Summary: Insuring property under a blanket limit as opposed to a specific limit of insurance can be a good decision for many insureds. There are several options for insuring commercial property, including specific or blanket limit, replacement cost, functional replacement cost, and agreed value. An insured can even choose to have part of their property included in a blanket limit while other property can be insured under a specific limit of insurance. They can choose to have their buildings insured under a specific limit while business personal property is insured under a blanket limit, or vice versa; or a blanket limit could even apply to a single location covering both the building and business personal property under one limit. 

Replacement cost and agreed value options can be combined under a blanket or specific limit of insurance. With so many choices it can be difficult for an insured to choose the best approach, and an agent can be most helpful in this situation. In this discussion, we will look at some of the questions we've received from subscribers who had their properties under a blanket limit of insurance and explain how the combined options work in real-life examples.

Why Choose a Blanket Limit?

First, why would an insured choose to insure under a blanket limit? The primary reason is that a blanket limit affords greater protection against losses than a specific limit, especially when property fluctuates in value. A major advantage of a blanket limit is that the entire limit is available if any covered property is damaged or destroyed. Here are some examples:

• A specific limit applies to one type of property while a blanket limit applies to multiple locations or types of property. For example, a $50,000 specific limit applies to the office building and a blanket limit of $2 million applies to all other buildings.
• A blanket limit may apply to more than one type of property at the same location or the same type of property at multiple locations. For example, a blanket limit of $1.5 million covering buildings and business personal property at one location; or a blanket limit of $3 million applying to all buildings at three locations.
• A blanket limit can apply to all types of property at all insured locations. For example, a $15 million blanket limit applying to all buildings and business personal property covering all insured locations.
• A blanket limit can apply to separate locations independent of each other. The one potential advantage in this case would be to lower overall costs.  For example, a blanket limit of $50 million covering the office, the warehouse, and the manufacturing plant, the shipping plant, and several retail outlets, all at different locations. 

Because of its limit flexibility, property coverage that includes a blanket limit costs a bit more than the same coverage with a specific limit.

Coinsurance Penalty

Most insurers will offer a blanket limit only if the property is insured for at least 90% of its value. When property is insured under a blanket limit, it changes the calculation of coinsurance. With a blanket limit the insurer will determine compliance with the coinsurance requirement by using the total aggregate values insured under the blanket limit. For example, if there are three locations insured under a single blanket limit, the insurer will combine all of the values at all of the locations and that aggregate limit will be used to determine compliance with the coinsurance requirement.

So for example, if a blanket limit of $200 million is on the policy and a loss occurs that is $200,000, then the insurer will use the $200 million limit to determine if that amount meets the 90% full replacement value of all of the buildings, multiplied by the $200,000 loss. A blanket limit allows more room for error – if some of the buildings are a bit underinsured but others are over insured, the chance of applying the coinsurance penalty is reduced. See coinsurance explanatory example in the Q&A section below.

Replacement Cost

An insured has the option to insure the following types of property on replacement cost valuation:

• Buildings and permanent machinery, fixtures, and equipment  that are covered with the building
• Business personal property including furniture, fixtures, machinery and equipment
• Merchandise and stock if the "including stock" option is shown as applicable in the declarations, and
• Tenants improvements and betterments are not considered the property of others. Since these items become the property of the landlord, a tenant who has purchased this coverage will receive replacement cost coverage for the improvements made to a building.

The replacement cost optional coverage does not apply to personal property of others; contents of a residence; works of art, antiques, or rare articles; or stock unless the "stock" option is shown in the declarations.