CP 00 80–TOBACCO SALES WAREHOUSES COVERAGE FORM ANALYSIS

(June 2019)

Menu (click here to expand or to collapse)

This analysis is of the 10 12 edition. Changes from the 06 07 edition are in bold print.

CP 00 80–TOBACCO SALES WAREHOUSES COVERAGE FORM ANALYSIS

INTRODUCTION

This coverage form opens by stating that various policy provisions restrict coverage. For this reason, the named insured should carefully read it to determine and understand its rights and duties and to understand what is covered and what is not covered.

It also defines the terms "you or your" as the named insured and "we, us, and our" as the insurance company that provides coverage. Named insured is not defined. As a result, it means only entities listed or named on the declarations. If a given entity is not listed, there is no coverage for its property, even if the property is described on the declarations.

This coverage form has one word that has special meaning. It is defined in G. Definitions.

A. COVERAGE

This coverage form obligates the insurance company to pay for direct physical loss or damage to only a certain type of property. The property must be at a location listed or described on the declarations. The loss or damage must be due to a covered cause of loss described in the causes of loss form attached to the policy in order for coverage to apply.

1. Covered Property

CP 00 80 is very specific as to what is covered. Only tobacco that is inside a sales warehouse is covered. The tobacco in the warehouse can be leaf, loose, scrap, or stem but it must be either of the following:

· Owned by others and in the named insured’s care, custody, or control awaiting auction

· Part of the named insured’s leaf account awaiting resale

The sales warehouse must be listed on the declarations with a limit of insurance in order for the tobacco inside to be covered.

Note: CP 00 80 covers property on a scheduled basis, not a blanket basis. Each building must be scheduled with its own limit. It also has very restricted effective dates. Even though it may be written for a full annual term, coverage applies to begin at 12:01 a.m. on the 15th day before the regular auction season opens. Coverage ends at 12:01 a.m. on the 15th day after the regular auction season officially ends.

HangingTobacco

Example: Trails End Tobacco Warehouse’s coverage is written for the period 06/01/19 to 06/01/20. The auction season begins on 11/01/19 and ends on 02/01/20. Any tobacco in a covered Trails End building in its care, custody, or control beginning on 10/15/19 and ending on 02/15/20 is covered.

2. Property Not Covered

The following property is excluded:

a. Water and crops that are still growing. Water simply means all water on the premises.

b. Any tobacco more specifically covered under this or another coverage form or policy. There is an exception. Coverage applies to the amount of loss that exceeds other available coverage, regardless of whether or not it can be collected.

c. Tobacco outside buildings or structures. This means that tobacco that is only temporarily outside due to insufficient storage space inside the warehouse is excluded.

d. Tobacco that is being transported on water

e. Contraband. Legal property in the course of illegal transportation or trade is also excluded.

Note: Tobacco could be considered contraband if the person who brought it to the warehouse and was claiming ownership had stolen the tobacco.

3. Covered Causes of Loss

This coverage form requires that one or more of the causes of loss forms be attached. The cause of loss form that applies is entered on the declarations.

4. Additional Coverages

a. Debris Removal (10 12 change)

After a loss that involves physical loss or damage, debris must be removed. Coverage that applies to the costs to remove it is needed. Over the years, this relatively simple concept has become one of the more hotly debated issues under commercial property coverage forms as insurance buyers search for alternate sources for pollution coverage. Debris removal coverage was never intended to be environmental clean-up coverage but in various court decisions, prior language was found to cover such losses. Efforts to eliminate any misunderstanding have made this coverage much more complicated but the concept remains the same.

This coverage is explained as follows:

(1) Actual expenses to remove debris are paid if all of the following apply:

The named insured actually incurs the debris removal expenses
The debris to be removed is covered property
The covered property became debris because a covered cause of loss occurred
The loss occurs during the policy period
The expenses are reported within 180 days of the direct physical loss

The coverage this paragraph provides is subject to limitations as outlined below.

(2) This paragraph explains that the coverage form is not a pollution policy. There is no coverage to remove pollutants from land or water or to remove, restore, or replace polluted land or waters.

(3) This paragraph explains the amount of coverage provided under the basic limits. There are two distinct limitations:

(a) The total amount paid for a direct loss PLUS the debris removal is the lesser of:

· The actual physical loss or damage PLUS the debris removal expense

· The limit of insurance for the damaged covered property

(b) The total amount paid for debris removal is the lesser of:

· The sum of the amount paid for the direct physical loss plus any applicable deductible amount multiplied by a factor of .25. The formula is:

(Paid Loss Amount + Deductible Amount) x .25 = Debris Removal Coverage Amount

· The actual debris removal expense

Example: Thad’s Tobacco Auction House just started operations for the season. There is $20,000 worth of tobacco in the warehouse, but the limit of insurance is $200,000. The deductible is $500. A fire destroys the tobacco. The maximum debris removal expense available is ($20,000 + $500) X .25 = $5,125. Because $20,000 + $5,125 ($25,125) is less than $200,000, $25,125 is the maximum amount of coverage available to handle the direct loss and debris removal expense. However, the amount paid out will not exceed the actual expenses incurred.

CleanBarn_1

(4) This paragraph provides an additional amount of insurance to remove debris if one of the limitations in paragraph (3) above applies. The additional amount of coverage is $25,000, subject to the following:

(a) The total amount paid for a direct loss PLUS the debris removal is the lesser of:

· The actual physical loss or damage PLUS the debris removal expense

· The limit of insurance for the damaged covered property plus $25,000 Debris Removal Additional Coverage

Example: Changing the example above, it is now later in the season and the tobacco in the warehouse is worth $195,000. The warehouse is destroyed. Debris removal is difficult, and its estimated cost is $15,000. Using the formula in paragraph 3, up to $48,750 is available for debris removal expense that is sufficient for the claim. However, the limit of insurance is $200,000. As a result, the most available to pay for debris removal expense is $5,500 ($200,000 – [$195,000-$500]). This means that Thad must pay $9,500 out of pocket. However, there is full coverage because Thad can use the $25,000 Additional Coverage.

(b) The total payment for debris removal is the lesser of:

· The total of the amount paid for the direct physical loss plus any applicable deductible amount multiplied by a factor of .25 PLUS $25,000. The formula is [(Paid loss amount + deductible amount) x .25] + $25,000 = Debris Removal Coverage Amount.

· The actual debris removal expense

The last point to make with respect to this coverage is that the maximum amount of insurance available for direct physical loss and debris removal expense does not exceed the coverage limit of insurance plus $25,000.

CP 04 15–Debris Removal Additional Limits is used to provide higher debris removal limits.

Related Court Case: Debris Removal Obligation Was Paid

b. Preservation of Property

If you do not have insurance, know that your business is being threatened, and have time to act, you probably start by moving your most valuable possessions out and away from danger. The same course of action is just as important when you do have insurance. CP 00 80 encourages the named insured to protect its property by providing coverage as an incentive to do so.

If covered property must be moved from an insured location in order to avoid it being damaged by a covered cause of loss, the insurance company pays for any direct loss or damage that such property sustains during the move. In addition, coverage applies at the location where the property is stored for up to 30 days after the date it is moved there.

There are several important points to consider:

The only property insured is covered property at a location listed on the declarations. Property eligible for coverage moved from a location that is not covered does not create coverage.
The potential loss or damage from which the property is being protected must be a covered cause of loss.

While the property is being moved to and from and while at the "safe" location, it is covered for ANY cause of loss. This coverage applies for up to 30 days.

Note: The property removed must be moved back to the covered location or the temporary location must be added to the policy within 30 days from the date of the move because coverage ends after 30 days.

c. Fire Department Service Charge (10 12 changes)

This additional coverage responds to situations where the named insured must pay for the expense of a fire department that responds to an emergency. The old maxim: "He who hesitates is lost" applies to this coverage. The sooner a fire is reported, the faster it is controlled. Taking the time to consider the cost of fire department response is time lost in fighting the fire.

This coverage pays only if the named insured is contractually obligated to pay for the expense of a fire department that responds to an emergency or is required to pay because of a local ordinance. It provides up to $1,000 per premises to apply to the service charge and is not subject to a deductible. Higher limits are available.

The $1,000 limit applies per premises, regardless of the number of departments that respond, or the number of services provided. (10 12 change)

Note: This could be a significant reduction in coverage for certain businesses. Higher limits should be recommended in such cases.

Example: Dueling Warehouses has four tobacco warehouses on its premises in a rural area. Dueling has agreements with three different volunteer departments located nearby. A fire occurs on a very windy night. All three departments respond. They continuously spray all buildings in an attempt to contain the fire and prevent additional involvement. The maximum payout is $1,000. Under the wording in the prior edition, multiple payments could have been made because of multiple building and multiple agreements. Dueling should consider increasing the limit.

d. Pollutant Clean Up and Removal

The second paragraph of Additional Coverages–Debris Removal specifically excludes expenses to extract pollutants from land or water. This additional coverage provides a limited amount of coverage for those expenses. Each of these requirements must be met in order for coverage to apply:

The expenses must be the named insured’s actual expenses to extract pollutants from land or water at the described premises.
The pollutants must result from a covered cause of loss.
The covered cause of loss must occur during the policy period.
All expenses must be reported to the insurance company within 180 days of the date that the covered loss occurred.
The only covered expenses for testing, monitoring, or assessing for levels of pollution are tests conducted during the extraction process.

The $10,000 limit for this additional coverage is unusual because it is an aggregate limit, not an occurrence limit. It is the total amount available to a premises during a single annual coverage period. As a result, any and all losses that involve eligible expenses at a premises reduce the $10,000 aggregate limit at that premises.

Note: CP 04 07–Pollutant Clean Up and Removal Additional Aggregate Limits of Insurance is used to increase the limit.

Related Court Case: Pollution Cleanup Coverage Inapplicable

5. Coverage Extension–Property off Premises

Occasionally covered property must be stored for a short time at another location. This extension applies if that other location is not owned, leased, or operated by the named insured. The most this coverage extension pays for loss or damage to such property is $10,000. This coverage extension does not apply to tobacco while it is located at any of the following:

In or on a vehicle
In the named insured’s salespersons’ care, custody, or control
At exhibitions or fairs

Additional Conditions 1. Need for Full Reports does not apply to losses that this extension covers. The $10,000 limit is in addition to the limit of insurance.

Inland marine coverage forms are available to cover tobacco in transit or located elsewhere for storage.

AAIS Non-filed Inland Marine Coverage Forms Overview

ISO Non-filed Inland Marine Coverage Forms Overview

B. EXCLUSIONS AND LIMITATIONS

Exclusions and limitations are in the Causes of Loss Forms that apply. More than one causes of loss form may be attached based on entries on the declarations.

C. LIMITS OF INSURANCE

This section states the maximum limits the insurance company pays in any one loss. In most cases, the limit on the declarations is the total amount that can be recovered for a single loss.

The limits provided for the coverage extensions and the following additional coverages are in addition to the limits of insurance for other coverages listed on the declarations:

Fire Department Service Charge
Pollutant Clean-up and Removal

Insurance company payments made under Preservation of Property Additional Coverage do not increase the limit of insurance that applies.

D. DEDUCTIBLE

The deductible is the amount of a loss that the named insured must pay. However, the insurance company first applies Additional Condition 1. Need for Full Reports to determine if the amount of loss must be adjusted.

The adjusted loss amount is compared to the deductible amount. If it is less than the deductible, the named insured is responsible for the entire loss amount.

If the adjusted loss amount exceeds the deductible, the insurance company pays the lesser of the amount of loss above the deductible or the limit of insurance.

E. LOSS CONDITIONS

These Loss Conditions apply in addition to IL 00 17–Common Policy Conditions and CP 00 90–Commercial Property Conditions.

CP 00 90–Commercial Property Conditions Form Analysis

IL 00 17–Common Policy Conditions Analysis

1. Abandonment

The named insured still owns the property after a loss and is responsible for all expenses associated with it, unless or until the insurance company agrees to accept ownership of the property.

2. Appraisal

The insurance company and the named insured may occasionally disagree on the value of the property or on the actual amount of loss. The appraisal condition is designed to resolve these disagreements without court intervention. In the first step, one of the parties decides it has reached an impasse with the other party and makes a written request for an appraisal. Each party then hires an independent appraiser. Each appraiser must be both competent and impartial.

The appraisers then choose an umpire. If they cannot agree on one, they can request that a judge of a court that has jurisdiction over the matter select one. Once all parties are selected and in place, each appraiser states the value of the property and the amount of loss. If both parties agree, the amount of loss is settled. Only disputed amounts are submitted to the umpire. Any decision made by any two of the three is binding on both the insurance company and the insured.

The expenses associated with this process fall outside the category of expenses the coverage form pays. The named insured pays the following costs or expenses and the insurance company does not reimburse it for them:

Its appraiser
Its equal share of the cost of the umpire
Its equal share of any other appraisal expenses

The insurance company pays the following costs and expenses. None of these expenses reduce the limit of insurance:

Its appraiser
Its equal share of the cost of the umpire
Its equal share of any other appraisal expense

Despite the outcome of the appraisal, the insurance company still retains its right to deny the claim.

3. Duties in the Event of Loss or Damage

The insured is expected to act reasonably whenever a loss occurs. If not, the company’s obligation to pay the loss may end. The named insured must:

Notify the police or other law enforcement authorities if a law may have been broken.
Give prompt notice to the insurance company of loss or damage and describe the property involved. This notice is not a complete and thorough report but instead provides enough information for the insurance company to begin to process the claim and decide how to respond. Some court cases have challenged the meaning of "prompt." As a result, the best advice is for the insured to send as much loss information to the insurance company as soon as it knows that a loss has occurred.

Give a description of how, when, and where a loss occurred as soon as possible after it occurs. This requirement is slightly different than the prompt notification obligation. That obligation is to inform the insurance company on a timely basis that a loss has occurred. This obligation assists the company to determine if the loss is actually covered.

HOW is what actually caused the loss. The answer determines if the loss is covered.
WHEN is the exact time of the loss. Because coverage applies only if the loss occurs during the policy period, this information is very important. There is coverage if the loss occurs at 12:02 a.m. on the inception date. There is no coverage if it started at 11:59 p.m. the day before the inception date. In addition, accurate information on when the loss or damage occurred may help resolve whether the loss occurred suddenly or over a period of time. This is important. There is a distinction because sudden losses tend to be fortuitous and covered while losses that take place over a period of time may be maintenance issues that are not covered.
WHERE is important because most coverages require that the property is at a location or premises listed on the declarations. If the loss occurs elsewhere, the coverage form must be examined carefully to determine if any coverage applies at such locations.

Take appropriate steps to protect the covered property from any further damage. The named insured is expected to be vigilant. The requirement to protect property involves taking reasonable measures, not extraordinary or unreasonable ones. Covering property with tarps to protect against moisture damage, boarding up windows, and hiring security guards are examples of reasonable measures to take after a loss. Any expenses the named insured incurs are taken into consideration in the loss adjustment and settlement but paying these expenses does not increase the limit of insurance. Finally, the named insured should separate the damaged property from the undamaged property and set the damaged property aside for examination whenever possible.
Provide inventories of the damaged and undamaged property when the insurance company requests them. This includes quantities, costs, values, and the amount of loss claimed. This detailed information is important to properly adjust the loss and offer a fair settlement. The named insured controls the inventory and is responsible for supplying the information needed.
The insurance company has the right to verify that the information the named insured provides is accurate and correct. For this reason, it may inspect the property in order to prove the loss or damage. It may also examine the insured's books and records that relate to the loss or damage. The insurance company can also take samples of the damaged and undamaged property and make copies of the insured's books and records.

This condition states that the insurance company must be reasonable in its requests. Since reasonable is not a defined term, the two parties might disagree about the intent of this condition. For example, the company may take the position that repeat visits are necessary in order to be thorough. The insured may view the same actions as being a delaying tactic that slows down the settlement. While the essence of this condition is to prevent the carrier from harassing the insured, it also benefits the insurance company. Because of the way it is written, an uncooperative insured cannot claim that a single visit is sufficient for the carrier to adjust and settle a loss.

Show good faith in the truth and accuracy of a claim for loss by providing the insurance company with a signed and sworn proof of loss. This must be done no later than 60 days after the company requests it, along with any other information needed. The insurance company provides the necessary forms and instructions on exactly the information it needs.

Note: If the company's requests are unclear and the insured is confused, any delay in providing the information cannot be used as an excuse to deny coverage.

Cooperate with the insurance company in investigating and settling the claim.

In addition to the points outlined above, the insurance company has the right to examine any insured under oath. The examination can take place without another insured being present. The examinations can be done as often as necessary with respect to anything related to either the insurance coverage or the claim itself. They can include examinations of the insured's books and records. In all examinations, the written document used to record the insured's answers must be signed.

Note: Loss investigation is a serious part of the insurance claims process. The insurance company must have complete access to information as necessary to investigate and settle the claim. This may include information the insured would rather not disclose. Claims adjusters want to believe their insurance customers are honest but the sheer number of incidents of fraud makes them cautious. While the insurance company cannot use intimidation or harassment, it must still be diligent in order to protect its assets and to prevent or limit fraud.

4. Loss Payment (10 12 change)

a. and b. The insurance company must use one of the four options below to settle a claim:

Pay the value of the lost or damaged property.
Pay the cost to repair or replace any lost or damaged property. This cost does not include any expense for increased cost due to enforcing or complying with any ordinance or law that regulates use, repair, or construction of any property.
Take all or any part of the property at an agreed or appraised value.
Pay to repair, rebuild, or replace the damaged property with property of similar type and quality. This payment does not include any expense for increased cost due to enforcing or complying with any ordinance or law that regulates use, repair, or construction of any property.

The value of the damaged or destroyed property or the cost to repair or replace is based on the terms of the valuation condition of the coverage form or any other provision that amends or replaces the valuation condition.

c. The insurance company must tell the insured the option it will use within 30 days after receiving a properly prepared and signed sworn proof of loss.

d. Insurance is meant to indemnify, not reward. As a result, the insurance company does not pay more than the insured's financial interest in the covered property at the time of loss.

e. The insurance company has the right to adjust claims for loss or damage to property the named insured does not own directly with the property's owner. However, the insurance company has the right to settle those claims with the named insured and allow the named insured to work with the property’s owner. Any settlement reached must satisfy all claims for the property because the insurance company pays only once. The most the insurance company will pay for such a loss is the property owner’s financial interest in the property.

f. The insurance company that provides the property coverage may decide to defend the named insured against suits due to claims brought by the property's owner. In such cases, the insurance company does so at its own expense.

g. The insurance company must pay the loss within 30 days after it receives the insured's signed and sworn proof of loss. This obligation depends on the insured meeting all policy conditions as well as the value of the loss being determined by one of the following:

The parties having agreed on the amount of loss
An appraisal award having been made

5. Recovered Property

Either the named insured or the insurance company may recover property after a loss is paid. The recovering party must promptly notify the other and inform it of the recovery. The named insured has the right to decide whether to return the claim payment and keep the recovered property or allow the insurance company to keep the recovered property. The insurance company is responsible for recovery expenses and any repair to the recovered property, subject to the limit of insurance.

Examples:

Thad’s Tobacco Warehouse sustains a theft loss on the first day of the auction season. Smokes ‘n Strokes Insurance Company settles the claim for $60,000 based on the five-day average valuation. The stolen tobacco was located during the last week of the season. The current selling price is $75,000. Thad accepts the recovered property and returns the $60,000 to Smokes ‘n Strokes.
Thad’s Tobacco Warehouse sustains a theft loss on the first day of the auction season. Smokes ‘n Strokes Insurance Company settles the claim for $60,000 based on the five-day average valuation. The stolen tobacco was located during the last week of the season. The current selling price is $45,000. Thad rejects the recovered tobacco and keeps the $60,000 settlement. Smokes ‘n Strokes can sell the tobacco as salvage.

6. Valuation

a. The insurance company determines the value of tobacco in sales warehouses by a specific formula when a loss occurs. It is the average price on sales of similar types and grades of tobacco:

On the date of loss
On the two sales days immediately before the date of loss
On the two sales days immediately after the date of loss

b. These prices are based on sales at the tobacco warehouse closest to the tobacco warehouse where the loss occurred. The insurance company determines the average price by the following formula:

Divide total sales by the number of pounds of tobacco
Deduct the following amounts at the time of loss:

Unearned warehouse charges
Unearned auction fees
Unpaid government taxes

Example: Thieves broke into Thad’s Tobacco Warehouse and stole as much tobacco as they could grab in 30 minutes. The Tobacco Specialty Insurance company determined that Tony’s Warehouse was the closest warehouse to Thad’s so used Tony’s sales in order to develop a fair per pound price for Thad’s stolen tobacco.

Tony’s Warehouse–Five Day Tobacco Sales
Day	Pounds Sold	Daily Sales
one	10,000	$18,500
two	15,000	$28,200
three	5,000	$8,750
four	17,000	$31,280
five	12,000	$21,840
Total	59,000	$108,570

Based on the above, the price per pound is $108,570÷59,000 = $1.84. Because 34,000 pounds of tobacco were stolen the value of the loss is developed as follows:

Pounds of Tobacco Stolen: 34,000

Five-day average price per pound X $1.84

Total unadjusted loss $62,560

Total Taxes and fees -$2,560

Final Loss Valuation $60,000

F. ADDITIONAL CONDITIONS

CP 00 80 is written on a reporting basis. The following conditions explain the responsibilities that are part of the reporting process and include how loss payments are made and premiums adjusted.

1. Need for Full Reports

a. This condition explains that a penalty is applied whenever the values reported for the selling season was less than the full value of the covered property during that season. The penalty percentage is calculated by dividing the reported value by the actual value.

That percentage is then multiplied by the amount of the loss.

Example: Moe’s Tobacco barn had a successful season. He sold 100,000 pounds at an average price of $1.90 per pound. But his bookkeeper made a mistake and sent the report to Gitcher Figures Rite Insurance Company as 90,000 pounds at 1.87 per pound. There was a $6,000 loss during the season. Moe was surprised when the loss was paid as follows:

(90,000 X $1.87 = $168,300) ÷ (100,000 X $1.90= $190,000) = .886 X $6,000 = $5,316

Note: Reports are submitted by location. This means that one location may be reported accurately and another not. The reporting penalty for each location is calculated separately.

b. When a loss occurs at a location that was acquired after values at other locations had been reported, the per location reporting requirement penalty is not applicable. Instead the sum of the values reported for all locations is divided by the sum of all location values that should have been reported for the season.

Note: There is no penalty at newly acquired locations if the named insured had reported values at all locations accurately.

2. Premium Adjustment

a. The premium charged at inception is an advance or deposit premium. The insurance company determines the actual final premium at the end of the policy year, or the expiration date based on the reports of value submitted.

b. Once the final premium is calculated, the deposit premium is subtracted from the final premium. The insurance company then either charges additional premium or returns any excess premium to the named insured.

3. Reports of Value

The named insured is obligated to file a report of values with the insurance company within 30 days of the official closing of the sales auction season. It must include the number of pounds of tobacco sold and resold during the sales auction season and the price per pound paid for it. This information must be reported separately for each location.

Note: This paragraph does not specify a specific form to use. As a result, any form may be used to report the information, as long as it contains the required information and is submitted in writing.

G. DEFINITIONS

One term is defined.

Pollutants

This term refers to any solid, liquid, gaseous, or thermal irritant or contaminant. It includes smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned, or reclaimed.