Difference in Conditions (DIC) Insurance Explained

In the world of commercial property insurance, standard policies often leave significant gaps in coverage, particularly concerning catastrophic perils like floods and earthquakes. Difference in Conditions (DIC) insurance is a specialized form of property insurance designed to fill these specific coverage gaps. It is often referred to as a "gap-filler" policy because it provides protection against perils that are typically excluded from standard commercial property forms.

For students preparing for the complete Commercial exam guide, it is essential to understand that DIC insurance is not a substitute for a primary commercial property policy. Instead, it is a supplemental layer of protection. Most DIC policies are written on an open-peril basis, meaning they cover all risks of physical loss unless the peril is specifically excluded. However, unlike standard open-peril forms, the primary intent of the DIC is to pick up the major catastrophic exposures that the underlying policy drops.

Because DIC forms are generally not standardized by organizations like the ISO (Insurance Services Office), they offer insurers a high degree of flexibility. This allows underwriters to tailor the policy to the unique geographical and operational risks of a specific business. To master these concepts for your licensing, you should also practice Commercial questions frequently to recognize how DIC interacts with other property forms.

There are several unique characteristics that distinguish DIC insurance from the standard property forms you will encounter on the exam. Understanding these technicalities is vital for correctly identifying the purpose of a DIC policy in a scenario-based question.

• No Coinsurance Clause: Most DIC policies do not include a coinsurance requirement. This is because the policy is often written for a specific limit that may be less than the full value of the property, focusing instead on a probable maximum loss from a specific peril.
• High Deductibles: Since DIC insurance covers catastrophic events like earthquakes and floods, the deductibles are significantly higher than those found on a standard policy. These deductibles are often expressed as a percentage of the value of the property at the time of loss rather than a flat dollar amount.
• Exclusion of Fire and Wind: To avoid overlapping with primary insurance, DIC policies specifically exclude perils that are covered under the insured's primary property policy, such as fire, lightning, and windstorm.
• Surplus Lines Market: Because of the high risk associated with the perils covered, DIC insurance is frequently written through non-admitted or surplus lines insurers who have more flexibility in pricing and policy language.

Underwriters look at several factors when pricing a DIC policy. For earthquake coverage, they analyze the proximity to known fault lines and the soil type of the location. For flood coverage, they look at the Base Flood Elevation (BFE) and the specific flood zone designated by FEMA. Unlike a standard homeowner or commercial policy that might include a small sub-limit for these perils, a DIC policy can provide multi-million dollar limits suitable for large industrial complexes or high-rise office buildings.

Another common use for DIC insurance is for businesses with international operations. A U.S.-based company may purchase a DIC policy to ensure that their locations in foreign countries have coverage that meets the same broad standards as their domestic policies, effectively bridging the gap between local foreign policies and the company's corporate insurance standards.