CP 00 70–MORTGAGEHOLDERS ERRORS AND OMISSIONS COVERAGE FORM ANALYSIS

(June 2019)

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INTRODUCTION

Banks, credit unions, savings and loans, and other financial or lending institutions must protect their investments in real property against direct property losses. They do this by requiring that the borrower purchase insurance on the mortgaged property for an amount at least equal to the amount of the loan.

Because errors can occur, most of these institutions purchase their own coverage in case a property that should be covered is not because of a negligent act, oversight, error, or omission. Insurance Services Office (ISO) CP 00 70–Mortgageholders Errors and Omissions Coverage Form is used to supply the coverage.

This coverage form is an unusual coverage form within the Commercial Property Program because CP 00 90–Commercial Property Conditions is not attached, and no Cause of Loss Form is attached. The conditions and causes of loss are part of the coverage form. However, the IL 00 17–Common Policy Conditions is still required.

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

CP 00 70–MORTGAGEHOLDERS ERRORS AND OMISSIONS COVERAGE FORM ANALYSIS

This coverage form opens by defining 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 other words that have special meanings. They are defined in G. Definitions.

A. COVERAGE

CP 00 70 provides four distinct coverages:

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1. Coverage A–Mortgageholder's Interest

This is errors and omissions insurance that provides only property damage coverage. The error or accidental omission that results in a loss to the named insured must be due to a representative not following the named insured’s procedures with respect to obtaining insurance on mortgaged properties. The violations can involve either the obtaining of or the maintaining of the insurance that covers the named insured's interest as the mortgageholder on the specific mortgaged property.

Note: This means that coverage applies only if all of the following apply:

The named insured has specific established procedures to obtain and maintain insurance that covers its interest as a mortgageholder. The procedures must apply to all mortgaged property.
The named insured or its representative must make an error or accidental omission in following the established procedures such that the named insured’s interest in the property is not being protected.
A cause of loss that would have been covered if the procedures had been followed must cause a loss.
The loss that occurs must impact the mortgageholder’s interest in the property.

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Example: Good Bank is a lending institution that provides mortgages for homeowners. It requires that the homeowner purchase property insurance that protects the mortgaged property for at least the full value of the loan amount and uses an HO-3 coverage form as a minimum. Each loan requires a copy of the policy plus a paid receipt at the closing, with Union listed as the mortgageholder. A complete copy of the policy is required within 30 days after closing.

A special mortgage rate promotion made it difficult for loan officers and closers to keep up with demand. During one closing, the loan officer agreed to accept a photocopy of the proof of insurance, placed it in the file, and promptly forgot to follow-up. As it turned out, the purchaser never paid for the insurance policy and Union was not notified, The forgetful homeowner left an unattended frying pan on the stove burner, and the subsequent fire destroyed the house. The homeowner did not have coverage, so Union Savings Bank was not covered under the homeowner’s mortgageholder provision. However, Good Bank filed a claim under its Mortgageholders Errors and Omissions Coverage Form and received payment for the amount of its interest. The homeowner still had no coverage though.

What happens if Union Savings Bank does not have standard operating procedures? At the time of closing, what if it only recommended that the purchaser purchase insurance, without requiring the causes of loss, amounts, proof of insurance, or follow-up procedures? This coverage form would not have responded because no procedures were in place, so no accidental breach of procedure had occurred.

a. Covered Property

Real property and any personal property that are part of the mortgage contract are covered but only as long as the named insured has a mortgageholder’s interest in it. Coverage continues even during and following foreclosure proceedings and property that is sold under conditional sales and other agreements. The key is that the named insured retain the title.

b. Property Not Covered (10 12 changes)

The following property is excluded:

Accounts, bills, currency, deeds, food stamps, money, notes, securities, and other evidence of debt. Lottery tickets are a unique type of property. They are considered covered property only if they are held for sale.

Land, water, lawns, and crops not yet harvested, while having value, are excluded. Land that is part of the mortgaged property is also excluded. However, lawns that are part of vegetated roofs are an exception to this exclusion and are covered. (10 12 change)
Electronic data is excluded. Electronic data is defined as all programs, information, and data stored, created, transmitted, or used on computers. The data can be in the form of floppy disks, hard disks, CD-ROMS, tapes, and similar storage media even when not on the computer. Electronic data that is an integral part of the building’s heating, ventilating, air conditioning, elevator, lighting, or security systems is an exception to this exclusion and is covered. (10 12 change)

c. Covered Causes of Loss

The named insured’s mortgage insurance requirements dictate the causes of loss insured. If the mortgagor is required to carry basic causes of loss on the property, this coverage form insures against only those causes of loss. However, if special causes of loss are required, this coverage form insures against them. However, there are limits:

Causes of loss excluded under B. Exclusions in this coverage form are excluded.
Any loss covered under other arrangements, such as mortgage guarantee, title, life, health, or accident insurance policies or programs, is excluded.

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Example: Strong and Secure Bank procedures require mortgagors to provide HO 3 coverage. When a wind loss damages a mortgaged property that did not carry the required insurance due to a procedural error, this coverage responds because wind is a covered cause of loss in HO-3.

d. Coverage Extension–Mortgages Serviced for Others

The insurance company covers losses that arise from mortgages owned by others that the named insured services but only if there is a written contract to do so. Loss payments on such mortgages are paid to both the mortgage owner and the named insured.

Note: Such contracts must contain clearly written terms and conditions. This coverage extension does not apply unless there is a written contract.

2. Coverage B–Property Owned or Held in Trust

This coverage is not for mortgageholders interest. This covers property that is owned or held in trust by the named insured. There is coverage for the direct physical damage to the covered property by a covered cause of loss. The proviso this time is that the loss must not be covered by other insurance and the reason that it is not covered is because the named insured or a representative made an error or omission in procuring or maintaining the insurance. Again, there must be a customary procedure in place and an error or omission must have happened that caused the insurance to either not be placed or allowed to lapse.

Note: Stated another way, coverage applies only if all the following apply:

The named insured has written procedures to obtain and maintain insurance on property that it owns or holds in trust
The named insured or its representative makes an error or omission in following established procedures so that its interest is not protected
A covered cause of loss for this coverage causes direct physical loss or damage to the covered property

a. Covered Property

The property covered is real and personal property the named insured owns or in which it has a fiduciary interest. The fiduciary interest may be as a trustee or in another capacity.

b. Property Not Covered

This property is excluded:

Accounts, bills, currency, deeds, food stamps, money, notes, securities, and other evidence of debt. Lottery tickets are a unique type of property. They are considered covered property only if they are held for sale.
Land, water, lawns, and crops not yet harvested, while having value, is excluded. Land that is part of the mortgaged property is also excluded. However, lawns that are part of vegetated roofs are an exception to this exclusion and are covered. (10 12 change)
Electronic data is excluded. Electronic data is defined as all programs, information, and data stored, created, transmitted, or used on computers. The data can be in the form of floppy disks, hard disks, CD-ROMS, tapes, flash drives, and similar storage media even when not on the computer. Electronic data that is an integral part of the building’s heating, ventilating, air conditioning, elevator, lighting, or security systems is an exception to this exclusion and is covered. (10 12 change)

c. Covered Causes of Loss

These are different than in Coverage A because coverage is not dependent on the required coverage within the standard procedure. Instead the causes of loss are limited to only the following:

Fire

3. Coverage C–Mortgageholders Liability

Unfortunately, this coverage does not explain the liability exposure as clearly as Coverages A and B. There is no explanation of the kinds of damages caused and the types of error or omission that must occur. As a result, it is very open-ended and means that there is coverage if all of the following apply:

The named insured mortgageholder has written procedures to obtain and maintain certain types of insurance on mortgaged property for its benefit.
An error or omission occurs while the procedures are being followed.
The named insured is legally obligated to pay the damages that the error or omission created.
The damages result from the named insured being a mortgageholder, mortgage fiduciary, or agency that services mortgages.

As with most liability coverage, the insurance company has both the right and the duty to defend the named insured when it is sued for damages. Defense is required only if the insurance coverage applies to the damages claimed.

Note: The lack of clear language plus the duty to defend within this coverage led to a court action that the insurance company may not have expected. The court decided in favor of the mortgageholder in the case of Midland Mortgage Company v. USF&G when it was determined that the coverage wording was ambiguous so the coverage could be used to defend a class action suit filed against the mortgage company. This interpretation may cause this section of the coverage form to be revised at some future date.

The actual case that precipitated USF&G having to defend did not proceed as far as the plaintiff had hoped because class action status was denied.

a. Covered Causes of Loss

This section is unusual. The only reference to causes of loss is that the valid insurance to be obtained must be for a Covered Cause of Loss. The Covered Cause of Loss cannot include any hazards excluded in Section B, mortgage guarantee policies, or title, life, health, or accident insurance.

However, this is legal liability coverage and there are no exclusions that apply to the actual legal liability a suit alleges.

b. Additional Coverage–Supplementary Payments

The insurance company pays the following with respect to any claim or suit against the named insured that it defends.

All expenses it incurs
The cost of bonds to release attachments in amounts that are within the limit of insurance. It pays for only the bonds. It does not furnish them.
Reasonable expenses the named insured incurs at the insurance company's request. This includes up to $250 per day in lost earnings due to time away from work.
All costs assessed against the named insured in a suit or legal proceeding
Prejudgment interest a court awards against the named insured on the portion of the judgment it defends. If the insurance company offers to pay the limit of insurance, it does not have to pay any prejudgment interest that accrues during the period of time after it makes the offer.
Interest on the total amount of any judgment that accumulates after a judgment is entered and before it pays, offers to pay, or deposits the part of the judgment within the limit of insurance in the court

These payments do not reduce the Limit of Insurance that applies.

Note: This section is similar to the supplementary payments in the ISO Commercial General Liability Coverage Form. The most important feature is that each of these is in addition to any limit of insurance.

c. Coverage Extensions

Additional Insureds

Under Coverage C, the following are considered named insureds if the named insured is a partnership, limited liability company, or corporation:

The named insured's partners, members, executive officers, trustees, directors, and stockholders, but only with respect to their duties as such
Managers of limited liability companies, but only with respect to their duties as managers

As in all liability coverage forms having additional Insureds does not increase the Limit of Insurance.

Newly Acquired Organizations

Under Coverage C, any organization the named insured acquires or forms and has a majority interest in is also a named insured if other similar insurance is not available to it. The organization cannot be a partnership, limited liability company, or joint venture. This extension ends when either of the following occurs:

90 days after the organization is acquired or formed
At the end of the policy period on the declarations

This extension does not apply to errors or accidental omissions that took place before the organization was acquired or formed by the named insured.

Note: The 90-day limitation is important. It provides temporary protection by amending the named insured designation to include the new organization. It also gives the named insured time to contact the insurance company to amend the named insured or to purchase specific coverage for the new organization. On the other hand, the insurance company also has a measure of protection because the coverage is temporary, and the named insured must inform it of the new organization. It can then decide whether to cover the new organization, based on the exposures it presents.

4. Coverage D–Real Estate Tax Liability

The insurance company pays damages the named insured is legally liable for because of its errors or accidental omissions in paying real estate taxes it had agreed to handle on the mortgagor's behalf.

Note: These damages usually consist of penalties, fines, fees, and assessments made against the property owner. However, this coverage does not have a Causes of Loss Section. Because other coverages do, it suggests that the causes of loss are unlimited. This means that coverage applies if both of the following apply:

An error or omission occurs in paying a mortgagor's real estate taxes
The named insured is legally obligated to pay damages because of the error or omission

B. EXCLUSIONS

CP 00 70 states that these exclusions apply to all four coverages, but it does not make any reference to legal liability. This suggests that these exclusions apply to only Coverage A and Coverage B. In addition, Coverage A refers directly to Section B. Exclusions in its Causes of Loss section. Coverage B does not have a similar reference, and this could be viewed as ambiguous. Coverage C refers to this section, but it appears to only clarify what is considered valid insurance and does not have a direct impact on the coverage itself. Coverage D does not refer to causes of loss.

1. Broad Exclusions

The causes of loss in this exclusion do not apply to loss or damage caused directly, indirectly, or in any sequence in a chain of events that contribute to the loss. Exceptions to the chain of events condition are stated in the specific exclusion subpart. The lead wording emphasizes that coverage for any event analyzed in these exclusions does not apply even if the event is widespread.

a. Ordinance or Law (10 12 change)

Local governments develop ordinances and laws that relate to construction, remodeling, and repair of buildings. Most are not retroactive. As a result, existing buildings are grandfathered out of the ordinance until they must undergo renovations or repairs. When a substantial loss occurs and rebuilding, remodeling, or repair is necessary, the grandfathered laws activate and come into play. This exclusion states that the coverage form does not apply to any costs that must be incurred because the laws and ordinances are being enforced. The compliance with the ordinances or laws is also not covered.

This exclusion also states that coverage does not apply to the expense to remove undamaged portions of the building or to rebuild them. There is also no coverage for the additional cost to rebuild at a different location because ordinances or laws do not permit rebuilding at the existing location. Finally, it does not pay remodeling costs required to bring the building up to current standards.

b. Earth Movement consists of five separate components:

(1) Earthquake includes any sinking, rising, or shifting of the earth directly related to the earthquake. The
10 12 edition adds tremors and aftershocks to this list.

(2) Landslide includes any sinking, rising, or shifting of the earth directly related to the landslide.

(3) Mine Subsidence applies to only man-made mines and applies whether they are operating or not. Mine subsidence coverage is an option that may be purchased separately. In some states, mine subsidence coverage is required to be offered in certain counties. If coverage applies to property located in Illinois, Indiana, Kentucky, Pennsylvania, or West Virginia, the laws in those states should be reviewed carefully to determine the way to handle this exposure.

(4) Sinkhole Collapse is covered but all other earth sinking, rising, shifting, eroding, contracting, or expanding is excluded. Loss or damage due to water movement beneath the ground and poor soil conditions is also excluded.

However, if any of the events described above cause or result in a fire or explosion, the insurance company pays for the ensuing loss or damage the fire or explosion causes.

(5) Volcanic eruption, explosion, or effusion is excluded. However, if they result in fire or volcanic action, coverage applies to the loss or damage that the fire or volcanic action causes.

Note: Volcanic action includes airborne blasts and shockwaves, dust, ash, and particulate material the volcano emits, as well as lava flow. The costs to remove dust, ash, and particulate matter is excluded unless there is direct damage to the covered property.

All aspects of this exclusion apply regardless of whether or not nature or any other force causes the event. (10 12 addition)

Note: Volcanic events are unpredictable, cause widespread damage, and usually occur over a period of days. An eruption that takes place over a period of 168 consecutive hours is treated as one occurrence. This is very important to the named insured that has a substantial deductible for this coverage. Instead of a number of deductibles applying to multiple events, only one deductible applies to each 168-hour period. On the other hand, this also means that only one limit is available for all losses that occur within that same time period.

c. Government Action

Coverage does not apply if the government entity seizes or destroys property. However, coverage does apply if the action it took is to prevent the spread of fire.

Note: Coverage applies only if coverage applies to the fire the government entity is trying to stop.

Examples:

Scenario 1: There is no coverage when Perfection City confiscates Evergreen Growers' building because Evergreen uses it to grow controlled substances.

Scenario 2: Coverage applies when the fire chief orders that Evergreen's outbuildings be destroyed in an attempt to prevent further spread of a major wildfire.

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d. Nuclear Hazard

There is no coverage for loss or damage to anything related to nuclear hazards. Reactions, radiation, and contamination are excluded. However, if a fire ensues, the loss or damage that fire causes is covered.

e. Utility Services

Loss or damage due to utility failure is excluded if the failure begins away from the described premises. When the failure begins on the insured premises, there is still no coverage if the source of the failure is equipment that supplies off premises utility service to the described premises. Utility failure is loss of power, water, communications, and other utility services. It also includes lack of capacity and reduction in supply.

Communication services include Internet, cellular, satellite, and other access services. Power surge that occurs because of the power failure is excluded. If power failure or surge results in a covered cause of loss, coverage applies to the damage caused by that covered cause of loss.

Related Article: Utility Service Coverage

f. War and Military Action

This exclusion lists three specific warlike activities that are excluded.

War. This can be a declared, an undeclared, or a civil war.
Military force of a warlike nature. These activities must utilize military personnel or agents of a government or other type of authority. The actions taken to thwart any of these activities are also considered war.
Insurrection, rebellion, revolution, and attempts to usurp power. Any government action taken to respond to such actions is also considered war.

Note: The words "terrorism" or "terrorist" do not appear in this exclusion.

g. Water (10 12 changes)

Note: This exclusion was changed in January 2009 by introducing mandatory endorsement CP 10 32–Water Exclusion Endorsement. The mandatory wording in that endorsement is now incorporated into this exclusion and CP 10 32 is no longer needed. Loss or damage caused by the action of water outside the building is excluded. To further clarify this exclusion, it is broken down into five separate components. Each defines exactly what water means.

(1) Flood is excluded. Flood is surface water, tides, tidal water, and waves. Waves include tidal waves and tsunami. Overflow of any body of water is also excluded. A body of water is a natural or man-made river, creek, ocean, or lake. Spray from any of the above, wind-driven water, and storm surge are also excluded.

(2) Mudslide and mudflow occurs when a sudden large volume of water mixes with unstable soil conditions and is excluded.

(3) The sewers, drains, and sumps part of this exclusion is broadened in two ways. The first is the how and the second is the what. In the 06 07 edition, water had to back up or overflow. In the 10 12 edition, the water can be discharged in other ways. A description of those other ways is not provided. Second, in the 06 07 edition, the water had to come from a sewer, drain, or sump. In the 10 12 edition, it may also come from a sump pump or related equipment. Related equipment is not defined.

(4) Water saturated ground can create hydrostatic pressure against a building's surface or subsurface portions. Loss or damage caused by or that results from such water that enters through foundations, walls, floors, paved surfaces, basements, doors, windows, and other building openings is excluded.

(5) Waterborne material. This section introduces the term "waterborne material." Damage caused by this material carried by waters described in (1), (3), and (4) above is excluded. Such material moved or carried by mudslides or mudflow described in (2) above is also excluded.

ISO adds a paragraph that explains when this entire exclusion applies. It applies whether any of the events are caused by an act of nature or otherwise. In order to clarify the term "otherwise," ISO provides an example that uses the terms “dam”, “seawall," "levee," "boundary" or "containment system" and states that any of them failing to contain the water is an "otherwise" type situation. However, it is important to note that using this example format does not limit the exclusion to failure of only those specific items. The goal is to define the term "otherwise" as broadly as possible.

Much like other exclusions, if fire or explosion occurs because of any action of water, coverage applies to the loss or damage the fire or explosion causes. In addition, if a sprinkler leakage loss occurs due to these actions of water, coverage applies to the loss or damage the sprinkler leakage causes.

Sprinkler leakage coverage applies only if sprinkler leakage is a covered cause of loss on the coverage form or policy.

h. Fungus, Wet Rot, Dry Rot, and Bacteria

Loss or damage caused by or that results from the existence or any activity of fungus, mold, rot, bacteria, and other similar growing organisms is excluded. However, if the existence of one of them causes a specified cause of loss to occur, coverage applies to the loss or damage caused by the specified cause of loss.

This exclusion does not apply if the fungus, mold, rot, bacteria, or similar organisms result from a fire or lightning loss. It also does not apply to coverage that E. Additional Coverage–Limited Coverage for Fungus, Wet Rot, Dry Rot, and Bacteria provides.

2. Limited Exclusions

There is no coverage for loss or damage caused by the following exclusions. Note that the lead language is not as strong or inclusive for these exclusions as the language in 1. Broad Exclusions.

Editorial note: ISO does not give titles to these exclusions. To assist in the analysis, we have provided a title to help identify the exclusion’s main intent.

a. Pollutant Damage

There is no coverage for loss or damage when it is caused by or results from any release, discharge, seepage, migration, dispersal, or escape of pollutants.

There are three exceptions to this exclusion.

If the required coverage is Special Causes of Loss, when a specified cause of loss causes the event, this exclusion does not apply.
When a pollution event results in a specified cause of loss and that specified cause of loss causes the loss or damage, that resulting loss or damage is covered but not the pollutant event.

b. Artificially Generated Energy

Coverage does not apply if electrical, magnetic, or electromagnetic energy generated artificially causes damage, interferes with, disturbs, or disrupts any of the following:

Networks, devices, systems, wires, or appliances of an electrical or electronic nature
Cellular or satellite devices, appliances, systems, or networks

Examples of artificially generated energy include electrical current, charges a magnetic field produces, electromagnetic, and microwaves, among others, but this listing is not inclusive. However, loss or damage caused by a fire that results is covered.

c. Vegetated Roofs (10 12 addition)

Lawns, trees, shrubs, and plants that are part of vegetated roofs are covered property because they are excepted from A. Coverage 2. Property Not Covered. This limitation is needed because this property is alive and depends on certain conditions to survive. They are also outdoors and do not have any protection from the elements. There is no coverage if lawns, trees, shrubs, or plants within the vegetated roof are damaged because:

The atmosphere or the soil is too damp or too dry
The temperature changes too often or is considered extreme
Disease
Hail, frost, rain, snow, ice, or sleet

d. Late Notice

There is no coverage for loss or damage from an event that occurs more than 30 days after the named insured becomes aware that an error or accidental omission has occurred.

Note: This is an important exclusion because it specifically affects mortgageholders errors and omissions losses. This means that the clock begins to run the moment the mortgageholder becomes aware of an error or inadvertent omission. The named insured has only thirty days to rectify the situation and secure proper insurance coverage. This exclusion makes the named insured accountable for correcting known situations that may result in loss.

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Example: As a result of a regular audit, Friendly Mortgage, Inc. discovers several mortgages that do not have evidence that the required coverage is in place. A report that outlines the deficiencies and locations involved is submitted to Marvin, the department head. Unfortunately, the report sits in his in-basket for weeks before he reads and acts on it. Meanwhile, a fire occurs and damages one of the properties in the report. The bad news for Friendly is that the property was not insured and because of Marvin’s inaction, there is not coverage under this form either.

e. Failure to Obtain Coverage

The failure of the named insured to obtain, maintain, or correctly handle title, mortgage guarantee, life, health, or accident insurance policies or programs is not covered.

Note: This is an important exclusion because it relates directly to standard mortgageholder activities. It is a clarifying exclusion to the extent that it informs the named insured that this is not open-ended professional insurance coverage.

f. Neglect

There is no coverage if an insured does not use all reasonable means to save and preserve property from further damage during and after the time of loss.

Note: This could be a difficult situation for the mortgageholder because it may not even know that a loss occurred until long afterwards. Reasonable action is required, not the impossible.

3. Anti-Concurrent Causation Exclusions

The subparts of this exclusion are sometimes referred to as the anti-concurrent causation exclusions. These exclusions are unique in that, if a loss is covered as a covered cause of loss, with the exception of these exclusions, it is still covered. On the other hand, if the loss would have been excluded anyway, it is still excluded. The four subparts of this exclusion are:

a. Collapse

Collapse is initially totally excluded but limited coverage is added back in D. Additional Coverage–Collapse.

Collapse is excluded. This means the following property conditions are also excluded:

(1) Any type of sudden caving in or falling down

(2) When the structural integrity of the building is lost or compromised. The evidence of this could be parts of the property separating from the rest of the building or the building appearing to be in danger of caving in or falling down.

(3) Cracking, sagging, expansion, settling, shrinking, bulging, or bending, but only as they relate to items (1) and (2) above

There are two exceptions to this exclusion.

The coverage provided in Section D. Additional Coverage–Collapse is not excluded. This exception prevents a conflict between that Additional Coverage and this exclusion.
When a collapse is caused by specified causes of loss, building glass breaking, weight of rain on a roof, or weight of people or personal property loss or damage from that collapse is covered.

b. Weather Conditions

Loss or damage due to weather conditions is excluded but only when the loss is caused by a weather condition combined with a cause of loss excluded in 1. Broad Exclusions.

c. Acts or Decisions

Governmental entities and related groups make decisions and take actions that may not only affect others but may also cause loss or damage. Loss or damage that results from such acts or decisions is excluded.

d. Design Flaws

Loss or damage that is due to faulty, inadequate, or defective planning, design, materials, and maintenance is excluded. An important provision is that it applies both on and away from the designated premises.

4. Additional Exclusion

This exclusion applies to only merchandise, goods, or other products.

Loss or Damage to Products

There is no coverage for loss or damage to merchandise, goods, or other products caused by any party's error or omission. These errors or omissions are excluded beginning with planning or testing through repair and maintenance. This exclusion also applies to errors or omission made at locations where work is outsourced. It applies to any compromise of the product in form, substance, or quality.

The one exception is if such an error or omission causes a covered cause of loss to occur. In that case, coverage applies to only the loss or damage from the covered cause of loss.

C. LIMITS OF INSURANCE

The most paid for all loss due to any one error or accidental omission is the limit of insurance on the declarations that applies to the specific coverage.

Note: ISO does not provide a recommended Declarations Page for this coverage. The Property Declarations Page must be modified to show these limits.

Payment is subject to certain limitations:

1. With respect to Coverage A and Coverage B, the insurance company pays the smallest of:

This first amount must be calculated. First, determine the amount of the direct physical loss or damage that would have been covered by insurance if that required insurance would have been in place, at the time of loss. Then subtract from that amount other insurance recoveries on that property that are payable to the named insured. The reason the insurance is not in place must be due to an accidental error or omission.
The amount of insurance the named insured would have had in place if not for the error or accidental omission
The amount of the named insured's mortgageholder's interest under Coverage A

2. Coverage D does not contain a separate limit. The most paid for all damages due to failing to pay taxes on a single mortgage is 15% of the limit of insurance on the declarations for Mortageholders Errors or Omissions Coverage.

Note: ISO does not provide a specific declarations for this coverage. As a result, the property declarations must be modified to enter these limits.

There is no mention of Coverage C's limit of insurance in this section and no explanation as to how to develop a limit. Considering the vagueness of this coverage, the equally vague limit of insurance could be very costly to the insurance company.

D. ADDITIONAL COVERAGE–COLLAPSE

This additional coverage is necessary because collapse is specifically excluded elsewhere in the coverage form. Policies and coverage forms once provided collapse coverage. However, broad legal interpretations forced rewriting collapse coverage as a named cause of loss.

1. Collapse coverage applies to abrupt collapse. As used in this coverage, abrupt collapse means that the building or part of the building must abruptly fall down or cave in. As a result of such falling down or caving in, the building or part of the building cannot be occupied for its intended purpose.

2. Payment for such abrupt collapse as described in item 1. is for only direct physical damage to the collapsed building or the business personal property that is inside the building. However, payment is made only if any of the following cause the collapse:

a. Hidden decay. This applies only if the named insured was not aware of the hidden decay prior to the collapse

b. Hidden insect or vermin damage. This applies only if the named insured was not aware of the hidden insect or vermin damage prior to the collapse

c. Defective construction material or construction methods. This applies only if the collapse occurs while the building is being built, remodeled, or renovated

d. Defective construction material or construction methods. This applies only if the collapse occurs after a building has been built, remodeled, or renovated, provided and dependent upon one of the following contributing to the collapse:

Items a. or b. of this paragraph
A specified cause of loss
Glass breakage
Weight of people or personal property
Weight of rain that collects on a roof

3. There is no coverage for any of the following:

A building or any part of a building that is in danger of falling down or caving in
A part of a building that remains standing even if it has separated from another part of the building
A building or part of a building that is standing but shows evidence that it may collapse due to bulging, sagging, cracking, bending, leaning, settling, shrinking, or expanding

4. There is coverage if personal property abruptly falls down but the building it is situated in does not but only if both of the following apply:

The collapse was due to a cause of loss listed in 2.a through 2.d above.
The personal property that collapsed is in a building.

Coverage does not apply if the only damage to the personal property is marring or scratching.

5. Any cracking, bulging, sagging, leaning, settling, expanding, or shrinking of personal property is not treated as collapse. The personal property must either abruptly fall down or cave in to be covered.

6. This additional coverage does not increase this coverage form’s limit of insurance.

7. Whenever the term "covered cause of loss" is used throughout this coverage form, this Additional Coverage–Collapse is included, subject to the description and limitations this additional coverage provides.

E. ADDITIONAL COVERAGE–LIMITED COVERAGE FOR FUNGUS, WET ROT, DRY ROT, AND BACTERIA

Collapse was removed as a covered cause of loss and then added back in as an additional coverage many years ago. Similarly, and for the same reasons, fungus coverage was removed as a covered cause of loss and is added back as a specified cause of loss coverage. Although the method is similar, the coverage provided is very different.

1. Coverage applies when the fungus, wet rot, dry rot, or bacteria result from a specified cause of loss. If flood is a covered cause of loss, fungus, wet rot, dry rot or bacteria from that flood is also covered. Because fire and lightning losses are excepted from exclusion 1.h. Fungus, Wet Rot, Dry Rot, and Bacteria and therefore covered, this Additional Coverage excludes losses that result from them in order to prevent duplication of coverage.

This coverage applies only if the insured takes all reasonable steps to prevent further damage to property during or following a loss.

This Additional Coverage does not apply to lawns, trees, shrubs, or plants that are part of vegetated roofs. (10 12 addition)

2. Loss or damage includes more than direct damage to the property by the fungus, wet rot, dry rot, or bacteria. It also includes removing them. The cost to tear out and replace walls and other parts of the building in order to get to the problem is covered. Any necessary testing to verify that the property is clean, and the situation mitigated is also covered.

3. The limit of insurance for this coverage is not per occurrence. It is $15,000 per policy year. This means that the limit for the policy year is $15,000, regardless of the number of locations and occurrences. There is no additional limit available once the limit is exhausted. If the condition continues over multiple policy years, the limit available in the policy year when the loss occurred that caused the fungus, wet rot, dry rot, or bacteria is the only limit that applies.

4. The $15,000 limit is a sub-limit. It does not increase the limit of insurance.

5. This additional coverage's terms do not increase or reduce the coverage provided under Additional Coverage–Collapse.

F. ADDITIONAL CONDITIONS

These conditions are unique to this coverage form and apply in addition to the common policy conditions.

Note: The CP 00 90–Commercial Property Conditions is not attached but most of the conditions in that form are embedded into this coverage form.

1. Condition Applicable to Coverage A–Mortgageholder’s Interest

Transfer of Mortgage–Coverage A

This is an unusual condition. When the insurance company and all other insurance companies providing coverage on the damaged property agree, they can pay the named insured an amount that equals the outstanding mortgage balance, even if it exceeds the amount of loss. When they do so, they have the right to demand and to receive a full assignment of the mortgage, including all securities that collateralize the debt, as interests may appear.

Note: This means that the carriers can pool their resources to pay off the outstanding debt in return for receiving the mortgage and all collateral. This could be offered when the carriers believe controlling the mortgage would provide an advantageous recovery/salvage opportunity and reduce the total cost of the loss.

Example: The Williams Apartment complex is valued at $6,000,000. Plenty Money Bank holds a $5,000,000 mortgage on the property. Plenty Money requires that Williams maintains $6,000,000 coverage on the complex. The complex sustains $4,000,000 in damage when a tornado rips through town. Williams Apartment had not followed through on purchasing insurance coverage and an error in Plenty Money Bank did not discover that oversight. Happy Insurance Company has an option to either pay Plenty Money the $4,000,000 or to pay $5,000,000 and take over the entire mortgage. Plenty Money has no say in the decision.

2. Conditions Applicable to Coverage B–Property Owned or Held in Trust

a. Our Options–Coverage B

Under Coverage B, the insurance company has four payment options if loss or damage occurs to covered property.

Pay the property’s value
Pay the costs necessary to repair or replace the property
Take all or part of the property at its agreed or appraised value
Repair, replace, or rebuild the property with similar property

The insurance company must give notice of the option it intends to exercise not more than 30 days after it receives the sworn statement of loss.

The insurance company never pays the named insured more than its financial interest in the covered property.

b. Recovered Property–Coverage B

Either party that recovers property after a loss is settled must inform the other promptly. The named insured has the option to get the property back if it returns the amount the insurance company paid. Subject to the limit of insurance, the insurance company pays recovery expenses and expenses necessary to repair the recovered property.

The named insured always has the option to keep the insurance settlement and let the insurance company keep the property.

c. Time Period–Coverage B

Coverage B is not a long-term coverage. It is a safety net for times between the acquisitions of owned property or of a fiduciary interest in property and when insurance coverage is purchased for that property. As a result, each item of covered property is insured only during the time period that:

Begins on the date the named insured acquires the property or when its fiduciary interest in it begins
Ends 90 days after the date the property is acquired, the fiduciary interest begins, or the date other insurance on the property takes effect, whichever occurs first

d. Valuation–Coverage B

If there is covered loss or damage to covered property, the insurance company determines its value based on its actual cash value on the date of loss.

Note: Replacement cost coverage is not available.

3. Conditions applicable to Coverage C–Mortgageholder’s Liability and Coverage D–Real Estate Tax Liability

a. Bankruptcy–Coverages C and D

With respect to Coverages C and D, the insurance company must meet its obligations, even if the named insured or its estate becomes bankrupt or insolvent.

b. Separation of Insureds–Coverages C and D

Except for the Limits of Insurance, and with respect to Coverages C and D, insurance applies separately to the named insured and to each additional insured.

Example: Financial Bank has
CP 00 70 with a $1,000,000 limit of insurance. It receives notice of a suit that claims it was negligent in reporting its real estate tax liability. At the same time, Financial Bank's president is served for the same incident, claiming that he was negligent in administering his duties as bank president. Each suit claims $1,000,000 as damages. CP 00 70 defends both parties and pays damages to the extent of their respective liability. However, the most paid is $1,000,000, even if the judgment against each party is for $1,000,000, because they stem from the same incident.

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4. Conditions Applicable to All Coverages

a. 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.

b. Appraisal

The insurance company and the insured may occasionally disagree on the actual amount of loss. The appraisal condition is designed to resolve these disagreements without a 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 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

The insurance company still retains its right to deny a claim, even if there is an appraisal.

c. Duties in the Event of Loss or Damage

(1) Coverages A and B

The named 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.

The insurance company has the right to refuse to pay the loss if police are not notified. It needs this requirement to protect its interests, which include being certain that the claim is legitimate as well as making sure there is a chance that the responsible parties are found and punished. When theft of property is involved, police involvement increases the chances that the property will be recovered.

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 time may be maintenance issues that are not covered.
WHERE is important because most coverages require that the property be 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. Action is expected. 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 undamaged property and set the damaged property aside for examination whenever possible.
Provide inventories of 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. Because 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 to 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.

It is important to bear in mind that while all of the above conditions are similar to those on other property coverage forms, under Coverage A the owner of the property is not the named insureds. The named insured is the mortgageholder that made a mistake in not making sure that the owner had coverage. The settlement is for the benefit of the mortgageholder and not the property owner which could complicate any investigation.

(2) Coverages C and D

The named insured must:

Promptly send the insurance company written notice of any claim made or suit brought

The named insured must also:

Send the insurance company copies of any notices, demands, summonses, or legal papers it receives in conjunction with the claim or suit.
Give the insurance company its authorization to obtain records or other information.
Cooperate with the insurance company as it investigates, settles, or defends any claim or suit.
If requested, assist the insurance company to enforce any rights of action against any person or organization that may be liable to it because of damage that this insurance covers.
If requested, give the insurance company a signed statement of facts including the information requested so it can determine its rights and duties as they relate to this coverage form.

The named insured must not make any voluntary payments, assume any obligations, or incur any expenses without the insurance company's consent. If it does, it does so at its own cost.

d. Insurance under Two or More Coverages

Two or more coverages within a coverage form may apply to the same loss or damage. However, the insurance company is not liable for more than the actual amount of the loss or damage. This condition is important because it points out that insurance is a contract of indemnity. It is intended to protect the insured's assets. It is not a license to profit from an accidental or intentional loss.

e. Legal Action against Us

Under Coverages A and B, the insurance company cannot be sued or have any legal action brought against it until and unless all its terms are met. In addition, the action must be brought within two years after the named insured discovers the accidental error or omission.
Under Coverages C and D, no one has the right to include the insurance company as a party to any lawsuit that involves the named insured. No one can bring any legal action against the insurance company until and unless all its terms are met.

Others can sue the insurance company to recover on an agreed settlement or final judgment against the named insured in a court trial. However, the company is not liable for damages that this coverage form does not insure or for amounts that exceed the limit of insurance.

Note: An agreed settlement is a settlement and release that the insurance company, the named insured, and the claimant or its legal representative signs.

f. Liberalization

The insurance company may adopt a revision to this coverage form that broadens coverage without charging an additional premium within 45 days prior to or during the policy period. If it does, the broadened coverage automatically applies to this coverage form.

This condition is meant to provide the insured with the full benefit of coverage upgrades the insurance company makes to the coverage form. One reason it is important is that many carriers begin to review and process renewal policies well in advance of the expiration date. This is to reduce expenses, increase efficiency, and comply with state non-renewal laws. As a result, the insured may not receive the most current policy upgrade, even if it becomes effective for that renewal. This condition permits the broader coverage to apply automatically provided a premium charge does not accompany it and eliminates the company's expenses to subsequently endorse the renewal policy.

However, the opposite is not true. Changes in the new or upgraded version that reduce coverage do not automatically apply. In addition, enhancements or upgrades that are available but are subject to an additional premium charge are not automatically included.

g. Loss Payment

The insurance company must pay for covered losses within 30 days after it receives the sworn proof of loss. This is subject to all conditions being met and an agreement being made on the value of the claim through either mutual agreement or the appraisal process.

h. Other Insurance

If the named insured has other insurance subject to the same plan, terms, conditions, and provisions as this coverage form, the loss is shared on a proportionate basis. The insurance company's share is based on the proportion of its limit to the total limits of all insurance that covers the property on the same basis.
If any other insurance that applies to a covered loss is other than as described above, this insurance applies on only an excess basis. This coverage form pays the amount that exceeds any other such insurance regardless of whether or not it can be collected. If the other carrier denies coverage, this coverage form acts as though the other carrier paid and offers only the amount above what the other insurance should have paid. However, this coverage form does not pay more than the limit of insurance on the declarations even when it is used as excess.

The insurance company never pays more than the limit of insurance that applies.

i. Policy Period, Coverage Territory

There are important changes to the standard policy period that need to be pointed out because this coverage requires two different triggers before coverage applies. The first trigger is the error or omission. The date of the error or omission is not required to be during the policy period. It can happen at any time.

The second trigger is the actual suit, loss, damage or claim. The event that causes the suit, loss, damage, or claim must take place during the policy period.

Example: Mortgage Friends policy period is 6/1/2019- 6/1/2020. Priscilla handled a number of transactions for Mortgage Friends for the time period 1/1/17-5/1/19 before she was fired with cause. Her supervisor established a project to review all files Priscilla had handled. On 7/2/2019 a fire occurred at a mortgaged home that had no insurance. A review of the file revealed that Priscilla has made an error in not following up on coverage. The current policy period covers the loss even though the error happened in the prior year.

The coverage territory is also unique. It covers errors and omissions wherever they take place. However, coverage is limited to only property that is located within the United States of America, its territories and possessions, and Puerto Rico.

Note: The coverage territory in the CP 00 90–Commercial Property Conditions includes Canada but the coverage territory in this coverage form does not.

j. Transfer of Rights of Recovery against Others to Us

Under Coverages A and B, any party the insurance company pays that has rights to recover damages from another party transfers those rights to the insurance company for up to the value of the payment made. That party with the rights must do everything necessary to secure them and not do anything after the loss to impair them. However, the named insured may waive its rights of recovery in writing against other parties before a covered loss occurs. After a loss, the named insured may also waive such rights in writing under any of the following circumstances:

If this insurance covers that party
If the party is a business enterprise that the named insured owns or controls
If the party is a business enterprise that owns or controls the named insured
If the party is the named insured's tenant (Remember under Coverage A. that the named insured is the mortgageholder so the mortgageholder could not waive recovery for the mortgagor’s tenant.)

This does not restrict the named insured's insurance.

Under Coverages C and D, any rights the named insured has to recover all or part of any payment the insurance company made transfer to the insurance company. The named insured must not do anything after a loss to impair them. If the company requests, the named insured must bring legal action or transfer those rights to the company and help it enforce them.

k. Vacancy

The insurance company does not pay for loss or damage if either of the following applies:

The building where the loss or damage occurred was vacant for 60 or more days before the date of loss
The building from which a claim or suit arises was vacant for 60 or more days before the date of the event that lead to the claim or suit.

A building is considered vacant unless at least 31% of its total square foot area was occupied. This means that the building was rented to a lessee or sub-lessee to conduct its normal operations and/or was being used by the building owner to conduct its normal operations.

l. Your Duties

This is an interesting condition because duties in most insurance policies apply only after the loss. In this coverage form the named insured has significant duties that must be part of their standard operating procedures. The duties vary by coverage.
Coverage A–Mortgageholders’ Interest

The named insured must make a reasonable effort to make sure that all mortgaged properties have valid insurance for the covered causes of loss in this policy and that the named insured is named as the mortgageholder on that insurance. The named insured may purchase the coverage or require that the mortgagor purchase it but regardless the named insured must make sure the insurance is maintained. Coverage B–Property Owned or Held in Trust

The named insured is responsible to make reasonable efforts in purchasing and maintaining valid insurance as required to protect its interest as the owner, fiduciary, or trustee.

Coverage C–Mortgageholders’ Liability

The named insured must secure and keep valid insurance against the covered causes of loss in agreed amounts and under conditions that the mortgagor accepts.

Note: This wording does not track with the insuring agreement’s wording. This coverage does not require the mortgageholder to purchase or maintain the coverage. It only requires that it have procedures in place to ensure that the mortgagor maintains coverage. This duty’s requirement and the coverage provided do not match and this could result in an ambiguity that invalidates this duty.

Coverage D–Real Estate Tax Liability

The named insured must pay all real estate taxes based on the agreed upon terms with the mortgagor.

Note: Having standard operating procedures that the named insured adheres to closely is one key to addressing the issues that this condition outlines. Underwriters and agents who review this coverage must be aware of the need to evaluate the named insured’s internal operating procedures.

G. DEFINITIONS

This coverage form has six important definitions that relate to mortgageholder errors and omissions coverage.

1. Fungus

This term includes any and all forms of fungus. Mold, mildew, spores, scents, mycotoxins (or by-products that the fungus releases or produces) are examples of items considered fungus, but the term is not limited to only them.

2. Mortgageholders’ interest

This is the named insured’s interest as the mortgageholder of real or personal property as well as its interest in any capacity as a legal fiduciary.

3. 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.

4. Specified causes of loss

These are fire, lightning, explosion, windstorm, hail, smoke, aircraft, vehicles, riot, civil commotion, vandalism, leakage from fire extinguishing equipment, sinkhole collapse, volcanic action, falling objects, weight of snow, ice or sleet, or water damage.

There is a definition within a definition. Water damage is the accidental discharge or leakage of water or steam that results directly from any part of a system or appliance that contains or uses water or steam breaking apart. It does not include any sump pump system or appliance or its related equipment and parts.

Note: This definition is not the same as the specified causes of loss definition in the CP 10 30–Cause of Loss – Special Form. It does not contain the definitions for fall objects or sinkhole collapse. While it does contain the definition for water damage the CP 10 30 definition is much more expansive. These differences could be substantial depending on the particular loss circumstances.

5. Suit

This is a legal proceeding one party brings against another. It also includes arbitration or other alternative dispute resolution proceedings where damages are claimed that the named insured must submit to or submits to with the insurance company's consent.

6. Valid insurance

This is a valid insurance policy or other evidence of insurance coverage.