Case Scenario: Fire & Sprinkler Damage

This scenario is an example of what a dental business office insurance policy covers during fire and sprinkler loss. Every loss is different, and we encourage you to contact your insurance agent with any questions on your specific policy coverages and forms.

Insured Description:

Our insured operates a dental practice from the loss location, which is a single story office building constructed of metal framing with stucco siding. The building is approximately 3,500 square feet and is built on a concrete slab. The interior consists of nine examination rooms, a reception area, an employee lounge and two offices with a laboratory in the center. The building has a fire sprinkler system installed.

Detailed Loss Description:

Our insured was notified by their alarm company of a fire at approximately 6:30 p.m.  The fire originated in the southeast corner of a laboratory area at a three-tier metal shelf containing a removable power strip and battery pack chargers for a headlight system. Paperwork stored above the shelving ignited and set off the sprinkler system.  Smoke, water and heat caused damage to the insured’s drop ceiling, drywall, flooring and wall coverings throughout the premise. Damage was also found to dental equipment, tools and consumables used in the practice. A mitigation company was called and immediately began remediation that aided in limiting the damage.

Policy Coverages:

The insured’s policy has coverage provided for the peril of fire under the governing forms BP0003, BP7076 and BP7080. No exclusions or limitations have been identified to effect coverage relating to our insured’s claim for damages.

The Building limit is $1,000,000.00 and is written at replacement cost with a $1,000.00 policy deductible. A 90% coinsurance applies on the insured’s policy. Our insured is the sole owner of this property with insurable interest in same.

Bank of XYZ is listed as Mortgagee Holder/Loss Payee for this loss location.

The Business Personal Property limit is $500,000.00 at replacement cost.

Business Interruption coverage is afforded at actual loss sustained for a 12-month period.  Subject to a waiting period of 72 hours.


Co-Insurance Clause

Here are two examples that demonstrate how the clause works:

Replacement Cost Building Value $1,200,000
Co-insurance Requirement 90%
Required Amount of Insurance $1,080,000
Actual Amount of Insurance $1,000,000
Amount of Loss $300,000

The co-insurance formula is:
(Actual Amount of Insurance )      X     Amount of Loss = Amount of claim
(Required Amount of Insurance)

Inserting the amounts above in the formula produces the following calculation:
($1,000,000)    X    $300,000   =   $277,778

So the owner absorbs a $22,222 co-insurance penalty. Since he chose to under insure his building by 16% rather than transfer it to the insurer, he absorbs 16% of the loss. If the building had been insured to the amount required by the 90% co-insurance clause then the co-insurance calculation would look like this:

(Actual Amount of Insurance)     X   Amount of Loss = Amount of claim
(Required Amount of Insurance)

($1,080,000)   X      $300,000   =   $300,000

In the second example, since the owner met the co-insurance requirement, she was not a coinsurer and her claim is paid without penalty.


Property and Business Income Loss:


Building repairs include ceiling replacement, drywall and trim repair/replacement, painting, cabinet repair, flooring replacement and security system repair. All repairs are to be completed in nine exam rooms and 13 other rooms throughout the premises.

An allowance will be made for overtime and weekend labor in order to reduce the business income loss exposure.

Business Personal Property:

This Business Personal Property list includes dental items that are being reviewed for pricing by the insurance company’s vendor.  An X-ray machine located outside the area of the fire and sprinklers was inspected by the manufacturer, and no evidence of damage was found beyond minimal cleaning. This unit was returned to service with full warranty intact. All other effected Personal property was cleaned by the mitigation company that is not a total loss.

Business Income Loss:

The dental office closed on Tuesday and reopened the following Monday. The dental office is closed on Saturdays and Sundays. Quick action by the mitigation and repair companies contained the period of restoration to four days.

Overall review:

In a scenario like this we want to be sure the insured has coverage for high-end equipment as well as miscellaneous items associated with the dental practice. Also, as the insured is the owner of the building we need to ensure that the building is insured to value so there is not a coinsurance penalty. Coinsurance can apply to the Business Personal Property as well as the Business income coverage so insured to value is a vital component of the claim that is often overlooked.

Payment will be made to the insured at Actual Cash Value (ACV) of the property at the time of the loss with the depreciation holdback amount given ((as the insured has Replacement Cost (RCV) coverage)) when the items are actually replaced per the policy provision. The cleaning of the building and personal property will be paid at RCV as this expense is incurred at the time of billing. Should the insured sign a certificate of satisfaction and direction of pay with the mitigation contractor, this can be paid directly to the contractor and the insured’s request. Having mitigation work done as soon as possible is also key in these situations as in this scenario it allowed the insured to be back up within only four days, which reduced their business income loss.


This article was co-written by Tim Leonard, AIC, director of complex claims at Liberty Mutual and Carrie Millar, MBA, CAE, agency manager of Dentist Insurance Services. DIS’s experienced staff is ready to get to work for you. If you feel you need a review of your current insurance policies – call us at 800-877-7597 or e-mail [email protected]

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