2.2 Texas Commercial Property Insurance

Rate Regulation: File and Use

Texas regulates most property and casualty rates - including commercial property - under a file and use system. The mechanics, and the contrast with stricter systems, are commonly tested:

• The insurer files its rate or rating manual with TDI and may use it immediately - it does not have to wait for approval.
• TDI reviews the filing after it is in use and can disapprove a rate it finds excessive, inadequate, or unfairly discriminatory (the three statutory rate standards).
• This differs from a prior-approval system, in which the rate cannot be used until the regulator approves it, and from use and file, in which the rate is used first and filed shortly after.

The phrase to remember is that the rate may be used as soon as it is filed, with regulatory oversight occurring on the back end. The goal is a competitive market in which rates are neither too high nor so low that the insurer's solvency is threatened, and never discriminatory among similar risks.

Commercial Property Coverage Forms

A commercial property policy is assembled like building blocks. The core coverage forms define what property is insured, and a separate Causes of Loss form defines which perils apply.

The Causes of Loss form sets the breadth of perils, paralleling the named-versus-open distinction on the homeowners side:

• Basic - a short named-peril list (fire, lightning, windstorm, vandalism, etc.).
• Broad - the Basic perils plus additional named perils (e.g., certain water damage, weight of ice/snow).
• Special - open peril (all-risk): covered unless excluded, the broadest and most often quoted.

Coinsurance - the underinsurance penalty

Most commercial property is written with a coinsurance clause (commonly 80%, 90%, or 100%), which requires the insured to carry a limit equal to at least that percentage of the property's value. If the insured carries less, the insurer pays a proportional share of a partial loss and the insured absorbs the rest as a coinsurance penalty.

The formula is: (Limit Carried / Limit Required) x Loss = Amount Paid (then subtract the deductible).

Worked example: A building worth $1,000,000 has an 80% coinsurance clause, so the required limit is $800,000. The owner insures it for only $600,000 and suffers a $200,000 fire loss. Recovery = ($600,000 / $800,000) x $200,000 = $150,000 (before deductible). The remaining $50,000 is the coinsurance penalty for being underinsured. Carrying the required limit avoids the penalty entirely - this is why agents push owners to insure to value.

Surplus Lines Insurance in Texas

When a risk is too large, hazardous, or unusual for the admitted (TDI-licensed) market, it may be placed with a surplus lines (non-admitted, but eligible/surplus-lines-eligible) insurer through a licensed surplus lines agent. Because non-admitted carriers are not backed by the Texas guaranty association, the law imposes specific guardrails:

• Diligent search / declinations: the surplus lines agent must generally document that at least three admitted insurers declined the risk before exporting it - confirming coverage is genuinely unavailable in the admitted market.
• Export list: TDI maintains an export list of coverages pre-determined to be unavailable from admitted carriers (e.g., certain aviation, excess/umbrella, environmental, employment-practices, and directors-and-officers liability). Risks on the export list may be placed without the three-declination search.
• Surplus lines premium tax: 4.85% of the premium.
• Stamping fee: a small fee payable to the Surplus Lines Stamping Office of Texas.
• Disclosure: the insured must be told the policy is written by a non-admitted carrier not protected by the Texas guaranty association.

Memorize the two numbers and the two pathways. The two numbers: a three-insurer diligent search and a 4.85% surplus lines tax. The two pathways into surplus lines: (1) document three admitted-market declinations, or (2) the coverage appears on the export list, which bypasses the search.

A common exam distractor is to claim surplus lines policies are backed by the guaranty association - they are not, which is precisely why disclosure to the insured is mandatory. Another distractor confuses the surplus lines agent (who places the business) with the surplus lines insurer (the non-admitted carrier). The agent must be specially licensed, must collect and remit the tax, and must keep evidence of the diligent search for the prescribed period.

Business Income, Extra Expense, Terrorism, and Builders Risk

Business income (business interruption) and extra expense

Business Income coverage replaces the net income the business would have earned plus continuing normal operating expenses (such as payroll and rent) during the period of restoration - the time reasonably needed to repair or replace the damaged property. Key points:

• The loss must result from a covered cause of loss to covered property (the direct damage triggers the income loss).
• A short waiting period (often the first 72 hours) typically applies before BI coverage begins.
• An extended period of indemnity can continue coverage after repairs while the business rebuilds its customer base.
• Civil authority coverage can apply when a government order bars access to the premises after nearby covered damage.

Extra Expense pays the additional costs to keep operating or shorten the shutdown - a temporary location, expedited shipping, rented equipment - and carries its own limit separate from Business Income.

Terrorism (TRIA) and builders risk

Under the federal Terrorism Risk Insurance Act (TRIA), commercial property insurers must offer terrorism coverage and disclose its premium and terms; the insured may accept or reject it (rejection is documented in writing). TRIA acts as a federal backstop for certified acts of terrorism, sharing catastrophic losses between insurers and the government.

Builders risk insures a structure under construction (and often materials at the site or in transit) against loss during the building phase. It can be written on a completed-value basis (the full finished value, with premium adjusted) or a reporting form, and theft of materials or transit coverage may require an endorsement. Coverage typically ends when the project is finished and accepted, at which point a standard commercial property policy takes over.

Together, these forms let a Texas business tailor protection for its building, contents, income, terrorism exposure, and construction projects.