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Claims involving commercial structures can present a number of challenges to the claim professional. Multiple stakeholders, unique building construction, and the financial impact of business interruption are among several issues that may add complexity to commercial building claims. Recognizing and understanding those specific issues and taking a systematic approach to loss adjusting for commercial buildings helps cut through potential issues and may ultimately control indemnity and claim expenses for insured parties.
When examining commercial losses, adjusters must take into account three major considerations. The first is multiple stakeholders. Multiple property owners and tenants; primary leases and subleases; mortgages; and liens all impact the investigation of a building loss and are therefore essential considerations in the adjusting process.
The second major consideration is construction uniqueness. Commercial building structures are classified by commercial underwriters into six occupancy categories, which are outlined in Figure 1.
Each type of occupancy is comprised of unique construction principles and methods. In addition, buildings within each category can greatly vary in terms of size, HVAC, alarm and fire systems, interior finishes, trade fixtures, and tenant improvements. Because of the range of characteristics, familiarity with commercial building structures and alternative repair methods specific to occupancy classifications will contribute to the proper overall loss assessment.
Lastly, adjusters must be aware of business interruption. Because of the nature of occupancy and exposures, commercial policies may have coverage for business interruption, including business income and extra expenses. Delays in the evaluation and assessment of damage to the commercial structure by the adjuster can directly impact the time element of these claims and increase indemnity costs.
The Basic Steps
The first essential step in adjusting any loss is confirmation of policy information. Securing a valid copy of the declaration pages and entire policy form and endorsements will establish — among many items — the insured entity and other interested concerns, policy limits, valuation approach, insurance-to-value requirements, and endorsements that either extend or limit coverage.
The next step is to confirm the extent of insurable interests in the commercial property. The adjuster must identify the type of property ownership and its use to ensure proper evaluation of coverage and assessment of damage covered under a commercial policy. For example, two common types of property ownership are cooperative ownership and condominium ownership. In cooperative ownership, a corporation obtains a mortgage, constructs a multi-unit residence, holds the title, and levies assessments. Residents who live in the building purchase stock in the corporation and become shareholders. They receive a long-term lease for their residences.
Condominium ownership is comprised of units and public or common areas. An individual condominium unit is a separate defined area owned by an individual unit owner. Unit owners share ownership of the common or public areas of the condominium building (hallways, stairs, and lobbies).
A party who sustains a financial or monetary loss when a commercial structure is damaged or destroyed may be considered to have an insurable interest. An insurable interest in a property is required before asserting a claim. The adjuster must identify the insurable interest under the policy and assess claim payments to the extent of insurable interest.
An adjuster frequently will need to communicate with both landlords and tenants when handling commercial building losses. To determine landlord and tenant interests, the adjuster must analyze the lease agreement, which often contains provisions that outline the rights of the landlord and tenant to make improvements and betterments to leased space. A lease may define which insurance responsibilities belong to the landlord and which belong to the tenant. Those categories include:
Assess and Evaluate
A systematic approach to assessing commercial building damage will help the adjuster efficiently determine the claim settlement for the insured. Suggested steps for an adjuster to follow are as follows:
Step One: Secure relevant floor plans or blueprints of the building areas that sustained damage. The tenant or landlord may have copies of the tenant build-out, fire escape plan, or a recent sales brochure that will document the commercial building space that sustained damage.
Step Two: Properly document the wall, floor, and ceiling construction in each damaged area of the building. Such elements in a commercial structure are comprised of materials similar to those found in residential structures; however, they are often of higher quality and durability.
Step Three: Identify the trade fixtures or improvements and betterments within the damaged areas of the building. The adjuster should request that the tenant or landlord substantiate build-out costs for leased space and provide copies of prior estimates or contracts. This information will confirm original costs, quality, and age of fixtures and other improvements within a leased space.
Step Four: Identify items that are unique to the business or commercial structure, such as alarm systems, fire suppression systems, and commercial kitchen and mechanical equipment. The landlord or tenant will be familiar with these systems and can provide documentation to ascertain ownership and costs.
Step Five: Prepare an initial scope of work based on inspection and measurements of the damaged area, damage assessments, and other information provided by the landlord or tenant. This will help determine whether the estimate properly documents the scope of damages.
Step Six: Complete a cost estimate for the damages, including a proper accounting of all measurements, quantities, labor hours, and material allowances. The estimate is usually computer-generated and should be completed using all information gathered. Whether prepared by the adjuster or construction consultant, timely completion of the estimate is important.
Accurately Determine Settlements
The claim settlement amount should be based on the cost of repair or replacement at the time of the loss and reflect the local actual-cash-value definition. The adjuster also must calculate for depreciation based upon age, usage, and obsolescence of building items. Coming full circle to the start of the adjusting process, the claim settlement needs to take into account the insurance policy and insurable interests in the property.
Because of the complexity of a commercial building loss, documentation and communication are especially important. The adjuster must be detailed, organized, and thorough to avoid miscommunication during the handling of the loss. He may need to contact many parties, such as insurers, other adjusters, contractors and mortgagees to review deeds, charters, bylaws, and other documents. This will aid in the resolution of the evaluation of coverage and determination of ownership interests. In addition, more than one policy may cover building damage, which can affect the claim settlement.
The steps offered here can provide some general guidelines for adjusters handling commercial building losses. It is important to keep in mind that no two commercial building losses are ever the same. However, the more education and experience an adjuster brings to the complexity of such losses, the more likely claims can be resolved in a timely and cost-effective manner. Adjusters can seek additional training, knowledge, and expertise by achieving a CPCU designation, mentoring with a more experienced staff adjuster, or by participating in continuing education (CE) requirements with an emphasis on commercial building losses.