ISO Floor Plan Coverage Form

ISO FLOOR PLAN COVERAGE FORM ANALYSIS

(August 2018)

 

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INTRODUCTION

The Insurance Services Office (ISO) Floor Plan Coverage Form automatically covers dealers’ stock and other merchandise that is being financed through banks or other lending institutions. Merchants involved with high-value merchandise such as mobile equipment and expensive household objects like refrigerators and other appliances often borrow money from banks or finance companies on the collateral of their stock or specifically identified property "on the floor" for sale. This coverage is unique in that the items are automatically covered if they are stock or merchandise that is identified as specifically encumbered to the bank or other lending institution. This identified merchandise is not permitted to be sold until the financial institution releases its encumbrance. This coverage form is very flexible and can be written as a single interest contact applying to only the named insured dealer or the lending institution or it can be written as a dual interest contract covering both.

ELIGIBILITY

Eligibility is both broad and conditional. If coverage is written on a single interest basis, either the dealer that has the stock or the financial institution that finances it can be covered. If coverage is written on a dual interest basis, the dealer that has the stock is the named insured and the financial institution is the secured lender. To be eligible, the relationship between the dealer and the secured lender must be such that both retain a financial interest in the stock until it is sold. However, the dealer may not be a manufacturer or a processor.

 

Note: The Nationwide Inland Marine Definition states that automobiles and motor vehicles are not eligible for coverage under the Floor Plan Coverage Form. However, ISO does not restrict coverage in its rules and CM 00 52 does not exclude automobiles.

 

The Nationwide Inland Marine Definition clearly states the difference between insuring owned inventory and providing floor plan coverage. The covered property must be encumbered to a financial institution and the financial institution must release the covered property from the encumbrance before the named insured can sell it.

POLICY CONSTRUCTION

ISO Floor Plan 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: Floor plan coverage may be issued as a stand-alone, monoline inland marine policy or as part of a commercial package policy.

CM DS 08–ADVISORY FLOOR PLAN DECLARATIONS

CM DS 08–Advisory Floor Plan 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. In addition, a box must be checked to indicate if coverage applies to a single interest or to dual interests.

Interest

A checkmark must be entered in either the Single Interest or the Dual Interest Box. If the Dual Interest Box is checked, the named insured must be the dealer who is selling the covered merchandise.

Premium for This Coverage Form

The premium for Floor Plan Coverage is entered in the space provided.

Description of Covered Property

A general description of the covered property is entered in the space provided.

Name of Secured Lender

The name of the secured lender is entered in the space provided. This must be entered whenever the dealer who is selling the merchandise is the named insured. If the secured lender is the named insured this could be left empty.

Limits of Insurance

Separate limits of insurance must be entered in the spaces provided for each of the following:

The premises address must be entered. If multiple addresses apply, an endorsement providing the address and the limit for that address must be attached.

This is actually a catastrophe limit for all losses regardless of location. This limit must be closely monitored when changes are made to the limits above. If those limits are increased and this limit is not, this limit will be a secondary cap reducing coverage for the policyholder.

Deductible

The deductible is $500 unless a different amount is entered in the space provided.

Rates and Premium

Coverage is on a reporting basis. The following is entered in the spaces provided:

Special Provisions

Any special provisions are entered in the space provided.

 

Example of types of property this coverage form insures

CM 00 52–FLOOR PLAN 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 52 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.

A. Coverage

The insurance company pays for direct physical loss or damage to covered property from a covered cause of loss.

1. Covered Property

Property is covered only if the named insured is at risk for the property. That property is covered if it is:

 Note: The covered property wording is awkward because either the dealer or the lender could be the named insured when coverage is for only a single interest. If the lender is the named insured there is no reason for the “encumbered to the lender” wording. It is more important to have the description of the property covered. If the dealer is the named insured the encumbered wording is the most essential information because only the encumbered property is covered regardless of the description.

2. Property Not Covered

There is no coverage for the following property:

a. Property in which the named insured no longer has an interest

b. Property after it is sold, disposed of, or delivered

Note: Once the named insured has disposed of the property or no longer has an interest in it, the lender's interest also ends, and this coverage is no longer needed. This coverage form is effective until the sale is made, and the property is delivered to the purchaser. After that, coverage ends.

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

Note: Although it is not stated here, under the Nationwide Inland Marine Definition, automobiles and motor vehicles cannot be covered under this coverage form.

3. Covered Causes of Loss

The covered causes of loss under this policy are direct physical loss or damage to the named insured's covered property. 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.

 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 in order 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.

 d. Water

Loss or damage caused by water is excluded but not all types of water. Water, as used in this exclusion, is only flood, surface water, waves, tides, tidal waves, tsunamis, or overflow of any body of water or their spray, all whether driven by wind or not. Storm surge and material that is waterborne, moved, or carried by water in any way is also water. Coverage is excluded, regardless of whether the damage is due to an act of nature or otherwise.

This exclusion has an exception. If water, as described above, causes a fire, explosion, or theft and this coverage form would otherwise cover that fire, explosion, or theft, that fire, explosion or theft loss or damage is covered.

This exclusion applies to only property at the named insured's premises.

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

Coverage under this form is direct damage coverage. Therefore, delay, loss of use, loss of market, or any other consequential loss is not covered.

b. Bankruptcy, Foreclosure, or Similar Proceedings

Coverage does not apply to loss or damage when it is caused by or is the result of bankruptcy, foreclosure, or similar proceedings.

Note: The exclusion is open-ended and does not specify whose bankruptcy, foreclosure, or similar proceedings.

 

Example: Arnie's Lawn & Garden Equipment finances its stock of a major equipment manufacturer's outdoor lawn, yard, and garden equipment he holds for sale through a floor plan arrangement with the manufacturer.

That manufacturer's equipment has problems and defects that make them unpopular with consumers and it declares bankruptcy.

Scenario 1: The reduced value of Arnie’s property resulting from that bankruptcy is not covered.

Scenario 2: The manufacturer’s creditors claim Arnie’s property as part of the bankruptcy and Arnie is not permitted the sell the property until the legal battle is over. The loss of value of the equipment and the cost of storing it is not a covered loss.

Scenario 3: Arnie works with the bankruptcy court so that he can sell the property because this would maximize its value. To do so though he is required to purchase a surety bond. The cost of the bond is not a covered loss. 

 

c. 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 j.

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.

d. Artificially Generated Current

Loss or damage is excluded when it is caused by results from artificially generated electrical, magnetic, or electromagnetic energy damaging, disturbing, disrupting, or interfering with any of the following:

Examples of this excluded energy are electrical current, charges a magnetic or electromagnetic field produces, and microwaves but are not limited to just these. There are two exceptions:

e. Breakage of Glass or Similar Fragile Property

Loss or damage caused by or that results from glass or other similarly fragile property breaking is excluded. The exception is that loss or damage caused directly by fire, lightning, explosion windstorm, vandalism, falling aircraft, rioters, strikers, collapse of buildings, theft, or accident that involves the vehicle that transports the property is covered if the insurance this coverage form provides covers these losses.

f. Property in the Open

Loss or damage to property that is in the open is excluded but only for loss or damage that is caused by or results from rain, hail, sleet, snow, or freezing.

This exclusion does not apply to property in transit.

 

Example: Arnie is concerned that a hailstorm could seriously damage the large amount of equipment on his lot, even though he is in a part of the country where hail is uncommon. An intense cold front moves in over the past week's stiflingly hot and humid conditions. The incoming front results in a storm with golf ball size hail that badly damages nearly everything on the lot. Arnie's fears are realized when he learns that coverage does not apply to this property for the damage the storm caused. He is consoled to some extent when informed that the equipment he had in transit by a contract carrier is covered for the hail damage it sustained.

 

g. 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.

 

Example: Arnie takes a call from a person who identifies himself as a dealer in damaged merchandise. He offers to buy some of Arnie’s damaged equipment at a discounted price and give Arnie his cut after it is sold. Arnie is thrilled and, in his rush to get the equipment loaded on the transporter sent to his premises, does not check out the business’ reputation and character. Arnie did not receive any money, never again saw the equipment he sent and never heard from the "dealer" again. When he subsequently checked on the business, he learned that there were no records that such a business ever existed. On top of all that shocking news, Arnie also learned that his loss is not covered because of this exclusion.

 

h. Unauthorized Instructions

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

i. Neglect

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

j. Theft (01 13 addition)

There is also no coverage for theft committed by anyone else 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 c. above. This change does not affect coverage. It makes the exclusion more visible.

3. 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, except for 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

Coverage does not apply to loss or damage that weather conditions cause. This exclusion applies only if the weather condition contributes in any way to an excluded cause or event in 1. Primary Exclusions above that produces the loss or damage.

 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.

e. Wear, Tear, and Other

Loss or damage caused by wear and tear is excluded. Damage caused by qualities in covered property that causes it to damage or destroy itself is excluded. Damage due to latent defect, gradual deterioration, depreciation, mechanical breakdown, insects, vermin, rodents, corrosion, rust, dampness, heat, or cold is also excluded.

C. Limits Of Insurance

The limits on the declarations are the most paid for loss or damage in a single occurrence.

D. Deductible

The deductible on the declarations must be exceeded before the insurance company pays anything. Once the deductible is satisfied the insurance company will pay up to the limit of the insurance that applies. The deductible applies on a per occurrence basis.

 E. Additional Conditions

1. Valuation

This valuation clause replaces General Condition F. Valuation in CM 00 01–Commercial Inland Marine Conditions.

Related Article: CM 00 01–Commercial Inland Marine Conditions

The value of property is determined when the loss or damage occurs, not when the policy is issued.

a. Unsold Property

This property is valued at the lowest of the following:

b. Sold Property

Property that has been sold but that has not yet been delivered is valued at its net selling price, which means that adjustments for allowances and discounts must be deducted from the gross selling price.

c. Loss Limitation–Single Interest

When coverage is written on a single interest basis, the value developed in a. and b. above must be limited to the proportion of loss or damage the named insured's interest in the property bears to the property’s total value as of the date of the loss.

 

Example: Main Street Appliances finances large appliances through floor plan financing with 7th Street Financial.  A fire loss destroys $100,000 of the floor plan financed property. Main Street’s financial interest is $15,000 while 7th Street’s is $85,000.

Scenario 1: Main Street is the named insured and the policy is single interest. Main Street is paid no more than $15,000

Scenario 2: 7th Street Financial is the named insured and the policy is single interest. 7th Street Financial is paid no more than $85,000.

Scenario 3: Main Street is the named insured and the policy is dual interest. Main Street is paid no more than $15,000 and 7th Street Financial is paid no more than $85,000. 

 

Notes:

Refer to the note under dual interest below. In single interest coverage, the coverage that applies is only for the benefit and financial interest of either the dealer or the lender, whichever is the named insured.

These valuation conditions are different than in most inland marine coverage forms because of the unique nature of the property insured and the number of parties that have complicated financial interests in it. This section and the ones that follow, especially those that address dual interest and reports and premium, should be examined carefully to completely understand the differences in the coverage this form provides compared to most other commercial property coverage forms.

2. 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 insures covered property anywhere in the United States of America, its territories and possessions, Puerto Rico, and Canada.

b. Transit Coverage in the Event of Cancellation

Covered property that is in transit at the time a policy is cancelled remains covered by this policy until it reaches its final destination.

 

Example: Humble Home Furnishing’s Floor Plan Coverage is cancelled on May 6. At the time of cancellation, a truckload of product is on its way to a customer located at the far west end of the state. The truck is involved in a major collision when it is ten miles from its destination, catches fire, and the property is destroyed. Even though the policy was cancelled the previous day, the goods in the truck are still covered, based on this condition.

 

c. Dual Interest

When this policy is issued on a dual interest basis, all interested parties are subject to the conditions of this policy. There is one exception. The secured lender’s interest does not become impaired when the dealer or any other party does not comply with coverage provisions. This applies only if the lender attempts to comply with those provisions.

Note: This is a very important condition. The secured lender’s interest is protected much like mortgagees under commercial property coverage forms. If the dealer does not comply with one or more policy conditions that affect a loss, the lender's interest in the property is not adversely affected. Of course, this protection applies only if the lender either did not know or did and then took positive action to comply with those conditions.

d. Records and Inventory

The named insured is required to maintain accurate records of its business and to keep maintain them for at least three years after the policy expires or is cancelled. As a minimum, the following records are required:

The named insured must also conduct a physical inventory of its stock in trade at least once a year.

e. Reports and Premium

(1) Reporting Requirements

The named insured is required to submit reports not later than 30 days after the end of each month. The reports are to contain the information identified in d. Records and Inventory above.

When coverage is written on a dual interest basis, total values are reported.

When the policy is written on a single interest basis, the values to be reported are determined by the party insured. When the named insured is the lender, its outstanding balance as of the last day of the month is reported. When the named insured is a dealer, the total amount of its payments is reported.

(2) Rates and Premium

Premium is calculated by multiplying the total applicable amounts at all locations by the monthly rate on the declarations. These premiums are applied to the deposit premium and no additional premium is due until that premium has become fully earned. Once the deposit premium has been fully earned, subsequent premiums are due and payable each month. After the report is sent to the insurance company, the insurance company will compute the additional premium and send a bill to the named insured. That premium is due as of the date on the bill.

(3) Minimum Premium

The minimum premium on the declarations is the minimum annual premium the named insured must pay, even if the reports it submits produce a lower actual premium.

(4) Failure to Submit Reports

If the named insured has failed to submit the required reports at the time loss or damage occurs, a penalty will be exacted. If no reports had been submitted prior to the loss, the maximum paid for the loss will be multiplied by 90%. If reports had been submitted, but the reporting is not current, the maximum payment will be based on the latest report that had been received.

(5) Reports in Excess of Limits of Insurance

The most paid in a loss is the limit of insurance on the declarations, even if a higher amount had been reported. However, when higher limits are reported, they are used in the computation of the earned premium.

(6) Reporting Less Than the Total Amount Required

When, following a loss, it is determined that values reported were less than what should have been reported, the amount of the loss is reduced to only the proportion of the loss or damage that the amounts reported bear to the total actual amount as of the last report.

Note: This is similar to the coinsurance penalty on coverages written on a non-reporting basis.

(7) Annual Re-rating

This coverage is re-rated at each anniversary date and the premium charged reflects the rates that apply at that time. The named insured must furnish the information the insurance company needs for re-rating within 30 days after each anniversary date.

(8) Cancellation

In case of cancellation, the named insured must report the total amount required up to and including the cancellation date. If the cancellation is effective other than at the end of a month, premiums for part of a month are calculated on a pro-rata basis.

ENDORSEMENTS

ISO has not developed any endorsements to use with the Floor Plan Coverage Form.

UNDERWRITING CONSIDERATIONS

This coverage should be underwritten the same way as business personal property. The primary concern is the construction, operations, and common and special hazards of the specific occupancy, public and private fire protection, and exposures presented by neighboring occupancies that affect the named insured’s operation. Theft and vandalism may be other important considerations, depending on the type of merchandise and security measures employed to protect it against theft and vandalism. These perils must be evaluated carefully.

Related Article: ISO Commercial Property Program Underwriting Considerations