policy from one owner to another
- A provision reducing payment for underinsurance
Correct answer: The insurer's right to recover from a negligent third party after paying the insured's claim
Subrogation allows the insurer, after paying a claim, to step into the insured's shoes and recover the loss from the responsible third party.
Subrogation prevents the insured from collecting twice (from the insurer and from the tortfeasor) and allows the insurer to recoup paid claims. For example, if a negligent DC contractor starts a fire, the property insurer pays the claim and then pursues the contractor for reimbursement.
Question 3: Which DC property coverage pays for loss or damage to goods in transit by a motor carrier?
- Commercial general liability
- Motor truck cargo insurance (Correct answer)
- Marine open cargo policy
- Bailee's customer insurance
Correct answer: Motor truck cargo insurance
Motor truck cargo insurance covers freight while in transit in a motor vehicle, protecting the carrier against claims for cargo loss or damage.
Motor truck cargo insurance protects the motor carrier (trucker) for liability for cargo owned by others while in transit. Shippers may purchase their own cargo insurance through an inland marine open cargo policy to protect their interest in the goods.
Question 4: What is the 'appraisal clause' in a DC property insurance policy used for?
- Determining the replacement cost before policy inception
- Resolving disputes about the amount of loss when the insured and insurer disagree (Correct answer)
- Establishing the building's market value for tax purposes
- Authorizing the insurer to conduct inspections
Correct answer: Resolving disputes about the amount of loss when the insured and insurer disagree
The appraisal clause provides a mechanism to resolve disputes about the dollar amount of a covered loss without going to court.
Under the appraisal process, each party appoints an independent appraiser, and those two appraisers select an umpire. If the appraisers disagree, the umpire decides. This is a binding alternative dispute resolution process for valuation disagreements.
Question 5: Which of the following is covered under the Causes of Loss – Special Form for commercial property in DC?
- Flood from an overflowing river
- Earthquake damage to the building
- Accidental discharge of water from a burst pipe inside the building (Correct answer)
- Wear and tear of roofing materials
Correct answer: Accidental discharge of water from a burst pipe inside the building
Accidental discharge from a burst pipe (sudden and accidental water discharge) is generally covered under the Special Causes of Loss Form as it is not among the standard exclusions.
The Special Causes of Loss Form covers all perils except those listed as exclusions (flood, earthquake, war, wear and tear, etc.). A sudden and accidental burst pipe causing water damage is typically covered. Flood from external sources and earthquake are standard exclusions.
Question 6: A DC retail store's inventory is destroyed in a fire. The store has a $500,000 commercial property policy with an 80% coinsurance clause and the inventory was worth $400,000. The store carried $400,000 of coverage. Is there a coinsurance penalty?
- Yes, because the store should have carried $500,000
- No, because the store's $400,000 coverage equals 80% of $400,000 inventory ($320,000 required) (Correct answer)
- Yes, because 80% of $500,000 policy limit is required
- No, because fire is a covered peril so coinsurance does not apply
Correct answer: No, because the store's $400,000 coverage equals 80% of $400,000 inventory ($320,000 required)
The coinsurance requirement is 80% of the property value ($400,000 × 80% = $320,000 required). The store carried $400,000, which exceeds the requirement—no penalty applies.
Coinsurance penalty occurs only when the insured carries less coverage than the required percentage of property value. Here, required coverage = $400,000 Ă— 80% = $320,000. The insured carried $400,000 > $320,000, so there is no coinsurance penalty and the full $400,000 inventory loss would be paid (subject to the policy limit).
DC Property Insurance 2
What does 'extra expense' coverage provide in a DC commercial property policy?