iso forms v. company or state specific forms

Copyright. The Society of Certified Insurance Service Representatives, Incorporated. All rights reserved. This material includes copyrighted material of ISO Properties, Inc. with its permission. This course or any part thereof may not be reproduced, copied, republished, uploaded, posted, transmitted, or distributed in any form or by any means or stored in any information retrieval system without the express written consent of the National Alliance for Insurance Education and Research and the Society of CISR. All trademarks and services marks are proprietary to The Society of CISR, or its affiliates or licensees.

ISO Forms v. Company or State Specific Forms

Insurance companies often use policy forms other than the ISO Commercial Casualty Exposure forms. These policies may incorporate language similar to the ISO Forms in their contract and endorsement language. You must also be aware that state specific forms often contain different provisions than the ISO Standard Forms.

Be sure to look for differences between the ISO Forms which we study in this course, and the company specific or state specific forms that you use in your job.

Forms used in this course are located by clicking on the Forms Library link. We also present a link to the forms used at the beginning of each lesson.

Course Objectives Overview

This course consists of six lessons:

1. Fundamentals of Commercial Property Insurance 2. Structure of the Commercial Property Policy 3. Building Personal Property Coverage Form 4. Causes of Loss Forms 5. Basics of Time Element Insurance 6. Commercial Inland Marine (IM) Insurance

Each lesson is further broken down into topics. In each topic, you will have content to read, graphical material to view, and self-quizzes to test your comprehension of important points. You may link to the final exam after completing all of self quizzes in the course with a score of 70 or above.

CISR Commercial Property Course Print

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Lesson 1 – Fundamentals of Commercial Property Insurance

The primary purpose of this lesson is to build the necessary foundation of words, phrases and policy provisions for commercial property insurance. We will focus principally on basic concepts as identified in the Learning objectives stated on the next page. The knowledge gained in this lesson is key in understanding the material presented in the remaining lessons.

Lesson 1 - Topics of Discussion

Topics in this lesson include:

• Commercial Property Exposed • Insurable Interest • Types of Loss • Valuation of Commercial Property • Coinsurance • Writing Commercial Property Coverage • Handling Value Fluctuations

Lesson 1 - Learning Objectives:

After completing this lesson, you will be able to:

1. Identify the types of commercial property exposed to loss. 2. List parties that could have an insurable interest in property. 3. Understand the difference between direct and indirect loss. 4. Define actual cash value (ACV), replacement cost, and functional replacement value. 5. Explain the coinsurance formula and given appropriate information, determine an adequate policy

limit and explain how to apply the coinsurance formula after a loss occurs. 6. Define Agreed Value. 7. Identify the difference between specific, schedule, and blanket coverage. 8. List ways to provide coverage for fluctuating business personal property values. 9. Calculate amounts payable under the Value Reporting Form penalty provisions.

Forms that you need to print for this lesson:

• Peak Season Limit of Insurance (CP 12 30) • Value Reporting (CP 13 10)


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Lesson 1 Topic A – Commercial Property Exposed to Loss

Learning Objective: Identify the types of commercial property exposed to loss.

1. Real Property

Real property is comprised of buildings, structures and fixtures that are tangible. Real property can be seen.

• Land is real property, but it is generally not the subject of insurance. • Buildings are real property. They have walls and a roof. You can probably envision many types of

buildings, ranging from a small one-story office to a skyscraper. • Structures. A structure is any construction, including buildings. However, examples of structures

that are not buildings include a 3-sided lumber yard storage shed or a gazebo. Another example can be seen in the picture to the left. A stadium is an example of a structure.

• Outdoor Fixtures. These are man-made objects, other than buildings or structures, that are attached to land in some manner.


Commercial Property Exposed to Loss Continued

2. Personal Property

The insured's personal property is also known as Your Business Personal Property. Some of the commercial property coverage forms define what is covered as business personal property. In general, this includes most of the equipment, supplies, stock, machinery, etc., and material used to operate the named insured's business.

Office equipment is an example of Your Business Personal Property.


Commercial Property Exposed to Loss Continued

3. Personal Property of Others

Personal property of others is property that is in the care, custody, or control of the insured. Many businesses have property of others on their premises. When this exposure is incidental, we use commercial property coverage forms.

If the exposure is extensive, we could use commercial inland marine coverage forms.


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Lesson 1 Topic B – Insurable Interest

Learning Objective: List parties that could have an insurable interest in property.

Parties with an insurable interest have a financial stake or equity in a property. In the instance of commercial property, these parties are:

• Owner: Business owners stand to lose their investment in their building and other property as well as their source of income.

• Mortgage or Lien Holder: The mortgage or lien holder has an insurable interest when there is an unpaid balance on the property loan.

• Lessees or Tenants: When tenants sign leases, they are granted the right to occupy the designated premises for a stipulated period of time. This right-to-use creates an insurable interest for the tenant.

• Signers of Contractual Agreements: Certain contracts, such as those signed when leasing phone systems, copy machines or even entire buildings, may require the lessee to provide direct damage insurance on the leased property. This contractual arrangement creates an insurable interest.

Lesson 1 Topic C – Types of Loss

Learning Objective: Understand the difference between direct and indirect loss.

Direct

A direct loss is loss or damage as a direct result of a covered cause of loss.

Example:

A building that burns because of a fire (a covered peril) illustrates a direct loss. The building was directly affected by the fire.

Indirect

A loss of income resulting from a direct loss to property is an indirect loss.

Example:

A tornado destroys the business (a direct loss). Now the business cannot operate and loses income (indirect loss) until the business can rebuild or move to another location.


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Lesson 1 Topic D – Valuation of Property

Learning Objective: Define actual cash value (ACV), replacement cost, and functional replacement value.

How commercial property is valued is very important, particularly at the time of a loss. Several valuation options can apply to commercial property policies. The four types we will cover in this course are listed to the right.

Actual Cash Value (ACV): A method of establishing the value of property wherein depreciation and obsolescence are deducted from the value of the property. Formula: replacement cost minus depreciation = actual cash value (ACV) (CISR, CSRM Glossary)

Replacement Cost: The cost to repair or replace damaged property with like kind and quality without taking into account depreciation.

Functional Replacement Cost: An insurance valuation option based on use instead of construction of the property. The limit of insurance usually reflects the value to replace with less costly property or materials than the existing property.

Selling Price Clause for Stock Sold, But Not Delivered: A property insurance provision that changes the value on finished goods to that of their selling price rather than their actual cash value or replacement cost; therefore, profit is included in the insured amount.

We'll discuss each one more fully in this section.


Actual Cash Value

ACV is the traditional valuation method used in writing insurance policies.

The intent is to place the insured back into the same situation that existed prior to the loss, being no better or worse off as a result of a loss.

If you are writing an actual cash value insurance policy, you must carefully explain this concept to your clients since they will be responsible for the amount of the loss that is a result of depreciation or betterment, as this amount will be deducted from the payment when the claim is adjusted.

With ACV Valuation, insureds share in the cost to replace or restore property, should a total loss occur.

Example:


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The roof of a building has a useful life of 20 years, depreciating at a rate of 5% per year.

If a covered loss occurs when the roof is 10 years old, 50% of the roof's replacement cost at the time of the loss is deducted in calculating the actual cash value.

In other words, the insurer will only pay for half of the amount it will take to replace the roof.


Replacement Cost Value

In addition to actual cash value (ACV), replacement cost is another commonly used method of valuation.

This valuation method will cover the amount needed to replace a premises or item with like kind and quality in today's dollars.

Depreciation is not considered when using replacement cost. Most insureds prefer this method of valuing property over ACV because they want their insurance company to cover the entire cost of replacing damaged or destroyed property.

Take a look at the table to see how these two valuation options work.

Tip: Replacement Value is assessed at the time of loss.

Please refer to Lesson 1 Topic D Valuation of Commercial Property p4-5 (IP) to complete the Knowledge Checks at this time.


Functional Replacement Cost

Occasionally, insureds have property that cannot, or has no need to be “put back” exactly the way it was. Sometimes structure replacement with like kind and quality materials is cost prohibitive or unnecessary.

The insured’s concern in the case of a total loss would be to have replacement property that would provide a similar function or use instead of construction.

Reasons for electing this type of coverage include:

Table 1.1: ACV and Replacement Cost Comparison

Actual Cash Value Insurance Replacement Value: $100,000 Depreciation: - $20,000 ACV Paid: $80,000

Replacement Cost Coverage Replacement Value: $100,000 Depreciation Not Considered Replacement Cost Paid: $100,000


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1. Actual replacement of the original property is not feasible or is not desired. 2. Limit of insurance is based on the amount needed to buy property that will serve the same purpose as the

original property. 3. Functional replacement addresses the obsolescence problem of old, out-of-date properties.

An example of the need for functional replacement cost is when solid brick construction is replaced by modern, less expensive materials.

Selling Price Clause for Stock Sold, but not Delivered

This clause states that once stock (merchandise) is sold, the value of that stock will be its selling price. Profits gained from the sale are included in the coverage.

Example:

A retail furniture store buys a sofa wholesale for $500. It retails for $900. The sofa is sold, but not yet delivered, when a fire destroys the store. The policy will pay $900 because the Selling Price Clause allows the insured to recoup its profits from the sale of the sofa, in this case the additional $400.


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Lesson 1 Topic E - Valued Policy Laws

A number of states have legislation governing valuation of certain property in the event of a total loss. If the insured's property is totally destroyed by a peril specified in the state law, the amount stated in the Declaration Page is considered to be the value of the property at the time of loss and is payable in full.

A valued policy law would apply to a certain type of property and a specific peril. Not every state has passed a valued policy law.

Lesson 1 Topic F – Coinsurance

Learning Objective: Explain the coinsurance formula and given appropriate information, determine an adequate policy limit and explain how to apply the coinsurance formula after a loss occurs.

What is Coinsurance?

Coinsurance is an insurance-to-value requirement wherein the insurer stipulates that the insured must carry an amount of insurance equal to a specified percentage of the value of the property.

These specified percentages may be 80%, 90% or 100%, and either Actual Cash Value or Replacement Cost may be used in valuation of the property. As long as the insured carries the required amount of insurance, there is no penalty. If the insured carries less than the required amount of insurance, a penalty applies. This means that the insured will not collect the full amount of the loss.


Why Is It Necessary?

Writing policies for limits of insurance that match the exposures at risk is important for both insurance companies and insureds. The company collects an appropriate premium for the exposure, and the insured is more likely to carry enough insurance to pay for losses.

Table 1.2: Benefits of Coinsurance For The Insured For the Insurer

• Adequate limits of insurance in the event of a loss • Lower rate per $100 of insurance, making it more

economical to buy the higher amount required

• Better premium level per risk insured • Prevents the purchase of insurance for the

payment of small maintenance losses


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• Insures rate adequacy over time


Coinsurance Formula

Insurance Carried: The limit of insurance shown on the policy.

Insurance Required: The value of the property at the time of the loss multiplied by the coinsurance percentage shown on the declarations page. If the insured complies with the requirement, this will be equal to 1, and no penalty will be applied to the loss.

Loss: The amount of a claim an insured presents to an insurer.

Loss Payment: The amount an insurer pays to indemnify an insured under the terms of the policy.

The formula is designed to reduce the loss payment by a coinsurance penalty if the insured does not carry adequate limits of insurance to handle the loss.

If the insured carries enough insurance, no penalty will be applied to the loss.

When you examine this formula, you can see that there are three calculations that you must understand.


Coinsurance formula continued

We’ll learn how to use the formula by pretending that we have a $50,000 covered building loss. Use the following facts:

• The policy requires that the insured carry limits sufficient to cover 80% of the building value. • The replacement cost of the building is $250,000.


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• The insured’s policy shows a building limit of $180,000 • The amount of the loss is $50,000

Calculation 1 - How much insurance SHOULD HAVE been carried? Multiply the coinsurance percentage by the building at the time of the loss. You can do this by selecting the appropriate numbers from the drop down menus in the fields. Hold your mouse over each gray box and select the amount that: first, represents the percentage of required limits noted above, and second, the replacement cost noted above.



We’ve discovered that the insured SHOULD HAVE carried at least $200,000 (80% of $250,000). How does that compare to what he DID carry?

Calculation 2: Calculate the ratio that will be applied to the loss.

Click on the first two gray boxes and type in the amounts below. Then click on "Calculate". It is not necessary to enter the dollar signs or commas:

$180,000 (Insurance Carried) DID HAVE $200,000 (Insurance Required) SHOULD HAVE

Answer: The insurance company will pay for 90% of the loss amount. The insured must pay 10% of the loss amount, in addition to any deductible.




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Calculation 3: Return to the coinsurance formula to determine how much the insurance company will pay.

Insurance carried/Insurance required = 90% of the amount they should have carried

Actual loss = $50,000 loss payment



Tip: Remember, if the insured carries sufficient limits, the coinsurance formula is not applied.

Let’s review the formula from another angle. We will look at a situation in which the insured is adequately covered.

• Building Value (at time of loss) $100,000 • Coinsurance Clause 80% of Building Value (at time of loss) • Insurance Carried $85,000 • Amount of Loss $10,000

How do you determine the amount of insurance required?

1. Multiply 80% times the building value at the time of the loss 2. Use the 100% of the building value at the time of the loss

Correct Answer is 1

80% X $100,000 is $80,000. When you compare this to the $85,000 limits actually in force, you find that the insured has met the coinsurance requirement.


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Tip:

National Alliance classroom instructors have a great tip for remembering the coinsurance formula for determining how much the insurance company will pay: “Did have" divided by "Should have" multiplied by the loss amount When working coinsurance problems, don’t just use the replacement cost of the building for “Insurance Required”. Make sure you’ve considered the ratio of insurance to value required by the insurance company.

Learning Objective: Define Agreed Value

Agreed Value

There are situations when an insured does not want to be subject to the coinsurance provision. This can be done under certain property policies by electing the Agreed Value provision. By activating this provision the coinsurance requirement is suspended. This is a result of the insured and the insurance company agreeing on the value of the property as established when the insurance company approves a Statement of Values form completed and signed by the insured. The features of Agreed Value include:

• The insurer suspends any coinsurance requirement as long as the insured carries an amount of insurance equal to (or greater than) the agreed upon value.

• This coverage remains in effect for one year only, and must be renewed each year. A new statement of values must be filed with the insurance company each year.

• The insured pays a higher rate per $100.


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Lesson 1 Topic G - Writing Commercial Property Coverage

In this topic, we discuss the ways you can write commercial insurance policies. The three ways are by using:

• Specific Coverage • Schedule Coverage • Blanket Coverage

Learning Objective: Identify the difference between specific, schedule, and blanket coverage.

Specific Coverage

Under this method, a fixed amount of insurance applies separately to each item insured.

Building Limit: $100,000 Personal Property Limit: $50,000

$100,000 Building Limit + $50,000 Personal Property Limit


Schedule Coverage

You may hear the phrase Schedule Coverage. This is a list of specifically insured items at two or more locations.


$100,000 Building Limit + $50,000 Personal Property Limit


$150,000 Building Limit + $25,000 Business Personal Property Limit


Blanket Coverage

When the insured has multiple locations and multiple types of property, the process of writing coverage can be complex. As opposed to specific or scheduled coverage, blanket coverage is a method of writing property insurance with a single limit of insurance applying to more than one type of property (real or personal) or


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property at more than one location.


Blanket Coverage continued

Insurance companies can write blanket coverage one of two ways:

1. A single limit applying to one type of property (real or personal) at more than one insured location.

Recall that with scheduled coverage, each location is listed separately with a valuation limit for each item.

With blanket insurance, one limit, in this case S600,000, is written to apply to all three locations. This is an example of blanket insurance that covers one type of property at multiple locations.

2. A single limit of insurance applying to more than one type of property (real and personal) at one or more insured locations.

In this example we examine another way blanket insurance can be used. It can be used to cover 2 types of property at 1 or more locations.

All three locations and personal property are covered under a $600,000 total blanket limit.


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Let's examine what happens if you don't have blanket insurance. Suppose you have schedule insurance and you move personal property from one location to another.

Remember that with schedule insurance you have a valuation limit for each type of property at each location. In this example. The value of personal property in location one has decreased from $25,000 to $15,000. While the value of personal property in location two has increased from $50,000 to $60,000.

When you have blanket insurance to cover two types of property at one or more locations, your total limit can be shifted from one location to another.


Blanket Coverage Requirements

When writing blanket coverage, certain requirements must be met:

• A minimum coinsurance of 90% generally is required.

• A Statement of Values listing each location and all property to be covered must be signed by the insured.

• Same Causes of Loss must apply to all property.

Due to the nature of the insured's operations some properties cannot be blanketed.


Advantages and Disadvantages of Blanket Insurance

Advantages

• The ability to apply the limit of insurance where needed when more than one type of property is covered.


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• Coinsurance applies to the total blanket limit rather than to each separate item.

• Insured has up to 100% insurance at each location, but only has to carry 90% insurance to value.

• When the policy covers personal property at several locations the insured does not have to worry about fluctuating value between or among locations.

Disadvantages • An annual signed Statement of Values is required. • Possible underwriting restrictions. • Can cost more (surcharge in rate for some Causes of Loss) • Some properties cannot be blanketed. • Limitation on Loss Settlement - Blanket Insurance (Margin Clause) Endorsement (CP 12 32)

POLICY NUMBER: COMMERCIAL PROPERTY CP 12 32 06 07

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.

LIMITATION ON LOSS SETTLEMENT – BLANKET INSURANCE (MARGIN CLAUSE)

This endorsement modifies insurance provided under the following:

BUILDING AND PERSONAL PROPERTY COVERAGE FORM CONDOMINIUM ASSOCIATION COVERAGE FORM CONDOMINIUM COMMERCIAL UNIT-OWNERS COVERAGE FORM STANDARD PROPERTY POLICY

SCHEDULE

Premises Number: Building Number: Margin Clause: %

Description Of Property:





Information required to complete this Schedule, if not shown above, will be shown in the Declarations. A. This endorsement applies to loss settlement on property that is subject to a Blanket Limit of Insurance. A Blanket Limit of Insurance is a single Limit of Insurance that applies to any of the following as

B. Margin Clause With respect to property that is subject to a Blanket Limit of Insurance, we will determine a maximum loss payable for each building and for the contents of each building or the contents at each premises.

http://magma.magma.scic.com/Elearning/IP/CP12326Q.pdf


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shown elsewhere in this policy: 1. Two or more buildings; 2. Building and contents; 3. Contents of more than one building; or 4. Contents at more than one premises. Actual loss payment will be determined based on the amount of loss or damage subject to all applicable policy provisions including the Limits of Insurance Condition, Coinsurance, Deductible and Valuation Conditions. But the actual loss payment, for each building, for the contents of each building or for the contents at each premises, will not exceed the maximum loss payable as described above and will not exceed the Blanket Limit of Insurance. The Margin Clause does not increase the Blanket Limit of Insurance. C. Examples In the following examples, the figures and Margin Clause percentages are used for illustrative purposes only and do not reflect your actual insurance. EXAMPLE #1 Buildings #1 through #3 are covered under a Blanket Limit of Insurance of $4,500,000. The combined value of these three buildings at the time of loss is $5,000,000. There is a Coinsurance requirement of 90% (.90 x $5,000,000 = $4,500,000); therefore no Coinsurance penalty. The value stated for Building #1 is $1,000,000. The Margin Clause percentage is 120%. The maximum loss payable for Building #1 is $1,200,000 ($1,000,000 x 1.20). Building #1 sustains a loss of $1,200,000. The Deductible is $10,000. Step (1): Amount of loss minus Deductible

($1,200,000 – $10,000 = $1,190,000) Step (2): Since $1,190,000 is not more than the

maximum loss payable, we will pay $1,190,000.

The maximum loss payable is determined by applying the applicable Margin Clause percentage indicated in the Schedule to the value of the property as shown in the latest statement of values reported to us. If the statement of values does not state individually the value of each building and the value of contents at each building or premises, we will determine individual values as a part of the total reported values prior to application of the Margin Clause percentage. EXAMPLE #2 Buildings #1 through #3 are covered under a Blanket Limit of Insurance of $4,500,000. The coverage in this example is written without a Coinsurance requirement. The value stated for Building #1 is $1,000,000. The Margin Clause percentage is 115%. The maximum loss payable for Building #1 is $1,150,000 ($1,000,000 x 1.15). Building #1 sustains a loss of $1,300,000. The Deductible is $10,000. Step (1): Amount of loss minus Deductible ($1,300,000 – $10,000 = $1,290,000) Step (2): The result of Step (1) exceeds the

maximum loss payable. We will pay $1,150,000, the maximum loss payable in accordance with the Margin Clause.

EXAMPLE #3 Buildings #1 through #3 are covered under a Blanket Limit of Insurance of $4,000,000. The combined value of these three buildings at the time of loss is $5,000,000. There is a Coinsurance requirement of 90% (.90 x $5,000,000 = $4,500,000); therefore the Blanket is underinsured and there will be a Coinsurance penalty. The value stated for Building #1 is $1,000,000. The Margin Clause percentage is 120%. The maximum loss payable for Building #1 is $1,200,000 ($1,000,000 x 1.20). Building #1 sustains a loss of $1,200,000. The Deductible is $10,000. Step (1): Amount of Blanket Limit divided by

Coinsurance requirement ($4,000,000 ÷ $4,500,000 = .889)

Step (2): Amount of loss times Coinsurance penalty factor ($1,200,000 x .889 = $1,066,800) is the adjusted amount of loss

Step (3): Adjusted amount of loss minus Deductible ($1,066,800 – $10,000 =


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$1,056,800) Step (4): We will pay $1,056,800 (less than the

maximum loss payable). The remainder of the loss, $143,200, is not covered due to application of the Coinsurance penalty and Deductible.


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Lesson 1 Topic H - Handling Value Fluctuations

Learning Objective: List ways to provide coverage for fluctuating business personal property values.

Many businesses have varying levels of inventory.

Example:

A children's toy store may start stockpiling inventory for the Christmas season beginning in August. The store's inventory continues to increase as the holiday shopping season nears. By January, inventory may drop suddenly as the shopping season ends.

This fluctuation in values can be handled by endorsing the policy every time a change occurs, but that would not be very efficient. The use of the following approaches better address how to insure businesses with fluctuating business personal values:

1. Blanket Coverage

2. Peak Season Endorsement (CP 12 30)

3. Value Reporting Form (CP 13 10)

http://magma.magma.scic.com/Elearning/IP/Cp12300695z.PDF

http://magma.magma.scic.com/Elearning/IP/CP13104L.PDF


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THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.

PEAK SEASON LIMIT OF INSURANCE


BUILDING AND PERSONAL PROPERTY COVERAGE FORM CONDOMINIUM COMMERCIAL UNIT-OWNERS COVERAGE FORM STANDARD PROPERTY POLICY

Schedule*

Peak Season Prem. Bldg. Covered Additional Limit Period No. No. Property Of Insurance From To

The Limit of Insurance on covered personal property is increased to include the amount shown in the Schedule:

A. At the described location(s); and

B. Only from 12:01 A.M. Standard Time of the first day to 12:01 A.M. Standard Time of the last day of the applicable period(s) shown in the Schedule.

* Information required to complete this Schedule, if not shown on this endorsement, will be shown in the Declarations.


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THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. VALUE REPORTING FORM


BUILDING AND PERSONAL PROPERTY COVERAGE FORM CONDOMINIUM COMMERCIAL UNIT-OWNERS COVERAGE FORM STANDARD PROPERTY POLICY

One or more of the following symbols will be shown in the Declarations in place of a Coinsurance percentage: DR, WR, MR, QR, PR. For an explanation of these symbols, refer to "Reporting Period" under Section D. - Definitions.

A. Additional Covered Property 1. Covered Property is extended to include personal

property at the following types of locations for which a Limit of Insurance is shown in the Declarations or on the Reported - Acquired - Incidental Locations Schedule: a. "Reported locations"; b. "Acquired locations"; and c. "Incidental locations".

2. The following is added to Property Not Covered: Covered Property does not include property at fairs or exhibitions.

B. Reporting Provisions For Covered Property to which this endorsement applies: 1. Reports Of Values

a. You must file a report with us following each "reporting period" and at expiration, in accordance with b. or c. below, showing the values of Covered Property separately at each location. Each report must show the values that existed on the dates required by the "reporting period"; these dates are the report dates.

b. If this policy is a renewal of a value reporting form policy we previously issued, you must file a report with us within 30 days of the end of each "reporting period" and at expiration.

c. If coverage was not previously issued by us on a value reporting form basis and:

(1) Reporting Period symbol DR (Daily), WR (Weekly) or MR (Monthly) is shown in

(a) File the first report with us within 60 days of the end of the first "reporting period"; and

(b) File the second report with us within 30 days of the end of the second "reporting period", concurrent with sub- mission of the first report; and

(c) File each subsequent report with us within 30 days of the end of each subsequent "reporting period" and at expiration.

(2) Reporting Period symbol QR (Quarterly) is shown in the Declarations and the inception date of the policy falls in March, June, September or December, you must:

(a) File the first report with us within 60 days of the end of the first "reporting period"; and

(b) File each subsequent report with us within 30 days of the end of each subsequent "reporting period" and at expiration.

(3) Reporting Period symbol QR (Quarterly) is shown in the Declarations and the inception date of the policy does not fall in March, June, September or December, you must file a report with us within 30 days of the end of each "reporting period" and at expiration.

(4) Reporting Period symbol PR (Policy Year) is shown in the Declarations, you must file a report with us within 30 days of the end of each "reporting period" and at expiration.

d. For property at "incidental locations", your reports must show separately the entire values in each state.


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e. You may not correct inaccurate reports after loss

or damage. 2. Full Reporting

The Coinsurance Additional Condition is replaced by the following: COINSURANCE a. If your report of values for a location where loss

or damage occurs, for the last "reporting period" before loss or damage, shows less than the full value of the Covered Property at that location on the report dates, we will pay only a proportion of the loss. The proportion of loss payable, prior to application of the deductible, will not be greater than the proportion determined by:

(1) The values you reported for the location where the loss or damage occurred, divided by

(2) The value of the Covered Property at that location on the report dates.

b. For locations you acquire after the last report of values, we will not pay a greater proportion of loss, prior to the application of the deductible, than the proportion determined by:

(1) The values you reported for all locations, divided by

(2) The value of the Covered Property at all locations on the report dates.

Example of Under Reporting: If: The values reported are $90,000

The actual values on the report dates were $20,000 The deductible is $ 250 The amount of loss is $60,000

Step a: $90,000 $120,000 = .75 Step b: .75 x $60,000 = $45,000 Step c: $45,000 - $250 = $44,750 The most we will pay is $44,750. The remaining $15,250 is not covered.

3. Reports In Excess Of Limit Of Insurance If the values you report exceed the Limit of Insurance: a. We will determine final premium based on all

the values you report, less "specific insurance"; b. In the event of loss or damage, we will not pay

more than the Limit of Insurance applicable to the Covered Property.

4. Failure To Submit Reports If at the time of loss or damage you have failed to submit: a. The first required report of values:

(1) We will not pay more than 75% of the amount we would otherwise have paid; and

(2) We will only pay for loss or damage at locations shown in the Declarations.

b. Any required report of values after the first required report:

(1) We will not pay more for loss or damage at any location than the values you last reported for that location; and

(2) We will only pay for loss or damage at locations reported in your last report filed before the loss.

5. Treatment Of "Specific Insurance" a. You must include the amount of all "specific

insurance" in your reports of value. b. We will subtract the value of "specific

insurance" from your values when computing advance and final premium under this endorsement.

Example: If: The value of the property is $400,000

The amount of "specific insurance" is $50,000 The Limit of Insurance under this form is $300,000 Your report of values should show: Value of Property $400,000 Amount of "Specific Insurance" $50,000 Difference $350,000 We will compute final premium based on the values in excess of reported "specific insurance" during the policy year.

c. Subject to all other applicable provisions of this policy, including the applicable Limit of Insurance, the most we will pay is that portion of the loss that exceeds the sum of (1) and (2) below:

(1) The amount due from "specific insurance", whether you can collect on it or not; plus

(2) The amount of any deductible applying to such "specific insurance".


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Examples The following examples assume that the Reporting Provisions applicable to this form have been complied with. If: the amount of the "specific insurance" is

$50,000; the Limit of Insurance under this form is $300,000; the Deductible applicable to the "specific insurance" is $5,000; and the Deductible applicable to this insurance is $1,000;

we will determine the most we will pay as follows: Example #1 ("Specific insurance" not subject to a coinsurance requirement.) Amount of loss $300,000 Deductibles

"Specific Insurance" $ 5,000 This insurance $ 1,000

Amount due from "Specific Insurance" $50,000*

$56,000 - $ 56,000 The most this insurance will pay $244,000 The most payable, combined, from the "specific insurance" and this insurance is $294,000 ($50,000 + $244,000). The remainder of the loss, $6,000, is not covered. Example #2 ("Specific insurance" subject to 100% coinsurance requirement. Value of property at time of loss is $350,000.) Amount of loss $300,000 Deductibles



$43,900 - $ 43,900

The most this insurance will pay $256,100 The most payable, combined, from the "specific insurance" and this insurance is $294,000 ($37,900 + $256,100). The remainder of the loss, $6,000, is not covered.

Example #3 ("Specific insurance" subject to 100% coinsurance requirement. Value of property at time of loss is $370,000.) Amount of loss $360,000 Deductibles



$49,600 - $ 49,600 $310,400

The most this insurance will pay is $300,000 (the Limit of Insurance). The most payable, combined, from the "specific insurance" and this insurance is $343,600 ($43,600 + $300,000). The remainder of the loss, $16,400, is not covered. *The amount due from "specific insurance" will vary based on such factors as the amount of loss, the value of property at time of loss, and the coinsurance requirement, if any, applicable under the policy providing "specific insurance". C. Premium Adjustment

For Covered Property to which this endorsement applies: 1. The premium charged at the inception of

each policy year is an advance premium. We will determine the final premium for this insurance after the policy year, or expiration, based on the average of your reports of value.

2. Based on the difference between the advance premium and the final premium, for each policy year, we will: a. Charge additional premium; or b. Return excess premium. The due date for any additional premium is the date shown as the due date on the bill.

D. Definitions 1. "Acquired Locations" means any locations in

the policy territory acquired after the inception of the coverage under this endorsement.

2. "Incidental Locations" means any locations not shown in the Declarations, other than "acquired locations" and "reported locations", with values of $25,000 or less.


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3. "Reported Locations" means any locations, other than those shown in the Declarations, that have been reported to us at the inception of the coverage under this endorsement.

4. "Reporting Period" means the period of time for which new reports of value are due, as shown by a symbol in the Declarations. If the symbol is: a. DR (Daily), reports must show values as of each

day; but the "reporting period" ends on the last day of the month.

b. WR (Weekly), reports must show values as of the last day of each week; but the "reporting period" ends on the last day of the month.

c. MR (Monthly), reports must show values as of the last day of the month; and the "reporting period" ends on the last day of each month.

d. QR (Quarterly), reports must show values as of the last day of each month; but the "reporting period" ends on the last day of:

(1) March; (2) June; (3) September; and (4) December.

e. PR (Policy Year), reports must show values as of the last day of each month; but the "reporting period" ends on the policy anniversary date.

5. "Specific Insurance" means other insurance that: a. Covers the same Covered Property to which

this endorsement applies; and b. Is not subject to the same plan, terms,

conditions and provisions as this insurance, including this endorsement.


Blanket Coverage

Carrying blanket coverage is one way to handle changing values. With blanket coverage, one limit applies to property at multiple locations. There is no need to inform the insurance company when inventories move from one location to another.


Peak Season Limit of Insurance CP 12 30

Please refer to page 1 of the Peak Season Limit of Insurance Form.

The Peak Season Endorsement Form automatically increases the insured's business personal property limit for specified periods to take care of seasonal increases in values. On the form, the insured lists the location, the type of property covered, the additional limit of insurance and the specific time period covered. You can list as many peak seasons as needed. This endorsement is good for those types of business that have the same levels of fluctuation at the same time year after year.


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There are some drawbacks to using this form. Limitations

1. The beginning and ending dates of the increased limits are very specific.

2. The insured's business personal property exposure may not exactly match the endorsement.

Learning Objective: Calculate amounts payable under the Value Reporting Form penalty provisions.

Value Reporting Form CP 13 10

The Value Reporting Form is for businesses that have fluctuating personal property values that are subject to change. It provides a way to maintain adequate coverage for changing values during a period of time, and charge an accurate premium that reflects these changes. Property eligible for coverage under the Value Reporting Form includes:

• The insured's merchandise and stock

• The insured's business personal property • The property of others in the insured's care


How it works

The Policy Limit The insured sets the policy limit to reflect the year's highest projected values. This is the limit that should be shown on the policy declaration page. Note: As long as the insured makes timely and accurate reports, this limit is available to pay losses throughout the term of the policy.

The Provisional Premium At the start of the policy year, the insured pays an advance premium based on 75% of the policy limit (the


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year's highest projected values). This "deposit" is called the provisional premium. The insured then submits periodic reports stating the amount of actual values at hand.


Periodic Reports

Table 1.4: Types of Periodic Reports

DR Daily; values computed daily but reported to insurer monthly WR Weekly; values computed weekly but reported to insurer monthly MR Monthly; most common report QR Quarterly PR Policy year. Note: Many companies will not offer this option.


How it works continued

At the end of the policy year, the insurer averages the reports to determine the final premium based on the average amount at risk. This final premium is applied to the provisional premium. Depending on the result, the insured is then reimbursed the balance of the provisional premium or is billed to pay additional premium.

The insured pays only for what was at risk, and the insurer receives a premium that matches the insured's exposure.

The insured is responsible for:

• Submitting timely periodic reports to the insurer. • Providing the insurer with honest and accurate reports. • Submitting reports within 30 days of the end of each reporting period.

EXCEPTION: The insured has 60 days to submit the first report of a new policy.


Penalties

Please refer to page 2 of the Value Reporting Form

What happens when the insured neglects to make timely and/or accurate reports? We discuss the penalties


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here.


Full Reporting

First, note that the Coinsurance condition is replaced. The Value Reporting Form states that an insured must make accurate reports. If he or she does not, the loss payment is reduced. The policy will pay a percentage based on what the insured reported. Here is an example. Joe's CD Land incurs a $10,000 loss. Joe reported $80,000 when, in fact, the business had $100,000 on hand on the date of the Value Reporting Form. The policy says to:

1. Divide the amount reported by the actual amount on hand (or what Joe should have reported), then;

2. Multiply the loss by the percentage derived in Step 1.

To calculate the loss payment for Joe's CD Land: Step 1: $80,000/$100,000 = 80% Step 2: 80% x $10,000 = $8,000 will be paid.


Reports in Excess of Limit of Insurance

The most the policy will pay is the amount stated on the Declaration page, even if the insured accurately reports a higher amount. Even though the insured will not collect more than the policy limit, the total amount reported will be included in the final premium calculation.

Tip: If an insured does report an amount higher than the limit, endorse the policy immediately to reflect the higher amount of coverage.


Failure to Submit Reports

The penalties for late reports are handled in two ways:


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1. If the insured never makes a report (or if the first report is delinquent) The policy will pay 75% of the amount that otherwise would have been paid.

2. If the insured stops making reports If the insured makes the first report and then at some point in the policy year stops making reports, the policy will pay no more than the amount reported on the insured's last report.


Failure to Submit Reports Continued

Let's take Joe's CD Land again. Joe makes accurate and timely reports for six months at which time he stops. The last value reported was $60,000. If Joe's CD Land then suffers a loss, the most the policy will pay is $60,000, even if the loss exceeds that amount. The table below reviews these four situations that could arise and the consequences to the insured should a loss occur. Please note that the limit of insurance in this example is $100,000 and anything paid to the insured is calculated at the time of loss

Full Reporting Provision Report in excess of the limit

Failure to Submit First Report Failure to Submit Subsequent Reports

Insurer pays the percentage reported

Insurer pays the policy limit

Insurer pays 75% of the amount that otherwise would have been paid

Insurer pays the last reported value

Example Example Example Example Reported: $40,000 Reported: $125,000 No Report Last Reported Value:

$82,000 Actual Values at the time

of report: $80,000

Loss: $60,000 Loss: $125,000 Loss: $80,000 Loss: $100,000 Policy pays $40,000

÷$80,000 X $60,000 = $30,000

Policy Pays: $100,000

Policy Pays: $60,000 Policy Pays: $82,000


Value Reporting Form continued

Advantages of Value Reporting

• Insured only pays for actual amount at risk

• Company receives premium for actual value


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Disadvantages of Value Reporting

• Paperwork intensive

• Insured pays penalties if reports are late or are inaccurate

Note: To learn more about Value Reporting, read over Form CP 13 10.


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Lesson 2

Structure of the Commercial Property Policy – Introduction

As you complete lesson 2, you will understand the structure of a Commercial Property Policy and how it can provide different coverages to businesses and other organizations. The Commercial Property Policy contains the following modules:

• Common Policy Declarations, • Common Policy Conditions and • Commercial Property Conditions.

Depending on the needs of the insured, there will be a selection of forms to cover building and personal property and Causes of Loss Forms. Endorsements also might be added to the policy. The choice depends on what perils you need protection for. As you study the rights and responsibility of the First Named Insured in this chapter you will understand why the term first named insured has special significance for some provisions in the common policy conditions.

Lesson 2 – Topics of Discussion


• Structure of the Commercial Property Policy • Common Policy Declarations • Common Policy Conditions • Commercial Property Policy Declarations • Commercial Property Conditions

Lesson 2 – Learning Objectives:

1. Explain the structure of the Commercial Property Policy and define its component parts. 2. Identify the rights and responsibilities of the First Named Insured. 3. List Commercial Property Conditions that apply under Commercial Property Conditions CP 00 90


• Common Policy Conditions – (IL 00 17) • Common Policy Declarations - (IL DS 00) • Commercial Property Conditions - (CP 00 90)


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• Commercial Property Coverage Part Declarations - (CP DS 00)

Forms you have printed and will need for this lesson

None


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Lesson 2 Topic A - Structure of the Policy

Learning Objective: Explain the structure of the Commercial Property Policy and define its component parts.

• Common Declarations • Common Policy Conditions • Coverage Parts (for each line of insurance)

Components of the CPP

The simplified commercial lines forms are arranged in various "coverage parts". Each coverage part applies to a single line of insurance.

Contents of the Commercial Package Policy (CPP)

COMMERCIAL LINES POLICY SIMPLIFICATION

Commercial Package Policy (CPP) = Common Policy Declarations + Common Policy Conditions

Coverage Parts Optional Tabbed Folders

Commercial Property Coverage Part Declaration Page ↓

Commercial General Liability Coverage Part ↓

Commercial Crime Coverage Part Declarations Page ↓

Inland Marine Coverage Part ↓

Equipment Breakdown Protection Coverage Form Declarations Page ↓

Building And Personal Property Coverage form

CGL Declarations Page

Commercial Crime Coverage Form

Inland Marine Declarations Page

Equipment Breakdown Protection Coverage Form

CP Conditions Form CGL Coverage Forms (Includes Conditions)

Inland Marine Coverage Forms

CP Coverage Form Inland Marine Conditions Forms

The glue that holds the pieces together is the Common Policy Declarations and the Common Policy Conditions.


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Lesson 2 Topic B - Common Policy Declarations

Think of the Common Policy Declarations Page as a summary, or a cover sheet, for the policy.

It lists the most pertinent information in summary format, allowing a quick review of the important details concerning the policy.

Please refer to Lesson 2 Topic B Common Policy Declarations p1 (IP) to view a sample Declarations page.

Named Insured: The “Named Insured” is the person or organization being insured in the policy.

Policy Period: The "Policy Period" lists the time span the coverage is in effect. Note that all policies begin at 12:01 A.M. standard time at the insured's mailing address.

Business Description: The "Business Description" requires a description of the insured's business.

Coverage Parts: The policy will contain only those "Coverage Parts" that are indicated by a premium change.


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Lesson 2 Topic C - Common Policy Conditions


Please refer to page 1 of the Common Policy Conditions Form.

Common Policy Conditions are the general provisions that govern all insurance policies. It may be helpful to think of conditions as rules. We will cover policy conditions in this topic.

1. Cancellation

The cancellation provision explains the conditions under which a policy may be cancelled. Ten Days: Notice of cancellation for nonpayment of premium. Thirty Days: Notice of cancellation for other reasons.

Every state has regulations regarding the cancellation of insurance policies, and there are corresponding state amendatory endorsements that change this condition.

2. Changes

Only the First Named Insured has the right to request changes to the policy. The insurance company must agree and then endorse the policy.

3. Examination of Books and Records

The insurance company may review a company's books and records for up to three years after the policy period.

4. Inspection and Surveys

The insurance company has the right to inspect the covered premises. However, that inspection is for insurability, and does not guarantee that the premises are safe, healthful, or comply with an organization's or government's standards.

5. Premiums

The First Named Insured is responsible for paying premiums. The First Named Insured also receives premium refunds due.

6. Transfer of Rights and Duties under this policy

The named insured may not transfer rights or duties contained in the Policy except in the event of death, and then only to the named legal representative. Note that until the legal representative is appointed, anyone having proper temporary custody of the insured's property has the insured's rights and duties.


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Learning Objective: Identify the rights and responsibilities of the First Named Insured.

First Named Insured

In this topic, it is important to understand the rights and responsibilities of the First Named Insured. The First Named Insured possesses rights, privileges, and responsibilities that are of extraordinary importance. Among these are:

1. The First Named Insured is the only person from whom the insurance company will accept a policy cancellation request.

2. The insurance company is obligated to notify only the First Named Insured should it decide to cancel the policy.

3. The First Named Insured receives any premium refund due when a policy is cancelled. 4. The First Named Insured is the only person from whom the insurance company will accept

requests for policy changes. 5. The First Named Insured is responsible for paying the policy premium. 6. Refund of a portion of the premium due to policy changes, will be made payable to the First

Named Insured.


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Lesson 2 Topic D - Commercial Property Declarations


Commercial Property Declarations page is the part of the insurance policy that deals specifically with property.

Named Insured: The name of the person organization being insured.

Description of Premises: States the building's address and gives a description of the business.

Coverages Provided: This section describes the coverage provided, including the policy's limits, the covered causes of loss and the appropriate coinsurance percentage.

Optional Coverages: These coverages apply only if correctly indicated on the Declarations Page. In this example, the insured has chosen Agreed Value, Replacement Cost for Building and Business Personal Property and Inflation Guard for Building and Business Personal Property. We will discuss each of these coverages later in the course.

Mortgageholders: Names any mortgagees on the insureds property.

Deductible: The standard deductible is S500, although the insured may choose a lower or higher option.

Forms Applicable: Any form that applies to the policy is listed here. These forms are usually shown by their form numbers rather than titles.


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Lesson 2 Topic E - Commercial Property Conditions

In this topic, we will discuss the conditions, or rules, that apply to commercial property insurance. These rules are described in more detail in Form CP 00 90 that you should have printed at the beginning of this lesson.

1. Concealment, Misrepresentation or Fraud This provision allows the company to void the contract if any insured intentionally conceals or misrepresents a material fact, or commits a fraudulent act, regarding the coverage, the covered property or a claim.

2. Control of Property An act by a person not under the insured's direction or control will not affect the insurance. If a breach of a policy condition occurs at a different location than the loss, the location of the loss will not be affected.

3. Insurance Under Two or More Coverages If there is coverage under more than one section of this policy for a covered loss, the insured will only be paid once for the adjusted loss.

Learning Objective: List Commercial Property Conditions that apply under Commercial Property Conditions CP 00 90.

Conditions continued

4. Legal Action Against Us In order to bring legal action against the insurance company, the insured(s) must have been in compliance with the policy conditions, and the action has to be brought within two years of the date of the loss.

5. Liberalization If the insurance company adopts a revision that broadens the coverage and is not subject to an additional premium charge, then the broadened coverage applies immediately to the Policy.

6. No Benefit to Bailee The insurance is only for the benefit of the insured. If the insured's property is damaged while in the custody of any other person or organization, the Policy only provides coverage for the insured and does not benefit the other person or organization.

http://magma.magma.scic.com/Elearning/IP/CP009078.pdf


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Learning Objective: List Commercial Property Conditions that apply under Commercial Property Conditions CP 00 90.


7. Other Insurance This condition addresses what will happen if more than one policy covers the insured property. If there is any other insurance on this property with another insurance company, we will pay our share of the covered loss or damage proportionately. If the other insurance on this property is primary, we will pay only for the amount of covered loss or damage in excess of the amount due from the other company, but not more than the applicable limit.

8. Policy Period, Coverage Territory Covered loss or damage must occur within the time period shown in the declarations in order for the policy to respond. In the commercial property forms, the coverage territory is specifically defined as the US, including its territories and possessions, Puerto Rico and Canada.

Learning Objective: List Commercial Property Conditions that apply under Commercial Property Conditions CP 00 90


9. Transfer of Rights of Recovery Against Others to Us (Subrogation) Once an insurer has paid for a loss, it is granted the right to recover the money from another party or entity that might have caused the loss.

The insured may waive its rights against another party in writing if it is:

1. Prior to a loss; or

2. After a loss if that party is:

a. An insured

b. A business owned or controlled by the named insured

c. A business that owns or controls the named insured

d. A named insured's tenant


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COMMERCIAL PROPERTY CP 00 90 07 88

COMMERCIAL PROPERTY CONDITIONS

A. CONCEALMENT, MISREPRESENTATION OR FRAUD This Coverage Part is void in any case of fraud by you as it relates to this Coverage Part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning: 1.This Coverage Part; 2. The Covered Property; 3. Your interest in the Covered Property; or 4. A claim under this Coverage Part.

B. CONTROL OF PROPERTY Any act or neglect of any person other than you beyond your direction or control will not affect this insurance. The breach of any condition of this Coverage Part at any one or more locations will not affect coverage at any location where, at the time of loss or damage, the breach of condition does not exist.

C. INSURANCE UNDER TWO OR MORE COVER- AGES If two or more of this policy's coverages apply to the same loss or damage, we will not pay more than the actual amount of the loss or damage.

D. LEGAL ACTION AGAINST US No one may bring a legal action against us under this Coverage Part unless: 1. There has been full compliance with all of

the terms of this Coverage Part; and 2. The action is brought within 2 years after

the date on which the direct physical loss or damage occurred.

E. LIBERALIZATION If we adopt any revision that would broaden the coverage under this Coverage Part without additional premium within 45 days prior to or during the policy period, the broadened coverage will immediately apply to this Coverage Part.

F. NO BENEFIT TO BAILEE No person or organization, other than you, having custody of Covered Property will benefit from this insurance.

G. OTHER INSURANCE 1. You may have other insurance subject

to the same plan, terms, conditions and provisions as the insurance under this Coverage Part. If you do, we will pay our share of the covered loss or damage. Our share is the proportion that the applicable Limit of Insurance under this Coverage Part bears to the Limits of Insurance of all insurance covering on the same basis.

2. If there is other insurance covering the same loss or damage, other than that described in 1. above, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.

H. POLICY PERIOD, COVERAGE TERRITORY Under this Coverage Part: 1. We cover loss or damage commencing:

a. During the policy period shown in the Declarations; and

b. Within the coverage territory. 2. The coverage territory is:

a. The United States of America (including its territories and possessions);

b. Puerto Rico; and c. Canada.


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I. TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO US If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing:

1. Prior to a loss to your Covered Property or Covered Income.

2. After a loss to your Covered Property or Covered Income only if, at time of loss, that party is one of the following: a. Someone insured by this insurance; b. A business firm:

(1) Owned or controlled by you; or (2) That owns or controls you; or

c. Your tenant. This will not restrict your insurance.


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Lesson 3 Building and Personal Property

The Building and Personal Property Coverage Form (CP 00 10) is one of the most frequently used commercial property forms. In the following lesson, a detailed examination of each of the provisions of this form will be discussed.

This lesson is very important because it helps you understand specific coverage details of the Building and Personal Property Coverage Form (CP 00 10).

By mastering this lesson, when other forms are studied, you will have learned how to apply the information that is covered in a form.

Please pay attention to the learning objectives in this lesson for guidance on how to analyze significant issues.

Lesson 3 – Topics of Discussion:

Topics in this lesson included:

• Property Covered • Property Not Covered • Additional Coverages • Coverage Extensions • Limits & Deductibles • Loss Conditions • Additional Conditions • Optional Coverages


1. Identify the types of property covered and property not covered by the Building and Personal Property Coverage Form.

2. Describe the Additional Coverages and Coverage Extensions provided by the Building and Personal Property Coverage Form.

3. Explain how vacancy affects coverage and the loss payment under the Building and Personal Property Coverage Form.

4. Define the rights of mortgage holders as provided in Commercial Property Coverage Forms. 5. Describe the Optional Coverages that may be "activated" from the Declarations of the Building

and Personal Property Coverage Form.


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Building and Personal Property Coverage Form (CP 00 10)

Forms you have printed and will need for this lesson

None


44

Lesson 3 Topic A - Property Covered

Learning Objective: Identify the types of property covered and property not covered by the Building and Personal Property Coverage Form.

Refer to page 1 of the Building and Personal Property Coverage Form

Covered property is described in form CP 00 10, subject to the insuring terms and limitations, for damage as a result of a covered cause of loss. Covered property includes the following. Building As stated below, "building", has a broad definition in Commercial Property Coverage forms. The term "building" includes the buildings or structures described on the Declarations Page, and completed additions to those building or structures. Building coverage also applies to fixtures, including outdoor fixtures, permanently installed machinery and equipment, and owned personal property used to service and maintain the building, structure or its premises. Also included in the definition of building is additions and repairs in progress, material, equipment, supplies, and temporary structures within 100 feet of the described premises and used for making additions or repairs - all if not covered by other insurance. We will explore how building property can include a number of other types of property later in this section.


Property Covered continued

Refer to pages 1 and 2 of the Building and Personal Property Coverage Form

Business Personal Property

The insured's Business Personal Property (BPP) is covered while located in or on the building described in the Declarations and also while it is in the open (or in a vehicle) within 100 feet of the described premises.

We'll look at what this property includes in more detail later in this section.

Personal Property of Others

This is property belonging to others, that is in the care, custody or control of the insured and located in or on the building described in the Declarations or in the open (or in a vehicle) within 100 feet of the described premises.

Payment for the loss of or damage to the Personal Property of Others is made to the owner of the personal property.


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Building Property


"Building" takes on a very broad definition in commercial property coverage forms. The term "building" includes the structure on the described premises, but the definition is not limited to just the building or structure.

Buildings and structures – Completed additions: Covered buildings and structures that are complete as of the time of the loss are subject to the building limit of liability.

Fixtures – Fixtures, including outdoor fixtures such as flag poles and light poles can be either covered building property and/or business personal property depending upon coverage needs and case law. We'll give an example of this in this section.

Permanently Installed Machinery and Equipment – Permanently installed machinery and equipment, such as the generator shown here, is also building property.

Additions under construction – The building property category can include additions under construction, alterations and repairs to the building or structure if they are not covered by insurance elsewhere. This would include material, equipment, supplies and temporary structures, on or within 100 feet of the described premises and used for making additions, alterations or repairs to the building or structure.


Business Personal Property Used to Service the Building


Certain types of personal property used to maintain or service the building are insured using the limit of liability for "building property."

• Fire extinguishing equipment • Floor coverings, such as hardwood floors and area rugs • Outdoor furniture, such as a patio set used for employees and customers • Appliances used for refrigerating, ventilating, cooking, dishwashing and laundering, includes

cleaning supplies such as wax and detergent used in appliances which service the building • Riding lawn mowers or push mowers are used to service the premises and considered "building"


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Summary of Building Property

Refer to page 1 of the Business and Personal Property Coverage Form

The policy language for property covered under the building limit is located on your print copy of Form CP 00 10 on page 1, letter A, Covered Property.

When selecting the limits of insurance, your insured must take into account the value of all items described in this section of the policy.

Look at the warehouse to the right and think about which items are building property. The inventory shelving and light fixtures are permanently installed, and these values need to be included in the building limit.


Your Business Personal Property


In addition, the insured's business personal property is covered while located in or on the building described in the Declarations. It is also covered while it is in the open (or in a vehicle) within 100 feet of the described premises. Examples of business personal property are shown here and on the next page.

Stock, such as the inventory shown at this distribution center warehouse.

Furniture and Fixtures, such as the table and chairs in this conference room, work stations and desks.

Machinery and Equipment, such as this commercial sewing machine, computers, and an industrial press at a manufacturing plant.

Other Property Owned by You and Used Your Business – Examples: office supplies and work product materials.

Learning Objective Identify the types of property covered and property not covered by the Building and Personal Property Coverage Form.

Your Business Personal Property continued


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Leased personal property for which you have a contractual responsibility to insure – A good example would be the copiers and printers leased by a business.

Labor, materials, or services that you furnish for the property of others – Example: A furniture company has completed a custom upholstery job, but has not delivered the item to the customer. A fire destroys the item.

Use value of improvements and betterments to a tenant – Many tenants make permanent additions or alterations to a building at their own expenses. These additions or alterations belong to the tenant until the end of the lease, at which time they become the property of the landlord. These improvements and betterments are included in the definition of business personal property.


Summary of Business Personal Property


Business Personal Property, unless stated otherwise in the Declarations Page, includes the following:

• furniture and fixtures • machinery and equipment • stock • Any other property owned by you and used in your business • Labor, materials, or services you furnish for the property of others • Use interest in tenants' improvements. • Leased personal property for which you have a contractual responsibility to insure

Business cell phones, laptops, organizers, briefcases are examples. Specialty equipment used by a particular trade such as an engineer may have a toolbox with flow meters and equipment used specifically for an engineer.


Personal Property of Others

Refer to pages 1+2 of the Business and Personal Property Coverage Form.

An upholstery shop is an example of a business insuring the property of others.


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One way to insure the property of others in the insured's care is to list an amount of insurance for this category on the declarations page. This coverage is for property that belongs to other people or organizations that is:

• In your care, custody, or control • Located in or on the insured's building or in the open (or in a vehicle) within 100 feet of the

described premises.

When setting limits of insurance, consider all of the above.


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Lesson 3 Topic B - Property Not Covered


Refer to pages 2 and 3 of the Business and Personal Property Coverage Form

This coverage form also identifies what types of property are not covered. The reason these types of property are excluded is that other coverage forms may be more appropriate in addressing the exposures.

The chart which follows on the next page summarizes property not covered, and the forms the insured needs to purchase to obtain coverage. In some cases there is more than one way to obtain coverage.



Type of Property Not Covered How to Buy Coverage Back Accounts, bills, currency, food stamps or other evidences of debt, money, notes or securities.

Commercial Crime Coverage Forms

Animals, unless “boarded” or “your stock” CP 14 10 Additional Covered Property or Inland Marine Coverage Forms

Autos held for sale* Garage forms Bridges, roadways, walks patios or other paved surfaces

CP 14 10 Additional Covered Property, or Inland Marine Coverage Forms

Contraband, illegal transportation/trade N/A, NOT INSURABLE

*Exception: Autos you manufacture, process or warehouse other than auto types you hold for sale, rowboats or canoes out of water at the described premises.

Tip: The rules for these coverages and forms can be found in your Commercial Lines Manual.


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Refer to pages 2 & 3 of the Building and Personal Property Coverage Form

Type of Property Not Covered How to Buy Back Coverage Excavations, grading, backfilling or filling CP 14 10 Additional Covered Property Foundations of buildings, structures, machinery CP 14 10 Additional Covered Property Land, water, growing crops or lawns Crops or lawns – Inland Marine Forms Airborne or waterborne personal property Inland Marine Coverage Forms, or Ocean Marine

Coverage Forms Bulkheads, pilings, piers, wharves or docks CP 14 10 Additional Covered Property, or Inland

Marine Coverage Forms Property Covered Elsewhere BPP Form pays excess


To determine what perils are covered under a property policy, refer to the Causes of Loss Form.

Type of Property Not Covered How to Buy Coverage Back Retaining Walls CP 14 10 Additional Covered Property Underground pipes, flues or drains CP 14 10 Additional Covered Property Electronic Data CP 04 30 E-Commerce or Inland Marine Forms Research, replace, restore information on valuable papers and records

Valuable Papers & Records Commercial Property Form or Inland Marine Forms

Vehicles or self-propelled machines CP 14 10 Additional Covered Property

Note: *The value of these items should not be included in the limits of insurance unless they have been covered under CP 14 10.





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Type of Property Not Covered How to Buy Coverage Back Certain Outdoor Property Fences – CP 14 10 Additional Covered Property Certain Outdoor Property Antennas – CP 14 50 Radio or TV Antennas Certain Outdoor Property Trees – CP 14 30 Trees, Shrubs and Plants Certain Outdoor Property Use Inland Marine Forms

Note: * The value of these items should not be included in the limits of insurance unless they have been covered under CP 14 10.



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Lesson 3 Topic C – Additional Coverages

Learning Objective: Describe the Additional Coverages and Coverage Extensions provided by the Building and Personal Property Coverage Form.

Refer to pages 3 - 6 of the Business and Personal Property Coverage Form

Additional Coverages are provisions that expand the coverage provided in the Causes of Loss forms. This "extra" coverage is provided for:

1. Debris Removal 2. Preservation of Property 3. Fire Department Service Charge 4. Pollutant Clean Up and Removal 5. Increased Cost of Construction 6. Electronic Data


1. Debris Removal


The coverage will pay the named insured's expense for debris removal of covered property that has been damaged by a covered cause of loss that occurs during the policy period. The amount paid is limited to:

25% X (amount paid for damage to the covered property + the policy deductible)

Note that pollution cleanup from land or water is excluded, and that this is not additional insurance. However, if the debris removal loss exceeds 25% or if the policy limits are exhausted during loss payment, the policy will pay up to an additional $25,000.

This $25,000 is over and above the limit on the declaration page and may be increased for an additional premium. Please refer to your Commercial Lines Manual, Division Five, Fire.

The amount earmarked for debris removal will equal 25% of the amount paid to cover the damage unless the special provisions of the Limits of Insurance apply.

Under certain circumstances this will also include debris removal of other property that is on the premises (if no covered property has direct damage this will be limited to $5,000).


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2. Preservation of Property


In many cases, if a covered premises is threatened by a covered cause of loss, it may be necessary to move personal property to prevent damage. The coverage protects the property while it is being moved or while stored at another location for up to 30 days. During these 30 days, the policy will cover any direct physical loss or damage. The normal causes of loss exclusions do not apply.

This is not additional insurance.

Preservation of property is one of the few instances when an insurer will cover property for any direct physical loss or damage


3. Fire Department Service Charge


Fire departments normally have an established range within which the department responds to a call. Businesses located outside these boundaries are typically asked to sign an agreement with the fire department stating that if the business sends out a call, the fire department will respond. The policy will apply up to $1,000 unless a higher limit is shown in the Declarations Page to pay for the fee charged by the responding fire department.

This is additional insurance.


4. Pollutant Clean-Up and Removal


If an insured suffers a covered cause of loss that also results in the pollution of land or water at the described premises, the policy will pay up to $10,000 per location to extract the pollutants from that land or water. The loss must be reported in writing within 180 days of the loss, and the coverage applies at the described premises only. The Commercial Lines Manual contains rules to increase this coverage, however most insurance companies are unwilling to raise this limit.


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This is additional insurance.


5. Increased Cost of Construction


Increased Cost of Construction allows limited coverage for the increased cost of complying with building codes following damage to an insured building that is insured on a replacement cost basis. Coverage is limited to 5% of the building value, subject to a maximum of $10,000. Note that this Additional Coverage only applies to damaged parts of the building.


6. Electronic Data


This provides for the cost to replace or restore electronic data that has been destroyed or corrupted by a Covered Cause of Loss. Within this Additional Coverage, the covered causes of loss are limited to named perils, regardless of the Causes of Loss form attached. Limited coverage for viruses is included. The total limit available for this coverage is $2,500 in any one policy year.

This is paid in addition to the limit of insurance for any coverages.


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Lesson 3 Topic D – Coverage Extensions



Unlike additional coverages, which add coverage to the policy, coverage extensions are increases in existing amounts of insurance. Losses must result from a covered cause of loss. For these extensions to be activated the following items apply:

1. The Declarations must show the presence of 80% or higher coinsurance (Coinsurance must be shown on the Declarations, but compliance with the coinsurance clause is not required.); or

2. The Declarations must show a Value Reporting symbol.

Other important considerations applicable to coverage extension are:

• Loss must be a result of a covered cause of loss.

• Coverage extensions provide additional insurance unless otherwise indicated.

• Coinsurance does not apply to these extensions.


The Seven Extensions are:

1. Newly Acquired or Constructed Property 2. Personal Effects and Property of Others 3. Valuable Papers and Records (Other Than Electronic Data) 4. Property located Off-Premises 5. Outdoor Property 6. Non-owned Detached Trailers 7. Business Personal Property Temporarily In Portable Storage Units


1. Newly Acquired or Constructed Property



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Newly acquired or constructed buildings are covered automatically up to a maximum of $250,000 per building, and newly acquired business personal property is covered for not more than $100,000 at each building.

The coverage is limited to 30 days, at which time it must be reported to the insurance company and premium paid from date of acquisition for coverage to continue beyond the 30 days.


2. Personal Effects and Property of Others


Business personal property coverage can be extended to include personal effects, which is the personal property of the named insured, its management and/or its employees. This part of the Coverage Extension does not include coverage for theft.

Business personal property may also be extended to cover personal property of others in the named insured's care, custody, or control. For either use of this Coverage Extension, there is a maximum payment of $2500 per described premises.


3. Valuable Papers and Records (Other Than Electronic Data)


The insurer will pay up to $2,500 per premises to replace or restore information that is lost or damaged. This extension does not apply to valuable papers and records which is considered electronic data.


4. Property Located Off-Premises


Up to $10,000 may apply to cover the insured's covered property, other than "stock," that is temporarily housed at a location not owned, leased or operated by the insured. This could be property in storage at a


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location the insured leases, provided the lease began after the policy inception, or property at any fair, trade show, or exhibition. However, this does not apply to covered property:

• In or on a vehicle • In the care of your salesperson unless they are at a fair, trade show or exhibition


5. Outdoor Property


This Extension applies to fences, radio, television antennas, satellite dishes, trees, shrubs and plants. Payment is limited to damage caused by fire, lightning, explosion, riot or civil commotion, or aircraft ONLY, regardless of Cause of Loss that applies to the policy. Note that wind and hail, as well as vehicle damage are not covered perils.

• The maximum limit for this extension is $1,000 per occurrence, but not more than $250 for one tree, shrub or plant


6. Non-Owned Detached Trailers


This Extension provides coverage for a trailer that you do not own but is used in the insured's business provided that it is:

a. In the insured's care, custody or control at the described premises; b. The insured has a contractual responsibility for damages to it.

The most that will be paid for a loss or damage under this extension is $5,000, unless a higher limit is shown in the Declarations. There is no coverage if the non-owned trailer is attached to any vehicle or during hitching or unhitching. This insurance is excess insurance.


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7. Business Personal Property Temporarily In Portable Storage Units


Limit of $10,000 for Business Personal Property temporarily stored in a portable storage unit at or within 100 feet of the described premises

A higher limit may be selected if shown on the Declaration Page.

This amount is the most that will be paid regardless of the number of storage units.

Coverage is limited to no more than 90 days from when the storage unit was first put into use.

Lesson 3 Topic E – Limits of Insurance

Please refer to page 8 of the Building and Personal Property Coverage Form.

Every policy is subject to a maximum on the amount that an insurance company will pay in the event of loss. These limits can be found on the Declarations Page. Some coverages have sub-limits that are not shown on the Declarations Page.

1. Declarations Limit The most an insurer will pay is listed on the Declarations Page.

2. Outdoor Signs The most that will be paid for loss or damage for outdoor signs, whether or not the sign is attached to the building is $2,500 per any one occurrence. Outdoor Signs (CP 14 40) can be used to increase the limit.

3. Additional Limits of Insurance Earlier in this lesson, we discussed some limits that are considered in addition to the Limit of Insurance. They are as follows -

o Fire Department Service Charge o Increased Cost of Construction o Pollutant Clean Up and Removal o Electronic Data

The amount of insurance for the above are separate from the Limits of Insurance.

4. Preservation of Property The insurance company gives the insured the coverage for Preservation of Property; however, there is no increase on the policy limit. This is not additional insurance.



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Lesson 3 Topic F – Deductible

Refer to page 10 of the Business and Personal Property Coverage Form.

The amount indicated in the Declarations is deducted from the adjusted loss and then payment is made. We will not go into extensive detail on the application of the deductible since some special rules apply. However, you need to remember that the policy deductible applies to each occurrence, not to the limit for each item.

Tip: For state-specific information on deductibles, check your Commercial Lines Manual Fire Division (five) Rules and your State Exception Pages.

Lesson 3 Topic G – Loss Conditions

Learning Objective: Explain how vacancy affects loss payments under the Building and Personal Property Coverage Form.


The Building and Personal Property Coverage Form contains conditions in addition to the Common Policy Conditions (IL 00 17) and the Commercial Property Conditions (CP 00 90). Let's look at some of these conditions. Loss Payment In the event of a loss, the loss payment options always belong to the insurer. The insurer has four options, and will usually choose whichever option is most cost-effective for the insurer. These options are:

1. Pay the value of the damaged property 2. Pay the amount to repair or replace 3. If there is property left, the insurer can take the property at an agreed or appraised value 4. Repair the damaged property, or replace it with like kind

The insurer will notify the insured of their intentions within 30 days of receiving the sworn proof of loss. The insurer will not pay the insured more than the insured's financial interest in the damaged or destroyed property.


Vacancy Condition

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Vacancy poses special problems for both the insured and the insurer. Vacant buildings are usually more at risk since they are unattended. An insurance company places limitations on a policy if a building is found to be vacant for more than 60 consecutive days prior to a loss. Click on the animation to find out how insurers define vacancy and the limitations imposed if a building is found to be vacant.

How Do Insurance Companies Define Vacancy?

Vacancy is defined two ways, depending on the insured’s status as the policyholder:

1. The insured as tenant 2. The insured as business owner

If the insured is a tenant

The insured's property is considered vacant if the unit does not contain enough business personal property to conduct customary operations.

If the insured is the building owner

The insured's building is considered vacant unless 31% or more of the building's total square footage is rented or is used to conduct customary operations.


Vacancy Conditions continued


What happens if there's a vacancy? If a building has been vacant for more than 60 consecutive days before loss or damage occurs, there is no coverage for the following causes of loss:

• Vandalism • Sprinkler Leakage • Building Glass Breakage • Water Damage • Theft and Attempted Theft

For all other covered causes of loss such as fire, windstorm, lightning, etc., loss payment is reduced by 15%. On the next page we will show how this works. Some states have a modified vacancy definition. Check your commercial property policies for any state amendatory endorsements to see if a change applies for your state. These forms are usually titled "Your State"—Changes, or "Your State"—Amendatory Endorsement.


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Vacancy Conditions continued

Example:

Let's review how the penalty is applied if a building is left vacant for more than 60 consecutive days and has a covered loss.

The loss payment is reduced by 15%.

An easy way to do this is to take the amount of the loss and multiply it by 85%.

Calculate how much would be paid in the situation below. Disregard deductibles.

After the insured's building has been vacant for more than 60 consecutive days, a fire destroys the building. The amount of damage is $100,000.

85% X $100,000 = $85,000 Amount Paid

Valuation


The process of valuation is how an insurance company will determine the value of a property in the event of a loss. The different types of valuation are described in the table below.

Actual Cash Value(ACV)

ACV is the default position of a policy when it comes to assessing loss.

Replacement Cost For Building Losses $2500 Or Less

If the building limit of insurance satisfies the coinsurance requirement and the loss is $2,500 or less, the insurer will pay replacement cost instead of ACV. This does not include any expenses due to ordinance or law requirements. However, the following property will be valued at ACV even when attached to the building:

a. Awning or floor coverings b. Appliances for refrigerating, ventilating, cooking, dishwashing, or laundering c. Outdoor equipment or furniture

Stock Any stock sold but not delivered will be assessed at its selling price. Glass The policy will pay for glass at its replacement cost. The policy also covers the cost of

upgrading to glass with safety glazing material, if the law requires it. Tenant's Improvements and Betterments

Improvements to the property are payable at Actual Cash Value, if the tenant makes the repairs immediately. Special provisions apply when the tenant does not make the repairs; however, those provisions are beyond the scope of this course.


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Lesson 3 Topic H – Additional Conditions

Learning Objective: Define the rights of mortgageholders as provided in Commercial Property Coverage Forms.


Additional Conditions apply after Common Policy Conditions and the Commercial Property Conditions. Additional Conditions can be found on your Building and Personal Property Coverage Form (CP 00 10), pages 12-14. They include Coinsurance, which is covered in depth in Lesson 1. It shows up again here, because it is in this part of the policy that coinsurance is introduced. Another Additional Condition which we will study now is the Mortgageholders Clause.


Mortgageholders Clause


In the beginning of this course, we discussed that mortgageholders have an insurable interest in a property they hold the mortgage over. What happens if the policy is rendered null and void because of the insured's failure to comply with certain provisions of the policy? This is where the mortgageholder clause comes in.

This condition is designed to preserve the mortgageholder's rights. It allows the mortgage holder to receive loss payment, even if the insured voids the policy.

In effect, the mortgageholder becomes the insured. Even if the mortgageholder has started foreclosure, they have the right to receive loss payment. If more than one mortgageholder is listed on a policy, the one listed first gets paid first, the second is paid next, and so on.


Rights & Obligations

Please refer to page 14 of the Building and Personal Property Coverage Form.

Mortgageholder's Rights




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The Mortgageholder also has certain rights under the policy.

In the event of cancellation, the insurer will give the mortgageholder written notice ten days before effective date of cancellation for non-payment of premium and thirty days for any other reason.

In the event of non-renewal, the insurer will give written notice to the mortgageholder at least 10 days prior to the policy's expiration date.

Tip: Remember to look at your State Amendatory endorsements for the cancellation and non-renewal clauses (as we discussed in Lesson 2, Commercial Policy Conditions).

Mortgageholder's Obligations The Mortgageholder has certain obligations. An insurer will make a loss payment as long as the mortgageholder:

• Makes a premium payment if a premium payment is due. • Files a sworn statement of loss. • Notifies the insurer of a change in ownership or occupation.


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Lesson 3 Topic I – Optional Coverages

Learning Objective: Describe the Optional Coverages that may be "activated" from the Declarations of the Building and Personal Property Coverage Form.


As its name suggests, Optional Coverages are elective. They must be purchased as an add-on to the existing policy. For these coverages to be effective, an entry must be made in the Declarations.

Here are four types of Optional Coverages for insuring commercial property.

Agreed Value: An option in the commercial property policy which suspends the coinsurance clause. The insured is required to file a statement of values with the insurance company; the company must agree with the values filed, the policy is written at the agreed value, and then the coinsurance clause is suspended for one year only, not to extend beyond the policy expiration date. (CISR Glossary)

Inflation Guard: An optional coverage that automatically increases the amount of insurance each day to keep pace with the rate of inflation selected at the beginning of the policy by the insured.

Replacement Cost: Insurance issued in an amount to cover the property described for a limit which will be adequate to replace the structure at the cost of today's labor and materials. The Valuation Loss Condition is modified where the deduction for depreciation is not applied in the loss settlement process.

Replacement Cost to Personal Property of Others: If the Replacement Cost valuation on the insured's property has been chosen, then this fourth option, can be chosen. A limit of insurance for Personal Property of Others must be shown on the declarations page. Additionally, the extension of Replacement Cost to Property of Others coverage option must be selected.


Optional Coverages continued


Agreed Value

As we discussed in Lesson 1, this property valuation provision suspends the coinsurance condition. It remains in effect for one year, and must be renewed by endorsement if the policy term exceeds one year.


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Inflation Guard

Building values and/or Business Personal Property values may increase over the course of a year or several years. Having Inflation Guard activated ensures that the limit of insurance automatically increases at an annual percentage that is shown on the Declarations page. The limits are prorated daily throughout the year.


Replacement Cost

With replacement cost, the policy pays to replace damaged or destroyed property without deduction for depreciation. Note some of the conditions found in this Optional Coverage:

1. The phrase replacement cost is substituted wherever you find "actual cash value" 2. Certain property will still not be paid on a replacement cost basis:

a. Personal property of others b. Contents of a residence c. Works of art, antiques, or rare articles d. "Stock" (unless included on Declaration Page)

3. You may take actual cash value settlement and then change your mind. You must notify the company of your intent to do this within 180 days after the loss or damage.

4. The insurer will not pay the replacement cost amount until the loss or damage is actually repaired or the property is replaced. These must be made as soon as reasonably possible.

5. Payment will be the least of: a. Limit of insurance b. Cost to replace with comparable material and quality, and used for the same purpose. c. The amount spent that is necessary to repair or replace

6. This does not include the increased cost that is due to any ordinance or law that regulates the construction, use, or repair of any property.


Replacement Cost of Personal Property of Others


If Replacement Cost on the insured's property has been chosen, then this fourth option (Replacement Cost to Personal Property of Others) can be selected.


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If a written contract (lease) applies, then recovery is limited to the lesser of the replacement cost or the contractual obligation. This could cause a gap if contractual obligation is higher than the replacement cost. (There is a Leased Property Endorsement - CP 14 60 - to fill this gap)

Lesson 4 – Causes of Loss Forms

In the previous lesson you studied the Building and Personal Property Coverage Form and now we challenge you to explore the perils as they are defined in the causes of loss forms as well as their exclusions.

Commercial property programs offer three causes of loss forms and we will learn to distinguish their differences. We will also study in depth limitations on certain property; additional coverage for collapse and additional coverage extensions.

Since businesses can suffer losses caused by enforcement of ordinances or laws regulating construction and repair of damaged buildings, we will discuss these losses.



• Causes of Loss Forms • Exclusions • Limitations on Certain Property • Additional Coverages - Collapse • Additional Coverage Extensions • Additional Coverage - Limited Coverage for "Fungus", Wet Rot


1. Differentiate between the Covered Causes of Loss forms: Basic, Broad, and Special. 2. Given a loss situation, apply the exclusions of the Special Causes of Loss Form. 3. Describe the three possible losses a business faces with ordinance or law exposures. 4. Explain the Additional Coverage: Collapse. 5. Identify the three additional coverage extensions included in the Special Causes of Loss Form. 6. Discuss the Additional Coverage: Limited Coverage for Fungus, Wet Rot, Dry Rot, and Bacteria.

Lesson 4 Causes of Loss Intro p4 (IP)


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• Causes of Loss Form Comparison Chart • Special Form (CP 10 30) • Ordinance or Law Coverage Endorsement (CP 04 05)

Forms you have printed and will need for this lesson:

None

Lesson 4 Topic A - Covered Causes of Loss

Learning Objective: Differentiate between the Covered Causes of Loss forms: Basic, Broad, and Special.

A Causes of Loss Form describes what perils are covered in a policy. Every commercial property policy must have a Causes of Loss Form attached. Before we get into the differences between the types of Causes of Loss forms, we need to discuss the two approaches to determining causes of loss:

1. named perils (Basic and Broad forms) and 2. open perils (Special Causes of Loss Form).


Perils

Named Perils Open Perils There are two types of Causes of Loss forms that are named perils:

• Basic • Broad

In this approach, the insured must prove that a named peril caused the loss to the property.

The insured must prove that a covered cause of loss occurred.

There is only one type of Causes of Loss form that is an open peril:

• Special

In this approach, the insurer pays for direct loss to property from any cause subject to the exclusions and limitations contained in the policy.

The insurer must prove that an exclusion applies.

Learning Objective: Differentiate between the Covered Causes of Loss forms: Basic, Broad, and

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Special.

Types of Causes of Loss Forms

Refer to pages 1 and 2 on the Causes of Loss - Basic Form

There are three types of Causes of Loss forms, including two that are named perils (the Basic Form and the Broad Form) and one that is an open perils type of form (the Special Form). 1. Basic Form (CP 10 10) This form covers losses arising from eleven named perils plus the Additional Coverage - Limited Coverage for Fungus, Wet Rot, Dry Rot and Bacteria. The burden of proof lies with the insured to show that the loss was caused by one of the eleven perils. This form:

• Covers losses arising from any of eleven named perils; • Requires the insured show that the loss was caused by the peril, as defined and limited in the

coverage form; and • Damage caused by wind or hail, vandalism, or sprinkler leakage may be excluded by endorsement.


2. Broad (CP 10 20)

Refer to pages 1 and 2 on the Causes of Loss - Broad Form

The Broad Form (CP 10 20) provides coverage for all the named and the Additional Coverage in the Basic Form, plus loss caused by:

• Falling objects • Weight of snow, ice or sleet • Water damage • Additional Coverage - Collapse • Damage caused by wind, hail, vandalism, sprinkler leakage or theft may be excluded by

endorsement


3. Special Form (CP 10 30)

Refer to page 1 of the Causes of Loss - Special Form




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The Special Form (CP 10 30) provides coverage on a "risks of physical loss" basis. It uses the open perils approach and pays for loss or damage as a result of direct physical loss, with certain exclusions and limitations. This is the only form that picks up theft, which is a very important peril to many insureds. Theft is covered because it is not excluded. We will study the Special Form in-depth since it is the most commonly used form. It tells us that the policy will pay for risks of direct physical loss, unless the loss is either:

• Excluded in Section B - Exclusions; or • Limited by Section C - Limitations.

Also, damage caused by wind, hail, vandalism, sprinkler leakage or theft may be excluded by endorsement. As you can see by the information provided so far, the Special Causes of Loss Form gives the insured very broad coverage. The remainder of Lesson 4 provides a review of what coverage is excluded or limited by this form.


Earthquake and Volcanic Eruption Endorsement CP 10 40

Refer to page 1 of the Earthquake and Volcanic Eruption Endorsement

In addition to the previous Causes of Loss Forms we feel that it is important that you are aware of the following endorsement.

Earthquake and Volcanic Eruption Endorsement CP 10 40

This endorsement serves to add earthquake and volcanic eruption to the Basic, Broad and Special Causes of Loss Forms. It does not remove the earth movement exclusion found in the Causes of Loss Forms. This endorsement provides coverage for only earthquake and volcanic eruption as defined in the endorsement.

Let's summarize what we've learned.

Causes of Loss Forms

Causes of Loss Forms describes what perils are covered in a policy. Every commercial property policy must have a Causes of Loss Form attached.

Basic – In the Basic Form, damages caused by wind or hail may be excluded by endorsement.



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Broad – The Broad Form covers damages caused by falling objects.

Special – The Special Form is best defined by what is not covered, with specified limitations and exclusions.

In this example of a covered loss attributable paint overspray, a house is covered because this kind of loss is not excluded.

Tip: For more information on the Special Causes of Loss Form refer to Causes of Loss - Special Form (CP 10 30). Also be sure to review the Causes of Loss Coverage Comparison Chart that was recommended to be printed in the Lesson 4 Introduction.

Lesson 4 Topic B – Exclusions

Learning Objective: Given a loss situation, apply the exclusions of the Special Causes of Loss Form.

Refer to pages 1 - 5 on the Causes of Loss - Special Form.

With an open perils policy (Special Form), the exclusions really define the coverage. Within Special Causes of Loss, you will find three sets of exclusions: exclusions common to all forms; Special Form exclusions; and concurrent causation exclusions.


Causes of Loss continued

Within special causes of loss, you will find...

Exclusions Common to All Forms – All of the Causes of Loss forms contain this set of exclusions. These losses are excluded regardless of any other cause or event that contributes concurrently (at the same time) or in any sequence to the loss. There are eight exclusions: ordinance or law, earth movement, governmental action, nuclear hazard, utility services, war and military action, water and fungus, wet rot, dry rot, and bacteria.

Special Form Exclusions – Twelve additional exclusions are found only in the Special Form. These exclusions are necessary because the Special Form is an open perils form, and the insurer may choose not to cover certain exposures.

Concurrent Causation Exclusions – If a loss is covered by two perils, one of which is clearly excluded and one of which is not excluded, concurrent causation holds that the one which is covered by the policy must


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pay. To prevent the insurer from having to pay for losses it never intended to pay, three exclusions were added.

Learning Objective: Describe the three possible losses a business faces with ordinance or law exposures.

Exclusions Common to All Forms

1. Ordinance or Law Insurers will not cover any exposures incurred by the insured as a result of the enforcement of any ordinance or law. For example, some communities require that if a building has been damaged to some specified extent (often 50%), it must be demolished and reconstructed to comply with current building codes. Because of the Ordinance or Law Exclusion, the policy will pay only for the damaged half of the building. The insured now faces three uninsured exposures:

• The value of the undamaged part of the building because it is no longer useable; • The cost to demolish the building; and • The increased cost to rebuild the structure to satisfy current codes.

These expenses can be very high for many insureds. So what can the insured do? There is a solution. By attaching the Ordinance or Law Coverage Endorsement (CP 04 05) to the policy, the insured can buy coverage for the following:

• Coverage A - Coverage for Loss to the Undamaged Portion of the Building • Coverage B - Demolition Cost Coverage • Coverage C - Increased Cost of Construction Coverage

Note: Coverages B and C (demolition and construction costs) may be written as a blanket coverage, with a single limit.


Exclusions Common to All Forms continued

2. Earth Movement Insurers will not pay for any damage caused by movement of the earth. However, damage caused by a fire or explosion following an earthquake is covered. This exposure gives rise to the need for the Earthquake and Volcanic Eruption Endorsement CP 10 40.

3. Governmental Action If the government seizes a property, the loss is not covered.


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4. Nuclear Hazard Any damage caused by a nuclear incident is not covered, but any resulting fire is.



5. Utility Services On-premises damage caused by an interruption of off-premises utility services is not covered. However, any damage caused by a fire, even if that fire is caused by interruption of off-premises utility services, is covered. Let's use an example: an insured owns a manufacturing plant that uses water-cooled machines. A loss of water due to damage by a covered cause of loss at the off-premises water supply location causes the machine's sensitive parts to overheat and melt down. The damage to the machines is not covered. However, if the damage to the machines sparks an external fire, any resultant fire damage is covered.

6. War and Military Action Damages caused by an act of war, including undeclared, civil war and other warlike actions by a military force, are not covered.



7. Water The following type of water losses are not covered:

• Flood, surface water, waves, tides, tidal waves, overflow of any body of water or their spray(whether driven by wind or not);

• Mudslide or mudflow; • Sewer, drain and sump back-up or overflow; and • Water under the ground surface that presses on, flows or seeps through:

o Foundations, walls, floors or paved surfaces; o Basements; and o Doors, windows or other openings.

• Material carried by water, mudslide or mudflow (language previously in the CP 10 32 Endorsement)


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If fire, explosion, or sprinkler leakage occurs as a result of the water damage listed above, the insurer will pay for the loss caused by the fire, explosion or sprinkler leakage. These losses are excluded due to the catastrophic nature of the flood exposure. However, special policies (at appropriate premiums) are available to cover flood losses. Flood may be provided by endorsement (CP 10 65)


Exclusions Common to All Forms

8. "Fungus," Wet Rot, Dry Rot, and Bacteria

Coverage is limited to damage caused by specified causes of loss if they are the result of "fungus," wet rot, dry rot and bacteria. The exclusion does not apply when "fungus," wet or dry rot or bacteria results from fire or lightning or to the extent it is covered under the Additional Coverage - Limited Coverage For "Fungus," Wet Rot, Dry Rot and Bacteria with respect to loss or damage by a cause of loss other than fire or lightning.


Eight Exclusions

Eight Exclusions Found In All Causes of Loss Forms

1. Ordinance or Law – Some communities require that if a building has been damaged to some specified extent (often 50 percent), it must be demolished and reconstructed to comply with current building codes.

2. Earth Movement – In General, damages caused by an earthquake are considered excluded and therefore not covered.

3. Government Action – In general, losses due to government seizures are not covered. 4. Nuclear Hazard – Damage caused by a nuclear incident is not covered… But a fire resulting from the

explosion is covered.


Eight Exclusions


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5. Utility Services – Example: An insured owns a manufacturing plant that uses water cooled machines. A loss of water due to damage at the premises of the water supply causes the machine's sensitive parts to overheat and melt down, the damage to the machines itself is not covered. However, if the damage sparks an external fire, any resultant fire damage would be covered.

6. War and Military Action – Damage caused by war is not a covered loss. 7. Water – In general, damages caused by floods are not considered a covered loss. 8. “Fungus”, Wet Rot, Dry Rot, and Bacteria - Coverage is limited to damage caused by specified

causes of loss if they are the result of "fungus", wet rot, dry rot and bacteria. The exclusion does not apply when "fungus", wet or dry rot or bacteria results from fire or lightning or to the extent that it is covered under the Additional Coverage – Limited Coverage For "Fungus" Wet Rot, Dry Rot and Bacteria with respect to loss or damage by a cause of loss other than fire or lightning.


Special Form Exclusions (CP 10 30)

Please refer to pages 3 and 4 of the Causes of Loss - Special Form.

In addition to the exclusions we just covered, there are a number of exclusions found only in the Special Form. These exclusions are necessary because the Special Form is an open perils form, and the insurer has certain exposures that it does not wish to cover. There is no coverage under the Special Form for damage caused by any of the following:

1. Artificially Generated Currents Although damage caused by power surges or brown-outs can be extensive, this type of damage is excluded.

2. Delay or Loss of Market These include delay, loss of use, or loss of market and are indirect losses involving the loss of income that can result when a business suffers a direct loss. Time Element Forms must be used to handle these exposures. We will study the basics of time element insurance in Lesson 5.


Special Form Exclusions continued


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3. Smoke Damage Caused by Industrial Operations This includes smoke, vapor or gas from agricultural smudging or industrial operations.

4. Wear and Tear The losses you see listed under the wear and tear group of perils are generally not the subject of insurance since most of them are preventable. However, if any of these losses results in a "specified cause of loss" or building glass breakage, the company will pay for the damage.

5. Damage Caused by a Steam Engine Explosion This includes damages caused by the explosion of steam boilers, steam pipes or steam engines other than fire damage. These losses need to be covered under a Boiler and Machinery or Equipment Breakdown Policy.

6. Loss Attributable to Continuous Seepage This includes losses attributable to continuous or repeated seepage or leakage of water over a period of 14 days or more. This is often a maintenance issue, not the subject of insurance.



7. Water Damage Caused by Burst Pipes This applies to damages caused when pipes freeze, burst and then thaw. This exclusion applies only when the insured fails to take reasonable precautions to maintain the system.

8. Losses Caused by Anyone Entrusted with the Property This includes dishonest and criminal acts of the insured, partners, members, officers, managers, employees (including leased employees), directors, trustees and other authorized representatives. The insured needs a Fidelity or Employee Dishonesty Bond to cover the peril of employee theft.

9. Voluntary Parting under False Pretenses This exclusion denies coverage when an insured voluntarily gives the property to someone who has tricked the insured into doing so.


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10. Losses Due to Property Left Out This exclusion denies coverage to property in the open which is damaged by rain, snow, sleet or ice.



11. Collapse The policy form excludes damages caused by collapse, other than the coverage found under the section detailing Additional Coverage for Collapse. We will discuss this Additional Coverage shortly.

12. Release of Pollutants Damage caused by the release or escape of pollutants can result in enormous costs. The policy generally excludes pollution unless the release of the pollutants happened because a covered cause of loss occurred. This limited pollution coverage applies on premises only.

Tip: For more information on "Specified Causes of Loss," please read pages 10 of the Causes of Loss - Special Form (CP 10 30).


12 Special Form Exclusions

1. Artificially Generated Currents – Although damage caused by power surges or brown-outs can be extensive, this type of damage is excluded.

2. Delay or loss of market – These indirect losses involving the loss of income that can result when a business suffers a direct loss.

3. Smoke damage caused by industrial operations – This includes smoke, vapor or gas from agricultural smudging or industrial operations.

4. Wear and tear – Most losses here are preventable and not the subject of insurance. However, any resulting “specified cause of Loss” or building glass breakage is covered.


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5. Damage caused by a steam engine explosion – These losses need to be covered under a Boiler and Machinery or Equipment Breakdown Policy

6. Losses attributable to continuous seepage – This is often a maintenance issue, not the subject of insurance

7. Water damage caused by burst pipes – The exclusion only applies when the insured fails to take reasonable precautions to maintain the system.

8. Losses caused by anyone entrusted with the property – This includes dishonest and criminal acts of the insured, partners , members, officers, managers, employees (including leased employees), directors, trustees and other authorized representatives.



9. Voluntary parting under false pretenses – This exclusion denies coverage when an insured has been tricked into voluntarily giving away the property.

10. Losses due to property left out – This includes damages caused by inclement weather, such as rain, snow sleet or ice.

11. Collapse – The policy form excludes damages caused by collapse other than the coverage found under the section detailing Additional Coverage – Collapse.

12. Release of pollutants – The policy generally excludes pollution unless the release of the pollutants caused an on-premises damage and was due to a covered cause of loss.


Concurrent Causation Exclusions

Refer to page 4 on the Causes of Loss - Special Form.


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Concurrent causation holds that an open perils policy must pay if a loss to the property is caused by two perils - one which is excluded by the policy and one which is covered. To prevent the application of the concurrent causation doctrine, several exclusions were added to the Special Causes of Loss Form. They were developed to prevent the insurer from having to pay for losses it never intended to pay. The exclusions that were added include:

1. Contributing Weather Conditions 2. Acts of Persons or Authorities 3. Inadequate Design or Maintenance


Concurrent Causation Exclusions continued


1. Contributing Weather Conditions

This exclusion applies to weather conditions that contribute with a cause of loss found in the first group of exclusions (ordinance or law, earth movement, governmental action, nuclear, utility services, war or flood losses).

Example:

Torrential rains cause a mudslide to destroy a building. Prior to having this exclusion, insureds claimed that the loss was not caused by mudslide, which is clearly excluded, but rather caused by "weather conditions," which were not excluded. Courts often agreed, citing the concurrent causation doctrine.


Concurrent Causation Exclusions continued


2. Acts of Persons or Authorities


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This includes losses due to acts or decisions, including failure to act, of persons or authorities.

For example, assume that a river authority neglects to open floodgates, resulting in flooding of buildings above the dam. Without this exclusion, the insured could claim that the cause of the loss was negligent failure of the river authority to act, rather than flood.

3. Inadequate Design or Maintenance

This includes losses due to faulty, inadequate or defective planning, design, materials or maintenance.


Concurrent Causation Summary


The Three Types of Concurrent Causation Exclusions

Contributing Weather Conditions – This exclusion applies to weather conditions combined with a cause of loss found in the group of exclusions common to all forms.

Acts of persons or authorities - This includes losses due to the acts or decisions (including failure to act) of persons or authorities.

Inadequate design or maintenance – This includes losses due to faulty, inadequate or defective planning, design, materials or maintenance.


Special Exclusions

Refer to page 4on the Causes of Loss - Special Form.

Special exclusions apply only to the following forms:

• Business Income and related business forms; • Leasehold Interest Coverage Form; and • Legal Liability Coverage Form.

Note: The specifics of special exclusions are beyond the scope of this course and will not be covered.


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Lesson 4 Topic C – Limitations on Certain Property

Refer to pages 6 and 7 of the Causes of Loss - Special Form.

In addition to the exclusions we have covered, the insurer places limitations on what is covered. In this section we will find losses to certain property are not covered; some items are not going to be covered on an open perils basis; and some items have dollar limitations on how much the policy will pay for the peril of theft. Four limitations are covered in this section:

• Losses not covered; • Special items; • Limitations on theft; and • Limitation on appliances or systems.

Losses Not Covered

Refer to page 6 of the Cause of Loss - Special Form.

In this section, we will look briefly at some types of losses that are not covered. These include:

• Damage to steam boilers, pipes, engines or turbines caused by any condition or event from inside the equipment (such as mechanical breakdown or internal explosion). Boiler and machinery policies are needed to cover this exposure.

• Hot water boiler damage caused by a condition or event from inside the equipment. This could include a mechanical breakdown or internal explosion. Boiler and machinery policies are needed to cover this exposure.

• Damage to interior property resulting from rain, snow, sleet, ice, sand or dust. This exclusion would not apply if there is exterior damage by a Covered Cause of Loss. For example: A windstorm rips off a building's roof and the damage caused to the interior by rain is covered. But, if someone left a window open and wind blew in and caused damages, that loss would not be covered.

• Theft of building construction materials.

• Inventory shortage. This applies only when the shortage is the only indication that a loss occurred.

• Property transferred by unauthorized instructions. Certain crime forms provide coverage for losses caused by employee dishonesty or computer fraud.


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Special Items


Open perils coverage does not apply to all property. The following items are covered only if their loss results from a Specified Cause of Loss:

• Animals • Fragile Articles • Builder's machinery, tools and equipment off the insured's premises

Limitations On Theft


The Special Causes of Loss Form limits the dollar amount the policy will pay for the theft of certain items.

These exposures are generally not common to all insureds and require special forms with an appropriate premium charge. The special limit shown for each category is the total occurrence limit for the loss or damage to all property in that category. If you have one piece of jewelry or ten pieces of jewelry stolen at one time, the most the company will pay is $2,500.

Tip: Sub-limits within the total limit of insurance do apply to the insured's Business Personal Property. (See table above.)

Limitation on Appliances or Systems

The last limitation deals with appliances or systems from which water escapes. The policy will pay for any resulting covered water damage, but will not pay to repair the defective system itself.

Theft Loss Payment Limits Item $2,500 Furs and fur garments $2,500 Jewelry, watches, etc. $2,500 Patterns, dies, molds and forms $250 Stamps, tickets, lottery tickets


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Losses Not Covered:

Damage to steam engines – Damage to a steam engine caused by mechanical breakdown or Internal explosion is not a covered loss and special policies are required.

Hot water boiler damage – Damage to hot water boiler caused by an internal explosion is a covered loss and special policies are required

Damage to interior property – Damage to interior property caused by external forces such as rain or ice is not covered unless there is exterior damage by a Covered Cause of Loss.

Theft of building construction materials – Theft of building construction materials is not a covered loss.

Inventory shortage –An inventory shortage is NOT covered if the shortage is the only indication that a loss occurred.

Property transferred by unauthorized instruction – Property transferred by unauthorized instructions is nots a covered loss. However, special crime forms provide coverage for certain types of fraud.

Special Items:

Special Items -The open perils coverage does not apply to all property, and some items are covered only if their loss results from a Specified Cause of Loss. These include valuable papers, animals, fragile items, and off-premises builder's equipment.

Limitations On Theft:

Limitations On Theft –The Special Causes of Loss Form limits the dollar amount the policy will pay for the theft of certain items. Although these exposures vary, a total occurrence limit determines the maximum amount a company will pay.

Limitations on Appliance or Systems:

Limitations On Appliance Or Systems – Water damages resulting from leaking appliances are covered. However, the policy will not pay to repair the damage to the appliance itself.


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Lesson 4 Topic D – Additional Coverage: Collapse

Learning Objective: Explain the Additional Coverage: Collapse.

Refer to pages 7 and 8 on the Causes of Loss - Special Form.

The subject of collapse has generated much controversy. The issue of what actually constitutes a collapse and what is not has been debated in many claims and court cases. The Special Causes of Loss Form limits collapse losses. Collapse losses are covered only if they are caused by one of the following:

1. A Specified Cause of Loss (see page 10 of the Special Causes of Loss Form) 2. Hidden decay (dry rot) 3. Hidden damage by insects, such as termites 4. Weight of people or property 5. Weight of rain on roof 6. Use of defective material or building methods if the collapse occurs during construction of a

building

Note: If the collapse occurs after construction is complete and results from a listed cause of loss, the insurer will pay for the damage, even if the use of defective material contributes to the loss.


Additional Coverage: Collapse continued

Personal property damaged in a collapse is covered only if the property was inside the building at the time of collapse and only if the collapse itself was caused by a covered cause of collapse. Certain outdoor property will be covered if the collapse is caused by a covered cause of loss and only if:

1. the loss is a direct result of the collapse of the insured building; and, 2. the property is considered covered property under this coverage form.


Additional Coverage: Collapse continued

Refer to page 8 of the Causes of Loss - Special Form.

Important Considerations about Collapse It is important to remember that collapse does not include:

• settling • cracking • shrinking


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• expansion

Tip:

Additional Coverage - Collapse is found only in the Broad (CP 10 20) and Special (CP 10 30) Causes of Loss forms. It is important to remember that this Additional Coverage - Collapse will not increase the Limits of Insurance as provided in this coverage part.


Six Types of Additional Coverage

Refer to pages 7-8 on the Causes of Loss - Special Form.

1. Specified Causes of Loss

Collapse is covered if the damage was caused by a specified cause of loss, as defined in the Causes of Loss - Special Form.

2. Hidden Decay (dry rot)

Collapse is covered if the damage was caused by some type of hidden decay.

3. Hidden Damage by Insects, such as Termites

Collapse is covered if the damage was caused by some type of hidden decay.


Six Types of Additional Coverage

Refer to pages 7-8 on the Causes of Loss - Special Form.

4. Weight of People or Property

Collapse is covered if the damage was caused by the weight of people or property.

5. Weight of Rain on Roof

Collapse caused by the weight of rain on the roof is considered a covered cause of loss.

6. Use of Defective Material or Methods if the Collapse Occurs During Construction of a Building

If collapse occurs during construction of a building and defective materials or methods were used, then the loss is covered.


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Lesson 4 Topic E – Additional Coverage Extensions under the Special Causes of Loss Form

Learning Objective: Identify the three additional coverage extensions included in the Special Causes of Loss Form.

Refer to pages 9 and 10 on the Causes of Loss - Special Form.

The Special Causes of Loss Form includes three extensions of coverage not found in the Basic Causes of Loss Form or in the Broad Causes of Loss Form. These three extensions address:

• property in transit • water damage, other liquids, powder and molten material damage • glass


Special Causes of Loss Form - Additional Coverage Extensions continued


1. Property in Transit The insurer will cover the insured's business personal property while in transit (more than 100 feet from the premises) if the property is being transported in a vehicle the insured owns, leases or operates. This does not apply to property that is in the care, custody, or control of the insured's salespersons. The maximum loss payment for this additional coverage is $5,000. In addition, the damage must be caused by:

o fire, lightning, explosion, windstorm or hail o riot, civil commotion or vandalism o vehicle collision o theft of an entire package as evidenced by visible signs of forced entry into a securely

locked vehicle or compartment of a vehicle.

Tip: There is really very little coverage here. Insureds who have any kind of transit exposure need to buy appropriate inland marine coverage to take care of this exposure.


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2. Water Damage, Other Liquids, Powder or Molten Material Damage If the insured sustains a loss due to a covered water damage loss, the insurer will pay the cost to tear out and replace parts of the building to get to the source that caused the damage within the building. However, the insurer does not repair the damage to the system itself. For example, if a building has a burst water pipe, the insurer will have to pay to have walls replaced where the water pipe burst. However, the policy does not pay to fix the water pipe itself.




3. Glass The insurer will pay for expenses to put up temporary plates or board up openings if repair or replacement of damaged glass is delayed. The insurer will also pay for expenses incurred to remove or replace obstructions when repairing or replacing glass that is part of a building. This does not include removing or replacing window displays. This coverage extension E.3., does not increase the Limit of Insurance.


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Summary of Additional Coverage Extensions

Property In Transit – Business or personal property in transit is covered up to S5,000 if the property is being transported in a vehicle the insured owns or operates (salespeople, however, are excluded from this coverage)

To be considered a covered loss, the damage must be caused by:

• Fire, lightning, explosion, windstorm or hail; • Vehicle collision; or • Theft with obvious signs of forced entry

Glass – If an insured incurs expenses due to delays in repairing damaged glass in a building, the temporary plates, boarding up, and removal of obstructions will be paid.

Water Damage, Other Liquids, Powder or Molten Material Damage – If a building has a burst water pipe, the insurer will pay to have walls replaced where the water pipe burst. This policy does not pay to fix the water pipe itself.


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Lesson 4 Topic F – Additional Coverage Limited Coverage for “Fungus”, Wet Rot, Dry Rot & Bacteria

Learning Objective: Discuss the Additional Coverage: Limited Coverage for Fungus, Wet Rot, Dry Rot, and Bacteria.

Background and Impact of Mold Claims

Commercial and industrial facilities can be faced with sick building syndrome in which fungus, wet rot, dry rot, and bacteria have made media attention and an awareness of the forefront of workplace safety concerns.

Site inspections, air evaluations and clean up of buildings can be very costly in lost time and production. Claims for mold damage have been increasing markedly in frequency and severity, to a point where insurers have become concerned with the large financial impact threatened by this growing problem. For example, in a highly publicized recent case involving an insurer's failure to fully remediate mold, a Texas jury awarded $32 million in favor of the policyholders. Data provided by the Texas Department of Insurance indicates the level of losses have begun to increase substantially. Emerging data for other states is beginning to show a similar pattern.

Insurers are seeking means of underwriting this exposure. In fact, Arizona and Nevada now rank among the top eight states having the most mold insurance claims. Litigation is now expanded to target builders, architects, HVAC equipment suppliers and installers, etc. The residential construction defects cases have turned into bodily injury claims as a result of the interior mold and the building industry and allied professions now view mold as a serious concern.


Bacteria

In seeking a vehicle to help insurers define and price the emerging and potentially catastrophic losses due to mold and other forms of fungus, limitations and options that will offset a given insured's damages in whole or in part, but will also limit the mold exposure and its impact on the industry have been introduced.

While most, if not all, of the media attention has been focused on mold, bacteria has been included. Bacteria is known to grow in the same environment as mold and can generally be found to be present at the same time and in the same place. Therefore, the limitations and options should also apply to bacteria as bacteria can be expected to be a part of many mold claims.


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Mold

A recent article written by C. Michael Moffitt, Ph.D., V.P. Environmental Services - Western Technologies, Inc. "The Growing Mold Issue - Mold and other fungi: Friend or foe?" discusses this very issue. As you can see in the photos that Dr. Moffitt provided, the mold Penicillium produces a metabolite, penicillin, which was discovered in 1929 to be an effective inhibitor of bacteria and helped usher in the modern age of antibiotics. Based upon these facts, it sounds like mold might be our friend; on the other hand, on the exact opposite study the ergot (a rye grain mold) produced thousands of poisonings, gangrene and domesticated livestock deaths in Europe during the Middle Ages.

In 1960, for example, 100,000 turkeys in England died from ingesting moldy peanuts that had been mixed into their feed. This particular mold, Aspergillus flavus, produces a metabolite called "aflatoxin" and has been found to be highly toxic and one of the most potent carcinogens known to man.

How does mold get started in buildings? Dr. Moffitt explains that mold needs moisture, nutrients, and low-light conditions to grow and amplify. The moisture can come from flooding, leaking roofs and windows, leaking or broken pipes, and high humidity (greater than 60%) caused by faulty air conditioning systems. Improper drainage and landscaping can also result in water intrusion. As you can see in the photos of this building, mold growth can destroy building material.


Additional Coverage - Limited Coverage for "Fungus", Wet Rot, Dry Rot And Bacteria

With this background in mind, the Additional Coverage, which is part of the Causes of Loss Form, has set up a total limit of coverage up to $15,000 for mold which results from named perils (including flood if flood coverage is endorsed to the policy). The limit is an annual aggregate limit. It is important to note that $15,000 exceeds the cost of most mold remediation claims and thus is highly responsive to the exposure while mitigating the potential for excessive costs. An optional endorsement CP 04 31 Changes - Fungus, Wet Rot, Dry Rot And Bacteria can be purchased to do the following:

• Increase the basic dollar limit • Modify the application of the dollar limit • Increase the number of days for time element coverage

This endorsement and limited coverage provided under the Causes of Loss forms are intended to be the only sources of recovery for mold-related losses. The Additional Coverage does not increase the limit of insurance on the covered property. Also under the




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Additional Coverage, it is made clear that the limitation on mold does not affect Collapse coverage.

Lesson 5 Basics of Time Element Insurance

Time element exposures occur when there is a loss of income or increase in operating expenses that result due to a direct loss from a peril and a business interruption occurs. Loss of business income, extra expense, and related exposures are considered "time element" since they are directly related to the passage of time.

How to recognize the appropriate form of time element coverage in a business will be discussed at great length in this chapter. The business interruption coverage forms, and the business income and extra expense coverage form are important areas that will be discussed.

Many businesses are dependent on other enterprises and if they were to shut down, their business would be affected. Topic D will cover these issues. You will also learn how to take a given loss situation and explain how the extra expense losses are paid. Please read your learning objectives for lesson 5.

Lesson 5 – Topics of Discussion


• Basics of Time Element Insurance • Business Income (and Extra Expense) • Extra Expense Coverage Form • Dependent Properties


1. List the requirements for a time element loss to be covered. 2. Define "business income" and "period of restoration". 3. Define "extra expense". 4. Given a description of a business, recommend the most appropriate form of time element

coverage. 5. Given a loss situation, explain how extra expense losses are paid. 6. Describe the dependent property exposures a business may face.


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• Business Income (and Extra Expense) Coverage Form (CP 00 30) • Extra Expense Coverage Form (CP 00 50) • Business Income From Dependent Properties - Broad Form (CP 15 08) • Business Income Changes - Beginning of the Period Restoration (No Waiting Period) (CP 15 56) • Common Policy Declarations Page (IL DS 00 04) • Ordinance or Law - Increased Period of Restoration Endorsement (CP 15 31)


None

Lesson 5 Topic A – Basics of Time Element Insurance

Lesson 5 Topic A Basics of Time Element p1 (IP)

We are ready to look at insurance that covers some of the indirect losses a business faces. In this lesson, we will study time element coverages that deal with financial loss that results when a covered peril causes an insured's business to have a loss of revenues, either completely, or partially.

The term "time element" is used because the dollar amount of the loss is dependent on the length of time the business is closed, or impaired during restoration.

Purpose of Time Element Insurance

The purpose of time element insurance is to reimburse a business's continuing expenses and loss of net profits due to a direct loss from an insured peril. Think of it as disability insurance for a business. The goal is to provide for an uninterrupted flow of income, and to provide an appropriate amount for a sufficient length of time.

Common Time Element Exposures

Suffering a direct loss is bad enough. To further complicate the situation, direct losses almost always include numerous other situations that can hamper a business's ability to run smoothly (see Table 5.1 for specific examples).


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Table 5.1:

Common Time Element Exposures Loss of Profits A business may not be able to generate a profit when it’s operations are

interrupted Continued Expenses Mortgage payments, payroll, taxes, insurance premiums, etc. continue even though

the business is interrupted Extra Expenses Some businesses – such as newspapers, banks, law firms, doctors, hospitals and

insurance agencies cannot afford to be interrupted even if property has been damaged or destroyed. They must find a way to stay open for business at all costs. In this case, extra expenses might include the costs of moving to a temporary location, leasing equipment, increasing advertising , etc.

Note: Service-oriented businesses are more susceptible to extra expense losses.

Learning Objective: List the requirements for a time element loss to be covered.

Some Basic Concepts of Time Element Insurance

With time element coverages, common concepts apply regardless of the type of time element coverage form used. These concepts are:

1. Requirements for a Time Element Loss. As with any policy, there are certain things that must occur for a time element loss to be covered. They are:

o The property must sustain direct damage. o The damage must be attributable to a covered cause of loss. o The damage must occur at the described premises. o The business has to suspend operations and/or incur extra expenses. o The business must suffer actual financial loss during the period of restoration.


Basic Concepts continued

2. Policies pay the insured on an "actual sustained loss" basis. The insurance company will reimburse only for what the business would have earned had no loss occurred. It is the insured who must prove the amount of the loss by showing the insurer its past records and future projections.

3. Due Diligence. The insured must do everything to restore the damaged property as soon as possible. We will


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see that the policy will only pay until the time the property should be repaired with reasonable speed.

4. Payments do not stop when the policy expires. The policy will continue to pay until the premises is restored or until the limit is exhausted, whichever comes first.

5. The amount of insurance depends on time and money. When setting the limit of insurance, the insured must take into account the maximum possible shutdown time. Factors such as weather, availability of construction materials and replacement machinery and parts must be considered. Additionally, the insured must consider the possibility that a loss will occur at the time of the year when it earns most of its money (seasonal fluctuations).

6. Limited coverage is included when damage to nearby premises causes authorities to deny access to the insured's premises. This policy provision is covered more in-depth later in this lesson.


Time Element Summary

Time Element Insurance Coverage

Requirements – To qualify as a time element loss:

• The damage must be attributable to a covered cause of loss and occur at the site at which the described premises are located.

• The business must suffer from some kind of financial loss, and/or have been forced to incur extra expenses, or suspend operations altogether.

Actual Sustained Loss – Policies pay the insured on an "Actual Loss Sustained" basis. Insurers will pay only for what the business would have earned had no loss occurred.

Due Diligence – The policy pays for a reasonable amount of time only - until the time at which the property should have been repaired.

Coverage When Policy Expires – Payments do not stop when the policy expires. They continue until the premises is restored or the limit is exhausted (whichever comes first).

The Amount Depends on Time and Money – When setting an insurance limit, the insured must take into account the maximum possible shutdown time as well as factors such as the weather and equipment availability. The insured must also consider that the loss may occur during the company's peak seasons.

Damage to Nearby Premises – Limited coverage is included when damage to nearby premises causes authorities to close access to the insured's building. An endorsement may be used to extend this time (CP


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15 32).

Lesson 5 Topic B – Business Income (and Extra Expense) Coverage Form

Learning Objective: Define "business income" and "period of restoration".

Refer to page 1 "We will pay..." of the Income (and Extra Expense) Coverage Form (CP 00 30).

The Business Income (and Extra Expense) Coverage Form (CP 00 30) combines both business income and extra expense under one form.

Make sure you have the print copy in front of you. We will refer to it throughout this section


Coverage Form continued

The insurer agrees to pay for loss of business income sustained due to the necessary suspension of operations during a "period of restoration." A direct physical loss of, or damage to, property must have caused the business suspension.

In addition, there must be a Business Income Limit of Insurance in place, and the loss or damage must have resulted from a Covered Cause of Loss.


Definition of Business Income

Refer to page 1 of the Business Income (and Extra Expense) Coverage Form.

The Business Income Coverage Form gives specific meaning to the term "business income". Business income consists of two amounts the policy will pay:

• The net income (net profit or loss before taxes) that would have been earned or incurred; and • Continuing normal operating expenses (including payroll).


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Definition of Period of Restoration


For business income coverage, the period of restoration, or the length of time loss payments will be made, begins 72 hours after damage occurs and ends when the property should reasonably be restored or repaired, or until such time the business resumes at a new, permanent location.

For extra expense losses, payments begin immediately. Notice that if the insured's loss is extended because of additional time needed to comply with ordinances or laws, the increased period of restoration is not covered. The insured may purchase an Ordinance or Law-Increased Period of Restoration Endorsement (CP 15 31) to provide coverage for this type of exposure.

The 72-hour waiting period is considered a "deductible".

The provision can be modified by endorsements, changing it to either: a 24-hour waiting period, or no waiting period (CP 15 56).

Note: Need a review? Navigate back to Lesson 4 Topic B to review.

Learning Objective: Define "extra expense".

Extra Expense

Refer to Item 2 on Page 1 of the Business Income Coverage Form (CP 00 30).

It is here that we find the provision for extra expense coverage in the Business Income (and Extra Expense) Coverage Form. Expenses, above normal expenses incurred during the "period of restoration", are covered in three ways. The policy will pay for extra expenses incurred:

• To avoid or minimize the "suspension" and to continue operations; • To minimize the suspension of operations if the business cannot continue operating; or • To repair or replace property to the extent the expense reduces the business income loss.

This is not additional insurance.

Additional Limitation - Interruption of Computer Operations


A limitation addressing electronic data applies to both "business income" and "extra expense". This coverage is only provided in the Additional Coverage - Interruption of Computer Operations.


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In the next few pages we will discuss the following Additional Coverages related to Business Income and Extra Expense risks:

• Civil Authority • Alterations & New Buildings • Extended Business Income • Interruptions of Computer Operations

Additional Coverages

Refer to page 2 of the Business Income (and Extra Expense) Coverage Form (CP 00 30).

1. Civil Authority

When a business is shutdown due to a covered cause of loss occurring within one mile of the insured's premises, the policy includes coverage for the insured due to the actions of a Civil Authority. After the 72-hour waiting period and as long as damage is caused by a covered cause of loss, the policy will pay for up to four weeks of business income loss to the insured. Note that the 72-hour waiting period and the four-week limitation do not apply to extra-expense losses caused by an interruption of a civil authority. The four-week limitation period may be increased with endorsement CP 15 32. This is not additional insurance.

Additional Coverages continued

2. Alterations and New Buildings

The Business Income (and Extra Expense) Coverage Form covers the business income and extra expense loss when the opening of a newly constructed or altered building has been delayed due to a direct loss that is a covered cause of loss. Payment is made for the loss attributable to the time period between when the building should have opened and when it actually did open. Not additional insurance.

3. Extended Business Income

Extended business income is paid after a business has already reopened after a loss. Upon reopening, business operations may not be at the same level as prior to the loss. Often there is a gap between what the insured was earning just before the loss and what he or she earns during the first few weeks business is resumed.


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Extended business income provides coverage to help the insured get back to where operations were prior to the loss. This extended coverage is limited to 60 days. This time period may be extended (up to 730 days) when the Extended Period Of Indemnity is selected. This will be discussed later.

4. Interruption of Computer Operations

There is a $2,500 limitation of all losses sustained and expenses incurred in one policy year; as well as, it is subject to numerous restrictions, and to named perils only depending on which Causes of Loss Form is selected.

Additional Coverage Summary

Civil Authority – Coverage is included when a business is shut down due to damage occurring at a nearby premises, when that damage has caused civil authorities to block access to the insured's location. Note that such coverage is limited to the four weeks following the 72-hour waiting period.

Alterations and New Building – When the opening of a new or remodeled business is delayed due to a covered direct loss, then payment is made for the lost income resulting from the period between when the building should have opened and when it did open.

Extended Business Income - Extended business income pays after a business has reopened to cover gaps during the first few weeks of resumed operations. Limited to 60 days, this coverage is intended to help return the business to position it was at before the loss occurred.

Interruptions of Computer Operations – This is for additional expenses or loss of income due to the interruption of computer operations caused by a covered cause of loss. This is limited to $2,500 in any one-policy year and the causes of loss are restricted to specific named perils.

Coverage Extension

Refer to pages 4 and 5 on the Business Income (and Extra Expense) Coverage Form.

If a coinsurance percentage of 50% or more is shown in the Declarations, you may extend the insurance provided by this Coverage Part as follows: Newly Acquired Locations

1. Does not apply to fairs or exhibits 2. $100,000 per location 3. Ends in 30 days, policy expiration, or when notified is company whichever comes first 4. Additional insurance


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Learning Objective: Given a description of a business, recommend the most appropriate form of time element coverage.

Methods for Writing Time Element Insurance

There are several issues to consider when selecting the appropriate form and coverage options for business income extra expense coverage.

1. What Limits of Liability Does Your Insured Need for Time Element Insurance? 2. Should you write Time Element Coverage with or without Coinsurance? 3. Is the Monthly Limit of Indemnity Option Needed? 4. Is the Business Income Agreed Value Option? 5. Is the Extended Period of Indemnity Option Needed?


How Much Business Insurance Do You Need?

In determining how much business insurance to obtain:

• Calculate and total the anticipated net income and operating expenses (including payroll) for the next 12 months

• Estimate the maximum possible shutdown time • Anticipate any bottlenecks in operations - both internal and external • Determine how much it will cost to satisfy the coinsurance requirement • Consider the seasonal fluctuations in the business


Methods for Writing Time Element Insurance

There are two methods of writing time element insurance: with coinsurance, and without.

With Coinsurance

The unmodified Business Income (and Extra Expense) Coverage Form includes a coinsurance condition. Coinsurance for this form of insurance operates in a manner similar to the property coinsurance calculation. The insured is required to have a minimum of 50 percent coinsurance, and may use 60%, 70%, 80%, 90%, 100%, or 125%.


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The internal calculations of coinsurance, and the setting of adequate limits to comply with this special coinsurance clause, however, are beyond the scope of this course.


Methods for Writing Time Element Insurance continued

There are four alternatives to the coinsurance requirement: use no coinsurance, maximum period of indemnity, monthly limit of indemnity, and business income agreed value.

Use No Coinsurance

The Commercial Lines Manual shows that an insured could write a limit of business income insurance with no coinsurance percentage applicable. However, most insurance companies are reluctant to do this, and the normal rate is increased significantly.

Maximum Period of Indemnity (Indicated by "X" on the Declarations Page.)

If the insured elects this option, coverage begins after a 72-hour waiting period. Loss, however, is covered for only 120 days or until the limit is exhausted, whichever comes first. Therefore, the insured needs to be absolutely sure the business can be up and running again within 120 days.


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Without Coinsurance continued

Monthly Limit of Indemnity

Under this option, coverage also starts after a 72-hour waiting period. A maximum payment for any 30 consecutive days is expressed as a fraction of the business income limit. These fractions are 1/3, 1/4 and 1/6, and the fraction chosen is shown on the Declarations Page. This does not mean three months, four months, or six months worth of coverage. Rather, it means that the most the insured can get for any 30-day period would be a fraction of the business income limit that is shown on the Declaration Page.

For example, if an insured has a business income limit of $200,000 and elects a maximum payment of 1/4, the insured would receive a payment of whatever loss has been incurred that month. However, the loss payment for any 30-day period would never exceed $50,000 or 1/4 of the $200,000 business income limit.

(See Table 5.2 on the next page for a detailed account of the insured's business income loss and potential coverage amounts.)



Table 5.2 Monthly Limit of Indemnity Period Loss Paid Reason First 30 days $65,000 $50,000 1/4 of $200,000 Maximum Available Second 30 days $40,000 $40,000 Less than $50,000 Third 30 days $45,000 $45,000 Less than $50,000 Fourth 30 days $50,000 $50,000 Equal to $50,000 Fifth 30 days $40,000 $15,000 $15,000 Remaining Limit Sixth 30 days $10,000 $0 Limit is Exhausted



Business Income Agreed Value This approach is an agreement between the insurance company and the Named Insured with regard to the values and calculations selected. The agreed value option suspends the coinsurance condition as long as the insured carries a limit of insurance equal to or greater than the agreed value.


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Certain conditions apply, including:

• A business income worksheet is required; • Failure to submit a new worksheet causes the coinsurance clause to be reinstated; and • The insured is penalized if the business income limit is less than the agreed value.


The Extended Period of Indemnity Option

Refer to the Common Policy Declarations Page.

For many insureds, it can take longer than 30 days after reopening to return the stream of income back to pre-loss conditions. The extended period of indemnity option allows an insured to change the 30-day extended business income coverage (discussed earlier in the Additional Coverages section). The 30-day extension can be replaced and options are available in increments up to 730 days. In selecting an extended period of indemnity, two conditions apply. This coverage:

1. the option cannot be used with the no-coinsurance option; and

2. the option cannot be used with the maximum period of indemnity option.

Lesson 5 Topic C – Extra Expense Coverage Form

Learning Objective: Given a loss situation, explain how Extra Expense losses are paid.

The purpose of the Extra Expense Coverage Form (CP 00 50) is to provide loss payments to businesses that cannot, due to their nature, afford to shut down for any length of time.

These are typically service-oriented businesses. Examples include newspapers, hospitals, accounting offices, law firms, insurance agencies, etc. For these types of businesses the CP 00 50 is more appropriate.


Definition of Extra Expenses

Extra expenses are the additional expenditures that a business would not normally have, which are incurred during the period of restoration following a covered loss. The policy will pay for the following types of expenses. Note: This definition of "extra expense" coincides with the definition found in the Business


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Income (and Extra Expense) Coverage Form.

To avoid or minimize the suspension and to continue operations;

A service oriented business such as a hospital, newspaper, accounting office, law firm or insurance agency needs to find temporary relocation to keep the business running.

To minimize the suspension of operations if the business cannot continue operation; or

Payments of overtime to repair crews and movers to help set up a new business location after a loss.

To repair or replace property to the extent the expense reduces the business income loss.

Lease or rental of temporary equipment, or repair/replacement of equipment needed to keep the business running.

Tip: These extra expenses could include the cost of temporary relocation and the lease/rental of temporary equipment that is necessary to keep the business running.


Extra Expense Coverage Form Provisions

Period of Restoration

In the Extra Expense form, the period of restoration begins with the date of direct physical loss at the described premises. There is no “waiting period” or deductible. Extra expense loss payments begin immediately.

Additional Coverages and Extensions The Extra Expense form includes coverage for:

• Alterations and New Buildings • Civil Authority • Newly Acquired Locations

These coverages are similar to the provisions found in the Business Income (and Extra Expense) Coverage Form we have discussed. Note: Numerous restrictions apply to interruption of computer operations due to covered causes of loss.


Special Loss Payment Provisions


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The Extra Expense Coverage Form contains certain special limits on loss payment. What the policy will pay is based on the length of the shutdown and the percentages shown on the declaration pages for the Extra Expense Coverage.

To determine the limit of liability available in a covered loss, the extra expense limit, shown on the declarations page, is multiplied by the percentage which corresponds to the timeframe of the period of restoration. The most common percentages in use are shown below.

There is a simple three-step process used to determine how coverage applies:

Step #1: Determine the length of the shutdown Step #2: Based on Step #1, choose the appropriate % from the Declarations: Less than 30 days - Use first % shown 31 - 60 days - Use the second % shown Step #3: Multiply the limit of insurance by the % determined in Step #2. This is the amount available to pay the loss.


Refer to page 4 of the Extra Expense Coverage Form.

Example:

Consider the following example:

Imagine a small insurance agency that has a policy that includes $100,000 in Extra Expense Coverage. The agency suffers a covered loss and must open immediately in another location until repairs are completed.

Table 5.3, based on an Extra Expense limit of $100,000, offers a summary of how the loss payment provision works.

Table 5.3: Period of Restoration

Percentage Option Amount Available

30 days or less 40 percent $40,000 or 40 percent of $100,000

31-60 days 80 percent $80,000 or 80 percent of $100,000

More than 60 days 100 percent $100,000


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Lesson 5 Topic D – Dependent Properties

Learning Objective: Describe the dependent property exposures a business may face.

There are many businesses that depend heavily on another enterprise to remain operational at normal levels. If the enterprise was to be shut down, the first business would be affected. These enterprises that affect a business are called dependent properties and are classified as one of the following: contributors, recipients, manufacturers or leaders.

1. Contributors

Contributors deliver materials and services to your business. A contributor to a manufacturer for example, would be a company that supplies its raw materials.

2. Recipients

Recipients accept your products or services. For example, think of a plastic manufacturer that has a contract with a toy company that accounts for 80 percent of its business. If the toy company is destroyed by a tornado, the plastic manufacturer would suffer a business income loss because of loss to a dependent property.


Dependent Properties continued

3. Manufacturers

Manufacturers produce products for delivery to a business's customers. A manufacturer's representative will suffer a business income loss if the manufacturer is shut down due to a loss.

4. Leaders

Leader properties attract customers to your business. Think of a movie theater as an example. Restaurants sprout around a movie theater to attract pre- and post-movie diners. But if the cinema burns down, the number of people patronizing these restaurants could decrease, and the restaurants would suffer a loss of income.


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Dependent Properties Summary

Contributors – Contributors are the suppliers who deliver materials and services to a business.

Manufacturers – Manufacturers produce products for delivery to customers, if the manufacturer shuts down, the manufacturer's representative would lose his/her commission income.

Recipients – Recipients accept products or services. The insured is dependent upon the recipient businesses to use and sell their products.

Leaders – A business that attracts a certain customer base and inspires related businesses to open up shop nearby is an example of a leader property. In turn, the related businesses are dependent upon the leader for their continued success.


Additional Considerations

When it comes to dependent properties, there are several additional considerations involved, including:

• With respect to contributing locations, services do not include water, communication or power-supply services;

• The insured must use any available source of materials or outlets for products; and • The ordinance or law exclusion applies.


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Lesson 6 – Commercial Inland Marine (IM) Insurance

Understanding the use and purpose of commercial inland marine insurance is important since nearly all businesses have one or more exposures that require this coverage. Not all types of property are eligible so it is important that commercial inland marine policies are in compliance with the Nationwide Marine Definition. This lesson will review exposures regarding property in transit, bailee (care, custody, or control), and specialized property subject for commercial inland marine consideration. It will also cover some of the key features and advantages of this type of insurance. We only have a few learning objectives, but they are important to your understanding this portion of commercial property.


Topics in the lesson include:

• How Commercial Inland Marine Developed • Inland Marine Forms Overview • Reasons for Writing Commercial Inland Marine • Conditions Unique to Inland Marine Coverages • Common Features in Writing Commercial Inland Marine Coverage Forms


1. Identify the types of property to be considered eligible as commercial inland marine. 2. Understand the difference between filed and non-filed commercial inland marine classes. 3. Explain the reasons for using and advantages of commercial inland marine. 4. Identify and briefly explain common features of inland marine policies.


• Commercial Inland Marine Conditions CM 00 01


None


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Lesson 6 Topic A - How Commercial Inland Marine Coverage Developed

Learning Objective: Identify the types of property to be considered eligible as commercial inland marine.

Commercial inland marine insurance evolved from ocean marine insurance as a result of an expanding America early in its history. At that time most shipments of goods were by water, and as the country changed, over land methods developed. This resulted in additional exposures involving transit, unnamed locations, and property being portable or unique which resulted in a change of insurance coverages. Ocean marine underwriters were experienced with these types of risks and readily provided coverage, and from there inland marine insurance developed as a separate classification of insurance.

Property insurance originated from fire insurance, and by its nature is for the most part designed for insuring property at fixed or specific locations, and is subject to rigid rules regarding insuring terms and rating. Inland marine insurance arose from ocean marine insurance, having more freedom and flexibility regarding insuring terms and rating. This led to conflicts and disputes regarding what types of property would be written under fire insurance and what type of property would be written under inland marine insurance. The solution was the creation of the Nationwide Marine Definition which was adopted in 1933, and later modified.

Learning Objective: Identify the types of property to be considered eligible as commercial inland marine.

Nationwide Marine Definition

The Nationwide Marine Definition identifies the following types of property to be considered eligible as Commercial Inland Marine:

1. Imports 2. Exports 3. Domestic Shipments 4. Bridges, Tunnels, and other Instruments of Transportation and Communication 5. Commercial Property Floaters


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Learning Objective: Understand the difference between filed and non-filed commercial inland marine classes.

You will find the rules and rates for these classes in your Commercial Lines Manual, Division 8.

Commercial inland marine is comprised of filed and non-filed classes of business as identified under a state's insurance code or law.

Filed Classes

Filed indicates those classes for which rules, rates, and forms must be filed by the insurance companies with state regulatory authorities for approval. Risks within a filed class are relatively uniform in nature and have similar exposures.

Examples of Filed Inland Marine Forms

• Accounts Receivable Coverage Form • Camera and Musical Instrument Dealers Coverage Form • Commercial Articles Coverage Form • Equipment Dealers Coverage Form • Film Coverage Form • Floor Plan Coverage Form • Jeweler's Block Coverage Form • Mail Coverage Form • Physicians and Surgeons Equipment Coverage Form • Signs Coverage Form • Theatrical Property Coverage Form • Valuable Papers and Records Coverage Form

Learning Objective: Understand the difference between filed and non-filed commercial inland marine classes.

Non-filed Classes

Non-filed indicates those classes for which rules, rates, and forms are not subject to filing requirements or uniform standards of application. The classes identified as non-filed have greater variance in the exposures, which makes it difficult to provide uniformity related to coverages and pricing. Non-filed classes have the ability to address unique or specific exposures on an individual risk basis.

Examples of Non-Filed Inland Marine Forms

• Builder's Risk Policies • Contractors Equipment Floaters • Installation Floaters • Specialized Computer Policies


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• Transportation Policies (Domestic Shipments) • Transmission Towers • Bailee Policies (to cover the goods of others in the insured's care, custody or control)

Note: You must check your company's inland marine manuals for the rules, rates and coverage forms to use when writing these coverages.

Lesson 6 Topic B - Reason For Writing Commercial Inland Marine Insurance

Learning Objective: Explain the reasons for using and advantages of commercial inland marine.

Commercial property forms have limitations.

With few exceptions, commercial property coverage is generally limited to designated premises. Commercial property coverage forms also contain internal limitations. See the table below for examples of these limitations.

Type of Property Limit Personal Property of Others $2,500 Outdoor Signs $2,500 Valuable Papers $2,500 Property Off Premises $10,000


Exposures

Certain exposures, such as those mentioned below, are better addressed as commercial inland marine rather than commercial property from a premium and insuring terms prospective.

1. Transportation

Insuring goods in transit is a complex process and requires flexibility in coverage, insuring terms and the ability to charge the proper premium for the exposure. The hazards vary depending on the type of property being shipped, where to, by whom, and type of conveyance. For example a shipment of eggs by truck is subject to breakage and spoilage as compared to pharmaceuticals where theft would be the concern, compared to a shipment of grain by rail which has low damageability and high salvage value.



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Exposures continued

2. Bailee (Care, Custody, or Control)

Many businesses serve as a bailee, having property of others in their care, custody, or control on which they perform a process or service. A majority of these businesses will have a transportation exposure since they will pick up and return their customer's property. In some cases they will need coverage while at locations other than their own depending on where their work is performed. An example of this would be a company that repairs industrial machinery, where they would go to the customer's site, remove and transport the machinery to their facility to make the repairs, and then return to the customer.

Coverage would be needed from the moment it became in the repair firm's care, custody, or control at the customer's location until it was returned and the service completed. Other examples of businesses with a bailee exposure include dry cleaners, upholsters, appliance repair shops.


Exposures continued

3. Specialized or Unusual Property

Specialized or unusual types of property in general lack having homogeneous exposures, being they do not have the same characteristics, or the same expectation of loss. Commercial inland marine policies can be crafted to meet the coverage needs unique to each. Examples include bridges, dams, tunnels, pipelines, communication and transmission towers, and loading bridges/cranes. Other types of property would include machinery and equipment used in the construction, mining, and energy industries.


Advantages of Commercial Inland Marine

The advantages of commercial inland marine over commercial property forms include:

• Flexibility in the insuring terms and conditions contained in the policy

• The ability to tailor the policy allows an insurance company to offer coverages that better address the exposures as they apply to a specific business


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Example

Exclusions can be removed, added or modified; covered perils expanded or restricted; and terms and conditions such as valuation, deductibles, warranties and locations covered can be manuscript to meet the need for a particular insured.

• The freedom to develop a premium that reflects the nature of the property, the exposures and the coverages and insuring terms provided under the policy - this results in a more accurate premium charge, based on the individual characteristics of the risk and its relationship to the coverage provided.

Lesson 6 Topic C – Conditions Unique to IM Coverages

Refer to page 2 of the Commercial Inland Marine Conditions Form (CM 00 01).

The Commercial Inland Marine Conditions Form shares many of the same conditions found in the Commercial Property Conditions Form; but the Inland Marine Conditions Form has several conditions that are peculiar to inland marine policies. Let's examine some of these conditions.

Note: Page 1 of the Commercial Inland Marine Conditions Form tracks with the conditions that we studied for the Commercial Property Conditions Form (CP 00 90). The unique conditions we will be discussing here are found on page 2 of the Commercial Inland Marine Conditions Form.(CM 00 01)

Refer to page 2 on the Commercial Inland Marine Conditions.

Conditions Unique to IM Coverages continued

G. Pair, Sets, or Parts

In a loss to a pair or set, the company can repair or replace to restore the set. The company can also pay the difference between the value of the pair or set before and after the "loss." In case of "loss" to any part, the company will only pay for the lost or damaged part.

Example:

A tire is stolen off of a piece of construction equipment which has four wheels. The insurance company will only pay for the loss of the one tire and not all four.

H. Recovered Properties

If property is recovered either by the insured or the insurer, the parties must give prompt notice to each other. The insured has the option to have the property returned; however, the amount paid by the


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company to the insured for the property will have to be refunded to the company. The company will pay recovery expenses and the expenses to repair the recovered property, subject to the Limit of Insurance.

Example:

The insurance company recovers a stolen diamond ring. The insured can take back the diamond ring or keep the insurance settlement.

I. Reinstatement of Limit after Loss

After a claim has been paid, the limit of insurance is not reduced. In the event of total "loss" of a scheduled item, the company will reduce the limit for that scheduled item and refund the unearned premium.

Example:

A building under construction with a value of $1,000,000 is insured for that amount. It is partially damaged by fire. The insurance company pays $250,000 for the loss, however the limit of insurance continues to be $1,000,000. Another fire loss for $800,000 occurs two weeks later before the repairs were made. The insured would still have the $1,000,000 limit in place to pay the claim.

Lesson 6 Topic D – Common Features in Writing Commercial Inland Marine Coverage Forms

Learning Objective: Identify and briefly explain common features of inland marine policies.

Locations Covered

Commercial inland marine forms are referred to as floaters. The reason is that they provided coverage where ever the insured property is located, being at designated location, unnamed location, or while in transit, subject to the territorial limits contained in the policy.


Common Features continued

Open Perils Coverage

The perils that are cited on inland marine forms may be "open perils" or "named perils". Most policies, however, are written with "open perils" coverage.


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As you will recall, with named perils, the insured must prove that a loss was caused by one of the covered perils. However, with open perils coverage, the insurance company must prove that a loss is excluded in order to deny coverage.

Unlike commercial property forms, commercial inland marine can be freely written for earthquake and flood while the property is in transit (over the road).


Common Features continued

Coinsurance Provision You will almost always find a coinsurance provision in a commercial inland marine policy. Although not all policies title the provision "coinsurance," almost all inland marine policies require insurance-to-value. Tip: When you receive an inland marine policy in your office, check the Additional Conditions section of the specific coverage form for words like "What We Will Pay," Insurance to Value, Coinsurance. Often you will find a statement that reads, "All covered property must be insured for its total value at the time of loss or you will incur a penalty." This is a 100% coinsurance clause.

Valuation Most commercial inland marine policies are written on an actual cash value basis. There are a number of inland marine forms where replacement cost coverage is available as an option. Some inland marine forms may restrict valuation to stated amount. Stated amount means that the policy will pay the lesser of:

a. The amount stated next to the insured item, b. The actual cash value, or, c. The cost to repair the item

Occasionally, you will write the agreed value basis, which takes on the same meaning it does in property insurance.


Exclusions

Wear and Tear – An Item is not covered for losses caused by normal wear and tear that occurs over time.

Nuclear Action


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War

Inherent Vice - Property is not covered for losses caused by the property's natural tendency to destroy itself. Opals, for example, will crack over a period of time.

Government Action

Loss of Income or Market – Inland Marine policies provide coverage for direct losses only. Indirect, or time element, losses are not typically included in these forms.

Dishonest Acts – This includes dishonest and criminal acts of the insured, partners, members, officers, managers, employees (including leased employees), directors, trustees and other authorized representatives.

Inventory Shortage – When inventory shortage is the only indication that a loss might have occurred, there is no coverage.

iso forms v. company or state specific forms

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