CP 12 32-Limitation On Loss Settlement-Blanket Insurance (Margin Clause)

CP 12 32–LIMITATION ON LOSS SETTLEMENT–BLANKET INSURANCE (MARGIN CLAUSE)

(June 2019)

 

602

100_3921 bldg front lettering 1902 Stock Exchange

100_1242

7 Chicago bldg

 

BLANKET INSURANCE

Blanket insurance allows the insured to combine separate limits for a number of coverages or locations into a single limit. The combination may be of two or more buildings, building and personal property at one or more locations, or personal property at a number of buildings, locations, or premises. Blanketing stock (or inventory) is especially important to most multi-location insureds because this property necessarily moves from location to location due to business operations and demands. Blanketing building and personal property is also very important because some types of property qualify as either building or personal property and combining them in one limit simplifies loss settlements. Blanketing two or more buildings is not as easy to rationalize because buildings do not move. However, it is done because of the overall ease of doing business and marketplace pressure. Blanketing any of this property should have little or no impact on valuation when the coinsurance clause applies. This is because the insured knows it will sustain a coinsurance penalty if the overall schedule is underinsured.

Related Article: Blanket Property Insurance

THE PROBLEM

Underinsurance has become an issue with blanket property treatment because of the agreed value option. The insured submits a list or schedule of locations and values for building(s) and contents. The insurance company underwriter reviews it and accepts it as submitted. If a loss occurs, the entire blanket limit is available to pay for the loss and a coinsurance penalty is not applied because of the agreed value option, even if the specific building involved in the loss is significantly underinsured.

 

Example: Mars and Sons Properties own 50 buildings throughout the Midwest, occupied by a variety of tenants. The buildings range in value from $100,000 to $6,000,000 and the total value of the schedule is $58,000,000. The insurance policy is rated at 100% coinsurance and the individual building values used in the rating calculations develop an annual premium of $25,000. The underwriter verifies the values at the three largest buildings and issues the policy as requested. A fire totally destroys a building insured for $650,000. In the course of his investigation, the claims adjuster discovers that the building was only partially occupied and that its actual replacement cost value is $5,500,000. The insurance company must pay $5,500,000 instead of $650,000 to satisfy the loss because the insurance policy's blanket limit is $58,000,000. Afterwards, the insurance company inspects and does replacement cost valuations on each building on the schedule and determines that the limits should be $128,000,000, with a corresponding premium of $75,000. Unfortunately it cannot make any changes until renewal. At renewal, Mars changes carriers to one that accepts the $58,000,000 limit.

THE SOLUTION

The problem of underinsured blanket schedules concerns the entire insurance industry. While some insurance companies refuse to write blanket coverage at all, that approach is not practical for larger insureds and larger schedules. In addition, most insurance agents do not want to be exposed to serious errors and omissions situations that may arise by writing coverage on a specific limits basis. A middle ground is needed, and this endorsement provides the way to arrive at that middle ground.

SCHEDULE

Each location and each type of property that is part of the blanket limit must be listed and described on the endorsement schedule. In most cases, a supplemental schedule is necessary because the endorsement schedule has space for only three locations or premises. In addition, a percentage is required for each entry. The available entries are 105%, 110%, 120%, and 130%.

A. BLANKET LIMIT OF INSURANCE

This section states that the endorsement applies only to property listed and described that is subject to the blanket limit of insurance. The types of property that can be blanketed are listed.

B. MARGIN CLAUSE

This clause is a significant departure from the current approach to writing blanket coverage. Instead of each type of property covered at each location having the entire blanket limit of insurance available to pay the loss, the most paid for a building and/or its contents at a given location is the margin clause percentage multiplied by the building and/or contents value on the statement of values.

 

Example: Let's update the first example and treat it as if this endorsement is attached. Mars and Sons select a 120% margin clause on all its buildings and contents. The building destroyed by fire with a value of $650,000 on the statement of values but actually worth $5,500,000 is not covered for more than $780,000. That value is calculated by multiplying the $650,000 value from the statement of values and multiplying it by the 120% margin clause.

 

If the insurance company does not receive a statement of values that lists the value of each item separately, at the time of loss, it will determine the value of each item of property as a total of the reported values and then apply the margin clause. It is important to note that it is the insurance company's responsibility to determine this value, but this endorsement does not state how it will do so. This leaves this step open-ended and therefore rather ambiguous.

 

Example: Mars and Sons list all buildings with values greater than $500,000. Fifteen buildings valued at less than $500,000 are combined into an "all other" grouping valued at $3,000,000. One of those buildings burns and the insurance company calculates its value at $50,000 as a part of the $3,000,000, even though it is actually worth $450,000.

 

The margin clause establishes the maximum amount to be paid. All other conditions (such as deductibles, coinsurance, limits of insurance, and valuation) must be applied before the margin clause percentage is applied. However, the total limit paid never exceeds the blanket limit of insurance.

 

Example: Cary and Associates insure building and business personal property for a blanket limit of $2,000,000, with each property item subject to a 120% margin clause. The statement of values lists the building value at $1,400,000 and the contents value at $600,000. A tornado completely destroys both the building and the contents. The claims investigation reveals that the building's value is $1,700,000 and the contents value is $700,000. The maximum margin clause loss payable is:

Building: $1,400,000 X 1.20 = $1,680,000

Contents: $600,000 X 1.20 = $720,000

The total payable is $2,380,000. However, loss payment is capped at the $2,000,000 blanket limit of insurance.