CP 13 10-Value Reporting Form

CP 13 10–VALUE REPORTING FORM

(June 2019)

 

 

INTRODUCTION

If commercial businesses did not have sales peaks and valleys, production scheduling could be set in place that would in maximum utilization of personnel and equipment resulting in level and predictable earnings. However, few businesses have such predictability. Consumer demands drive cycles that often change by the season, such as "back to school" sales and the Christmas holiday rush. This means that retailers must have stock in place before school starts or the day after Thanksgiving. In other words, retail businesses must have the merchandise before the need. Manufacturers must produce the merchandise during the year and store it until it is needed. Although the period and timing varies from one business to another, many businesses have cycles where a period of extremely high inventory is followed by one of nearly depleted stock.

BUSINESS PERSONAL PROPERTY INSURANCE LIMITS OPTIONS

Retail and wholesale operations and manufacturers purchase business personal property coverage to protect their equipment and inventory. It is very important to establish an appropriate limit so that the amount of property on hand at the time of the loss is sufficient to cover the loss and satisfy any coinsurance requirements. It is also important for the premium to not be excessive.

If the limit selected is for the highest value anticipated during the year, it is adequate regardless of when a loss occurs. However, the insured may pay a high price for that protection because the values throughout the rest of the year may be considerably lower.

If average value is used to determine the limit, the insured still pays a high premium but the limit may not be adequate to cover a total loss. The insured could be over insured most of the time and underinsured at the time of loss. Coinsurance penalties may come into play if a loss occurs when values are higher than the average limit selected.

In this case, the premium is lower, but the insured has a major out-of-pocket expense if the loss occurs during any other inventory period. In addition to not having sufficient limits in case of a total loss, a coinsurance penalty must also be considered. The insured could decide to insure on a no-coinsurance basis. However, it loses the benefit of the premium credit for insuring on a coinsurance basis, package discount application and having access to certain coverage extensions that are not available when limits are not at 80% coinsurance.

The insured can establish the limit needed as of the inception date and then notify the agent to increase and decrease limits throughout the year. This option is expensive because it involves considerable attention and clerical effort on the part of the insured, the agent, and the insurance company. In addition, this approach is subject to errors in limits and dates. However, it does have the benefit of having the proper limits in place at the time needed.

After the insured selects a limit that is sufficient most of the time, the attachment of a peak season endorsement allows it to vary those limits during selected time periods. The insured establishes the higher limits and time periods as needed, based on its knowledge of its business cycles. While this approach is flexible, the amount of coverage needed at the time of loss may not be adequate if the limit or dates selected are incorrect. In addition, the insured's premium charge may be higher because the limits needed were not as high as expected (or the dates that higher limits were needed were set too long).

Related Article: Peak Season Coverage


  • Option 6: Use a Value Reporting Form.

This option matches the premium with the exposure and the insured purchases only the amount of coverage needed. However, the insured must be aware of its responsibilities and the potential penalties before using this form and approach. This analysis is of the Insurance Services Office (ISO) CP 13 10–Value Reporting Form but this approach also applies to most value reporting forms.

HOW THE REPORTING FORM MEETS THE INSURED'S NEEDS

If the insured wants to only pay for the coverage needed at the time of loss, the reporting form is the best choice. The insured selects the highest limit anticipated to be needed in the coming policy year. A deposit premium is charged based on 75% of that limit. That high limit is the limit for the entire year and, therefore, available to pay for any loss that may occur. At the end of the year, the insurance company calculates a premium based on the reports provided by the insured throughout the year. If the premium is higher than the 75% deposit the insured pays the additional premium but if it is less, the insurance company returns the premium. This way, the insured pays only for the limits needed.

The reporting method is not one size-fits-all. The insured has many options. The insured chooses the type of personal property it will report, the way it will provide reports, and the reporting interval or frequency. All or just a portion of covered business personal property can be reported. Other property can be covered on a specific basis. In many cases, the insured covers all other business personal property on a specific or coinsurance basis and reports only inventory. The insured reports the specific property on the report along with the inventory figure when it uses this approach.

Because of the many options available, the option selected must be documented and reporting made in accordance with that option. As an example, if a specific property is not to be reported, it must be clearly identified as such. Otherwise, mistakes happen, there is confusion, and penalties are applied.

AVAILABLE VALUATION AND REPORTING PERIODS

Reports of value are submitted in one of five ways:

The insured must record the actual daily values. However, the actual reporting period ends on the last day of the month.

The insured must record the actual values as of the last day of the week for each report. However, the actual reporting period ends on the last day of the month.

The insured must record the actual values as of the last day of the month for the report. This is also the end of the reporting period.

The insured must record the actual values as of the last day of each month. The reporting period ends on the last day of the policy quarter. For example, a policy with an inception date of January 1 has quarters that end March 31, June 30, September 30, and December 31.

The insured must record the actual values as of the last day of each month. However, the actual reporting period ends with the policy's expiration date.

HOW REPORTS ARE FILED

DR, WR, or MR reports must have the first report filed with the insurance company within 60 days after the end of the first reporting period. After that, the reports must be filed within 30 days after the end of each reporting period.

Note: If the first report is not filed until 60 days after the first reporting period, the second report must be turned in at the same time.

 

Example: Felix’s Pet Barn selects the MR option and must make monthly reports. The inception date is 03/15/19. The reports are due as follows:

 

Report No.

End of reporting period

Report Due Date

1

04/30

06/30

2

05/31

06/30

3

06/30

07/30

4

07/31

08/30

5

08/31

09/30

6

09/30

10/30

7

10/31

11/30

8

11/30

12/30

9

12/31

1/30

10

01/31

03/02 (or 03/01)

11

02/28 (or 02/29)

03/30

12

03/31

04/30

 

If a report is not submitted as required, the insured may be penalized if a loss occurs during the lapsed time period. However, if the reports are proper and are submitted on time, the insured receives full payment of the loss, regardless of the value reported, up to the limit on the declarations.

 

Example: Felix meets all reporting requirements. His 08/31 report reflects values of $400,000. However, he had a loss on 10/18 and the amount of loss was $650,000. The loss was paid because the reports were accurate, were submitted on a timely basis, and the limit was $1,000,000.

 

QR reports are due 30 days following the end of the reporting period. This means that if the inception is January 1, the reporting period is January through March and the report of values is due no later than April 30. The only exception is when the inception date of the policy is in March, June, September, or December. The exception for policies issued in those months is that the first report on a new (not renewal) policy is due 60 days after the end of the first reporting period.

PR reports of value are due not later than 30 days after the end of the policy year.

Note: The 60-day period for the first report applies only to initial or newly issued policies. After the policy is renewed, the first report is due not later than 30 days after the end of the first reporting period. The 60-day period is really a way to help the insured get the necessary reporting procedures in place. When the policy renews, this period is not needed because these procedures should already be in place.

PENALTIES FOR NOT FOLLOWING THE RULES

There are three different types of penalties: Under-Reporting, Reporting in Excess of the Limit, and Failure to Submit Reports. Each is accompanied by a significant penalty that must be explained to the insured carefully and completely before using this endorsement.

If the value reported for the reporting period prior to a loss is less than the actual value at risk as of the reporting date, a penalty similar to the coinsurance penalty is applied. The value reported is divided by the actual value as of the reporting date and that fraction multiplied by the amount of loss to determine the amount of loss paid.

 

Example: Continuing our example above, Felix's 01/30 report for the period ending 12/31 is $300,000. A $60,000 loss occurs on 01/20. The insurance company investigation reveals that the actual inventory as of 12/31 was $500,000. Because Felix under-reported, the penalty is determined as the fraction represented by $300,000/500,000, or .60. This is multiplied by the $60,000 loss to equal $36,000. Felix reported a value less than the actual value at risk for the reporting period involved. As a result, he is penalized $24,000 and the insurance company pays only $36,000 of the loss.

 

If the value reported is more than the limit of insurance that applies, the value reported is used to calculate the premium. However, if a loss occurs, the insurance company does not pay more than the limit. In this case, the insured pays premium based on the excess value reported but does not benefit. The insured must notify the agent and increase the limit if it notices that the values reported exceed the policy limit.

 

Example: Felix's limit is $1,000,000. In October, he realizes that the inventory value is higher than the limit. He notifies his agent and requests that the limit be increased to $1,250,000. As a result, Felix is adequately covered if a loss occurs.

 

Two different penalties are possible if reports are not submitted at all.

 

Example: Felix renews his policy on 03/01 but forgets that his first report is due on 04/30. A $10,000 loss occurs on 05/01. Because he did not file a report, Felix receives $7,500, based on 75% of the $10,000 loss. In this case, Felix is penalized $2,500 for failing to report on time.

 

 

Example: Felix hires a new bookkeeper. Even though she is responsible for reporting the monthly insurance values, she is not informed of the duty, due to a breakdown in communications. As a result, the report for the period ending 06/30 with a value of $500,000 was the last one submitted. As Felix prepares to ship Christmas inventory in October, a fire destroys the warehouse and everything in it, including inventory valued at $1,200,000. Felix is furious when informed that his recovery is limited to $500,000, the amount on the last report submitted to the insurance company.

ENFORCING PENALTIES

Like Felix, many insureds are unhappy when penalized for reporting values improperly. It is not surprising that many of them file lawsuits and take other legal action that challenges the form as well as the penalties. Because timely and accurate reporting is required for the form to operate correctly, it would be withdrawn from use if the courts ruled in favor of these insureds. The courts have consistently supported the endorsement, held it to not be ambiguous, and ruled that the insured is responsible for providing accurate and timely reports. Three court cases that relate to this issue are summarized below:

Quality Foods, Inc., v. United States Fire Insurance Company, et al. United States Court of Appeals, Eleventh Circuit, No. 81-8036 is a very clear case that emphasizes that reports must be filed accurately and on time.

The facts established that buildings and their contents that a food company owned incurred severe damage by windstorm when a hurricane struck the coast of Alabama. The insurance company offered a settlement on the insured's claim for loss of contents, based on the full reporting requirement of the applicable policy, for 43% of the contents loss the insured sustained. The insured refused the offer and filed a lawsuit against the carrier. The carrier appealed a trial court judgment in favor of the insured for the full amount of the content loss.

The last report filed before the hurricane showed the contents inventory value on July 31 at $990,000. Other records showed the total value on that date was slightly less than $2.3 million. The August report filed in October after the hurricane showed a total inventory value of more than $2.5 million.

 

The insured said it had frequently filed reports late over the course of many years and coverage was never denied and a penalty was never imposed. For these reasons, the insured claimed that the carrier waived the full reporting requirement. It also assigned the blame for under-reporting the values to the insurance agent who arranged the insurance program.

The appeals court found the policy to be "totally unambiguous." It clearly required the insured to "report on the monthly basis, within a specified period of time, the total amount of inventory." The court found that the insured chose to ignore this requirement. The court noted that the policy required the insured to file its inventory reports within 30 days after the end of each month and that it was the insured's duty to report accurately or become subject to limited coverage. The appeals court upheld the full reporting requirement and ordered the trial court to reduce recovery to 43.3% of the content loss. As a result, instead of receiving payment of $321,216.59 for the full value of the loss, the insured received only $138,608. The insured could have avoided this costly oversight by either not using the reporting form or by following the required action of reporting on a timely basis.

National Fire Insurance Company of Hartford, et al v. Eastern Shore Laboratories, Inc., CCH 1973 Fire and Casualty Cases 781, ruled on the problem of not reporting at all. A total loss occurred almost four months after the policy inception date and the insured had not yet filed its first required report. The court ruled in favor of the insurance company, stating that it owed only 75% of the limit of insurance on the policy.

Williams Fruit Company v. Hanover Insurance Company, et al., CCH 1970 Fire and Casualty Cases 654, tried to excuse away its poor reporting on a new bookkeeper. The bookkeeper incorrectly used figures for property on hand as of the date the report was prepared, instead of the values as of the last day of the previous month. This resulted in substantial underreporting that was not discovered until after a fire. The court found the provisions of the policy and the monthly reports clear and noted that the insured had obtained provisional insurance from the insurance company for nearly 30 years.

PREMIUM CALCULATIONS

Rating and premium charges are done the same way as rating business personal property at 100% coinsurance. The premium developed is then multiplied by a factor of .75 to arrive at the deposit premium. The deposit premium is calculated this way because the limit used must be high enough to cover the insured's highest expected values during the year. However, the average value during the year is usually considerably lower. To recognize this distinction, only 75% of the premium due is charged, subject to reports and adjustment at the end of the policy year.

 

Example: The final adjusted rate is 1.00. The limit is $1,000,000. The provisional premium is $10,000, based on the $1,000,000 limit multiplied by the 1.00 rate. The $10,000 premium is then multiplied by a factor of .75 and the resulting premium of $7,500 is the advance or deposit premium.

 

At the end of the year, the reported values are added together and divided by the number of reports to arrive at the average values.


 

Example: Staying with our example of Felix, the limit is $1,000,000. The monthly reports submitted are as follows:

 

Report No.

End of reporting period

Report Due Date

Value Reported

1

04/30

06/30

$400,000

2

05/31

06/30

$400,000

3

06/30

07/30

$450,000

4

07/31

08/30

$500,000

5

08/31

09/30

$650,000

6

09/30

10/30

$700,000

7

10/31

11/30

$1,000,000

8

11/30

12/30

$900,000

9

12/31

01/30

$800,000

10

01/31

03/02 (or 03/01)

$500,000

11

02/28 (or 02/29)

03/30

$450,000

12

03/31

04/30

$400,000

Total

 

$7,150,000

 

The average value is $595,833, based on the total values reported of $7,150,000 divided by 12 reports. The average value is multiplied by the 1.00 rate to determine the final earned premium of $5,958. Because Felix paid a deposit premium of $7,500, the insurance company returns the $1,542 difference to Felix.

AGENT'S RESPONSIBILITIES

The agent or broker is responsible for furnishing reporting forms and describing the reporting procedures to both the named insured and also to the individual responsible for preparing and submitting the periodic reports when issuing a new policy written on a reporting form basis. The following important points must be emphasized:

The agent or broker should periodically discuss the reporting procedure with the insured as a matter of professional guidance. A letter that outlines reporting form requirements and procedures should be used. It serves as a permanent reference for the insured that contributes to reporting being done correctly and on time. It also serves as an important agency record that the insured was advised with respect to proper reporting procedures. The agent or broker should never assume the insured's responsibility for preparing and submitting reports or assume responsibility to remind the insured to report its values.

FACTORS THAT DETERMINE THE TRUE VALUE OF A REPORTING FORM

A reporting form should be recommended if the insured answers "yes" to each of the following questions:

If the insured's answer to each of these questions is "yes", using a reporting form is probably a good decision. On the other hand, if the answer to any question is "no," one of the other options briefly outlined above should be considered.