(June 2019)
The insured has coverage with limits of $500,000 on building and $250,000 on personal property. A tornado completely destroys the building and all the personal property. The total amount of loss is $750,000. However, the building loss is $600,000 and the personal property loss is $150,000, based on the proof of loss. The insurance company pays a total of $650,000. “That’s not fair” is the insured's first reaction, even though the settlement complies with the loss conditions. How could this have been handled more fairly and equitably? The answer is that the insured could have insured the building and personal property with a combined blanket limit of $750,000.
Blanket insurance combines a number of separate property coverages and/or coverages at two or more locations under a single limit of insurance.
Eligibility depends on the Insurance Services Office (ISO) rules that apply.
ISO allows combining and blanketing all commercial property direct damage items on the same coverage form. It also allows blanketing all time element coverages on the same coverage form.
Time element coverages cannot be blanketed with coverage on direct damage items.
This rule changes for each coverage. Each coverage must be reviewed before attempting to write anything on a blanket basis.
Different coverages cannot be blanketed together in a single limit.
Individual insurance company rules vary widely. Some companies have written rules while others have unwritten rules subject to underwriter judgment. Some companies are reluctant to write blanket insurance because they believe that doing so results in underinsurance. Others write blanket coverage relatively freely and with few limitations.
ISO Commercial Property Rule 19 explains that the coverage in many states can be combined on one coverage form and those locations can be blanketed. The rules and forms of a single state are used. However, not all states have adopted Rule 19. When it is not approved, the locations in states that have not adopted this rule must be handled separately from the ones that have.
Another concern is combining valued-policy state locations under a blanket. If a total loss should occur at a blanketed location, what limit could the insured demand?
Developing the blanket limit involves several steps. The insured must make decisions at each step that affect both the premium and the loss settlement.
When the insured decides to use a blanket limit for property coverage, it must identify the property to be covered. Blanket coverage does not relieve the insured of that responsibility. In fact, blanket coverage usually requires additional work. The insured prepares a statement of values (SOV) or an equivalent form that lists the property to include and cover in the blanket limit. CP 16 15–Statement of Values is the ISO version of the SOV that many insurance companies use.
A separate SOV is usually required for each blanket limit. For example, if each location has its own blanket limit, a SOV is needed for each location. However, each insurance company determines the format it requires. The key is to make the intent of the blanket limit clear and unambiguous with respect to what each blanket limit covers and does not cover.
The SOV must be completed at the beginning of each annual policy period. The insurance company uses the SOV to develop a blanket rate and to underwrite the limits and coverages requested. The location and its occupancy are required. The description of each type of covered property at that location, including the coverages requested and the 100% values of the types of covered property must also be provided.
|
Example: Green and Green, LLC owns its own building and occupies 50% of it. There are two tenants. The building, business personal property, stock, and property of others are to be blanketed. All coverages will use replacement cost valuation and CP 10 30–Causes of Loss–Special Form. |
The limit selected for blanket insurance is critical because coinsurance still applies. The coinsurance percentage and valuation method selected are important factors. The insured and the agent should not be lulled into a false sense of security when blanket limits are used. They must still take the appropriate steps and follow procedures to determine the full value of the types of property covered. Once these values are established, they are added together and totaled. An evaluation of anticipated increases needed during the year and an inflation guard factor should be developed before selecting the final limit and coinsurance percentage. Coinsurance penalties are applied if the blanket limit is inadequate. Recent building and business personal property appraisals are good starting points to determine limits and several commercial appraisal services are available to provide assistance. Information developed during any recent financing or refinancing activities is also useful to determine proper limits.
All eligible covered property must be included when establishing limits. The insured must include computer systems, boilers, permanent machinery, or insured property being processed at another location.
This process has an advantage. Even if property is assigned to the wrong type, its limit is still in the total blanket limit and coverage is not affected.
|
Example: Continuing our example, the building replacement value is $750,000, based on current appraisals. The business personal property replacement value is $300,000, based on a recent inventory. Stock is valued at $250,000 and property of others is $100,000. However, there is a problem. The business personal property value should actually be $100,000. This is because $100,000 of it is leased equipment which should be in the property of others category and $100,000 of it is permanent fixtures which should be part of the building amount. However, the coverage is sufficient to meet the coinsurance requirements and cover any loss because of the blanket approach. |
Coinsurance applies to all covered property at once. To determine what this means requires first examining specific insurance. Consider a building insured for $500,000 and personal property for $250,000 with 80% coinsurance. If the insured sustains a total fire loss to both the building and personal property, it must verify the building and personal property values before validating that the 80% coinsurance requirement has been met. However, much more work is involved if the building and personal property amounts are included in a blanket limit that covers ten locations. The insured must deal with the building and personal property limits at the other nine locations as well as at the loss location. The entire schedule's blanket limit and coinsurance must be verified. The insured may be better protected from the limits standpoint when it uses a blanket limit over multiple locations, but the loss adjustment process is much more complicated and time and labor intensive.
Another concern with blanket limits is that any dramatic or cumulative change at any location may affect the total, even if all values at all locations appear to be in line at policy inception. This is especially true towards the end of the policy period when these accumulated changes are most pronounced.
In addition, inadequate values for one or two high-value items may adversely affect the location where a loss occurs, even if most property in the blanket limit is valued properly. The blanket limit may protect the insured for inflationary and minor differences in value but can penalize it if the overall limit is inadequate.
Related Article: Coinsurance Clause
Agreed value is when the insurance company and the insured both agree on the property’s value and limit at policy inception. When this occurs, the coinsurance provision is waived, and the agreed value option replaces it. The agreed value amount must be recalculated and re-established at the beginning of each annual period.
The insurance company must agree to the limit before it issues the policy. It cannot apply a coinsurance penalty when the policy is issued on an agreed value basis. This is why it must be careful when it validates the agreed value at policy inception. In addition, the insured should review the agreed value carefully to determine if the language and coverage are standard or if coverage is not actually as broad.
The agreed limit must be updated and kept current if the insured acquires new locations or disposes of old ones. The insured should complete a new statement of values and establish a new agreed value when changes like these take place. The policy must be endorsed to reflect the new agreed value and effective date. Agreed value alone does not protect the insured if the limit is not adequate to begin with or if a location is omitted.
A 5% surcharge is applied to the commercial property rating for agreed value treatment. This charge is minor compared to the insured's potential savings.
When used, this endorsement limits the value of each item on the statement of values to a percentage of its scheduled value. The insured should be notified if this endorsement is attached at renewal because it can potentially reduce coverage.
Related Article: CP 12 32–Limitation on Loss Settlement–Blanket Insurance (Margin Clause)
|
Example: Continuing our example, CP 12 32 is attached to the policy with a 115% cap for each item. Green and Green is confident that its values are adequate and is not concerned about possible penalties. Unfortunately, some items have been misclassified. If a loss occurs, personal property of others is limited to no more than $100,000 X 1.15 = $115,000. Greene and Green has $200,000 in personal property and will be underinsured by $85,000 even though the entire limit is sufficient. |
When writing blanket coverage, a blanket rate is calculated on the entire blanket amount, based on the property covered. The blanket rate applies for the entire policy period unless there is a significant change in locations, operations, construction, or other rating factors that would require re-rating.
Blanket coverage requires either 90% or 100% coinsurance. 80% coinsurance is available in only a few limited circumstances. However, the full rate credit for using 90% or 100% coinsurance is not applied because of the blanket protection. The 90% coinsurance property is rated as 80% coinsurance and the 100% coinsurance property is rated as 90% coinsurance. The result is that the blanket rate is higher than the specific rates, but the insured's potential savings makes this very attractive if a loss occurs.
There are two methods to calculate the blanket rate. One is the blanket highest rate. The other is the blanket average rate.
This method is based on the highest rate that applies to any property the blanket amount covers. This is a very expensive approach in most cases.
|
Example: Jones Country Furnishings owns two buildings. One is at a rural location in Class 10 public protection while the other is in Class 5 public protection. The company decides to use the highest rate method instead of attempting to calculate a blanket rate. The highest rate is the rate for the personal property at location 2. As a result, the premium is .75 X 3,000,000 = $22,500. |
This is a method where each covered property is rated separately, the premiums are added together, and are then divided by the blanket limit to determine the final blanket average rate. This rating approach is much more cost-effective for the insured but is more difficult to calculate.
|
Example: Jones Country Furnishings wants to consider the blanket average rating method: Loc. 1: Building: $500,000 X .25 = $1,250 Loc. 1: Personal Property $1,000,000 X .50 = $5,000 Loc. 2: Building: $500,000 X .30 = $1,500 Loc. 2: Personal Property $1,000,000 X .75 = $7,500 Total Limit: $3,000,000 Total Premium: $15,250 Blanket Rate: $15,250 / $3,000,000 = .508 |
Note: These examples do not contemplate using coinsurance or deductibles.
Related Article: Coinsurance Clause
|
Example 1: $600,000 actual building value at the time of loss $150,000 actual personal property value at the time of loss A total loss that involves both building and personal property occurs. If coverage is on a specific insurance
basis:
If coverage is on a
blanket insurance basis:
|
|
Example 2 Actual values at time of loss: Location 1: Building: $1,000,000 Personal Property: $425,000 Location 2: Personal Property: $250,000 Location 3: Personal Property: $300,000 A total loss occurs at location 3. If coverage is on a specific insurance
basis:
If coverage is on a blanket insurance
basis:
|
These are some examples of when blanket coverage may be the preferred approach.
Related Article: Value Reporting Form
When used properly and carefully, blanket coverage can be the best way to cover property. Each of the elements of establishing limits, coinsurance, rate calculations, and loss adjusting must be considered in order to provide the insured with appropriate coverage for the exposures involved.