One key feature of insurance policies is a maximum policy limit that reflects the most that the insurance company will pay in the event of a claim. Limits can take several different forms. Some commercial property insurance policies include insurance margins that serve to limit how much the insurer will need to pay in certain cases.
An insurance margin is a feature of some commercial property insurance policies. It refers to an amount above the declared value of a piece of property that the insurance company will pay to replace that property following damage from a source that is within the policy's scope of coverage. Insurance margins only apply when a commercial insurance agreement includes a margin clause. The clause sets an effective maximum payout for the insurance company.
When a business purchases commercial insurance, it uses an appraisal of its property, including vacant land, buildings, vehicles and equipment, to determine the values it will declare to the insurance company. Declared value indicates how much coverage the business is paying for, as a higher declared value will result in a higher insurance premium. An insurance margin means that the insurance company will pay a set percentage, over 100 percent, of the declared value and no more. For example, if a business insures a factory for $1 million and has an insurance margin of 110 percent, the insurance company will pay $1,100,000 if the building is destroyed by fire, even if it costs $1,500,000 to rebuild.
Each commercial insurance provider offers its own insurance margin amounts. They range from just over 100 percent to upward of 150 percent, according to Adjusters International. Insurance policies may also combine the maximum limits of a margin clause with a per-occurrence or per-location limit, which means the margin will not always be the limiting factor in determining how much the company pays out.
Before insurance margins gained popularity in the late 1990s, many commercial insurance companies used agreed-value options instead. An agreed-value option is a limit based on dollar amounts rather than a percentage of declared value. It does not allot for appreciation over time or rising costs that will make it more expensive to replace or repair a business's property following a claim.
For example, if a business purchases insurance for a $2 million office building in 2000, it does so knowing that in 2020 the cost of raw materials and construction will be significantly higher. In this case the insurance company and business may agree on a $3 million agreed-value option, which applies regardless of when a claim occurs. With a 110 percent margin, the insurer would only need to pay $2 million if that's what it costs to replace the building following an explosion in 2010. The same disaster in 2015 might cause $3 million worth of damage, but the insurance company is only responsible for $2,200,000, according to the 110 percent margin.