Specific Limits Versus Blanket Limits
The limits that appear in a commercial property policy are typically one of two types: specific limits or blanket limits. This article will explain how they differ.
For the sake of simplicity, we'll assume that all of the property cited in the following examples is insured on a replacement cost basis at 100% of its value (meaning no coinsurance applies). We'll also ignore deductibles.
A specific limit is an individual limit that applies to a certain type of property.
If that property is damaged or destroyed by a covered peril, the most the insurer will pay for that property is the specific limit.
For example, suppose you own a commercial building and business personal property (BPP) situated at the same location. The cost to replace the building is $1 million while the cost to replace your BPP is $500,000. You insure the property under a policy that includes separate specific limits of $1 million for the building and $500,000 for the BPP.
A blanket limit applies to more than one type of property at the same location, or to the same type of property at multiple locations. It can also apply to all types of property at multiple locations.
In the previous scenario, suppose that you insure your building and BPP under a property policy that includes a blanket limit. In this case, your policy will show a limit of $1.5 million that applies to both the building and your BPP.
This limit will be available if your building, your personal property or both types of property are damaged or destroyed by a covered peril.
Now suppose that your own two commercial buildings that are situated at separate locations. Each building contains business personal property. The cost to replace the property is:
Location #1: $1 million for the building and $500,000 for the BPP
Location #2: $1.5 million for the building and $700,000 for the BPP
If you want to insure the property with blanket limits, you have three options.
- Separate Limits for Buildings and BPP You could choose a $2.5 million blanket limit for Buildings and a $1.2 million blanket limit for BPP. The Building limit will apply to both buildings. The BPP limit will apply to BPP at both locations.
- Separate Blanket Limit for Each Location Alternatively, you could choose a blanket limit of $1.5 million for the building and BPP at Location #1. A separate blanket limit of $2.2 million would apply to the building and BPP at Location #2.
- Single Blanket Limit for Both Locations A third option is a single blanket limit of $3.7 million that applies to Buildings and BPP at both locations.
Advantage of Blanket Limit
When you choose a blanket limit, the entire limit is available for a loss to any property that is subject to the limit. A blanket limit provides a major advantage over a single limit if some of your property increases in value after the policy begins. For instance, suppose that you elect a single blanket limit of $3.7 million to cover the buildings and personal property you own at your two locations.
Three months into the policy term you buy some equipment that you store at Location #1. The replacement value of your BPP at location #1 is now $650,000.
Late one night lightning triggers a fire in the building at Location #1. The building and all of its contents are destroyed. Even though the value of your BPP is greater than it was at the inception date of your policy, the loss is covered. The amount of the loss ($1,650,000) is less than the $3.7 million blanket limit.
Here is another example that demonstrates the value of a blanket limit. Suppose you had elected to insure your property with four specific limits:
- Building at Location #1: $1 million
- Building at Location #2: $1.5 million
- BPP at Location #1: $500,000
- BPP at Location #2: $700,000
When your building burns down at Location #1, the amount of your personal property loss ($650,000) exceeds your limit by $150,000.
You'll have to pay the $150,000 yourself.
If you choose specific limits, make sure each is adequate. Be sure to increase your limit if you acquire additional property or make improvements to property during the policy period. Otherwise, your limit may be insufficient to cover a loss.
Here are a few points to remember regarding blanket limits.
- Property coverage that includes a blanket limit is a bit more expensive than coverage based on specific limits.
- Coinsurance will apply if you insure your property for less than 100% of its value. Generally, a blanket limit is available only if you insure your property for at least 90% of its value.
- No matter what type of limit you choose, it will likely be subject to a deductible.
- A property policy may include both blanket and specific limits. For instance, a blanket limit may apply to buildings while a specific limit applies to personal property.
Beware the Margin Clause!
Finally, some insurers will add a margin clause to a policy containing a blanket limit. This clause is included via an endorsement. It reduces the amount you will receive from your insurer if your property sustains a large loss. If you find a margin clause attached to your property policy, ask your insurer to remove it.