The author
COVERAGE CONCERNS
Guidelines are found in basic exclusions and coverage options
By Roy C. McCormick
Familiarity with exclusions in commonly used forms of property and liability insurance contributes to the development of proper coverage ...
It is important that agents become familiar with any exclusions and limitations in the business property and liability forms and coverage parts that are used in the development of package policies. This can minimize the possibility of overlooking an exposure that should be discussed with the insured. Being aware of the coverage options offered by individual insurers, and having at-hand a list in manuals and other sources can bring to light a risk that requires attention.
Newer agents and brokers can profit from reviewing these two important sources of information. Old pros know that updating their fund of knowledge increases their expertise. The widespread use of businessowners policies makes them a logical place for double-checking fundamental policy provisions. In general, they are common to commercial packages of all types.
For reference purposes, we refer to businessowners policies drafted by the Insurance Services Office (ISO) and the American Association of Insurance Services (AAIS). Exclusions in other regularly used policies and forms should be reviewed. The following listing of a limited number of major exclusions demonstrates their significance and the need to determine if additional coverage should be recommended in specific situations:
* Loss caused by water is a fundamental exclusion. It includes: flood, surface water, waves, tides, tidal waves, overflow of any body of water including spray, all whether driven by wind or not; water backup from sewers or drains; and water below ground level that seeps, flows or presses in through or into foundations, walls, floors, paved surfaces, basements, doors, windows or other openings.
* Exclusion of damage caused by flooding should be called to the attention of every commercial insured. Flood insurance is an option and an important subject for discussion. Its significance is clear to many with property in identified flood plains and must not be overlooked.
* Loss caused by earth movement, other than sinkhole collapse, is excluded. (Resulting damage by fire or explosion, however, is covered.) Earthquake insurance is available and the option to purchase it must be discussed where the exposure is recognized.
* Loss due to failure of power or other utility service to the described premises is not covered if the failure occurs away from the premises. (Loss on the premises from a covered peril, resulting from the power failure, is covered.)
* Loss from mechanical breakdown, including rupture or bursting caused by centrifugal force, is not covered. Neither is loss due to explosion of steam boilers, pipes, turbines, or engines that are owned or leased by the insured or whose control is the insured's responsibility. (Loss caused by a resulting fire or a combustion explosion is covered.) Boiler and machinery insurance may be arranged when needed.
This is a partial list of basic commercial property insurance exclusions and limitations. Others, along with liability exclusions, should be periodically reviewed by those who design coverage for commercial clients. The need for additional protection in many instances will be apparent and the potential for overlooking something of importance minimized.
A list of endorsements that expand the scope of property and liability coverage is a second major source of information for insurance agents, brokers and account managers. This helps them fine-tune their ability to design sound protection for their clients. A review of those used by major insurers, included in manuals governing the underwriting of businessowners policies, underscores the importance of becoming familiar with them. The list includes the following important endorsements, available subject to underwriting discretion:
* Hired and non-owned auto liability insurance--significant for employers who do not have owned autos for which commercial auto policies are required. The endorsement, avoiding the issue of an auto policy, may be issued for either hired or non-owned autos or both. Most employers have a "non-owned" auto exposure. This becomes evident when it is alleged that an employee involved in an accident with his/her personal automobile was using it in the interest of the employer.
* Earthquake coverage, including volcanic eruption, is an essential consideration in areas that lie in or near major faults. Landslide, mudslide and mudflow are not causes of loss to which the endorsement applies.
* Peak-season limit of coverage, modifying personal property insurance to cover predictable inventory increase at the end of the year or other specified periods, without reporting requirements. This coverage is recommended particularly for retailers whose inventory is relatively constant except during a few known peak periods.
* Ordinance or law coverage, paying for loss or damage (if building property is damaged by a covered peril) caused by the enforcement of any ordinance or law requiring demolition of undamaged portions, or rebuilding as mandated.
These endorsements are representative of the numerous options available. The importance of being familiar with them is evident for professional care of business insureds.
It is especially important to keep abreast of reductions in coverage in revised forms. A significant reduction must be brought to an insured's attention prior to renewal, and the option of available additional coverage should be made known if there is a substantial exposure. Higher court decisions bear this out.
When the insured rejects a coverage that the insurance counselor thinks is essential, the insured should initial a "not wanted" statement. Documenting the non-acceptance of recommendations minimizes the potential for dispute in the event of an uninsured loss.
Familiarity with exclusions in commonly used forms of property and liability insurance contributes to the development of proper coverage for commercial risks. Knowledge of basic limitations and coverage options lessens the chance of overlooking additional protection warranted by information brought to light by an application or survey. *
The author
Roy C. McCormick is consulting editor of the Policy, Form & Manual Analysis Service (PF&M) published by Rough Notes.