Business Property Insurance Policy: Basic Terms and Definitions Explained

If you’re shopping around for a property insurance policy, it’s good to know the fundamentals so you can make knowledgeable comparisons from one insurance company to another. It’s also important to understand some of the more frequently used terms and definitions.

“In the insurance business, we use a lot of words and phrases that typically aren’t used in everyday conversation,” says Kurt Strickler, Commercial Sales Agent for Nationwide Insurance. “We find it helpful if our customers become familiar with some of the vocabulary and descriptions so that they can make better informed decisions.”

The basics

Business property insurance is a type of commercial insurance that pays a business owner who has suffered a financial loss because property has been damaged or destroyed.

Property is considered to be anything that has value. It can be classified as real property or personal property.

• Real property is land and the permanent things on it, like buildings, outdoor fixtures, machinery and equipment.
• Personal property is all other property that’s not classified as real property, and which can be easily moved.

There are two types of business property insurance policies: named peril and special cause of loss.

• Named (or Specified) peril is a policy that provides protection for specified events such as vandalism, windstorm, fire or sprinkler leakage. The policy only covers those events named in the policy and is usually cheaper because it provides less coverage.
• Special cause of loss coverage that means that the losses not covered are those that are specifically excluded in the policy.

Most business properties insurance companies use two different methods of determining the value of property.

• Replacement cost refers to the amount it takes to replace damaged or destroyed property with new property.
• Actual cash value (ACV) is replacement cost of property less the accumulated depreciation for age and wear.

The Top 10 Most Important Business Property Insurance Terms

Act of God
This means a natural occurrence such as earthquake or typhoon.

Contract of Indemnity
Refers to property insurance that restores the insured to his original financial condition after suffering a loss.

Increased Cost of Construction Insurance
This is Insurance that covers the additional cost of rebuilding a damaged or destroyed building where local laws require rebuilding with more expensive materials, services, or methods.

Malicious Mischief
This means the intentional damage or destruction of another person’s property. Coverage for malicious mischief typically is combined with vandalism coverage.

Physical Hazard
This refers to the material, structural or operational features of property. Building construction, electrical wiring, and the heating/cooling system are physical hazards.

Salvage
This term refers to property that’s damaged so much that it’s not practical to repair, and is taken over by an insurance company (after it has paid a claim) in order to reduce its loss by “salvaging” the remaining value of the property.

Territorial Rating
Refers to a method of classifying risks by geographic location to set a fair price for coverage.

Valued Policy
Also referred to as Agreed Amount. A policy stating that in the event of a complete loss a specific amount, as stated in the policy, will be paid.

For a more complete list of insurance terms, visit the Nationwide insurance glossary.