Veterinary medical care has evolved from focusing on agrarian food production to society’s current desire for advanced health care options for almost the entire animal kingdom. In response, veterinary facilities and equipment have evolved, too, especially from a cost standpoint, making property insurance a serious consideration for most practice owners. Understanding everything in your commercial property policy isn’t practical. Still, you should know the components and how they affect an overall risk-management strategy.
Standard commercial insurance policies have two sections: property and liability. I’ll explore the former and its two subsections.
1. Buildings
This subsection is often called “real property,” or the physical buildings and structures associated with the business. For building owners, the category typically includes permanently installed fixtures and animal cages, machinery, cabinets, floors, built-in reception desks, and heat, ventilation and air conditioning systems.
Landlords usually insure the real property (building) on their commercial property policy, which is separate from the tenant’s policy. That arrangement affords the landlord better control over claims associated with the real property. Landlords frequently require tenants to pay an apportioned share of the building policy as a component of the lease agreement. Much less frequently, the landlord will contractually require the tenant to insure the building under a commercial property policy and name the landlord as an additional insured party.
2. Business Personal Property
Often referred to as “contents” coverage, this subsection refers to business property that doesn’t qualify as real property. Business personal property is typically anything not permanently attached to the building and which the tenant would take upon moving from the location. It can be owned or leased by the veterinary practice or in its care, custody or control. Examples include medical equipment and supplies, the pharmacy inventory, portable cages, textbooks and office furniture.
Also considered business personal property are tenant’s improvements and betterments (TIB). A simple way to determine whether property is an improvement or betterment is to ask, “Is the item permanently attached to the building, or can it be removed without damaging the structure?” If it has to stay, it’s TIB. State laws and court decisions have helped to resolve disputes over the definition of TIB.
Here are critical considerations:
- Appurtenant structures include sheds, gazebos and storage containers. Ensure that any not listed on the insurance policy are covered as real or business personal property.
- Practice owners renting or leasing a building must consider contractual requirements when purchasing a commercial insurance policy.
- Insurance requirements detailed in a lease agreement can vary based on factors such as the type of building, its intended use and occupancy. Commercial leases prepared by landlords usually shift as much property and liability burden as possible onto the tenant. Therefore, when adjusting property damage claims, the lease terms are an essential determinant in the extent of coverage provided in a commercial insurance policy.
Ambiguity often arises when a landlord requires a tenant to provide commercial insurance for core building features and systems beyond the standard definition of TIB. Examples include roofing, HVAC systems, structural exterior plate glass and “inside the wall” components such as wiring, plumbing and fire sprinkler systems. If they’re not appropriately addressed, a coverage gap might exist.
Commercial insurance policies often require tenants to add a specific policy endorsement addressing their contractual responsibility for designated components of the real property (building).
CLAIM EXAMPLE
The rooftop HVAC system serving a veterinary practice breaks. The landlord says the lease agreement requires the tenant to repair or replace the unit. The tenant’s insurance company denies the claim because the tenant has no ownership interest in the building or the HVAC unit associated with the business. The tenant has to pay for the repair or replacement out of pocket.
The lessons learned:
- Ask your insurance agent to review your lease’s insurance requirements.
- When accepting contractual responsibility for portions of a building in which you have no ownership interest (not TIB), understand the maximum cost for which you are legally responsible in the lease agreement.
- Add a policy endorsement to your commercial property form to address your contractual responsibility as a tenant for the financial limit noted in the lease agreement.
- Ensure the sales agreement includes all existing tenant’s improvements and betterments when you purchase a practice in a rented or leased building. Also include the value of the TIB in your business property policy.
CLAIM EXAMPLE
A veterinarian purchases an existing practice in a leased space. The landlord agrees to change the legal business ownership on the current lease. The lease states that the tenant is responsible for insuring all TIBs in the rental space. Shortly after the sale, a leaking interior water pipe damages a significant portion of the floor, cabinetry and sheetrock wall. The new owner submits an insurance claim of several thousand dollars and is shocked when the insurer denies coverage for the damaged TIBs installed by the previous owner. The carrier concludes that ownership of all previously existing TIBs became part of the real property (building) and reverted to the landlord.
As the previous owner’s insurance agent in such a case, I was asked for guidance. After reviewing the lease that the new owner agreed to assume, I recommended that the tenant ask the landlord to submit the TIB portion of the claim to the landlord’s insurance company. The insurer denied the claim, stating that under the terms of the original lease, which remained in place, all TIBs were to be insured by the tenant. Welcome to contractual limbo.
I then asked the new owner to forward a copy of the business purchase agreement. Fortunately, the new owner’s attorney assigned values to all previously installed TIBs and included them in the purchase price. The new owner’s insurance company agreed to pay the entire claim when provided with a copy of the document.
AGENDA ITEMS
Consider raising these topics with your commercial property insurance broker:
- Additional coverages: Debris removal, pollutant cleanup and removal, preservation of property, fire department service charges, a civil authority clause
- Coverage extensions: Newly acquired or constructed property, the property of others, off-premises personal property, valuable paper and records, outdoor property
- Exclusions: Neglect, nuclear hazard, flood or mudslide, war, military action
- Excluded property
- Limits of insurance
- Deductibles