exam2notes - Chapter 3 — Causes of Loss Forms 0 BPP...

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Unformatted text preview: Chapter 3 — Causes of Loss Forms 0 BPP coverage form states: 0 "We will pay for direct physical loss of, or damage to, I Covered Property I at the premises described in the Declarations I caused by or resulting from any Covered Cause of Loss.” 0 Determining coverage for losses under BPP is not complete without defining the perils protected against 0 Three standard forms 0 Basic —— 11 common named perils o Broad Form * Adds three perils to basic form 0 Special Form - Risks of direct physical loss ("open peril") Peril Definitions 0 Many named perils are not Specifically defined 0 Definition based on common usage as defined in standard dictionaries 0 Though sometimes courts have had to define the perils 0 However, listed named perils often clarify intent with examples of exclusions o E.g,, "Smoke" does not include smoke from industrial operations Basic Form Perils 1. Fire was the early motivation for insurance 0 Typically the greatest risk for complete loss (building and personal property) 0 Court interpretation of fire: I Involves a flame/glow (notjust smoke) I Hostile fire (vs. friendly fire) 0 Also covers other damage resulting from fire (heat, smoke, water damage) 2. Lightning — cannot be artificially generated current 3. Explosion 0 Large scale, rapid expansion in volume, leading to bursting o Excludes rupture/collapse due to expansion of building and/or contents caused by water 0 We will see later that explosions from steam generating equipment is excluded 4. Windstorm or hall 0 Wind from hurricanes (but not water) and tornadoes as well as high winds 0 Excludes damage from ice, snow, and sleet even if wind driven 0 Interior damage only covered if wind/hail causes external damage 5. Smoke — sudden and accidental o Excludes industrial operations and agricultural smudging o Extends fire peril to smoke damage of friendly fires 6. Aircraft and vehicles 0 Requires physical contact by a vehicle (or object thrown by the vehicle) 0 Excludes damage caused by insured’s owned vehicles 7. Riot or civil commotion 0 Includes looting and damage caused by striking employees Basic Form Perils [cont’di 8. Vandalism o Willful and malicious damage/destruction to property 0 Glass is covered, but deductibles typically avoid insurer payment 0 Basic/broad forms exclude theft loss 9. Sprinkler Leakage 0 Water and other substances 0 Broad definition of sprinkler system including tanks 0 Includes repairs to system and building repair 10. Sinkhole collapse {Florida sinkholes) o Excludes sinkholes cause by manmade cavities (e.g., mines) 11. Volcanic action 0 Includes damage caused by the explosion, ash, or lava flow 0 Excludes damage caused by accompanying earth movement [volcanic eruption) Broad Form —Additlonal Covered Perils 12. Falling objects, but excludes 0 Personal property out in open 0 Interior damage unless exterior of building is damaged 13. Weight of snow, ice, or sleet o Excludes personal property outside buildings 14. (Limited) Water damage 0 Pays for water or steam damage caused by (sudden} accidental discharge of water from pipes, systems, or appliances 0 Excludes sump pumps and continuous leakage 0 Some restrictions on freezing of plumbing Causes of Loss — Basic and Broad Form Exclusions - Anti-concurrent causation exclusions (8) o Other exclusions {4] o Exclusions that apply to only specific coverage forms 0 Business income 0 Leasehold interest 0 Legal liability coverage form Causes 0 Loss Exclusions: Concurrent Causation Doctrine - Sometimes a chain of events leads to a loss 0 Flood leads to a building collapse 0 Act of war leads to a fire I Concurrent causation doctrine o If two perils cause a loss, courts have said that the loss is covered even if one of the perils is clearly excluded 0 To avoid paying for these losses, insurers use anti—concurrent causation Ia nguage o The exclusions clarify that a loss involving a chain of events that even includes a covered peril will generally NOT be paid 0 In some cases, fire exceptions are made (e.g., if earthquakes cause fire, the fire damage is covered) Anti-Concurrent Causation Exclusions - Ordinance or law (building codes) 0 No coverage for additional expense for required upgrades or demolition 0 Earth movement, such as earthquakes or landslides 0 But damage by a fire that is caused by earth movement is covered 0 Seizure/destruction as a result of government action 0 Except for spreading wildfire 0 Nuclear hazard, except when causing fire 0 No coverage for contamination - Failure of utility services unless it leads to covered cause of loss 0 War or military action, though 9/11 was covered 0 Resulting fires are not covered a Flood, mudslide, underground water, and backup - Fungus, wet rot, dry rot, and bacteria (mold) covered only if due to water damage after putting out a fire 0 Difficult to detect timing of damage 0 Additional coverage is quite limited in scope (see below) Other Basic and Broad Form Exclusions - No anti-concurrent causation language 0 Most cover ensuing loss if it leads to fire loss 0 Damage to appliances or equipment caused by artificially generated electricity 0 Explosion of steam boilers, engines, turbines, and pipes owned or used by insured - Mechanical breakdown - Neglect after a loss a Basic form also lists perils covered under the Broad Form as reinforcement o Rupture of water pipes 0 Water damage by systems or appliances Additional Coverages: Basic and Brand Forms 0 Instead of including as covered causes of loss, additional coverages help insurer impose limits and conditions unique for these items 0 Likely that coverage is more restrictive as "additional coverage” 0 Additional coverage for both forms 0 (Extremely?) Limited coverage for types of fungus (mold) up to 515,000 per year due to covered cause of loss (other than fire/lightning) o Broad form additional coverage — (abrupt) collapse 0 If ca used by Broad Form perils 0 Or if caused by decay, defective materials (during construction) or the weight of people, rain, or property Causes of Loss — Special Form 0 Special form causes of loss is open peril, covering “risks of direct physical loss” 0 Covers any accidental cause of loss unless specifically excluded 0 Shifts burden to insurer - Some basic differences in Special Form 0 Theft is covered, with some exclusions 0 Some water damage is covered 0 Damage from friendly fire (or heat from friendly fire) Special Form -— Types of Exclusions 0 Same exclusions as Basic/Broad Form 0 Anti-concurrent causation exclusions (8] o Other exclusions (4) a Add conditions mentioned in when defining perils in other causes of loss forms 0 E.g., Windstorm damage is not paid unless exterior is damaged first 0 Nonfortuitous, expected, maintenance exclusions 0 Wear and tear, settling, infestation 0 Coverage for some property limited to "specified causes of loss” (broad form perils} 0 Animals that are killed, Fragile items 0 Theft related exclusions - Other exclusions Special Form Thefl Exclusions - Employee theft (and related individuals), but destruction of property is still covered I Voluntary parting is handing over property as part of a fraudulent scheme 0 Inventory shortage [unexplained disappearance is not enough evidence of theft 0 Theft of building materials not yet attached I internal limits for items that are targets for thieves: 0 $2,500 for furs, jewelry, and dies/molds 0 $250 for stamps/tickets/lottery tickets Other Special Form Exclusions - Anti—concurrent causation exclusions 0 Weather conditions that lead to excluded losses 0 Third party negligence (decisions made or faulty planning/materials] 0 Pollutant damage (if not caused by "specified causes of loss”) 0 Special exclusions for specific coverage forms (Bl, liability) - Lost property due to production errors Additional Coverages and Extensions — Special Form 0 Same additional coverages as Broad Form 0 Collapse 0 Limited coverage for mold a Plus Special Form Coverage Extension 0 Personal property in transit in a vehicle owned by the insured (limited perils up to $5,000) Chapter 4 - Commercial Property Coverage Options (BPP Endorsements) What are some endorsements commonly used in conjunction with the BPP? What alternative valuation methods for determining insurance payments are available? What is blanket insurance? What are the advantages of blanket insurance over specific insurance? How do seasonal businesses pick a limit of insurance with fluctuating inventory values? What endorsements protect against international loss exposures? What endorsements modify Causes of Loss Forms? Endorsements for Alternative Valuation Methods 0 BPP valuation condition determines loss payments 0 Usually ACV 0 Optional replacement cost coverage in BPP 0 Others for specific items (pro rata portion of cost for |&B, selling price) 0 Some endorsements change valuation and ultimately the amount paid by the insurer - Manufacturer’s selling price endorsement ("Finished Stock” only) extends BPP valuation of finished stock, whether sold or not - May also be available for retailers (does this duplicate Bl coverage?) Functional Building and Personal Property Valuation Endorsements 0 Older buildings that often have very high replacement cost (or even ACV) - For losses, insurer pays cost to repair/replace with functionally equivalent materials/design 0 Functional building valuation example: replace plaster walls with drywall 0 Functional personal property valuation example: unigue machinem I If repaired, insurer will pay: (1) limit of insurance, (2) cost to replace/repair, or (3) cost to replace with equivalent property a If not repaired, insurer pays: (1) or [3) above or market value of property 0 Functional valuation endorsements delete the coinsurance requirement 0 Need to carefully determine the cost of replacing property 0 Functional building valuation also includes "Ordinance or law coverage” since many older buildings are out of code 0 Careful underwriting is required if way out of code International Coverage Endorsements o BPP covers property on premises, plus limited extension ($10,000) if away from premises, but never outside US/Canada - Business Personal Property — Limited international Coverage 0 Covers direct physical loss to business personal property temporarily in, or en route, a specific foreign country (or all foreign territories) 0 Must be at owned/operated location or with authorized representative I Not exported property or goods held for sale in foreign country 0 Extension includes coverage for business property used for personal travel if used to communicate with business 0 Property in Process of Manufacture by Others — Limited International Coverage 0 For companies outsourcing parts of the manufacturing process (non-owned] 0 Covers raw materials and goods in process in the foreign country (excludes sanctioned countries) 0 NOTE: foreign countries may require domestic insurance 0 Excludes property in transit and held for sale Other Commercial Property Coverage Options Most property excluded under BPP can be added 0 Additional covered property endorsement o Often requires specialized underwriting Manufacturers’ consequential loss assumption 0 if one piece of an unassembled good is destroyed, often other parts value 0 This endorsement provides coverage for this situation wherever other parts are located Brands and labels endorsement protects against reputational loss 0 After paying for a loss, insurer has right to damaged property and may "salvage" property if possible 0 Endorsement allows insured to remove brand recognition Increased Cost of Loss and Related Exp for Green updates 0 Three separate coverages available I Augmented replacement cost coverage — Extra cost of replacing damaged property with environmentally friendly materials I Extra expenses incurred for green updates (e.g., recycling expenses during debris removal) I Extended coverage for business income losses to install green updates 0 Internal limits based on % of covered direct loss have reduced Endorsements for Causes of Loss Forms Ca uses of loss form exclude many types of losses Ordinance or Law Coverage 0 Remember additional coverage under BPP? A. Pays for value of undamaged preperty that must be demolished 8. Costs for demolition and debris removal C. (if replacement cost coverage) increased costs due to building code improvements (at time of loss) Utility Services — Direct Damage 0 Covers damage to insured property (usually PP) if ca used by interruption of utility service (water, power, communications) 0 lnterru ption must result from damage to utility caused by covered peril 0 Listed limit is sublimit of BPP limit Spoilage Coverage has broader coverage due to any “power outage" or “mechanical breakdown” Radioactive contamination endorsement - "Limited" or "broad" coverage 0 Not for nuclear reactors Specific vs. Blanket Insurance D... Previously, the declarations page indicated separate limits for each type of property at each location 0 Called "specific insurance” Blanket insurance provides one aggregate iimit for either: More than one type of property at a specific location and/or Severai locations No speciai form is needed, just "blanket" written in declarations Undenivriter will want a statement of values form to help in rating Lists approximate value of all property covered under policy Costs and Benefits of Blanket Insurance 0 Cost: you have to buy more insurance - Coinsurance requirement is 90% with no discount 0 Benefits: 0 Helpful if moving property between two locations or when inventories fluctuate at several locations 0 If large loss exhausts limit under specific insurance, full amount of debris removal may be paid (instead of additional amount of $10,000) 0 May make it easier to meet deductible for small losses I Deductible is applied to each limit of specific insurance 0 But insurer is concerned that amount of insurance is appropriate 0 Relies on statement of values 0 Margin clauses limit the amount of coverage at any one location 0 Tied to a percentage “error” in the statement of values Fluctuating Personal Property Values 0 Options for insuring varying levels of personal pmperty o Raise limit to highest level —- increases premium 0 Limit = "average" — underinsured at certain points o Peak Season Endorsement — raises limit temporarily 0 Value Reporting Form — directly reflects varying inventory 0 Peak Season Endorsement increases insurance over a designated period during the year 0 Useful for seasonal businesses where business personal property fluctuates in a predictable manner 0 During peak season, the limit on business personal property increases automatically 0 Increased premium is pro rata over the period over extra coverage 0 Challenge for company is to decide on peak inVentory levels and timing 0 May get hit with coinsurance penalty if inventory is high Value Reporting Forms 0 Insured reports value of inventory each reporting period 0 Need decent inventory accounting system c Intent is that coverage reflects actual values of inventory 0 If reports are accurate and timely, all losses are paid (up to policy limit) even if existing inventory exceeds the last report 0 Premiums paid reflect actual amount of inventory held 0 A provisional premium is paid in advance based on 75% ofthe policy limit (policy limit based on the expected maximum inventory value during the yea r) 0 Final premium due/refunded is based on the average of actual reporting values I Policyholder is charged even if inventory exposure is over the policy limit Penalties when Using Value Reporting Form 0 "Timely" reporting typically means: 0 Within 60 days of reporting period for the first report (if new coverage), 0 Within 30 days for subsequent reports n Missed (or late) reports 0 Missed the very FIRST report (usually the January report) I Insurer pays 75% of what they would have paid 0 Missed any SUBSEQUENT report — maximum insurer payment is most recently received reporting value c If inaccurate reporting {underreporting), penalty is similar to coinsurance 0 Use Reported/Actual instead of Did/Should Chapter 4 Summary 0 Many endorsements are available for BPP I Categories 0 Optional valuation method I Manufacturers‘ selling price I Functional building] personal property valuation 0 Specific vs. blanket insurance 0 Fluctuating inventory values I Peak season limit I Value reporting form international coverage BPP coverage endorsements (e.g., add’l covered property) 0 Causes of loss endorsements OO Chapter 5 — Other Commercial Property Coverage Forms I BPP may not fit the needs of unique exposures given the difference in risks 0 Condominiums 0 Construction projects I What is special about these kinds of risks? I How do the property coverage forms differ from BPP? Unique Characteristics of Condominiums I Condominium is a group of units and surrounding land 0 Offices 0 Apartments 0 Attached/detached homes I Ownership interests are different from other types of property I A condominium unit is a portion of a condominium that are individually owned 0 A unit is the "box of air" enclosed by the walls, ceilings, and floors I "Common elements" are owned and managed by condominium association 0 Association is composed of all unit owners I Applicable laws and association agreement assist in determining who should insure specific property 0 Association vs. unit owner Common Elements I Benefit all unit owners I Can include real and personal property Foundation and roof Parking Exterior walls Central A/C, light, heating Hallways and stairs Grounds, pools, courts Lobbies Structural columns in units Interior walls (between units) Fixtures such as power, light, heating/cooling systems Laws Related to Dividing property Interests I Bare walls concept - Association has no ownership interest within the unit‘s bare walls I Single entity concept (originai specifications coverage) 0 Association owns property contained when unit was new (even if property is replaced) I All in concept (additional installation coverage) 0 Association ownership includes improvements made by unit owners Condominium Association Agreement I Defines the separation ownership between individual condominium units and common elements I Separation of property highlights risk exposures and insurance needs for both unit owners and association I Association agreement may also assist in determining association insurance coverage 0 Responsible party 0 Required iimits 0 Budget — collection of association dues of unit owners Obtaining insurance 0 The following questions arise related to protecting condominiums 0 Which party should insure specific items? 0 Association can get very broad coverage 0 What limit should be requested? 0 Want to avoid coinsurance penalty 0 Options include: I Agreed value optional coverage I Blanket insurance I Coverage can be difficult to get if little property risk to balance huge liability risk of common areas leg, swimming pools) Condominium Coverages - Condominium association coverage form 0 Covers the association’s building and personal property (such as exercise room equipment), plus personal property of others 0 Condominium commercial unit-owners coverage form 0 Covers the business personal property of the unit OWner, such as furniture, fixtures and improvements, machinery and equipment 0 The form also covers the personal property of others in the care, custody, or control of the unit owner 0 Both need accompanying Causes of Loss Form 0 What are differences between BF? and condo forms? Condominium association coverage form 0 Standard ISO form ties coverage to the association agreement 0 Non-standard forms may refer to applicable laws 0 Definition of “building” may or may not include 0 Fixtures 0 improvements and betterments 0 Appliances - Similar to BPP, has same additional coverages and extensions 0 Changes in conditions 0 Other insurance: Association fo...
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