Property damage and business interruption
The policy that answers for what the company owns and for what it stops earning while it cannot use it. The second part usually costs more than the first and gets sized with less care.
What it is
Property insurance covers the asset — buildings, plant, machinery, stock — against the perils that can destroy or damage it. Alongside it, in the same contract, travels business interruption cover, answering for the margin the company stops earning while the operation is down. Two covers with different logics: one repairs an asset, the other holds up a set of accounts.
The whole class turns on a principle article 26 of the Spanish Insurance Contract Act states in a sentence: insurance may not be a source of unjust enrichment for the insured, and the loss is determined by the value of the insured interest immediately before the event. From which follows the consequence that cuts most claims: if the sum insured is below that value, the indemnity is reduced in the same proportion.
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At a glance
- Average clause
- Art. 30 LCS
- Can be excluded by agreement
- Yes
- Extraordinary risks
- Consorcio
- Broker registered with the DGSFP
- J0140
The whole architecture of property insurance in Spain fits into four articles of Law 50/1980, the Insurance Contract Act, and they are worth knowing because they explain why a properly covered loss can still be paid at half.
Article 26 sets the principle: insurance may not be a source of unjust enrichment for the insured, and the loss is determined by the value of the insured interest immediately before the event.
Article 30 draws the consequence. If at that moment the sum insured is below the value of the interest, the insurer indemnifies the loss in the same proportion as the sum bears to that value. This is the average clause, and it operates on partial losses too: being insured at sixty per cent of value means collecting sixty per cent of any loss, not collecting in full until the sum runs out. The same article allows the parties to exclude it by agreement, and that is one of the most profitable negotiations in a property wording.
Article 31 covers the reverse case, overinsurance: either party may require the sum and premium to be reduced, and where the insured acted in bad faith the contract is void. And article 32 governs multiple insurance, requiring disclosure of other contracts covering the same interest; omitting that wilfully, with overinsurance, releases the insurers from paying.
Where the gaps open up
The first, and by far the most expensive, is sums insured left behind. A company that invests and does not revisit the policy ends up underinsured without knowing, and finds out in the settlement, not before.
The second is the indemnity period on business interruption. It gets set by thinking about how long the installation takes to repair, when what needs covering is how long the company takes to invoice as before: restocking, regaining approvals and winning back customers.
The third is interruption of computer origin. A traditional property policy requires prior physical damage to trigger business interruption, and encrypted systems do not produce any. That stretch is covered by cyber insurance, not by this one.
What the market does not insure
Part of the cover does not depend on the insurer at all. Extraordinary risks — among them extraordinary flood, earthquake and terrorism — are carried in Spain by the Consorcio de Compensación de Seguros, funded through a compulsory surcharge travelling on the policy receipt. It is neither bought nor excluded: it operates by statute over the insured property. Knowing it matters because, in a loss of that kind, the counterparty and the procedure are different ones.
Why through a broker
As a brokerage registered with the Spanish insurance regulator, the Dirección General de Seguros y Fondos de Pensiones, under reference J0140, New Brokers acts on the client's mandate, not on any insurer's behalf.
In property insurance the work that adds most value is not comparing premiums: it is valuing the sums insured properly and negotiating the exclusion of the average clause. The first avoids the automatic reduction of the indemnity; the second removes it. Neither can be fixed after a loss, and both are easily forgotten in a renewal processed out of habit.
What is covered
Fire, explosion and lightning
The historic section the class grew from, and the one the rest of the contract is built around.
Water damage and weather perils
The most frequent causes by number of claims, though not by average cost, across buildings, contents and stock.
Theft, robbery and consequential damage
Removal of property and the damage caused in the course of it, with protection requirements that condition cover and sometimes the deductible.
Machinery breakdown
Internal failure of equipment, which is not damage of external cause and therefore needs its own section. At an industrial plant, the most relevant after fire.
Electronic equipment and data
Hardware, control installations and the cost of reinstating the information they hold, distinct from damage to the physical medium.
Business interruption
The gross margin not earned during the indemnity period, plus the additional costs of continuing to operate.
Interruption at a supplier or customer
Stoppage originating outside your premises, at a sole supplier or a key customer. It requires express cover and those companies to be named.
Additional costs and debris removal
Outlays to keep trading after a loss, plus clearing debris, professional fees and rebuilding permits.
Goods in internal transit and on exhibition
Material moving between your own sites or temporarily held at third-party premises, with their own sub-limits.
Extraordinary risks via the Consorcio
Extraordinary flood, earthquake, terrorism and other events that the insurer does not cover but the Consorcio de Compensación de Seguros does, funded by a surcharge on the premium.
Limits and deductible
| Item | Statutory regime |
|---|---|
| Indemnity principle (art. 26) | Value of the interest immediately before the loss |
| Underinsurance, average clause (art. 30) | Indemnified in the same proportion |
| Agreed exclusion of the average clause (art. 30) | Permitted by mutual agreement |
| Overinsurance (art. 31) | Sum and premium reduced; void if in bad faith |
| Multiple insurance (art. 32) | Proportional contribution and a duty to disclose |
This table sets out the regime established by Law 50/1980, the Spanish Insurance Contract Act, for property insurance, not the terms of any particular policy. The average clause in article 30 may be excluded by agreement between the parties, and it is among the clauses most worth negotiating. Sums insured, sub-limits and deductibles are governed in every case by the specific conditions.
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Go to the client areaWhat is not covered
What falls outside a property policy almost always has the same root: it was not a sudden, accidental and unforeseen event.
Wear, corrosion, material fatigue and gradual deterioration through use.
A manufacturing or design defect in the damaged item itself, as opposed to the damage that defect causes to other property.
Damage to data and interruption of computer origin, which need a cyber policy: property cover usually requires prior physical damage.
Gradual soil contamination and ecological damage, which belong to the environmental liability policy.
Loss of profit without prior physical damage causing it, other than under express external-cause interruption extensions.
Goods in transit on behalf of third parties and goods being carried, which answer under the transport policy.
Damage arising from alteration or extension works above the agreed threshold without prior notice.
Extraordinary risks, which the market does not exclude so much as hand over by statute to the Consorcio de Compensación de Seguros.
When you will be asked for it
Sums insured left behind by years of investment
The company has extended premises and renewed machinery without revisiting the policy's sums insured, which still reflect values from several years back.
What it means
If at the time of loss the sum insured is below real value, the average clause applies and the indemnity is cut in that same proportion, including on a partial loss. It is the most common reduction and the most avoidable: a revaluation, or agreeing to exclude the clause, removes it.
Long shutdown from slow-to-replace machinery
A critical item is written off and its manufacturing lead time exceeds the indemnity period bought under the business interruption section.
What it means
The physical damage is settled without difficulty; the margin lost after the last covered month is not. The indemnity period is sized on the real time to return to market — restocking, regaining approvals, winning back customers — not on the repair time.
The same interest insured twice
A warehouse appears insured under both the owner's and the tenant's policies, with neither having told the other insurer.
What it means
Article 32 requires disclosure of other policies covering the same interest, and where that is omitted wilfully with overinsurance, the insurers are not obliged to pay. Where disclosure is correct, they contribute in proportion to their sums insured without exceeding the amount of the loss.
How it is arranged
Valuing sums insured at reinstatement value
We review buildings, plant, machinery and stock at their new-for-old reinstatement value, not their book value. It is the step that decides whether the average clause bites at the moment of loss.
Sizing business interruption
We calculate the insurable gross margin and set the indemnity period on the real time to recover the business, not on the time to repair the installation.
Placement and negotiation of the critical clauses
We negotiate exclusion of the average clause, the sub-limits on the sections actually used, the deductibles and any external-cause interruption extensions.
Keeping it current and handling the claim
We keep sums insured up to date as the company invests, and on a loss we coordinate the loss adjustment and represent you before the insurer.
Covers that work alongside this one
Cyber
Property policies normally require prior physical damage to trigger business interruption, and encrypted systems do not produce any.
Environmental liability
Damage to the installation after an environmental incident sits with this policy; damage to the environment and its remediation, with the environmental one.
Transport and cargo
Goods in your own warehouse answer under this policy; goods in transit, under the transport one. The handover point needs fixing.
General, employers' and product liability
Damage to your own property belongs to this policy; damage caused to third parties, to the liability one.
Construction and inherent defects
Alteration or extension works above a certain threshold leave the scope of the property policy and enter contractors' all risks.
Frequently asked questions
What is the average clause and how does it affect me?
It is the consequence of underinsurance. Article 30 of the Spanish Insurance Contract Act provides that, if at the time of loss the sum insured is below the value of the interest, the insurer indemnifies the loss in the same proportion as the sum bears to that value. In other words: insured at 60% of real value, you collect 60% of the loss, on partial losses too. The same article allows the parties to exclude that rule by agreement, and negotiating it is among the most profitable things in a property wording.
What value should I insure my premises for?
New-for-old reinstatement value, not book value nor market value. Article 26 provides that the loss is determined by the value of the insured interest immediately before the event, and that is what the sums insured must reflect. The habitual error is carrying figures forward from earlier years while the company has gone on investing.
What if I insure above real value?
Article 31 allows either party to require the sum and the premium to be reduced, with the excess premium returned, and on a loss the insurer indemnifies the loss actually caused: you do not collect more. Where the overinsurance is due to the insured's bad faith the contract is void, though an insurer acting in good faith may retain premiums already due.
How is business interruption calculated?
On the gross margin the company does not earn during the indemnity period, plus the additional costs incurred to keep operating. The two frequent errors are calculating the margin on the last financial year without allowing for growth, and setting an indemnity period based on technical repair time rather than the real time to recover the market.
What does the Consorcio de Compensación de Seguros cover?
So-called extraordinary risks — among them extraordinary flood, earthquake and terrorism — are not carried by the insurer but by the Consorcio, funded through a compulsory surcharge included in the policy receipt. It is not cover that is bought or excluded: it operates by statute over the insured property. Worth knowing, because in a loss of that nature the counterparty changes.
What information do you need to prepare a proposal?
A schedule of sites with sums insured for buildings, plant, machinery and stock at reinstatement value, the construction and fire and theft protection description, the profit and loss account to size the insurable margin, the schedule of critical machinery with replacement lead times, and the claims history. If you have a current policy, its specific conditions.
This information is for guidance only and is not binding. Covers, limits and exclusions are governed in all cases by the specific terms of each policy. New Brokers Correduría de Seguros, S.L., registered with the DGSFP under reference J0140.