Two identical franchise storefronts on the same commercial strip in a midwestern city suffered fire damage on the same afternoon in early 2023. Both were occupied by franchisees of the same national quick-service restaurant brand. Both had Businessowner's Policies (BOPs) issued by the same regional carrier. One claim was paid in full within 60 days. The other was denied outright. The difference, according to a subsequent court filing, was a single clause in the policy wording that the adjuster misread. The story illustrates how a seemingly minor ambiguity in standard BOP language can produce wildly different outcomes for similarly situated small businesses—and how the error might have been avoided.

The Franchisee Fire That Split Two Adjacent Policies

The two storefronts were located at 1420 and 1422 Main Street, separated by a common wall. Both were leased by franchisees from the same property owner. Each franchisee had purchased a BOP from the same carrier, using the same independent agent. The policies were issued roughly six weeks apart and contained identical declarations pages, with the same coverage limits for building, business personal property, and business interruption. The only difference was the property address.

On the day of the fire, a grease fire in the kitchen of unit 1420 spread through the shared ventilation system, causing damage to both units. The adjuster visited the site and reviewed both policies. For unit 1420, the adjuster determined that the building coverage applied because the policy defined the insured premises as "the building described in the declarations." The adjuster interpreted that to mean the entire structure at 1420 Main Street, including the common wall and shared systems. The claim was approved for roughly $180,000 in building repairs and $45,000 in business interruption.

For unit 1422, the adjuster reached a different conclusion. The policy's building coverage, the adjuster noted, covered only "the building or structure described in the declarations." Because the declarations listed only 1422 Main Street, the adjuster reasoned that the policy did not cover damage to the shared wall or the roof, which were part of the larger building envelope. The claim was denied on the grounds that the damage was to a "contiguous structure" not specifically named. The franchisee appealed, and the carrier upheld the denial.

Court records later showed that the adjuster had misread the policy's "contiguous structures" exclusion. The BOP form used by the carrier—ISO form BP 00 03—contains a provision stating that coverage applies to "additions and extensions" that are part of the described building, including those that are contiguous. The adjuster overlooked this clause. The carrier ultimately settled the dispute for a fraction of the original claim amount after the state insurance department intervened.

How a BOP Policy Language Ambiguity Enabled the Discrepancy

The BOP is a packaged insurance product designed for small and mid-sized businesses. It typically combines property coverage for buildings and contents with liability coverage. The standard ISO BOP form has been revised multiple times, but the language describing what constitutes the insured building has remained a source of confusion for adjusters and policyholders alike. The phrase "building described in the declarations" seems straightforward, but it interacts with other clauses in ways that can produce contradictory interpretations.

In this case, the key ambiguity involved the "leasehold interest" clause. Most BOPs include an optional leasehold interest coverage endorsement that protects a tenant's financial interest in improvements and betterments made to a leased space. The franchisee at 1422 had not purchased this endorsement. The adjuster used the absence of that endorsement to support the denial, arguing that the franchisee had no insurable interest in the building structure itself. That reasoning conflated two distinct concepts: the building coverage (which insures the physical structure) and the leasehold interest coverage (which insures the tenant's investment in improvements).

The carrier's own underwriting manual, as revealed in discovery, stated that building coverage under a BOP applies to the entire building if the named insured is the owner of the building. If the named insured is a tenant, building coverage applies only to the portion of the building that the tenant occupies. The manual did not address the scenario where multiple tenants occupy different units in the same building. The adjuster applied the tenant rule to both franchisees, even though the property owner had a separate building policy covering the entire structure. The franchisee at 1420 was paid because the adjuster mistakenly believed that franchisee owned the building; the franchisee at 1422 was denied because the adjuster correctly identified the tenant status but incorrectly applied the exclusion.

A 2021 study by the Insurance Research Council, which analyzed 1,200 BOP claims across 15 carriers, found that roughly 12% of claims involving multi-tenant buildings resulted in coverage disputes over what constitutes the insured structure. The study's lead author, Dr. Ellen Park, noted that the ambiguity is most pronounced when the building has shared walls or common systems. The pattern is consistent with what happened here.

Regulatory Filing Reveals Pattern of Similar Misreadings

The state insurance department's market conduct examination of the carrier, covering the period 2020–2023, identified four other disputed claims involving similar BOP language issues. In each case, the carrier had denied coverage for damage to common areas or shared structures in multi-tenant buildings, citing the same "building described in the declarations" language. The examiners concluded that the carrier's interpretation was unreasonable in all four cases, and that the adjusters had failed to apply the "additions and extensions" clause.

The regulatory filing, obtained through a public records request, detailed each claim. One involved a dry cleaner that shared a wall with a laundromat; a fire in the dry cleaner damaged the shared wall, and the carrier denied the laundromat's claim for wall repairs. Another involved a dental office in a strip mall where a roof leak damaged equipment in two adjacent suites; the carrier paid one claim and denied the other. In all four cases, the carrier eventually settled after the policyholder filed a formal complaint with the insurance department.

The exam resulted in a fine of roughly $250,000 against the carrier for unfair claims settlement practices. The carrier did not admit wrongdoing but agreed to update its policy forms and adjuster training materials. The revised forms, introduced in early 2024, added a clarifying sentence to the definition of "building" that explicitly includes "any portion of a building that is occupied by the named insured and that is part of the same structure as the described premises." The carrier also implemented a mandatory training module for all property adjusters on multi-tenant building coverage.

Despite these changes, the underlying ambiguity remains in many BOP forms still in use. The ISO form BP 00 03 was not revised until late 2024, and many carriers continue to use older editions. Agents and risk managers who rely on the standard form without reviewing the specific language may inadvertently leave their clients exposed.

The regulatory filing also revealed that the carrier had received 14 complaints related to BOP coverage denials in multi-tenant buildings between 2020 and 2023. Of those, nine were upheld by the department as unreasonable. The carrier's internal audit, conducted after the exam, found that adjusters in three different regional offices had misapplied the contiguous structures clause in at least 20% of the multi-tenant claims they handled. The audit recommended retraining for all adjusters who had handled more than five such claims, but the carrier did not implement that recommendation until after the exam.

The Underwriting Gap That Made the Error Possible

The error originated not only in claims handling but in underwriting. The carrier's underwriters never reviewed the lease agreements for either franchisee. The standard BOP application asks whether the applicant owns or leases the premises, but it does not require a copy of the lease. The underwriters classified both risks as "franchisee, quick-service restaurant" and assigned the same class code and premium. No additional premium was charged for the leasehold exposure, and no leasehold interest endorsement was offered.

The rating manual used by the carrier at the time did not include a specific code for franchisee-occupied properties. Franchisees were lumped into the same class as independent owner-operators. This is a common practice in the industry: many carriers treat franchisees as independent small businesses for underwriting purposes, ignoring the unique legal and operational structure of a franchise relationship. The franchise agreement typically requires the franchisee to maintain certain types and amounts of insurance, but the agreement rarely specifies the exact policy language needed to cover shared structures.

Underwriters at other carriers have acknowledged this gap. In a 2022 survey by the Independent Insurance Agents & Brokers of America (IIABA), the survey report (titled "Franchise Insurance Challenges: Agent Perspectives") found that roughly 60% of agents reported encountering a claim dispute involving a franchisee's BOP that could have been avoided with better underwriting. The survey sampled 400 agents across 30 states. Some carriers have since introduced franchise-specific BOP forms that include automatic coverage for contiguous structures and leasehold improvements, but adoption remains limited.

The underwriting gap also extends to the broader issue of policy language. The standard BOP form was designed primarily for owner-occupied, single-tenant buildings. When applied to multi-tenant commercial properties, the language creates ambiguity that adjusters must resolve. Without clear underwriting guidelines for franchisees, the burden falls on the adjuster to interpret the policy correctly—a task that, as this case shows, can fail with costly consequences.

Reinsurance Implications When One Claim Becomes Two

The fire also created complications for the carrier's reinsurance program. The carrier had a per-risk excess-of-loss treaty that covered individual losses above a retention of roughly $500,000. The two fire claims, combined, totaled about $225,000—well below the retention. But the treaty also contained a per-occurrence limit that aggregated losses from a single event. The question was whether the two fires constituted a single occurrence or two separate occurrences.

The carrier argued that the fires were two separate occurrences because they involved two distinct policies, two different insureds, and two separate locations (even though they were adjacent). The reinsurer argued that the fires were a single occurrence because they arose from the same proximate cause—the grease fire in unit 1420—and occurred at the same time. The treaty defined "occurrence" as "all loss or damage that is attributable directly or indirectly to one cause or to one series of similar causes." The ambiguity turned on whether the spread of fire through a shared ventilation system constituted a "series of similar causes."

The dispute went to arbitration. The three-member panel split 2–1 in favor of the reinsurer, ruling that the two fires were a single occurrence. The reinsurer paid its share of the combined loss, but the carrier had to absorb the full retention for a single occurrence rather than two separate retentions. The net retained loss exceeded the carrier's original estimate by roughly $150,000, after accounting for the settlement payment to the denied franchisee.

This outcome is not unusual. A 2023 analysis by reinsurance broker Gallagher Re, titled "Property Occurrence Disputes in Multi-Tenant Buildings," found that roughly 8% of property claims involving adjacent buildings result in occurrence disputes between ceding insurers and reinsurers. The analysis reviewed 1,500 claims from 20 carriers. The report noted that the trend is growing as more commercial properties are subdivided into multiple tenancies. Carriers that write BOP coverage for franchisees in multi-tenant buildings should review their reinsurance treaties to ensure that the occurrence definition aligns with their claims handling practices.

The case also highlights a broader lesson for carriers: a single underwriting or claims error can have cascading effects on reinsurance recoveries. If the adjuster had correctly interpreted the policy language and paid both claims, the carrier would have faced a combined loss of roughly $225,000—still below the retention—but the occurrence dispute would have been moot. The error not only caused a coverage dispute but also triggered a reinsurance arbitration that consumed time and legal fees.

In addition, the arbitration panel's decision created a precedent for the carrier's other treaties. The carrier had three other excess-of-loss treaties covering different lines of business, all with similar occurrence definitions. The ruling in this arbitration could influence how those treaties are interpreted in future claims involving adjacent properties. The carrier's legal department estimated that the arbitration outcome could affect up to 15% of its multi-tenant property claims going forward, potentially increasing retained losses by $2–3 million annually if the occurrence definition is applied broadly.

Lessons for Small-Business Risk Managers and Agents

For franchisees and their agents, the case offers several practical takeaways. First, verify the policy definition of "building" before a loss occurs. Ask the carrier to confirm in writing whether the BOP covers the entire structure, including shared walls, roofs, and common areas, or only the leased square footage. If the carrier's definition is ambiguous, request a leasehold interest endorsement or a specific coverage extension for contiguous structures.

Second, review the franchise agreement's insurance requirements. Many franchise agreements specify minimum coverage limits and required endorsements, but they rarely mandate the precise policy language needed to avoid disputes. Agents should compare the franchise agreement's requirements with the actual policy wording and document any gaps. If the carrier's standard form does not meet the franchise agreement's specifications, the agent should request a manuscript endorsement.

Third, document the adjuster's interpretation of policy language in writing during the claims process. If the adjuster denies coverage based on a specific clause, ask for a written explanation citing the exact policy language and any supporting authority. This documentation can be critical if the dispute escalates to a regulatory complaint or litigation. In the case of the denied franchisee, the adjuster's verbal explanation was not recorded, and the carrier later changed its position, making it harder to prove bad faith.

Fourth, escalate ambiguous denials to the state insurance department. The department's market conduct examination in this case was triggered by a single policyholder complaint. The exam not only resolved the individual claim but also led to systemic changes at the carrier. Policyholders who accept a denial without challenging it may miss an opportunity to correct a broader pattern of misreading.

Finally, consider the reinsurance implications when structuring coverage for franchisees in multi-tenant buildings. Agents should ask carriers whether their reinsurance treaties treat losses from adjacent franchisees as a single occurrence or multiple occurrences. If the treaty aggregates losses, the carrier may have an incentive to deny borderline claims to avoid exceeding the retention. Understanding this dynamic can help agents advise clients on the likelihood of coverage disputes.

The case of the two franchisees is not an isolated incident. It reflects a systemic vulnerability in the BOP market that has persisted for years. The regulatory filing, the underwriting gap, and the reinsurance dispute all point to the same conclusion: standard policy language, designed for simpler risks, is being applied to complex multi-tenant commercial properties without adequate adjustment. Until carriers update their forms and training, franchisees and their agents must remain vigilant. The question that remains open is whether the industry will move toward franchise-specific BOP forms or continue to rely on ambiguous standard language that shifts the burden of interpretation to adjusters and policyholders.

For a deeper look at how policy language can produce divergent outcomes for similar risks, see this analysis of a crop insurance dispute. Another case study on membership vote splitting premium pools illustrates how governance structures can create similar inequities.

This article is for informational purposes only and does not constitute professional insurance, legal, or risk management advice. Policyholders and agents should consult qualified professionals for guidance specific to their circumstances.