2.2 Michigan Commercial Property Insurance

Rate Regulation: File and Use

Michigan regulates commercial property rates under a competitive, file-and-use model. The insurer files the rate (or rule/form) with DIFS and may use it without waiting for prior approval, but the rate remains subject to review and possible disapproval. The statutory standard (MCL 500.2109) is that a rate may not be excessive, inadequate, or unfairly discriminatory:

• Excessive rates produce unreasonable profit in a competitive market.
• Inadequate rates threaten the insurer's solvency or drive out competition.
• Unfairly discriminatory rates charge different prices to insureds of substantially the same risk and exposure.

Large commercial accounts may also qualify for (a)-rated or individually rated coverage when no manual rate fits the unique exposure.

Commercial Property Coverage

Michigan commercial risks are written on the Commercial Property program (the Building and Personal Property Coverage Form, CP 00 10) inside a Commercial Package Policy (CPP) or a Businessowners Policy (BOP).

Valuation Methods (Know the Differences)

• Replacement Cost (RC): full cost to repair/replace with like kind and quality, no depreciation.
• Actual Cash Value (ACV): replacement cost minus depreciation (the default if RC is not selected).
• Agreed Value: the insurer and insured agree on a value up front; selecting it suspends the coinsurance clause, so no coinsurance penalty applies.
• Functional Replacement: replaces with functionally equivalent (not identical) materials, useful for older buildings.

Worked example: A building has $1,000,000 replacement cost and an 80% coinsurance clause, but is insured for only $600,000. On a $200,000 loss the recovery is ($600,000 / $800,000) x $200,000 = $150,000, less the deductible. Had the insured chosen agreed value, no coinsurance penalty would apply.

Causes of Loss Forms

Commercial property attaches one of three causes of loss forms that define what is covered, mirroring the named-vs-open distinction in homeowners:

The Special form shifts the burden of proof to the insurer and is the commercial counterpart to the HO-3 dwelling basis. Selecting Basic to save premium leaves wide gaps, another tested trade-off.

Business Income and Extra Expense

The Business Income (and Extra Expense) Coverage Form (CP 00 30) pays the net income the business would have earned plus normal continuing operating expenses during the period of restoration, the time it takes to repair or replace damaged property with reasonable speed.

• A 72-hour waiting period typically applies before business income begins.
• Extended period of indemnity continues coverage after repairs while revenue ramps back up.
• Civil authority coverage pays when a government order bars access to the premises because of nearby damage (commonly limited to 4 weeks).
• The triggering loss must be from a covered peril, a pandemic shutdown with no physical damage generally does not trigger coverage.

Surplus Lines (Nonadmitted) Insurance

When a commercial risk cannot be placed in the admitted market, it may be written by a nonadmitted (surplus lines) insurer. Michigan rules:

The surplus lines licensee collects and remits the tax and fee. Because nonadmitted carriers are not backed by the Michigan Property and Casualty Guaranty Association, the disclosure to the insured is mandatory.

Terrorism and Builders Risk

TRIA (Terrorism Risk Insurance Act): a federal backstop for certified acts of terrorism. Insurers writing commercial property must offer terrorism coverage; the policyholder may accept or reject it, and the premium charge and federal share must be disclosed.

Builders Risk: insures structures under construction. It is written on a completed-value or reporting basis, may need an endorsement to add theft of materials, and can cover materials in transit or at a temporary storage site. Either the contractor or the property owner may purchase it, and coverage generally ends when the project is completed and accepted or occupied.

Guaranty Association Protection

A central reason the surplus lines disclosure matters is the Michigan Property and Casualty Guaranty Association (MPCGA). When an admitted insurer becomes insolvent, the MPCGA steps in to pay covered claims up to statutory caps. Nonadmitted (surplus lines) carriers are excluded from this protection, so an insured placed in surplus lines bears the carrier-insolvency risk. This is why producers must confirm the surplus lines insurer is on the DIFS eligible list and is financially sound, and why the nonadmitted disclosure is mandatory. On the exam, link the words "nonadmitted," "surplus lines," and "no guaranty fund protection."

Producer Duties on Commercial Placements

A Michigan producer placing commercial property must collect accurate underwriting information, recommend appropriate limits and valuation, and document the insured's acceptance or rejection of optional coverages such as terrorism, equipment breakdown, and flood. Misrepresenting the cost or scope of coverage, or failing to forward an application or premium promptly, is an unfair trade practice and a frequent E&O exposure.