ISO Accounts Receivable Coverage Form

ISO ACCOUNTS RECEIVABLE COVERAGE FORM ANALYSIS

(August 2018)

 

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INTRODUCTION

The Insurance Services Office (ISO) Accounts Receivable Coverage Form insures the named insured’s losses for amounts due that it cannot collect because of an insured loss or damage to records of accounts receivable. Covered losses include the following:

This coverage form is not used as much as in the past because Accounts Receivable Coverage is an additional coverage or an extension of coverage with significant sub-limits in many commercial property coverage forms and policies and the differing ways in which businesses extend credit. Accounts receivable coverage should not be dismissed or treated as unnecessary before exploring the methods a particular business uses in extending credit. The coverage provided is usually broader than what most commercial property coverage forms and policies offer as an additional coverage or an extension of coverage.

ELIGIBILITY

Any commercial account is eligible for Accounts Receivable coverage. Businesses or other operations that regularly extend credit terms to their customers for purchases are the potential buyers of this coverage.

POLICY CONSTRUCTION

ISO Accounts Receivable Coverage requires at least these five forms:

Related Article: IL 00 17–Common Policy Conditions

Related Article: CM 00 01–Commercial Inland Marine Conditions

Note: Accounts receivable coverage may be issued as a stand-alone, monoline inland marine policy or as part of a commercial package policy.

CM DS 03–ADVISORY ACCOUNTS RECEIVABLE DECLARATIONS

CM DS 03–Advisory Accounts Receivable Declarations contains the following information:

Policy Number

The policy number is entered in the space provided.

Effective Date

The effective date of coverage is entered in the space provided.

Premium for This Coverage Form

The premium for Accounts Receivable coverage is entered in the space provided.

Limits of Insurance

The address of each of the named insured's covered premises and its limit of insurance must be entered in the spaces provided. Separate limits of insurance must be entered for coverage away from the named insured's premises and for coverage at all locations in any one occurrence.

Description of Receptacles

The address, receptacle manufacturer, class, label, and the label issuer's name must be entered for each receptacle at each covered premises.

Coinsurance

A coinsurance percentage or the words “No Coinsurance” must be entered in the space provided. The coinsurance percentage is 80% unless a different percentage is entered in the space provided.

Rates and Premiums

The following is entered in the spaces provided when coverage is written on a non-reporting basis:

The following is entered in the spaces provided when coverage is written on a reporting basis:

Duplicate Records

If duplicate records are maintained and CM 66 04–Duplicate Records endorsement is attached, the percentage of records duplicated must be entered in the space provided.

Special Provisions

Any special provisions are entered in the space provided.


 

Example of an account receivable

CM 00 66–ACCOUNTS RECEIVABLE COVERAGE FORM ANALYSIS

Note: This analysis is of the 01 13 edition. Changes from the 03 10 edition are in bold print.

Introduction

CM 00 66 opens by stating that certain provisions restrict coverage and encourages the named insured to carefully read the policy to understand what is covered, what is not covered, and to determine its rights and duties. It highlights that the insurance company uses the terms you and your to refer to the named insured that is shown on the declarations and the terms we, us, and our to refer to the insurance company that provides coverage. It also directs attention to Section E–Definitions because understanding the specific terms in the policy is critical to understanding the coverage and exclusions that apply.

A. Coverage

1. Items Paid

The insurance company pays the following that result from a covered cause of loss to the named insured's records of accounts receivable:

a. Amounts that are due from customers but cannot be collected

 

Example: Jim's Wholesale Clown Supplies sustains a covered loss and many of the records of accounts receivable are lost. His accounts receivable limit is adequate, and he is not subject to any coinsurance penalty. If he cannot determine the amounts his customers owe him in any other way, this coverage reimburses him based on D. Additional Conditions, 1. Determination of Receivables.

 

b. Interest charges on loans when the named insured must take them out to compensate for the loss of funds until the claim is paid

 

Example: Jim's own accounts payable are coming due and his creditors are not very understanding of his situation, even though his accounts receivable carrier is working hard to adjust his loss. He must take out a sizeable loan to pay his creditors until the accounts receivable loss is resolved and he is reimbursed. This coverage pays the interest charges on the loan Jim takes out.

 

c. Additional expenses that are incurred for collections but only if they are directly related to the loss.

 

Example: Jim hires a collection agency to track down some of his delinquent accounts who know about his loss and think they can avoid paying their balances. Because a few are found in different parts of the country, the expenses for this service are quite high. Fortunately, this provision reimburses Jim for these additional collection expenses.

 

d. Reasonable expenses the named insured incurs to reconstruct the accounts receivable records

Note: The term "reasonable" is not defined. As a result, it may be a point of contention between the insured and the insurance company in a loss settlement.

 

Example: Jim's situation is unique and reconstructing the records is difficult but not to the extent that the insurance company simply gives up and offers the limits instead of continuing with the adjustment. This coverage provision enables Jim's records to be completely reconstructed and gives him a "fresh start" on re-establishing and maintaining all his accounts receivable records.

 

2. Property Not Covered

There is no coverage for the following:

a. Accounts receivable records that are stored at locations that are not listed on the declarations

b. Contraband. These are goods that are illegal to possess or that are legal but are in the course of illegal transportation.

3. Covered Causes of Loss

The covered causes of loss under this policy is direct physical loss or damage to the named insured's records of accounts receivable. The only exceptions are those causes of loss that are listed and described in Section B.  Exclusions.

4. Additional Coverage–Collapse

Only abrupt collapse is covered under this coverage. What abrupt collapse is and is not is described below. 

a. 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.

b. Payment for such abrupt collapse as described in paragraph item a. is for only direct physical damage to the covered property that is inside the building. However, payment is made only if one or more of the following cause the collapse:

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

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

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

o    Hidden decay or hidden insect or vermin damage as described above

o    One or more of any of the following listed causes of loss. However, loss by them applies only if they are insured against in this coverage form and only to the manner in which they are. Fire, lightning, windstorm, hail, explosion, smoke, aircraft, vehicles, riot, civil commotion, vandalism, leakage from fire extinguishing devices, sinkhole collapse, volcanic action, breakage of building glass, falling objects, weight of ice, sleet, or snow, water damage, and earthquake are the causes of loss.

o    Weight of people or personal property

o    Weight of rain that accumulates on a roof

c. While this is additional coverage, it does not increase the coverage form's limits of insurance.

5. Coverage Extension

Removal

Records of accounts receivable that removed to a different location from an insured premises because of imminent danger of loss or damage are covered at that sanctuary location. Those records are also covered while they are in transit to and from that sanctuary location. The named insured must inform the insurance company, in writing, of the removal within ten days of the date that the records were removed.

Note: The limit of insurance at the location from which the records were removed applies to this coverage extension.

 

Example: Linda's Finer Fashions has a small but wealthy clientele and she cheerfully extends credit terms because her customers always eventually pay up, although not always on time. Because of this, she never pays much attention to her accounts receivable or automates the process, but she always knows who owes what. Her coastal Florida store is threatened by a Category Four hurricane she is sure will level her establishment. Linda packs up much of her stock and all her paper accounts receivable records into a box truck, drives 80 miles inland, and parks in a storage facility that one of her customers owns. An electrical short causes a fire in the storage facility and all of Linda’s records are destroyed. Her loss is covered because of this extension.

B. Exclusions

1. Primary 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. Coverage form wording emphasizes that coverage for any loss event described in these exclusions does not apply even if the event is widespread.

a. Governmental Action

Coverage does not apply if the government seizes or destroys property. This exclusion has an exception. Coverage applies to loss or damage due to such ordered acts of destruction at the time of a fire to prevent the fire's spread. The exception applies only if the insurance provided by this coverage form covers the fire.

b. Nuclear Hazard

There is no coverage for loss or damage for anything related to nuclear hazards. Reactions, radiation, and contamination are not covered. This exclusion has an exception. There is coverage if the nuclear reaction, radiation, or radioactive contamination results in fire. The exception applies only if the insurance provided by this coverage form covers the fire.

c. War and Military Action

This exclusion lists three specific warlike activities that are excluded.

Any government action taken to respond to such actions is also considered war.

2. Secondary Exclusions

There is no coverage for loss or damage caused by the following exclusions. Note that the lead-in 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. Delay, Loss of Use, and Loss of Market

There is no coverage for loss that results from delay, loss of use, loss of market, or any other consequential loss.

b. Dishonest or Criminal Acts (01 13 changes)

There is no coverage for loss or damage that is due to dishonest or criminal acts (including theft) from any of the following:

(1) Acts that the named insured, its partners, employees, directors, trustees, authorized representatives or managers and members of a limited liability company commit. This also includes such acts that leased workers and temporary employees commit.

(2) Acts of managers or members of a limited liability company, if the named insured is a limited liability company

(3) Acts by anyone with an interest in the property, their employees, or their authorized representatives. This also includes such acts that their leased workers and temporary employees commit.

Note: This edition removes item (4) in the previous edition that addressed others entrusted with property for any reason. It is re-introduced in newly added exclusion i.

This exclusion applies whether the persons act alone or in collusion with others or if the acts occur during regular working hours.

This exclusion does not apply to acts of destruction by the named insured’s employees, leased workers, or temporary workers. However, loss due to theft of covered property by employees, leased workers, or temporary workers is excluded.

c. Alteration, Falsification, Concealment, or Destruction

Loss or damage that is the result of any actions taken on records of accounts receivable as a means to conceal other wrongful acts related to the giving, taking, or withholding money, securities, and other property is excluded. This is not a total exclusion but only to the amount of the giving, taking, or withholding wrongful action.

 

Example: A fire at Acme Financial Temporaries results in lost records of accounts receivable in the amount of $57,000. However, a small file cabinet in the damaged accounts receivable area looks out of place and puzzles the adjuster. After asking a few questions, he learns that it was next to the Controller's office on the other side of building. His questioning of the Controller causes her to admit that she pushed the cabinet into the records area before she left the premises. She was embezzling money and hoped the fire would destroy evidence of her theft. The adjuster later determines a cost of $6,000 to replace the records intentionally destroyed and reduces the $57,000 claim by this amount to a revised loss estimate of $51,000.

 

d. Bookkeeping, Accounting, or Billing Errors or Omissions

Loss or damage is excluded when due to errors or omissions in bookkeeping, accounting, or billing.

 

Example: Digging further into the Acme loss, the adjuster finds some ledger entries that do not add up to the totals claimed. The number of accounts that were over-billed amounts to another $8,500. This amount is deducted from the total amount of loss. This further reduces the loss amount to $42,500.

 

e. Electrical or Magnetic Injury, Disturbance, or Erasure of Electronic Recordings

Coverage does not apply to loss or damage to electronic recordings when due to programming errors, faulty machine instructions, or faulty installation or maintenance of data processing equipment or components. An occurrence that takes place more than 100 feet from the named insured's premises is excluded. Any interruption or fluctuation in electrical power supply that is caused by an occurrence taking place more than 100 feet from the named insured's premises is also excluded.

An exception is that direct loss or damage that lightning causes any of the above is covered.

 

Example: Fred's Fine Spirits receives its wine from only a few wineries and similarly distributes to only a few select retail operations. Fred is not real thorough, diligent, or timely in posting and backing up his accounting records. His procrastination works in his favor when his computer system crashes because he tries to save a few dollars by installing a new program himself instead of having a professional do it. This exclusion applies to the records that Fred lost but his unprocessed paper records allow him to reestablish the records when the system comes back on line. As a result, his loss is much smaller than if he had been more prompt in posting his records.

 

f. Voluntary Parting

There is no coverage if the named insured or someone the named insured entrusts property to is tricked or deceived into giving property away.

g. Unauthorized Instructions

Coverage does not apply if a loss occurs because covered property was given to another person or sent to another place based solely on unauthorized instructions.

h. Neglect

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

i. Theft (01 13 addition)

There is no coverage for theft committed by anyone entrusted with property. This exclusion applies whether a person is acting alone or is in collusion with others who committed the theft.

This exclusion applies 24 hours a day. This means that acts that occur during business hours are excluded as well as acts committed after hours.

This exclusion does not apply to covered property entrusted to carriers for hire.

Note: This exclusion was previously part of exclusion b. above. This change does not affect coverage. It makes the exclusion more visible.

3. Inventory Records and Audits

Any loss that can be proven only because an inventory or an audit revealed its factual existence is excluded. This is because it really means there is no physical proof of the loss. The loss might have been due to a mathematical or computation error, employee theft, or another clerical mistake. There is no coverage if there is nothing to physically suggest what actually happened.

Note: This information can be used to substantiate a loss adjustment but cannot be the only proof.

4. Other 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.

Editorial Note: This coverage form does not title these exclusions. The titles given suggest the exclusion’s content.

a. 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. Primary Exclusion above.

b. Acts or Decisions

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

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.

d. Collapse

Note: Collapse is initially totally excluded here but limited coverage is added back in Section 4. as 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 that separate from the rest of the building or the building appearing to be in danger of caving in or falling down.

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

There are two exceptions to this exclusion.

C. Limits of Insurance

The limit on the declarations is the most paid for loss or damage in a single occurrence.

D. Additional Conditions

1. Determination of Receivables

This replaces the valuation condition in CM 00 01–Commercial Inland Marine Conditions.

Related Article: CM 00 01–Commercial Inland Marine Conditions

a. It may not be possible to establish the outstanding amount of accounts receivable at the time of loss. In that case, the total of the average monthly amounts for the 12 months leading up to the month when the loss occurred is determined. The total is then adjusted for any normal fluctuations or other demonstrated variances in amounts of accounts receivable in the month when the loss occurred.

 

Example: Going back to Jim's Wholesale Clown Supplies, Jim does not have current backup or duplicate records of his accounts receivable. Coming up with a true estimate of his loss is like looking for a needle in a haystack. Fortunately, the records he does have, while somewhat dated, are fairly complete. As a result, the insurance company uses the provisions in this condition to come up with a total amount of receivables that closely approximates Jim's estimate of amounts his customers actually owe him.

 

b. The following are always deducted, regardless of the way the total amount of accounts receivable is determined:

 

2. Recoveries

This condition is added to Loss Condition H., Recovered Property in CM 00 01–Commercial Inland Marine Conditions.

Related Article: CM 00 01–Commercial Inland Marine Conditions

Any recoveries received by the named insured for accounts that were paid for by the insurance company must be paid to the insurance company. Once the recoveries exceed the amount paid by the insurance company, the named insured keeps the excess.

3. Additional Conditions

These conditions are in addition to those in IL 00 17–Common Policy Conditions and CM 00 01–Commercial Inland Marine Conditions.

Related Articles:

IL 00 17–Common Policy Conditions

CM 00 01–Commercial Inland Marine Conditions

a. Coverage Territory

The insurance company covers the records of accounts receivable when they are located:

b. Coinsurance

This condition applies if there is a coinsurance percentage on the declarations.

The insurance company does not pay the full amount of any loss if the value of all accounts receivable (subject to coinsurance) at the time of loss multiplied by the coinsurance percentage on the declarations exceeds the limit of insurance at all locations. The following are the steps the insurance company takes to determine the amount it pays:

Step 1: Determine the value of items, at the time of the loss, of all accounts receivable. Exclude values that are in transit, interest charges, excess collection expenses and expenses incurred in order to recreate the damaged records.

Step 2: Multiply Step 1 by the coinsurance percentage on the declarations.  

Step 3. Divide the limit for the accounts receivable subject to coinsurance by the result determined in Step 2.

Note: Stop here if the result is 1.00 or higher because no coinsurance penalty applies. Go to Step 4. only if the result is less than 1.00.

Step 4. Multiply the total amount of loss by the percentage determined in Step 3.

The insurance company does not pay more than the amount determined in Step 4. or the limit of insurance, whichever is less. It does not pay any remaining part of the loss.  

c. Protection of Records

The named insured must keep all records of accounts receivable in the receptacles listed on the declarations at all times when the premises are closed for business. The records also must be kept in the receptacles when they are not being used.

Note: This is a warranty statement and can result in coverage denial if the covered property is not handled as stated.

E. Definitions

There is one definition.

Premises

This is a limiting type definition because only the interior portion of the building that the named insured occupies at the address or location on the declarations is a premises.

 

Example: JRC, Inc. address is 1253 N. Main St, Mainville, Ohio. JRC occupies an office on the third floor. The limits of insurance are $50,000 on premises and $5,000 away from your premises.

Scenario 1: A fire occurs in the JRC office and destroys its accounts receivable. The $50,000 on premises limit is available.

Scenario 2: JRC’s bookkeeper takes the accounts receivables to the second story of the building where their accountant is. She and the accountant are at lunch when the fire occurs. The Away from Your Premises Limit of $5,000 applies because the accounts receivable are not on premises at the time of the loss.

Scenario 3: JRC’s bookkeeper has the accounts receivable with her in the elevator as she returns to the office. The fire occurs; the elevator immediately goes to the first floor. She flees the building and leaves the accounts receivable behind. The Away from Your Premises Limit of $5,000 applies because the accounts receivable are not on premises at the time of the loss.

ENDORSEMENTS

ISO has developed three endorsements to use with the Accounts Receivable Coverage Form.

CM 66 01–Exclusion of Named Customers

When this endorsement is used, the insurance company does not pay for any loss or damage to records of accounts receivable for customers listed on the endorsement schedule. This allows the named insured to insure for lower limits because these customer records are easily determined or are otherwise available.

CM 66 04–Duplicate Records

This endorsement requires that the named insured duplicate at least the percentage of accounts receivable on the declarations and maintain them for at least six months. It also amends Exclusions 2. e. by removing the exclusions for events that take place more than 100 feet from the insured premises.

CM 66 06–Reporting

This endorsement deletes D. Additional Conditions 3.b. Coinsurance if the named insured writes accounts receivable coverage on a reporting form basis. It replaces D. Additional Conditions 1. Determination of Receivables with conditions related to reporting. It adds Reports and Premium that explains how often reports must be submitted to the insurance company, how premium is calculated, minimum premiums, consequences of failing to submit reports, and reports that exceed the limits of insurance. It also adds a provision for annual re-rating.

UNDERWRITING CONSIDERATIONS

The key elements in accounts receivable coverage are duplication and safe storage. The named insured should create at least partial duplicate records and maintain them for the usual amount of time that common practices in the line of business involved suggest. Approved and rated storage receptacles provide greater protection against loss. Both duplication and using acceptable receptacles translate into rate credits that can reduce the premium costs for this coverage. Underwriting issues that are important in personal property coverage are also important considerations for this coverage. These include construction of the building the named insured occupies, the degree and extent of private and public protection, other occupancies in the building, and the nature of outside exposures.

Related Article: ISO Commercial Property Program Underwriting Considerations