130.4-2

CP 00 10–BUILDING AND PERSONAL PROPERTY COVERAGE FORM ANALYSIS

(December 2008)

This analysis is based on the 06/07 edition of this coverage form. Changes from the previous edition are in bold print.

Note: This form was introduced in most states in November 2008 but 06/07 remains as the form edition date.

INTRODUCTION

This coverage form opens by defining the terms "you or your" as the named insured and "we, us and our" as the company providing the insurance coverage. Named insured is not defined. As a result, it means only entities listed or named on the declarations. If a particular entity is not listed, there is no coverage for its property, even if the property is described on the declarations.

A. COVERAGE

The coverage form obligates the insurance company to pay for direct physical loss or damage to certain types of property. The property must be at a location listed or described on the declarations. In addition, the loss or damage must be due to a type of loss eligible for coverage or by a covered cause of loss.

Coverage applies only to loss or damage that occurs at a definite place and time. If the loss event is not tangible or capable of being measured, it is not covered.

The reference to premises means that coverage applies only to property located in or on the premises listed or described on the declarations. For this reason, the declarations is a very important document. Coverage does not apply if the location and type of property is not properly listed or described.

1. Covered Property

Covered Property is defined in two ways. In the first, the coverage form lists the types of property eligible for coverage. In the second, it provides information on the types of property not eligible for coverage. One method to determine what is covered is to ask the following questions:

a. Building

Building is the first type of covered property. The following property is covered in addition to the actual building or structure indicated on the declarations:

Note: Covered property includes items the named insured might not consider reporting to its agent. This is because the addition or changes are done as time permits by employees or friends. All building materials needed may be purchased at one time but installed intermittently and sporadically over an extended period of time. A builders' risk policy would be purchased if the building owner hired a contractor to do the job. If that were the case, the coverage under this form would not apply.

b. Your Business Personal Property

The next type of covered property is Business Personal Property. Three distinct conditions must be met in order for coverage to apply. The property:

Note: A premises is not the same as a building. A premises is the land on which the building is situated. For this reason, personal property in a vehicle parked is covered if the vehicle is within 100 feet of the premises. If the vehicle is more than 100 feet away, coverage does not apply.

The following is considered personal property. Certain provisions in the Property Not Covered section limit this otherwise inclusive listing. Personal property is:

Example: Bill owns a hardware store with a large basement. His family is rapidly outgrowing its home and he decides to move some extra household items to the basement of the hardware store instead of renting space in a storage facility. If a fire occurs, the Building And Personal Property Coverage Form pays nothing for the household items damaged or destroyed because that property is not used in the business.

Example: A machine shop sends a customer’s die to the named insured tool and die shop for repair and it pays for that service. If that die is subsequently damaged by a covered cause of loss on the named insured’s premises before the customer pays for the service, the named insured can then collect the cost of the service it performed on that die even though the die itself is not covered.

Use interest is the value the named insured invested in the improvements. It is generally based on the length of the lease agreement. Please refer to PF&M Section 130.6-16, Improvements And Betterments, for more information about covering improvements and betterments.

Example: The insured leases a restaurant for 10 years and installs $50,000 in improvements that cannot be removed. If a loss occurs, the value is prorated based on the remaining term of the lease contract. If the loss happens on the named insured’s opening day, it should expect to receive a claim settlement equal to almost the entire initial investment. On the other hand, if the loss occurs toward the end of the 10-year lease, it should expect a much lower settlement amount.

c. Personal Property Of Others

There is no coverage under Your Business Personal Property for Personal Property Of Others except for the coverage required by a lease agreement. For this reason, if separate coverage for personal property of others is required, this coverage applies if the personal property is in the insured's care, custody or control and is located or situated:

There is no requirement that personal property of others must be used in the named insured’s business in order for coverage to apply.

Example: Bill’s neighbor asks if he can keep some of his excess stock in the basement of Bill’s hardware store. If that property is damaged, coverage applies as long as it was listed or described and a limit of insurance provided while it was at the hardware store location.

Note: The named insured should be informed that any loss settlement in this example is with the owner of the personal property and not with the named insured. This coverage is not the same as Bailees’ Coverage. Please refer to PF&M Section 130.6-17, Property Of Others, for additional information.

2. PROPERTY NOT COVERED

This section modifies the Coverage section to apply to the coverage needs of the typical insured. If coverage on any excluded property is needed, separate coverage options are available for an additional premium charge. The following property is excluded:

a. Accounts, bills, currency, deeds, food stamps, other evidences of debt, money, notes or securities. This property can be covered under crime and inland marine coverage forms and policies.

Note: Lottery tickets held for sale are not securities.

b. Animals are excluded with two exceptions:

c. Automobiles held for sale. Automobiles can be covered under either inland marine or automobile coverage forms.

d. Bridges, roadways, walks, patios or other paved surfaces. This property is considered to be fixtures and is eligible for coverage as building property. Most insureds do not insure this type of property because of the comparatively high cost of doing so and the low probability of loss to it. If an insured decides to cover this property, it can do so using CP 14 10–Additional Covered Property. In addition, coverage on bridges is available under Inland Marine coverage forms.

e. Insurance coverage is not intended to facilitate illegal activities. For this reason, any property involved with illegal transportation, trade or related activities is excluded.

Example: George "2Bad" Rotterbee has commercial property coverage on his small grocery store with Good-Deal Mutual Insurance. George operates a "Meth Lab" in the back of the building. George arrives at the store one morning and upon entering the lab, discovers that a week’s supply of ether was stolen. Since ether is used to manufacture illegal drugs, Good-Deal's adjuster informs George that the property is not covered. The adjuster also notifies the police and tells Good Deal's underwriting department to expedite issuing a notice of cancellation.

f. Costs of excavations, grading, backfilling or filling are not covered. This is because these expenses are normally associated with new construction and are not usually part of existing construction and most insureds do not want to pay the premiums required to cover these costs as part of building. However, coverage is available under CP 14 10–Additional Covered Property, subject to an additional premium charge.

g. Foundations at or below ground level are not covered because the chance of loss or damage to them is minimal. Coverage is available under CP 14 10–Additional Covered Property, subject to an additional premium charge.

h. Land, water, lawns and crops not yet harvested, while having value, are not covered. Growing crops can be covered under farm or agricultural coverage forms and policies.

i. Personal property in transit by air or water conveyances is excluded. Coverage on this property is available under Inland Marine coverage forms. Please refer to PF&M Section 142.14, AAIS Transportation Coverage Forms, for more information about the coverage available for this property.

j. Bulkheads, pilings, piers, wharves and docks are excluded because most insureds do not have this type of property. If coverage on such property is required, CP 14 10–Additional Covered Property can be used. In some cases, an Ocean Marine coverage form may be more appropriate. Please refer to PF&M Section 150.1, Overview Of Ocean Marine, for more information.

k. If other coverage more specifically insures property also covered under the Building And Personal Property Coverage Form, this coverage form treats that other coverage as primary and responds to losses on an excess basis.

Note: Even if the other coverage is exhausted, is not available or cannot be collected for any reason, this coverage form still responds only on an excess basis over that other insurance.

Example: Mary’s Construction Company purchases a builders risk policy to cover the addition to John’s Restaurant. An arsonist burns down both the addition and the rest of the building. John’s insurance should pay for the loss to the restaurant and the builders risk policy should pay for the loss to the addition. However, Mary’s insurance company went into receivership just as it was preparing to pay the claim. As a result, Mary's insurance company did not pay for the loss to the addition and John’s policy did not respond because Mary’s builders risk policy limits were sufficient to cover the loss if it had been able to respond.

l. Retaining walls, other than retaining walls that are part of the building, are unusual and are excluded. If coverage on such property is required, CP 14 10–Additional Covered Property can be used, subject to an additional premium charge.

m. Underground pipes, flues or drains are not covered because the potential for loss is fairly remote. If coverage on such property is required, CP 14 10–Additional Covered Property can be used, subject to an additional premium charge.

n. Electronic data is excluded, except for the nominal limit provided under Additional Coverage, Electronic Data. Electronic data is a broad category that includes all programs and data stored on computers. Stored data includes floppy disks, CD-ROMS, tapes and similar storage media even when not on the computer. However, prepackaged software the named insured owns as stock held for sale is covered.

o. The cost to restore information on valuable papers and records is not covered, except for the limited coverage provided under the Coverage Extension for Valuable Papers And Records (Other Than Electronic Data). Valuable papers and records include proprietary information such as, but not limited to, accounts, books, deeds, card index systems, drawings, abstracts and manuscripts. Valuable papers and records in either a paper or an electronic form are excluded.

p. Vehicles and self-propelled machines licensed for use on public roads or operated primarily away from the described premises, including aircraft and watercraft, are not covered. This is because this property is correctly covered under automobile, inland marine, ocean marine or aviation coverage forms designed for their particular exposures. However, the exclusion does not apply to the following covered property:

q. Grain, hay, straw and other crops are not covered. This property should be covered under farm or agricultural coverage forms or policies. Please refer to PF&M Section 471.1, Overview Of The ISO Farm Program Coverage Forms, for additional information. Fences, outdoor radio and television broadcasting and receiving equipment and shrubs, plants and trees other than stock held for sale are not covered, except for the limited coverage provided under Coverage Extensions, Outdoor Property.

Note: Coverage Extensions, Outdoor Property provides coverage against specified perils for low limits of insurance. Other endorsements are available to provide additional coverage on this property. CP 14 10–Additional Covered Property can be used to extend coverage on fences. CP 14 30–Outdoor Trees, Shrubs And Plants can be used to extend coverage for that property.
CP 14 50–Radio Or Television Antennas extends coverage for antennas, satellite dishes and supporting equipment.

While the 06/07 edition of this form removes outdoor signs from the property listed in exclusion q, it does not mean that signs are totally covered. All attached and detached outdoor signs are covered for the same causes of loss as other covered property but remain subject to the $2,500 limit of insurance under Section C. Limit of Insurance.

3. COVERED CAUSES OF LOSS

This coverage form requires that one or more of the causes of loss forms be attached.

Example: Crainston Furs purchases CP 10 30–Causes Of Loss–Special Form on all building property and CP 10 10–Causes Of Loss–Basic Form for all business personal property because all furs and fur-related property is covered under its furriers block policy.

Please refer to PF&M section 130.6-1, Basic, Broad And Special Causes Of Loss Forms Analysis, for detailed information on each of the causes of loss forms.

4. ADDITIONAL COVERAGES

a. Debris Removal

After a loss involving physical loss or damage, debris that must be removed remains and coverage applying to the costs of removing it is needed. Over the years, this relatively simple concept has become one of the more hotly debated issues under commercial property coverage forms as insurance buyers search for alternate sources for pollution coverage. Debris removal coverage was never intended to be environmental clean-up coverage but the language has been found to cover such losses because of the simplicity of the provision.

This coverage is explained as follows:

(1) Actual debris removal expenses are paid if all of the following apply:

Example: Martha’s Food Factory, a restaurant, is vandalized. The interior is completely trashed and a significant amount of debris must be removed before replacement property can be brought in. The cost to remove the debris is covered provided Martha pays the costs of debris removal, the debris is actually removed, the personal property damaged is covered property, the loss occurs during the policy period, and the expense is reported within 180 days of the date of loss.

The coverage provided in this paragraph is subject to limitations as outlined below.

(2) This paragraph explains that the coverage form is not a pollution policy. There is no coverage for the removal of pollutants from land or water or for the removal, restoration or replacement of polluted land or waters.

Example: A fire at a fertilizer plant sends pollutants into the air and the residue later falls on the land and lake adjacent to the plant, resulting in the lake becoming severely polluted. It must be treated and its condition monitored. There is no coverage for the treating, testing or monitoring of the lake or for removing pollutants from the surrounding land.

(3) This paragraph explains the amount of coverage provided under the basic limits. There are two distinct limitations:

(a) The total amount paid for a direct loss, not just the debris removal, is the lesser of:

·         The actual physical loss or damage, including the debris removal expense, or

·         The limit of insurance for the damaged covered property

(b) The total amount paid for debris removal is the lesser of:

·         The sum of the amount paid for the direct physical loss plus any applicable deductible amount multiplied by a factor of .25. The formula is:

Loss Amount + Deductible Amount x .25 = Debris Removal Coverage Amount, or

·         The actual debris removal expense

Example: Ken’s photography shop has a small fire. The actual physical loss amount is $5,000. The limit of insurance is $25,000 and the deductible is $500. The maximum debris removal expense available is $1,375 ($5,000 + $500 X .25). Since the sum of $5,000 + $1,375 is less than $25,000, the total amount of $6,375 is the maximum amount available to apply to Ken’s direct loss and debris removal expense.

(4) This paragraph provides an additional amount of insurance for debris removal if one of the limitations in
paragraph (3) above applies. The additional amount of coverage is $10,000, subject to the following:

(a) The total amount paid for a direct loss, not just the debris removal, is the lesser of:

·         The actual physical loss or damage, including the debris removal expense, or

·         The limit of insurance for the damaged covered property plus $10,000 Debris Removal Additional Coverage

Example: We’ll change the loss amount in the Ken's photography example to a $23,000 physical damage loss and $5,000 in debris removal expenses. The maximum debris removal expense available is $5,875 ($23,000 + $500 X .25). However, since the limit of insurance is $25,000, the most paid for debris removal expense is $2,500 ($25,000 – [$23,000 - $ 500]). This results in Ken having to pay $2,500 out of pocket. However, when the $10,000 Additional Coverage is used, Ken has full coverage and has no out of pocket expense.

(b) The total payment for debris removal is the lesser of:

·         The total of the amount paid for the direct physical loss plus any applicable deductible amount multiplied by a factor of .25 plus $10,000. The formula is [(Loss Amount + Deductible Amount) x .25] + $10,000 = Debris Removal Coverage Amount, or

·         The actual debris removal expense.

Example: Continuing the example above, the Ken’s photography loss involved chemicals. The chemicals had to be removed by environmental specialists and taken to a special disposal facility. The removal cost was $10,000. Since the debris removal expense in step (3) (b) is limited to $5,875, $4,125 of the loss is not covered. However, the additional $10,000 limit is (4) (b) provides the necessary coverage to fully fund the loss.

The last point made concerning this coverage is that the maximum amount of insurance available for direct physical loss and debris removal expense does not exceed the coverage limit of insurance plus $10,000.

Example: Policy A's commercial property limit is $750,000. The policyholder sustains a huge grease fire loss and a large amount of debris remains. The direct damage loss amount is $735,000 and the debris removal cost is $44,000. In this case, the policyholder absorbs the following out of pocket loss:

Direct Damage Amount

$735,000

Add Debris Removal Expense

+$44,000

Total Loss

$779,000

Limit Of Insurance

$750,000

Add Additional Debris Removal Amount

+$10,000

Less Available Limit of Insurance

$760,000

Debris Removal Expense Not Covered

$19,000

Higher debris removal limits are available by using CP 04 15–Debris Removal Additional Limits. Please refer to PF&M Section 130.4-3, ISO Commercial Property Program Available Endorsements And Their Uses, for more information. Please refer to PF&M Section 130.6-22, Debris Removal Concerns, for additional examples and explanations. Please refer to PF&M Section 131_C091, Debris Removal Obligation Was Paid, in Court Cases, for an example of a problem with a debris removal limit.

b. Preservation Of Property

What happens if you have no insurance, know that your business is being threatened and have time to take action? You probably start by moving your most valuable possessions out of danger. The same course of action is just as important when you do have insurance. The Building And Personal Property Coverage Form encourages the insured to protect its property and also provides coverage as an incentive to do so.

If it is necessary to move covered property from an insured location in order to avoid it being damaged by a covered cause of loss, the insurance company pays for any direct loss or damage it sustains during the move. In addition, coverage applies at the location used to store the property for up to 30 days after the date it was moved there.

Several important points should be considered:

Example: Kermit moves his business furniture from his offices to protect it from rising floodwaters. Several pieces of furniture are dropped while being loaded on a rented truck, resulting in hundreds of dollars in damage. This damage is not covered because the threatened flood is not a covered cause of loss.

Example: Miller’s Bakery is located in a rural area close to a national forest. A major wild fire is nearby and the wind is blowing in the wrong direction. Miller realizes its equipment is in the direct line of the fire and moves it to a safe location on the other side of the river. A heavy rain extinguishes the fire before it reaches his property. However, a new problem develops. Due to the heavy rain, a flash flood overflows the river’s banks and totally destroys Miller’s relocated property. Even though flood is not a covered cause of loss, the loss to the property is covered because it was moved to protect it from a fire, a covered cause of loss.

Note: The property removed must be moved back to the covered location or the temporary location must be added to the policy within 30 days from the date of the move. Otherwise, all coverage ends after 30 days.

c. Fire Department Service Charge

This additional coverage assists in situations where the insured is contractually obligated to pay for the expense of a fire department that responds to an emergency. The limit is $1,000. However, a higher limit can be used when entered on the declarations.

d. Pollutant Clean Up And Removal

The second paragraph of Debris Removal Additional Coverage specifically excludes expenses to extract pollutants from land or water. This additional coverage provides a limited amount of coverage for those expenses. Each of these requirements must be met:

The $10,000 limit for this additional coverage is unusual because it is an aggregate limit and not an occurrence limit. It is the total amount available during a single annual coverage period and is not affected by the number of locations or the number of losses that occur during that period. As a result, any and all losses involving eligible expenses reduce the $10,000 aggregate limit.

Example: Ace Manufacturing has five locations in Michigan. During the spring, a series of tornadoes that came through damaged two of the locations. Paint spilled at one of the locations and toxic chemicals were released into a nearby pond at another. The pollutant cleanup cost at the first location was $15,000 and $30,000 at the other. Because of the $10,000 coverage limitation, only $10,000 of the $15,000 expenses at the first location was paid and none at the second.

Note: CP 04 07–Pollutant Clean Up And Removal Additional Aggregate Limits Of Insurance is used to increase the limit. Please refer to PF&M Section 130.4-3, ISO Commercial Property Program Available Endorsements And Their Uses, for more information about this optional coverage. Please refer to PF&M Section 131_C086, Pollution Cleanup Coverage Inapplicable, for an example of a claim not covered by this additional coverage.

e. Increased Cost Of Construction

This is welcome protection for any company subject to the Americans with Disabilities Act (ADA) or any of a large number of local, state and federal ordinances typically not enforced until a building requires significant renovations or repairs. These ordinances and codes are helpful to many people and their cost is relatively easily absorbed in new construction. However, updating an existing structure after a partial loss can add substantially to its reconstruction costs and the basic coverage form does not cover them.

Example: Havor Academy is a private school that has served elementary school children for over 100 years. The building is joisted masonry with plaster interior walls. The hallways in certain areas are rather narrow but lead to spacious areas. A fire starts in the academy’s kitchen and causes significant damage to the kitchen and dining hall. Havor obtains the required building permits for the reconstruction and is informed that the hallways must be widened to meet ADA standards. Since the walls that must be moved are not damaged, the only coverage available to pay for the widening is the limited amount provided by this additional coverage.

This coverage is explained in nine paragraphs.

Example: Havor Academy meets the requirements because covered property is damaged by fire, a covered cause of loss. Increased costs are incurred to rebuild, repair or replace the damaged covered property. The increased costs result from requirements to comply with enforcement of an ordinance or law. If Havor has Replacement Cost Optional Coverage, it is possible that coverage is available, subject to paragraphs (3) through (9).

Example: At the time of the Havor Academy loss, the town council was considering an ordinance requiring installation of sprinkler systems in all schools exceeding two stories in height. The council voted and passed the ordinance two weeks after Havor's loss and the building inspector informed Havor of the change. Since the ordinance passed after the loss, this additional coverage does not apply to the cost of adding the sprinkler system.

Example: Havor Academy and the town argued for years about the fire escape ordinance but Havor never had the funds to comply with it. It believed its evacuation procedure was more than adequate and that the town was unfair in requiring that it remodel its building. However, the town held the advantage after the fire loss and insisted that Havor either comply with the ordinance or the building would not be allowed to reopen. Havor turned to this additional coverage but since it was subject to the ordinance requiring installation of the fire escape prior to the loss and had not done so, the insurance company was not obligated to pay the added cost.

Note: The blanket provision is important because it keeps the 5% from being applied to the blanket limit. Doing so would allow each building within the blanket to receive the maximum limit for this additional coverage even if the specific building was worth less than $10,000.

Example: Havor Academy has 20 buildings on its campus insured for a blanket limit of $25,000,000 at 100% coinsurance. The fire damaged three of them. The maximum increased cost of construction limit available to each building is:

Building Number

Value

Lesser of

Maximum Paid

#1

$10,000,000

$500,000 or $10,000

$10,000

#2

$500,000

$25,000 or $10,000

$10,000

#3

$10,000

$500 or $10,000

$500

Example: Havor Academy is unhappy with the loss settlement and the amount it must pay to repair the building in such a way to bring it up to code. After reviewing its options, Havor decides that building a new building is less costly than repairing the old one. In addition, doing so will enhance the overall appearance of the entire campus. The good news is that the company still pays the $10,000 limit to meet the standards.

Note: Some ordinances or laws require that the insured actually relocate its operations. In that case, the limit applies to the new construction.

Note: CP 04 05–Ordinance Or Law Coverage should be used if higher limits or broader coverage is needed. Please refer to PF&M Section 130.6-8, CP 04 05–Ordinance Or Law Coverage, for more information about this form.

f. Electronic Data

Electronic data is excluded except for the small limit provided by this additional coverage. If a covered cause of loss damages or destroys electronic data, the cost to replace or restore it is covered under this additional coverage on a very limited basis.

This additional coverage has two unusual features. The first is that the applicable covered cause of loss varies by the cause of loss form that applies to business personal property at the location where the loss occurs. If the Causes Of Loss–Special Form applies, the covered causes of loss for electronic data are specified causes of loss and collapse. If the Causes Of Loss–Broad Form applies, the causes of loss named and collapse are included. While not mentioned, if the Causes Of Loss–Basic Form applies, only the causes of loss named in that form apply. In addition to the covered causes of loss listed above, loss or damage caused by virus, harmful code and similar attacks on the computer system is covered, regardless of the causes of loss form that applies. However, normal computer entry problems or date manipulation problems are not covered.

The second unusual feature is that the $2,500 limit is an aggregate amount and is the most paid over all locations for an entire year. If a loss begins in one year and continues into a second year, only the aggregate limit from the first year is available.

Since this is extremely limited coverage, an insured having electronic data exposures should consider an Electronic Data Processing Policy. Please refer to PF&M Section 142.6, AAIS Electronic Data Processing Equipment And Business Computer Coverage Forms, for more information.

5. COVERAGE EXTENSIONS

If 80% or higher coinsurance applies, or if coverage is written on a reporting form basis, several coverage extensions apply to covered property. They are limited to protecting property located in or on the building indicated on the declarations and property in the open or in or on a vehicle within 100 feet of the described premises. Any exceptions to these requirements are clearly stated in the particular extension of coverage.

Each extension provides additional limits of insurance and none are subject to the coinsurance condition.

a. Newly Acquired Or Constructed Property

Since contacting an insurance agent to report a new acquisition is not automatic behavior, The Newly Acquired Or Constructed Property extension provides the named insured with some peace of mind coverage for new purchases. However, this coverage is not free. The acquired property must be reported and an additional premium paid from the acquisition date.

Note: The newly built or acquired building must be used in a manner similar to that of existing buildings or as a warehouse. The insurance company accepts risks based on occupancy and should not be expected to automatically add a building with a dramatically different occupancy than what is already on the policy.

Example: L&M Property Management is a successful commercial real estate developer owning 15 office buildings and 10 apartment buildings. It has an opportunity to purchase a building occupied by a furniture manufacturer and quickly does so. A fire occurs two days after the acquisition but before the insurance company is notified. The coverage L&M expects under this coverage extension does not apply because the occupancy is not similar to that of other scheduled buildings.

The maximum limit per building is $100,000. However, this coverage extension does not apply to personal property of others in the insured's custody being worked on, even if the work is related to the eventual sale or manufacture of the property.

Note: Unlike the requirement under newly acquired building, there is no requirement that newly acquired business personal property be the same or similar to existing business personal property but it must qualify as eligible business personal property.

Note: This provision can be applied with sometimes unfortunate and undesirable results.

Example: If the insured acquires a building on 12/31/2008 and the policy renews on 01/01/2009, coverage no longer applies to the newly acquired building as of 01/01/2009.

This is particularly important for the insured that requests that the 30-day time period be increased to 180 days. Even then, coverage still ends on the earliest of the dates indicated above.

The construction date is the date the insured begins construction on a new building. Since covered property does not include foundations, unless otherwise modified, coverage and the 30-day limitation do not begin until construction above grade level begins.

The date that building and/or personal property was acquired is reported to the insurance company so that premium can be charged for the entire period it was covered. For this reason, this extension is provided for the insured's convenience and coverage is not provided without a premium charge. However, the insured receives the benefit of coverage being in place if the newly constructed or acquired property is not reported immediately. Owing additional premium is better than having an uninsured loss.

Please refer to PF&M Section 131_C058, Newly Acquired Property Held Not Covered After The Automatic 90 Day Period Expired, for more information.

b. Personal Effects And Property Of Others

Coverage for business personal property can be extended to include personal effects belonging to the named insured, its partners, officers, members, employees or managers. Note that this extension does not include theft coverage even if the causes of loss form covers theft. Coverage also extends to property of others in the named insured’s care, custody or control but this part of the extension does not have a limitation on theft. The most paid at a described location is $2,500. This is the most available, regardless of the number of persons involved and the value of the property lost.

Note: Loss adjustments involving such claims are handled directly with the owner of the property.

c. Valuable Papers And Records (Other Than Electronic Data)

The basic coverage form does not insure the cost to restore and replace valuable paper and records information. This coverage extension provides a small limit of insurance to pick up this cost but only for valuable papers and records not considered electronic data.

The applicable covered causes of loss vary by the causes of loss form that applies to business personal property at the location where the loss occurs. If the Causes Of Loss–Special Form applies, the covered causes of loss for electronic data are specified causes of loss and collapse. If the Causes Of Loss–Broad Form applies, the causes of loss named and collapse are included. While not mentioned, if the Causes Of Loss–Basic Form applies, only the causes of loss named in the form apply.

The limit is $2,500 at each location but higher a higher limit can be indicated on the declarations.

Note: If the insured requires higher limits and plans to use this coverage extension instead of a separate Inland Marine Valuable Papers And Records coverage form, the coverage provided by this form is different and may not be as broad as that provided by the inland marine form. While including coverage for this exposure under this coverage form may be less expensive, doing so may mean loss of valuable coverage enhancements and the portable nature of a floater form in a the stand-alone policy. Always compare the two coverage forms carefully before making any coverage decisions. Please refer to PF&M Section 141.13, ISO Valuable Papers And Records Coverage Form, for more information on inland marine coverage for this exposure.

d. Property Off-Premises

Most business personal property tends to move around to some extent. This extension recognizes this fact and provides up to $10,000 on such property. However, this coverage applies only to property usually situated at a described location that is away from the premises for short periods. The personal property can be temporarily:

Note: If storage space leased during the policy period is still leased when the policy renews, it must be added to the policy as a separate covered location or coverage ends. In addition, this extension has an important limitation. It does not apply to property in or on a vehicle or property in the possession of the insured’s salespersons, except at a fair, trade show or exhibition.

Inland marine coverage forms are available to cover off premises property, property in transit or property at the premises of others for storage, service or repair. Please refer to PF&M Section 140.2, Who Needs Inland Marine Coverage? This section details and explains the kinds of coverage available for property not covered by this coverage form.

e. Outdoor Property

Under Property Not Covered, q. (2) lists the following as not covered:

This coverage extension insures this property but only for loss or damage caused by or resulting from the aircraft, explosion, fire, lightning, riot or civil commotion causes of loss. The limit of insurance is $1,000 in any one occurrence, subject to a maximum of $250 for any one tree, shrub or plant.

Example: A group of high school kids looking for treats on a Halloween evening approaches Mitzi’s Daycare just as Mitzi is leaving to go home. They yell at her, "Trick or treat!" A smiling Mitzi tells them that she is sorry but she doesn’t have anything for them. The next morning, a frowning Mitzi reads, “Here’s your treat!” scrawled on her wood fence now lying on the ground. If her insurance company agrees the damage was due to civil commotion as opposed to vandalism, this coverage extension may apply to some of the damage caused by the disappointed tricksters.

Note: Signs were previously part of this extension but they are no longer excluded property in the 06/07 edition.

The Commercial Property Program has an endorsement available to include or schedule additional coverage for outdoor trees, shrubs and plants. CP 14 30–Outdoor Trees, Shrubs And Plants allows the insured to increase these coverage extension limits and schedule specific coverage for this property. CP 14 50–Radio Or Television Antennas is available to use to increase limits on that property. In addition, inland marine coverage forms are available that provide both higher limits and broader coverage. Please refer to PF&M Sections 130.4-3, ISO Commercial Property Program Available Endorsements And Their Uses and 140.2, Who Needs Inland Marine Coverage? for more information.

f. Non-Owned Detached Trailers

Personal Property coverage can extend to include coverage for non-owned trailers, subject to three conditions:

Note: Use of the words "contractual responsibility" is unusual and may be a preview of “things to come” in other areas of insurance that have been murky or unclear in the past.

However, there is no coverage for loss or damage that occurs:

The most paid under this extension is $5,000 unless a higher limit is indicated on the declarations. Since there is no further explanation, the limit applies to each occurrence. This coverage is excess over any other insurance covering such property, whether that insurance can be collected or not.

B. EXCLUSIONS AND LIMITATIONS

Exclusions and limitations are in the Causes Of Loss Forms that apply. Please refer to PF&M Section 130.6-1, Basic, Broad And Special Causes Of Loss Forms Analysis, for a detailed analysis of these forms.

C. LIMITS OF INSURANCE

This section states the maximum limits the insurance company pays in any one loss. In most cases, the limit indicated on the declarations is the total amount that can be recovered for a single loss. If an outdoor sign, whether attached to the building or not, is damaged or destroyed, coverage applies up to $2,500 per sign in each occurrence.

Example: A fire breaks out at Wally's Winery on July 8. The intense heat pouring out of the winery’s doors shatters the front and rear electric signs. The sign at the rear is valued at $810. The larger sign in front is valued at $2,710. The insurance company pays only $3,310 for the damage to both signs, $810 for the sign at the rear and $2,500 for the sign at the front of the building.

After both signs are replaced, a severe windstorm breaks a limb off a nearby oak tree on August 23. The limb smashes the sign at the rear and completely destroys it. The brand new sign just recently installed is valued at $1,973. The full value of this sign is paid for the second occurrence.

The limits provided for the following coverages are in addition to the limits of insurance indicated on the declarations:

Insurance company payments made under Preservation Of Property Additional Coverage do not increase the limit of insurance that applies.

Example: Back to Wally’s Winery. Once again, a fire breaks out in the center of the building and begins to spread. Wally moves $40,000 in stock to a truck in order to save it. However, a fire engine responding to the fire strikes that truck and the stock is destroyed. Wally’s total limit is $300,000. In this case, since $40,000 is paid under the Preservation Of Property Additional Coverage, only $260,000 of the limit remains to apply to loss to the remaining personal property.

Note: The extension of coverage limits are also in addition to the Limits Of Insurance indicated on the declarations, even though a statement to that effect does not appear in this section. The explanation of the limits appears at the end of the Extensions of Coverage section.

D. DEDUCTIBLE

When a loss occurs, the insurance company may reduce the amount it pays by determining if the insured has complied with the coinsurance or agreed value provisions. The remaining amount of loss is then compared to the deductible amount. If it is less than the deductible, the loss amount is the insured's expense.

Example: Mary’s Meat Market has a $50,000 limit of insurance on Business Personal Property and a $1,000 deductible. The police cut short an attempted break-in but not before the criminals damage the entry doors and a safe. The total loss is $988. Since this is less than the deductible, Mary pays for the repairs from her own funds.

If the loss amount exceeds the deductible, the insurance company pays the lesser of the amount of loss above the deductible or the limit of insurance.

Example: The criminals return to Mary’s two nights later. They are much more successful this time and manage to remove a large amount of inventory. Because of their concern about getting caught, they decide to set a fire to cover their tracks. The total loss is $63,000. The amount of loss after the $1,000 deductible is applied is $62,000. Since the limit of insurance is only $50,000, the insurance company pays $50,000.

If the occurrence causing the loss involves two or more kinds of covered property, each having separate limits of insurance, the occurrence deductible is applied only once.

Example: The fire from Mary’s Meat Market damages the building owned by LRO Property Management. LRO insures the main building for $250,000, subject to a $1,000 deductible. LRO also has a garage at the rear of the main building insured for $15,000. The loss amounts are $125,000 on the main building and $5,000 on the garage. The loss payment on the main building is $124,000, based on the $125,000 loss reduced by the $1,000 deductible. Since the deductible is applied to the loss on the main building, no deductible applies to the garage and the $5,000 loss to it is paid.

An optional deductible endorsement is available. CP 03 20–Multiple Deductible Form is used in cases where the insured wants to apply different deductibles to different forms of property or coverages. Please refer to PF&M Section 130.4-3, ISO Commercial Property Program Available Endorsements And Their Uses, for a complete list of available property endorsements.

E. LOSS CONDITIONS

These Loss Conditions apply in addition to IL 00 17–Common Policy Conditions and CP 00 90–Commercial Property Conditions.

1. Abandonment

The named insured still owns the property after a loss and is responsible for all expenses associated with it, unless or until the insurance company agrees to accept ownership of the property.

Example: A sinkhole causes the Montgomery Fashion Palace to tilt and slide off its foundation into the middle of Main Street, creating a major traffic obstruction. Montgomery Fashion informs its insurance company that it will accept a cash settlement and then close the business. However, the insurance company is not interested and refuses to accept the property. As a result, Montgomery is responsible for either moving the building back to its original position or arranging for its demolition. Montgomery is also responsible for all fines and penalties from the city for the traffic obstruction.

2. Appraisal

From time to time, the insurance company and the insured disagree on the value of property or on the actual amount of loss. This condition contains a procedure designed to solve this problem. In the first step, one of the parties determines that it has reached an impasse with the other party and makes a written request for an appraisal. At that point, each party hires an independent appraiser. The appraisers must be both competent and impartial.

Example: Jane is the insured and her insurance company is Bargun-Downe Property Company. They disagree on the value of the roof damaged by a lightning strike. They both agree to submit the dispute to appraisal. Jane selects an experienced appraiser who just happens to be her brother. Bargun-Downe selects a totally impartial party who has no appraisal credentials. Both appraisers are rejected. Jane’s selection is biased and the insurer’s selection is not qualified.

Next, the appraisers choose an umpire. If they cannot agree on an umpire, they can request that a judge of a court having jurisdiction over the matter select one. Once all parties are selected and in place, each appraiser states the value of the property and the amount of loss. If both parties agree, the loss amount is settled. Only amounts over which they disagree are submitted to the umpire. Any decision made by any two of the three is binding on both the insurance company and the insured.

The expenses associated with this process fall outside the category of expenses paid under the coverage form. The insured pays the following costs or expenses and is not reimbursed by the insurance company for them:

The insurance company pays the following costs and expenses. None of these expenses reduce the limit of insurance:

Example: Baron’s Furniture Store is seriously damaged by a tornado. Furniture is strewn over many city blocks. Sheila is the owner and believes the value of the loss is $560,000, based on inventory records. The insurance company claims representative visits the store, views both damaged and undamaged merchandise and determines the loss to be $350,000. Each side presents its case to the other but the impasse cannot be resolved. Sheila needs to restore the inventory and get back in business. She sends a letter to the insurance company and requests an appraisal. Each party selects a qualified and impartial appraiser but cannot agree on an impartial umpire. They ask a local judge to select the umpire and he does so. Sheila’s appraiser determines the loss to be $625,000 but the insurance company’s appraiser determines a value of the loss of $450,000. The umpire reviews their figures and agrees with the insured on some items and with the insurer on others. The final settlement is $510,000. Each side bears its own expenses for the appraisers and umpire but $510,000 is the agreed value of the loss.

Please refer to PF&M Section 131_c083, Insurer Must Accept Decision Of Its Approved Umpire, in Court Cases, for an example of how a court decided on an appraisal challenge.

3. Duties In The Event Of Loss Or Damage

The insured is expected to act in a reasonable manner immediately after a loss occurs. If not, the insurer’s obligation to pay the loss may end. The insured must:

Example: A theft occurs at an insured location and the insured reports the loss to the insurance company. It begins to adjust the loss and finds that no police report was made because the insured suspects that a relative may be involved.

Example: A fire destroys the insured’s warehouse. The insurance company adjuster discovers that a local gang may have started the fire. The insured does not fill out a police report because of fear of reprisal.

In cases like these, the insurance company has the right to refuse to pay the loss. It needs this requirement to protects its interests, which include being certain that the claim is legitimate as well as making sure there’s a chance that the responsible parties are found and punished. When theft of property is involved, police involvement increases the chances that the property will be recovered.

Example: The front window of Haptown Appliances blows in during a violent thunderstorm. The televisions on display are badly damaged by flying glass, debris and water. The police notify the owner and the owner informs his insurance agent and the insurance company. When the storm ends, the owner goes to the store and evaluates the situation. His immediate concern is that the security system is no longer working, so he purchases lumber, boards up the window and contacts the alarm company. The alarm company recommends a security company that can provide extra security until the window is repaired and the alarm system is put back into operation. After these arrangements are in place, the owner examines the appliances and moves the damaged ones to the rear of the store and begins to clean up. The insurance company includes the expenses for temporary security and boarding-up the window in the loss adjustment and settlement.

An important word in this particular condition is “reasonable”. Since it is not a defined term, the two parties might disagree about the intent of this condition. For example, the insurer may take the position that repeat visits are necessary in order to be thorough. The insured may view the same actions as being a delaying tactic that slows down the settlement. While the essence of this condition is to prevent the carrier from harassing the insured, it also benefits the insurance company. Because of the way it is written, an uncooperative insured cannot claim that a single visit is sufficient for the carrier to adjust and settle a loss. Please refer to PF&M Section 131_C087, Uncooperative Insured Can't Seek Arbitration (Classic), in Court Cases, for an interesting case on how the actions of an uncooperative insured can void a policy.

Note: If the insurer's requests are unclear and the insured is confused, any delay in providing the information cannot be used as an excuse to deny coverage.

In addition to the points outlined above, the insurance company has the right to examine any insured under oath. The examination usually takes place individually and without another insured being present. The examinations can be done as often as necessary concerning any matter related to either the insurance coverage or the claim itself. They can include examinations of the insured's books and records. In all examinations, the written document on which the insured's answers are recorded must be signed. Pease refer to PF&M Section 131_C063, Insured Fails To Produce Required Documents Following Fire Loss, in Court Cases, for an example of how seriously the courts consider this obligation to be.

Note: Loss investigation is a serious part of the insurance claims process and the insurance company must have complete access to information as necessary to investigate and settle the claim. This may include information the insured would prefer not to disclose. Claims adjusters want to believe their insurance customers are honest but the sheer number of incidents of fraud makes them cautious. While the insurance company cannot use intimidation or harassment, it must still be diligent in order to protect its assets and to prevent or limit fraud.

4. Loss Payment

The insurance company decides how a loss is paid based on one of four options:

The value of damaged or destroyed property, or the cost to repair or replace, is based on the terms of the valuation condition of the coverage form or any other provision that amends or replaces the valuation condition.

The insurance company must tell the insured the option it will exercise within 30 days after receiving a properly prepared and signed sworn proof of loss. However, it does not pay more than the insured's financial interest in the covered property.

Example: Mary and Jane form a partnership called Mary Jane’s Clothing. Five years later, Mary purchases Jane’s interest. A covered loss occurs two months after that. Since Jane’s name is still on the policy, she files a claim against the policy. Because she no longer has a financial interest in the covered property, she is politely informed that she has no right to make a claim and that the coverage form will not respond to her claim.

The insurance company has the right to adjust claims for loss or damage to property the insured does not own directly with the property's owner but may also allow the named insured to do so. The settlement must satisfy all claims for the property because the insurance company pays only once. In addition, the most paid is the property owner’s financial interest in the property.

If the insurance company providing the property coverage decides to defend the insured against suits due to claims brought by the owners of property, it does so at its own expense.

When the insured provides the insurance company with a signed and sworn proof of loss, it must pay the loss within 30 days of receiving it. This obligation depends on the insured meeting all policy conditions as well as the value of the loss being determine by one of the following:

When buildings abut one another, they often share a party wall. This wall separates the two buildings but is also part of each building. If the same insured owns all buildings, loss settlements are unaffected. However, if different insureds own the shared party wall, loss settlements may be more difficult. The 06/07 edition of the form formally addresses this issue for the first time.

When both building owners plan to repair and rebuild, the insurance company pays its insured’s proportional share of the damage to the party wall. However, if the named insured wants to rebuild but the other building owner does not, the insurance company pays the full value of the party wall. It then has the right to subrogate against the adjoining building owner.

5. Recovered Property

If either the named insured or the insurance company recovers property after a loss is paid, the recovering party must notify the other promptly and inform it of the recovery. The named insured has the right to decide whether to return the claim payment and keep the recovered property or allow the insurance company to keep the recovered property. The insurance company is responsible for the expense of the recovery and any repair to the recovered property, subject to the limit of insurance.

Example: Burglars break into Floyd’s Music Shop and steal $25,000 in CDs. The insurance company pays the claimed amount of $25,000. Two years later, the police notify Floyd that the CDs have been located at a warehouse. Floyd notifies the insurance company of this development. The insurance company representative and Floyd visit the warehouse and Floyd realizes that the current value of the CDs is negligible due to their age. He decides to keep the claim payment and let the insurance company keep the CDs.

6. Vacancy

Insurance companies are interested in insuring successful and ongoing businesses. Risk pricing contemplates an active occupancy. As a result, rates on vacant properties are heavily surcharged. Since vacancy is often discovered only after a loss occurs, the loss conditions severely limit coverage if the vacancy was not disclosed to the insurance company in advance.

Before imposing any restrictions, the insurance company must define exactly what it means by vacancy. If coverage applies to a tenant, the only part of the building considered when analyzing vacancy is the portion the tenant occupies. That portion is considered vacant if the business personal property on premises is not sufficient for the tenant to conduct its customary operations.

Example: Millie’s Florist Shop occupies a quarter of the Landow building. The tenant that previously occupied the rest of the building, The Cat and Mouse Café, moved out. The building owner is looking for a new tenant and the search is now in its ninth month. A fire breaks out in the vacant portion of the building and Millie's space experiences heavy smoke damage. In this situation, Millie’s loss is unaffected because the portion of the building she occupies is not considered vacant.

If the named insured is the building owner or a general lessee, the entire building is considered in determining vacancy. The building is considered vacant unless at least 31% of the total square foot area is:

Example: If the lessee, sub-lessee or building owner is a retail business, the retail business is its customary operation. The insurance company may deny a claim when a loss occurs and it discovers that 90% of the building is used for storage, because the building is vacant according to the language in the coverage form.

Buildings under construction or being renovated are not considered vacant. If the building or an area within it is temporarily vacant so that major renovation work can be done, and the tenant will return as soon as the work is done, the building is not considered vacant.

Example: The Eastward Shopping Center has four separate buildings and always struggles with vacancy issues. Building A is totally occupied by one tenant. Building B has one shop that occupies 20% of the space. The rest of the building has been vacant more than six months. Building C has multiple tenants but is 15% vacant. Building D has just been leased subject to completion of major remodeling. A contract has been signed and remodeling has begun.

A major summer storm’s heavy winds damage all four buildings. Based on the definition of vacancy, Buildings A and C are not vacant and their coverage is unaffected. Building B is vacant and is subject to a vacancy penalty. Since Building D is being remodeled, it is not vacant at the time of the loss and the vacancy penalty is not applied.

Having defined vacancy, the vacancy condition can be stated. If the building damaged by a covered cause of loss has been vacant, as defined above, more than 60 consecutive days before the date of loss:

Example: Building B in the Eastward Shopping Center example above was penalized 15% because the loss was caused by storm damage. The loss would have been denied if it had been caused by vandalism.

Please refer to PF&M Section 131_C045, Vacancy Exclusion Held Applicable When Building Was Devoid Of Substantial Warehouse Contents, in Court Cases, for a court interpretation of vacancy. Please refer to PF&M Section 130.6-10, Vacancy, for a broader explanation of vacancy and options available to the insured.

7. Valuation

The value of covered property at the time of covered loss or damage is determined as follows:

Note: This cost does not include any increased costs due to the enforcement of any ordinance or law affecting construction or use.

Example: Ben’s Wholesale stocks only merchandise it has sold. A covered loss destroys all the stock. The merchandise was sold at an agreed price of $600,000. Ben provides a 10% 30-day payment discount and it costs $50,000 to transport the merchandise to the customer. The value of Ben’s loss is $600,000 minus the 10% discount of $60,000 and minus transportation costs of $50,000, for a total of $490,000.

Example: Sally’s Card Shop added $5,000 in improvements when it moved in two years ago. The five-year lease includes a five-year renewal option. Lightning damages the improvements and they must all be replaced. Sally is not sure that the improvements are really needed at this time, so the proportion must be calculated in order to pay the loss.

Step one:

Original cost

$5,000

Multiplied by the number of years remaining in the lease (three plus the five in the renewal option)

X 8

Multiplied by the number of days in a year

X 365

Equals

$14,600,000

Step two:

Number of years from installation to expiration of the lease

10

Multiplied by the number of days in a year

X 365

Equals

3,650

Step one ($14,600,000) divided by step two (3,650) equals

$4,000

Sally receives $4,000 based on the proportion method.

Endorsements available to amend the valuation condition in the basic coverage form include:

Please refer to PF&M Section 130.4-3, ISO Commercial Property Program Available Endorsements And Their Uses, for a list of coverage options.

F. ADDITIONAL CONDITIONS

Two additional conditions apply in addition to the Common Policy Conditions and Commercial Property Conditions.

1. Coinsurance

This condition applies only if a coinsurance percentage is indicated on the declarations. The insurance company does not pay the full amount of any loss if the value of the covered property at the time of loss, multiplied by the coinsurance percentage on the declarations, exceeds the limit of insurance for the property.

It is important to understand that coinsurance is not required or mandatory. However, it is recommended because when coinsurance is not selected, pricing is surcharged significantly. The premium is based on the insured maintaining a limit of insurance equal to at least 80%, 90% or 100% of the value of the covered property. In exchange for the insured doing so, the insurance company charges a much lower premium. The coinsurance penalty outlined below illustrates how the insurance company makes sure the insured keeps the promise to insure to value.

Note: The insured can select the Agreed Value option and not be subject to coinsurance or the coinsurance penalty. This option is analyzed in the Optional Coverages Section.

Certain information is needed to determine if a coinsurance penalty applies:

Example: Keith’s Shoe Barn has coverage on its stock and other business personal property. The total value is $100,000 on the inception date. Keith decides to use 80% coinsurance and purchases coverage with an $80,000 limit. A fire occurs three months into the policy period. At the time of loss, the total value of stock and other business personal property is $120,000 because Keith purchased a large amount of stock in advance of back-to-school shopping. The loss is valued at $50,000. The value used to determine the coinsurance penalty is $120,000, the value at the time of loss, and not the $100,000 value on the inception date.

The limit of insurance does not have to be the value multiplied by the coinsurance. It should be based on and reflect the maximum value expected during the policy period. In cases where fluctuating values are expected, the insured should consider writing coverage on a reporting form or using the peak season endorsement. Please refer to PF&M Section
130.6-11, Value Reporting Form, for analyses of reporting forms. Please refer to PF&M Section 130.6-12, Peak Season Coverage, for an analysis of peak season coverage. In some cases, the insured may choose to insure at 100% value of the property but keep the coinsurance at 80% or 90% so the limit is adequate in case of unanticipated value increases and to avoid a coinsurance penalty.

Example: Since the value of the property at the time of the loss is $120,000. Keith’s Shoe Barn's limit should have been $96,000. Keith chose 80% but applied it to the inception date value of $100,000 and now faces a coinsurance penalty because the limit is only $80,000.

Step 1: Multiply the value of covered property at the time of loss by the coinsurance percentage

Step 2: Divide the limit of insurance by the result in Step 1.

Step 3: Before applying the deductible, multiply the total amount of loss by the result in Step 2.

Step 4: Subtract the deductible from the result in Step 3.

The insurance company pays the lesser of the amount determined in Step 4.or the limit of insurance. The named insured pays any difference.

Example: Keith’s Shoe Barn's coinsurance penalty is determined as follows:

Step 1: $120,000 X .80% = $96,000.

Step 2: $80,000 / $96,000 = .833

Step 3: $50,000 X .833 = $ 41,650.

Step 4: $41,650 minus the $1,000 deductible equals $40,650.

The insurance company pays $40,650. The remaining $9,350 is not covered and the insured must pay it from its funds.

The coverage form includes three useful examples to explain how the coinsurance condition applies. The coinsurance condition may be suspended by selecting the Optional Coverages–Agreed Value option. Refer to Section G. Optional Coverages for a more detailed analysis of this optional coverage. Please refer to PF&M Section 130.6-9, Coinsurance Clause, for more information on the coinsurance clause and alternative approaches.

2. Mortgageholders

Mortgageholder is not defined but it includes trustees in this coverage form. The insurance company pays for covered loss or damage to buildings or structures to each listed mortageholder in the order of precedence and as it's respective interest appears. The mortgageholder must prove its interest at the time of loss.

The mortageholder retains the right to receive loss payments even when foreclosure proceedings or similar action against the insured begins. However, it loses those rights after the foreclosure is complete since the named insured no longer has any interest in the property and the bank’s policy is then expected to respond.

If the insured’s claim is denied because of its actions or because it failed to comply with any of the terms and conditions of the policy, the mortageholder still has the right to receive loss payments, subject to it:

Example: Gravyboat LLC buys and sells homes. It owns 35 homes when the sub-prime bubble crunch hits. Gravyboat is overextended and unable to sell a number of houses. The mortgageholder begins foreclosure proceedings on five properties that are vacant. Gravyboat does not pay the premium and the insurance company sends a notice of cancellation. The mortgageholder receives the notice and pays the premium but does not tell the insurance company that the properties are vacant. When one of them is damaged by fire, the loss is denied because the mortgageholder did not inform the insurer of the vacancy, an increase in hazard.

Once any of the actions above takes place, the terms of the coverage form apply to the mortgageholder because it has assumed the position of the named insured.

If the insurance company pays the mortgageholder for a covered loss or damage but refuses to pay the insured because of its actions or because it did not comply with the terms and conditions of the coverage form:

The insurance company has the option to pay off the entire mortgage, including accrued interest. If it does so, it owns the mortgage and the insured must pay the remaining mortgage debt to the insurance company.

If the insurance company cancels the policy for non-payment of premium, it must give at least 10 days prior written notice to the mortgageholder before the cancellation takes effect. It must give at least 30 days written notice to the mortgageholder for any other reason.

If the insurance company decides not to renew the policy, it must give at least 10 days written notice to the mortgageholder prior to the expiration date.

Please refer to PF&M Section 131_C022, Payment Of Policy Proceeds To Insured Did Not Relieve Insurer Of Obligation To Mortgagee, in Court Cases, for an interesting court case supporting the rights of the mortgageholder.

G. OPTIONAL COVERAGES

This form includes provisions for four optional coverages. The coverage applies only if the selection is indicated on the declarations. The selection must identify each type of covered property to which it applies. For example, an optional coverage can apply to buildings but not to business personal property. It is also possible to have an optional coverage apply to some buildings but not to others.

1. Agreed Value

The coinsurance condition includes serious penalties if the value of covered property at the time of loss is less than the value required by the coinsurance clause. While the agreed value option gives the insured an alternative valuation technique, it is also subject to certain conditions and requirements.

When the insured selects this optional coverage, the coinsurance condition does not apply. Instead, the insurance company pays no more for covered loss or damage to covered property than the proportion that the limit of insurance under this coverage form bears to the agreed value indicated on the declarations.

An expiration date for the agreed value option must be entered on the declarations when it is selected. If its expiration date is prior to the policy expiration date and is not extended by endorsement, the coinsurance condition is reinstated and the option no longer applies. This optional coverage applies only to loss or damage that occurs on or after the effective date of this optional coverage and before the expiration date of the agreed value option indicated on the declarations or the policy expiration date, whichever is earlier.

Note: This option is called agreed value because the insurance company and the named insured agree that the value is adequate based on documentation submitted to substantiate the values. Before the option is extended, updated documentation must be submitted so that a new agreed value can be determined.

Example: Kitty’s Tavern submits an application and requests agreed value optional coverage. The worksheet accompanying the application indicates business personal property with a value of $150,000 but Kitty only wants to insure it to 90% of this value. The insurance company and Kitty agree on a 90% agreed value of $135,000. The policy is issued with this limit for the period January 1, 2009 to January 1, 2010. The expiration date of the agreed value clause is also January 1, 2010.

A $5,000 covered loss occurs. Because the limit and the agreed value are the same, the loss is paid in full.

The policy is extended to April 1, 2010 but without a request to extend the agreed value optional coverage. When a loss occurs on March 1, 2010, since the Agreed Value Optional Coverage date was not extended, the coinsurance clause is reinstated and the loss adjusted accordingly.

2. Inflation Guard

This option gives the named insured a certain degree of flexibility and is used primarily on real property, not personal property. The named insured selects an annual inflation rate. During the course of the year, the insurance limit automatically increases by the inflation rate selected. As a result, when a loss does occur, the new limit as of the date of loss is determined before any loss calculation is done. The new limit is calculated as follows:

Step 1: Determine the limit of insurance that applies to the loss.

Step 2: Multiply the limit in Step 1 by the decimal version of the annual increase amount indicated on the declarations.

Step 3: Determine the number of days since the limit was last changed.

Step 4: Divide the number of days determined in Step 3 by 365.

Step 5: Multiply the result in Step 2 by the number of days in Step 4 to determine the amount of increase.

Step 6: Add the figure in Step 1 to the figure in Step 5 to determine the limit of insurance that applies to the loss.

Example: Caldwell Manufacturing has building coverage with a limit $1,250,000 and an 8% inflation guard factor. On June 1, the limit is increased to $1,350,000. A loss occurs on July 1. The revised limit of insurance is calculated as follows:

Step 1: $1,350,000 is the limit because the loss occurred after June 1.

Step 2: $1,350,000 X .08 = $108,000.

Step 3: There are 30 days between June 1 and July 1.

Step 4: 30/365 = 082

Step 5: $108,000 X.082 = $8,856.

Step 6: $1,350,000 + $8,856 = $1,358,856, the amount available to apply to the claim.

Note: When Optional Coverages–Inflation Guard is included, the renewal limit should be reviewed carefully. If the inflation guard factor is 8%, the limit at renewal should be at least 8% higher or the insured's limits are actually lower at renewal.

Example:

·         Policy term: 01/01/2009 to 01/01/2010

·         Limit of insurance: $1,000,000

·         Inflation guard factor: 8%

·         Limit of insurance as of 12/31/2009: $1,000,000 X .08 = $1,080,000

The insured that wants the policy renewed "as is" should be reminded that this means a renewal limit of $1,080,000, reflecting the original limit increased by the annual inflation guard factor. Renewing for the $1,000,000 limit is actually a reduction in limits.

3. Replacement Cost

a. The Valuation Loss Condition is amended by replacing Actual Cash Value with Replacement Cost. This means that a deduction for depreciation of property is not taken when determining payment for property damaged or destroyed by a covered cause of loss.

b. Replacement cost valuation does not apply to:

c. The insurance company does not force the insured to accept replacement cost valuation. The insured can accept an actual cash value settlement. The insured can even change its mind and make a claim based on replacement cost as long as it notifies the insurance company within 180 days after the date of loss that it desires the replacement cost option. The reason to accept an actual cash value settlement and then reverting to replacement cost is to obtain initial funds to begin the process.

Example: Connie’s Feed and Grain has a $225,000 limit, including replacement cost optional coverage. When her store is destroyed by fire, she decides to take the actual cash value settlement of $150,000 instead of rebuilding. When members of the community beg her to reconsider her decision, she changes her mind and notifies the insurance company on the 179th day of her intent to rebuild. She uses the $150,000 settlement to start rebuilding. After construction is complete, she receives the remaining $75,000.

d. The insurance company does not pay on a replacement cost basis until:

Note: The longer the insured takes to begin making repairs, the more expensive the loss becomes because of deterioration and general exposure to the elements. Water damage is always a particular concern, especially in warm climates.

Tenant’s improvements or betterments are not considered property of others but losses involving them are settled differently than other personal property. If the insured does not meet the conditions outlined above, meaning that replacement cost valuation is not available, the valuation reverts to the method explained under the Valuation Condition. In addition, and to prevent double dipping, the insurance company pays the named insured only if it actually pays for the repairs. The named insured receives nothing if the landlord or another party pays for the repairs.

e. The insurance company is obligated to pay only the least of the following amounts:

Note: The named insured can decide to rebuild at a different location but the amount paid for the loss is limited to the amount equal to the cost to rebuild at the original site.

f. The cost of repair or replacement does not include any increase caused by the enforcement of any ordinance or law applying to the construction, use or repair of the property.

4. Extension Of Replacement Cost To Personal Property Of Others

This extension is used only when the Replacement Cost Optional Coverage is selected because it is simply a modification of it. It removes the exclusion for personal property of others from the Replacement Cost Optional Coverage.

There is one limitation. If personal property of others is subject to a written contract that establishes the named insured's liability for loss or damage to it, valuation of that property is based on the lesser of:

Example: Mary has a contract for leased equipment in her office. The contract states that if a loss occurs she is responsible for no more than $40,000. A loss occurs and the replacement cost value for the equipment is determined to be $60,000. The most the insurance company pays is $40,000 due to the language of the contract.

H. DEFINITIONS

Three terms are defined in this coverage form:

1. Fungus means all forms of fungus including, but not limited to, mold, mildew, spores, scents, mycotoxins or by-products released or produced by the fungus.

Note: This term is used in the Increased Cost Of Construction Additional Coverage to restrict coverage.

2. Pollutants are any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

3. Stock is merchandise held in storage or for sale, any raw materials and goods in-process and finished goods. This also includes supplies used in their packing or shipping.