You probably remember the concept of blanket insurance as explained in the property section of your licensing course. Things have progressed a bit since then, and we need to take another look at how this idea plays out in today's world of commercial insurance. This discussion does not apply to BOPs as blanket coverage is not available under such policies.

First, let's review the basics. Assume your client, Dan's Delicious Dining, owns three restaurants in Minneapolis and owns the buildings in which each is located. Building A has a replacement cost of $1 million, Building B's is $2 million, and Building C's is $3 million. If the policy is written that way with those amounts of insurance (known as “specific insurance”), and Building B was totally destroyed, the most the carrier would pay for the damage would be $2 million. If it turned out that the actual cost to replace was $2.4 million, the insured would be out of pocket $400,000.

If, on the other hand, you write the coverage for $6 million blanket over all three buildings, any loss up to $6 million will be covered. Building B's total destruction will result in the carrier paying the entire replacement cost of $2.4 million.

Blanket insurance is available not only for the same kind of property at multiple locations (“horizontal” coverage), but also among different classes of property (“vertical” coverage). So if the contents of Dan's Delicious Dining restaurants are valued at $200,000 in Building A, $300,000 in Building B, and $500,000 in Building C, blanket coverage can be written in one of two ways:
o $6 million blanket on buildings and $1 million blanket on contents
o $7 million blanket on buildings and contents. The second option offers an even greater “cushion” to the insured, especially because contents values can fluctuate more widely over time than building values. Another advantage is that questions as to whether particular damaged items are building or contents are eliminated–it doesn't matter.
Business income also can be combined in a similar fashion. Assume Location A needs $300,000 of business income coverage (net profit + continuing expenses for an estimated period of restoration); Location B (which hasn't been doing well and expects a tough year ahead) needs $200,000, and Location C needs $500,000. Now the coverage can be written in several different ways:
o $6 million blanket on buildings, $1 million blanket on contents, and $1 million blanket on business income
o $7 million blanket on buildings and contents and $1 million blanket on business income
o $8 million blanket on buildings, contents and business income.
The last is the best, especially because business income exposures are more difficult to estimate than either building or contents values. Unfortunately, many carriers will not bundle business income under the property insurance blanket. While we won't focus on average rate-making when blanket insurance is in effect, the basic concept leading to a final blanket rate is simple: for building or contents, use a weighted average of the specific building or contents rates. Use the Dan's Delicious Dining example (see Table 1).
Dividing the total premium of $25,000 by $6 million yields an average rate of $0.417 per $100 of value. The same process applies to blanket contents or to blanket building and contents.
For business interruption, the weighted average concept is the same, but the basis of the average rate must, of necessity, be different. It may be difficult or impossible to ascertain a breakdown of the business income limit as between various locations–some of the continuing expense items may be common to all locations, to say nothing of net profit. Therefore, the square footage of the insured locations that are included in the blanket business income coverage is used as the basis. One can question the logic of linking square footage to a loss of business income, but it's as good as any other measure.
To offer blanket coverage at virtually no cost, the carrier only has one concern: insurance to value. That age-old concept underlies the entire rate-making system of property insurance, and carriers must make sure it is being maintained. After all, if Dan could buy blanket coverage for only $3 million on his buildings (because he presumably could not suffer a loss in excess of that amount, absent a major hurricane), he could save half the premium.
For that reason, blanket coverage usually requires a 90 percent coinsurance clause (rather than 80 percent), applicable to the total covered property blanket limit. But many insureds ask for and receive an agreed amount provision that suspends the coinsurance provision for the policy period. In return, carriers insist that the insured sign and submit a statement of values (SOV), which sets forth the insured's replacement cost estimate of each building (or actual cash value if the policy was not on a replacement cost basis) and the value of contents at each location. Even with a coinsurance clause, carriers request the SOV to help the underwriter price the risk and to let the insurer know its total exposure.
The SOV has no impact on policy coverage since the policy is the only contract between carrier and policyholder. The SOV is the insured's best guess of the values and, absent obvious fraud, is not binding. That is why the carrier would have to pay Dan's Delicious Dining $2.4 million on Building B, even if the SOV stated the value at $2 million or less.
There are a few potential disadvantages of blanket insurance:
1. The building must be written with a minimum of 90 percent coinsurance, with no premium credit. In specific insurance, 90 percent coinsurance earns a 5 percent and 100 percent coinsurance a 10 percent credit. With blanket coverage, only a 5 percent credit for 100 percent coinsurance is possible.
2. A building must be insured for a minimum of 90 percent of its value but tenants' improvements and betterments located in the same building as personal property of the insured may be written at 80 percent coinsurance. An insured faced with this choice may decide that any possible loss will not exceed 80 percent of the insurable property value, and opt for the perceived less expensive specific insurance.
3. As mentioned, elimination of uncertainty at the time of a loss is one of the advantages of blanket coverage. Unfortunately, in event of a loss, the insurance company may require the insured to provide “a complete inventory of damaged and undamaged property,” including “quantities, costs, values, and amount of the loss claimed.” This is necessary to determine whether the coinsurance requirement has been met. It can be a laborious process since under the blanket, all covered property at all locations must be inventoried. (Blanket insurance requires that coinsurance apply to all the property under the blanket, not just the property at the loss location.) But use of the agreed amount provision will eliminate this burden altogether.
The advantages of blanket coverage far outweigh these potential drawbacks. But as with many developments in our business, things became a little more complicated over time, either because carriers grew to be more suspicious and/or insureds became more shrewd in submitting their SOVs.
Accordingly, carriers often request appraisals or builders' written estimates of value as a check on what the SOV shows. During hard markets, carriers may refuse to provide coverage on business income and/or contents, even on buildings. Sometimes a statement of values endorsement would appear on the policy.
An agent must be alert to make sure the policy clearly provides blanket, and not specific, coverage.
More recently, some carriers have introduced endorsements which substantially diminish the value of blanket insurance. One reads as follows: