AAIS Difference In Conditions Form-Property Coverage Part

AAIS DIFFERENCE IN CONDITIONS FORM–PROPERTY COVERAGE PART ANALYSIS

(February 2018)

 

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INTRODUCTION

Difference in Conditions (DIC) coverage can be described as an umbrella policy for property lines of insurance. It does not provide excess limits coverage for existing insurance coverages but it does provide coverage that is not available in the underlying coverage forms and policies. The coverage form name explains itself. The coverage provided is the difference between the underlying policy(ies) coverage and the coverage provided by the DIC policy. The more differences in coverage between the underlying coverage and the DIC, the greater the coverage the DIC provides.

The DIC was originally written over named perils coverage. Now it is usually written over an “all risk” or open perils type policy that is subject to certain exclusions and limitations. Its most common use is to provide earthquake and flood coverage. Most insureds are pleasantly surprised to discover that the DIC covers certain other perils that their underlying coverage forms and policies exclude.

DIC insurance coverage is designed to close specific gaps in standard insurance policies and is usually available for only larger industrial or commercial risks. It allows coverage to be customized to extend to such exposures as water damage, flood, collapse, earthquake, landslide, and other perils, according to the named insured's needs. A separate coverage form or policy is usually used to provide DIC coverage but coverage is available in some cases as an endorsement to the underlying coverage form or policy.

Note: Some states do not treat Difference in Conditions as inland marine insurance and require that it be filed as a fixed location property coverage form.

ELIGIBILITY

Any commercial operation with owned or leased property exposures is eligible.

POLICY CONSTRUCTION

AAIS Difference in Conditions coverage requires at least these four forms:

Related Article: CL 0100–AAIS Commercial Lines Common Policy Conditions

SCHEDULE OF COVERAGES

IM 7805–Schedule of Coverages–Difference in Conditions contains the following information:

Policy Number (01 12 addition)

The 01 12 edition added a space to enter the policy number.

Coverages

Coverage applies either on a blanket basis or at scheduled locations. Scheduled locations coverage requires that the covered locations be listed and described on IM 7806–Locations Schedule–Difference in Conditions or be on a similar schedule on file with the insurance company.

Type of Coverages

The coverage provided is either DIC Coverage or DIC Coverage Excluding Property Perils.

If the coverage provided is DIC Coverage Excluding Property Perils, additional information is needed:

Earthquake Limits

The following limits must be entered in the spaces provided if earthquake coverage is provided. The entered limit is for the sum of both the direct damage and the loss of income exposures, if any.

Flood Limits

The following limits must be entered in the spaces provided if flood coverage is provided. The entered limit is for the sum of both the direct damage and the loss of income exposures, if any.

All Other Covered Perils Limits (Excluding Earthquake and Flood)

These limits do not include loss of income coverage. Those limits are listed later in this schedule of coverages.

 

Coverage Extensions

The limits on the schedule of coverages for the following coverages apply to all covered locations:

The limit is $5,000 unless a different limit is entered.

The number of days is 10 unless a different number is entered.

The 01 12 edition added quotation marks around the word Limit (“Limit”) because Limit is a defined word.

Supplemental Coverages

Each of these coverages provides additional limits of coverage or additional coverage. Required entries vary by type of coverage.

The limit is $100,000 unless a different limit is entered.

The limit is $100,000 unless a different limit is entered.

Covered

The limit is $100,000 unless a different limit is entered.

The limit is $100,000 unless a different limit is entered.

The limit is $25,000 unless a different limit is entered.

The limit is $50,000 unless a different limit is entered.

The 01 12 edition added quotation marks around the word Limit (“Limit”) because Limit is a defined word.

Coverage Option–Masonry Veneer

The appropriate box must be checked.

Valuation

Either valuation is on an actual cash value or replacement cost basis. The appropriate box must be checked.

Deductibles

Deductibles must be entered for the following:

Flat dollar amount or percentage

Flat dollar amount

Flat dollar amount

Income Coverage Part

One of the following coverage options must be selected:

Income Coverage Limit

A limit must be entered for Income. It is important to note that this limit is for all covered perils except for earthquake and flood. The earthquake limits and flood limits apply to the sum of all covered direct and indirect loss caused by earthquake or flood.

Income Coverage Waiting Period

One of the following entries is required:

Additional Information (01 12 change)

This section of the schedule of coverages lists endorsements and forms included when the policy is issued.

The previous edition referred to this section as Optional Coverages and Endorsements.

IM 7800–DIFFERENCE IN CONDITIONS FORM–PROPERTY COVERAGE PART ANALYSIS

Note: This analysis is of the 04 07 edition. Changes from the previous edition are in bold print.

Introduction

This section explains that you and your are the parties entered on the declarations as the insured. We, us, and our refer to the insurance company that provides coverage. Other defined terms are in the definitions section at the end of the coverage form.

Agreement

This section states that the insurance company provides the coverage described in the coverage form and in the schedule of coverages in return for the named insured paying the premium. The coverage provided is subject to all the coverage form's terms, conditions, endorsements, and definitions.

 

Property Covered

Coverage applies to the property described in this section subject to exclusions and limitations.

Note: This section reads much like a commercial property coverage form with both building and business personal property being covered. Because the section is slightly different from the commercial property coverage part definitions, this could be an area of difference where coverage is created.

1. Coverage

Coverage applies to direct physical loss to covered buildings and business personal property when caused by or that result from a covered peril.

2. Coverage Limitation

Only buildings and business personal property at covered locations are covered.

3. Building Property

Buildings and structures are covered. The following are also included as building and structures:

Note: What is permanent versus mobile can be very important because such items that are mobile must be covered as business personal property. The business personal property rate is usually much higher than the building rate so a significant difference in premium can result when items are part of the building coverage instead of the business personal property coverage.

 

 

4. Business Personal Property

Owned business personal property that is in or on covered buildings or structures at covered locations. It is also owned business personal property that is within 1,000 feet of the covered location and either in the open or in or on a vehicle. The following are included as business personal property:

 

Example: Karl’s Kustomizing modifies a customer's machine to add protective guards. If that machine is damaged while at Karl’s, the labor Karl put into that machine, the raw materials consumed (including power and chemicals), and any other services provided are covered as Karl’s interest in the personal property of others.

 

Property Not Covered

Thirteen specific types of property are excluded:

1. Airborne or Waterborne Property

Property that is in the air or on the water is not covered except when it is being transported on a regularly scheduled airline flight or ferry service.

2. Aircraft or Watercraft

Aircraft and watercraft are both not covered. This applies to their related motors, accessories, and equipment too. The only is that any aircraft or watercraft including their parts, motors, equipment, or accessories that the named insured holds for sale or processes, warehouses, or manufactures is covered.

Note: This means that aircraft and watercraft that are part of the named insured’s mercantile or storage stock is covered but aircraft and watercraft that are being used by the named insured as watercraft or aircraft are not.

3. Animals

All kinds of animals are not covered, including birds and fish. There is no exception.

4. Automobiles and Vehicles

Automobiles, motor trucks, tractors, trailers, and similar motor vehicles that are designed for and used to transport people or property on public roadways are not covered. Motor vehicles that are held for sale are also not covered. However, those motor vehicles the named insured manufactures, processes, or stores are covered.

Note: This property is more correctly insured under commercial automobile coverage forms.

Related Article: CA 00 01–Business Auto Coverage Form Analysis

5. Bridges, Dams, and Tunnels

6. Contraband

Property that is illegal to possess is not covered. Property that is legal to possess but that is being used as part of an illegal trade or that is being transported illegally is also not covered.

7. Crops

Grain, hay, straw, and other crops are not covered only when outside a building or structure.

8. Exports and Imports

Exported or imported property is covered except when covered by ocean marine cargo insurance that anyone obtains to cover it.

9. Furs, Jewelry, Stamps, Tickets, and/or Letters of Credit

Fur trimmed and fur garments, lottery tickets that are held for sale, letters of credit, stamps, watches, watch movements, jewels, pearls, precious or semi-precious stones, gold, silver, precious metals, and property mostly made up of precious metals are all not covered.

10. Land, Water, or Cost of Excavation

Land of any kind is not covered. However, it is not just the land that is not covered. Any surface or subterranean water is also not covered, as is the cost of excavations including any grading or filling. This applies to the location where the covered property is located and any other location.

11. Money and Securities

Accounts, bills, currency, food stamps, any evidence of debt, and notes are not covered in addition to money and securities.

12. Property of Others

Property for which the named insured either arranges transportation or is a carrier for hire is not covered. This included the transportation arrangements made by the named insured as a carloader, consolidator, freight broker, freight forwarder, or shipping association.

13. Property You Have Sold

Property that has been sold remains covered until it is delivered.  Coverage ceases upon delivery except if the property was sold by the named insured under an installation agreement.

Coverage Extensions

Provisions That Apply To Coverage Extensions

There are three coverage extensions. The limit for each is either the limit on the schedule of coverages or the default limit in the coverage item. These limits are part of the applicable limit for covered property and not in addition to it unless otherwise indicated. These limits are not added to or combined with limits for any other coverage extension or supplemental coverage and are not subject to any coinsurance provisions that apply elsewhere in the coverage form.

1. Debris Removal

When a covered peril damages or destroys covered property, the cost to remove any created debris is covered under this extension. Debris removal does not include any costs for removing, restoring, replacing polluted land, or water or to extract pollutants.

There are two parts of the Limit section. The first is restricting any debris removal payment to no more than 25% of the amount paid for the actual direct physical loss or damage. To calculate the 25%, only the direct physical damage loss is considered. The second part is that when the debris removal and the physical damage loss are added together, no more than the limit of insurance is paid.

An additional $5,000 (or a higher amount entered on the schedule of coverages) is available if the debris removal expense is more than 25% of the loss amount or if the combined cost of loss and debris removal is more than the limit of insurance for the covered property.

Debris removal expenses must be reported to the insurance company within 180 days of the date of loss in order for this extension to apply.

2. Emergency Removal

This covers direct physical loss to covered property that was removed from the scheduled location in order to avoid loss or damage from an impending covered peril. The loss can occur while in transit between the scheduled location and the sanctuary location.

This coverage is unique in that the property that is being moved is not subject to any exclusion while in transit or at a sanctuary location. However, the reason for moving the property must be due to a covered peril.

Coverage applies for up to ten days after the property is first moved but does not extend past the policy’s expiration date. An entry can be made on the schedule of coverages to increase the number of days.

Note: Coverage does not extend past the expiration date which means that if the insured has property at a sanctuary location when coverage renews, the sanctuary location must be listed as a premises or coverage no longer applies.

 3. Limited Fungus Coverage (04 07 addition)

Note: This is a very small amount of coverage provided as an exception to the fungus exclusion.

a. This coverage extension applies to only the costs and expenses required because fungus is present on covered property because of a covered peril. Coverage also applies to direct physical loss or damage to covered property when due to any activity of fungus.

b. Loss or damage caused by or that result from fungus is covered only if it is a result of a specified peril other than fire, lightning, or flood. The specified peril must occur during the same policy period as the loss or damage by fungus. This is subject to the named insured having taken all reasonable steps to protect the property from additional loss or damage at and after the time of loss.

c. A 12-month aggregate applies to this coverage. No more than $15,000 is paid during each 12-month period. This applies to all buildings, structures, claims, and locations. The limit can be increased.

d. If a policy is extended beyond 12 months, this aggregate time period extends to that same time period. No additional coverage limit is applied during the extended policy period.

e. A reoccurrence of a fungus event is considered a continuation of the initial fungus occurrence and does not provide any additional coverage and subject to the aggregate in place at the time of the initial event.

f. Cleanup, removal, and testing activities and costs related to a fungus incident are covered but are subject to the same aggregate limit.

g. This coverage does not limit coverage for otherwise covered loss or damage that fungus does not cause. When fungus damage increases an otherwise covered loss, any such increase because of that fungus is subject to this coverage extension’s limitations.

Supplemental Coverages

Provisions That Apply To Supplemental Coverages

There are seven supplemental coverages. Each has its own default limit but that limit can be increased. Limits for any supplemental coverage are separate from and not part of the applicable limit for the covered property.

The limit available for coverage described under a supplemental coverage is the only limit available for it. It is not the total of the limit for a supplemental coverage and the limit for the covered property. The limits are not added to or combined with limits for any other supplemental coverage or coverage extension and are not subject to any coinsurance provisions that apply elsewhere in the coverage form.

1. Foundations of Buildings, Pilings, and Underground Pipes

Coverage applies to direct physical loss from a covered peril to foundations below the lowest basement level or the ground’s surface. It also applies to pilings, piers, wharves, docks, and retaining walls as well as to underground pipes, flues, and drains. The most paid in any one occurrence at a covered location is $100,000. This limit can be increased.

2. Newly Acquired Buildings

a. There is coverage for direct physical loss or damage from a covered peril to buildings or structures the named insured builds or acquires during the policy period.

b. Coverage begins on the day construction begins or the date the building or structure is acquired. It ends at the earliest of when the policy expires, 90 days later after construction begins or the acquisition, or when it is reported to the insurance company.

c. Additional premium is due from the date that construction began or the date the building or structure was acquired.

d. The most paid in any one occurrence is limited to the building or structure’s value on the schedule of coverages or $100,000, whichever is less.

3. Ordinance or Law (Undamaged Parts of a Building) (04 07 change)

a. A covered building or structure may sustain direct physical loss or damage from a covered peril and a governmental entity require that the rest of it be demolished due to enforcing an ordinance, law, or decree. In that case, the insurance company pays for the value of the undamaged portions. Coverage applies only if the regulation requires demolishing the undamaged parts, regulates the construction or repair of the property, or establishes specific requirements for zoning or land use at the covered location. The ordinance, law, or decree must be in force at the time of loss.

b. There is no coverage for the following:

c. This coverage is part of the applicable limit for coverage described under Property Covered, not in addition to it.

 

Example: Percy’s Hotel is located in the downtown section of a small city. It is a five-story brick building with ordinary wood floor and roof supports. Because it was constructed before any building construction ordinances or laws were on the books, it is grandfathered (exempt) from the requirement that all buildings over three stories high be of at least masonry noncombustible construction. However, other ordinances require that if any such building is damaged to the extent of 50% or more, the undamaged portions must be demolished and the building re-built to meet current construction standards. A covered earthquake damages nearly 60% of the structure. The ordinance is enforced and this Supplemental Coverage pays for the value of the undamaged portion of the building that must be torn down.

 

Note: Ordinance or Law Coverage was one of the Supplemental Coverages in the previous edition. However, this version is almost a complete rewrite. The coverage is separated into two different Supplemental Coverages in this edition and each must be reviewed to determine the complete extent of the coverage provided.

Related Article: CP 04 04–Ordinance or Law Coverage

4. Ordinance or Law (Increased Cost to Repair and Cost to Demolish/Clear Site) (04 07 change)

a. The insurance company pays the increased cost to repair, rebuild, or reconstruct the damaged portions of a building or structure. Such changes to undamaged portions are also covered without requiring demolishing those portions. The costs must occur when building, zoning, or land use laws in effect when a covered building or structure sustained direct physical loss or damage from a covered peril are enforced.

The repaired or rebuilt property must be for a similar occupancy or for the same purpose as the prior building unless regulations require a change. Increased costs of construction are not covered until construction is actually done and completed. The time limit for completion is as soon as possible, within reason, but no more than two years after the date of loss.

b. The building or structure may be repaired or rebuilt at the same location or rebuilt at a different one. If the insurance company agrees to extend the two-year period to repair or replace it must do so in writing.

The insurance company also pays the costs to demolish and clear undamaged portions of the covered building or structure on the site of the covered loss. However, this is only when a government regulation in force at the time of the covered loss or damage requires it.

c. There is no coverage for the following:

d. If the building is repaired or replaced, the insurance company pays the amount spent to demolish and clear the site of the undamaged parts of the covered building or structure. It also pays the actual increased cost to rebuild with like kind and quality for the same purpose at the same location. The named insured can rebuild at another site but the most paid is what it would require to rebuild at the same site. The most paid for the combination of demolition and rebuild/repair is $100,000.

If the building is relocated because an ordinance or law requires it, the insurance company pays the amount the named insured spends to demolish and clear the site. It also pays the increased cost to construct a near duplicate building or structure at a new location. The most paid for the demolition and rebuild is $100,000.

If the building is not repaired or replaced, the insurance company pays the amount actually spent to demolish and clear the site. The most paid $100,000.

The limits may be increased on the schedule of coverages.

5. Personal Property–Acquired Locations

a. Coverage applies to direct physical loss from a covered peril to business personal property at locations that are acquired during the policy period.

Note: This is not a personal property that is acquired but instead is business personal property at locations that are acquired.

b. This Supplemental Coverage does not apply to property at exhibitions or fairs.

c. This coverage applies for no more than 90 days after the location is acquired. It is further capped at the earlier of when the location is reported to the insurance company, or at the policy’s expiration date. Coverage does not extend past the expiration date.

d. Additional premium is due from the date the location is acquired.

e. The most paid in any one occurrence is the property’s value or $100,000, whichever is less. This limit can be increased.

6. Pollutant Cleanup and Removal

 The named insured's expenses to extract pollutants from land or water is covered if a covered peril that occurred during the policy period caused the release or discharge. The expenses are paid only when reported to the insurance company within 180 days of the date of loss.

Costs that are only related to testing, evaluating, observing, or recording pollutants are not covered but those testing costs which are part of the extraction process are.

 The maximum 12-month aggregate paid is a per-location limit in the amount of $25,000.

 

Example: A covered peril occurs at Buddy's building on 04/01/18 and causes a floor to collapse. The collapse damages the concrete basement and cracks an underground oil tank. On 09/01/18, oil is discovered in and around the private well that provides an auxiliary water supply to Buddy's building. After analyzing all the details and information, the conclusion is that the damage to the tank resulted from the covered peril that caused the collapse. The cost to remove the oil-soaked dirt is covered up to the $25,000 limit, provided the expenses are reported to the insurance company in writing by 09/30/18.

 

7. Property in Transit

a. Covered business personal property when in transit by any mode or conveyance is covered for direct physical loss caused by a covered peril. The only exception is for property in the custody of salespersons.

b. The most paid in any one occurrence is $50,000, regardless of the number of vehicles, trailers, conveyances, or containers involved in a specific occurrence. This limit can be increased.

c. This Supplemental Coverage is not subject to any location-related condition.

Perils Covered

The 04 07 edition significantly changed this section. The previous edition used the standard wording that provided coverage for risks of direct physical loss. That broad statement was modified by stating that the loss could be limited or could be denied if the peril was excluded.

This edition provides different options based on what is on the schedule of coverages.

1. DIC Coverage (04 07 changes)

Risks of direct physical loss are covered when DIC Coverage is selected on the schedule of coverages. This is not unlimited. The loss may be limited or excluded elsewhere in the policy. The loss is also subject to provisions and limits in the coverage form.

There is no coverage for any loss caused by a defined named peril. The only exception is the coverage provided in the Limited Fungus Coverage Extension.

2. DIC Coverage Excluding Property Perils (04 07 changes)

Risks of direct physical loss are covered when DIC Coverage Excluding Property Perils is selected on the schedule of coverages. This is not unlimited. The loss may be limited or excluded elsewhere in the policy. The loss is also subject to provisions and limits in the coverage form.

There is no coverage for any loss caused by a peril that is covered in the property policy described on the schedule of coverages. This applies whether or not payment for the loss can be collected.

If Earthquake and/or Flood Excess Coverage is selected on the schedule of coverages, the insurance company pays only after the amount of loss or damage exceeds the limit the property policy has listed on the schedule of coverages provided. The loss must be caused by earthquake and/or flood. The most paid is the excess limit on the schedule of coverages.

If Flood Excess Coverage is selected on the schedule of coverages, the insurance company pays only after the amount of loss exceeds the limit that the National Flood Insurance Program (NFIP) policy provides. The most paid is the excess limit on the schedule of coverages.

There is no drop down coverage when for any reason the named insured is unable to collect amounts under the underlying property policy or the NFIP Policy.

Perils Excluded

1. Primary Exclusions

The first group of exclusions is essentially absolute. Subject to specific exceptions, loss or damage by each is totally excluded, regardless of any other cause or event that contributes to a loss, either concurrently or in any other sequence. The insurance company does not pay for any direct or indirect loss or damage caused by or that results from any of these events.

a. Civil Authority

There is no coverage for loss that results from an order any civil or government authority issues. These orders may include seizure, confiscation, destruction, or quarantine of property but this exclusion is not limited to only these. The only exception is when a civil authority destroying property as a means of controlling a fire causes the loss or damage. This exception applies only if the fire is the result of a covered peril.

b. Earth Movement (04 07 addition)

Coverage does not apply to loss from any earth movement except for earthquake coverage that this coverage form may provide elsewhere. This exclusion does not apply to covered property in transit.

 

 

c. Flood (04 07 addition)

The insurance company does not pay for loss from flood except for flood coverage that this coverage form may provide elsewhere. This exclusion does not apply to covered property in transit.

d. Fungus (04 07 addition)

Coverage does not apply to loss, cost, or expense caused by or related to the existence or any activity of fungus, except as Coverage Extensions 3. Limited Fungus Coverage provides. This exclusion does not apply to loss or damage from collapse that hidden decay causes or to covered property in transit.

e. Nuclear Hazard (04 07 change)

The insurance company does not insure against loss or damage from any nuclear reaction, radiation, or contamination, whether the nuclear incident was controlled or not, or was caused by any means. Any loss caused by the nuclear hazard is not treated as a loss caused by fire, explosion, or smoke. However, coverage applies to direct loss or damage caused by fire that results from the nuclear hazard.

 

Example: Enterprising Hospital's radiation unit is located next to the boiler room. An earthquake causes the boiler room walls to crack and radioactivity is released into other areas of the hospital. There is no coverage for the damage the radioactivity causes.

 

f. Ordinance or Law (04 07 change)

There is no coverage for any loss or increased construction costs because of enforcing any government regulation that controls the use, construction, or repair of any property, other than as Supplemental Coverages
3. Ordinance or Law (Undamaged Parts of a Building) provides. This includes demolishing that property and removing its debris. This exclusion applies to enforcement that would have occurred even if the property was not damaged and to those increased costs incurred because the named insured complied with the regulation during any construction, demolition, or debris removal activities.

g. Utility Failure

Coverage does not apply to loss from interruption of any power or utility service that takes place away from a covered location. Increased or reduced voltage, high or low pressure, and other interruptions of normal services are all excluded. Coverage does apply when a power interruption causes a covered peril that results in direct loss or damage at a covered location.

h. War and Military Action (04 07 change)

The insurance company does not pay for loss or damage caused by any act of war. Undeclared and civil war or warlike action by a military force are all considered war. All actions taken to hinder or defend against an actual or expected attack by any government or sovereign authority that uses military personnel or other agents are also considered war and excluded. In addition, acts of insurrection, rebellion, revolution, or unlawful seizure of power and any action any government authority takes to prevent or defend against any such acts are excluded. If any action within the terms of this exclusion involves nuclear reaction, radiation, or contamination, this exclusion applies in place of the nuclear hazard exclusion.

Note: This means that the exception for resulting fire under the nuclear hazard is not covered when it is the result of war.

2. Secondary Exclusions

The second group of exclusions applies to loss or damage caused by or that results from any of the following loss events. Some of these exclusions have exceptions, conditions, or limitations that should be noted and reviewed carefully. The insurance company does not pay for any loss or damage caused by or that results from any of these events.

a. Animal Nesting, Infestation, or Discharge (04 07 change)

Loss due to nesting, infestation, discharge, or release of waste products or secretions by animals is excluded. The term animal includes birds, insects, and vermin but is not limited to just these. If any of the above acts of animals results in building glass breaking, coverage applies to the loss or damage from the breakage of building glass.

Note: Vermin refers to a variety of small animals and insects, such as rats and cockroaches that are destructive, annoying, or harmful to health.

b. Collapse (04 07 addition)

Except as Other Coverages 1. Collapse provides, loss caused by collapse is excluded. If collapse results in a covered peril occurring, coverage applies to the loss or damage that covered peril caused.

c. Contamination or Deterioration (04 07 change)

Loss or damage that is caused by contamination or deterioration is excluded. This applies to corrosion, decay, fungus, mildew, mold, rot, and rust. It also applies to any quality, fault, or weakness in covered property that causes it to damage or destroy itself. If contamination or deterioration results in a covered peril occurring, coverage applies to the loss or damage that peril causes.

Note: The previous edition also covered resulting loss caused by the breaking of building glass.

d. Criminal, Fraudulent, Dishonest, or Illegal Acts

Coverage does not apply to loss caused by or that results from criminal, fraudulent, dishonest, or illegal acts that any of the following commit alone or in collusion with another:

Coverage applies if employees destroy property. It does not apply if employees steal.

This exclusion does not apply to covered property in the custody of carriers for hire.

e. Defects, Errors, and Omissions

There is no coverage for loss from any act, error, or omission, whether negligent or not, and whether on or off covered locations, that relates to the following:

 

Example: The Smallville City Council decides to delay performing preventive maintenance on a floodwall. The wall collapses and floods Healthy Manufacturing. Healthy Manufacturing cannot collect its damages from this coverage form because the loss was due to the floodwall being improperly maintained.

 

In addition, coverage does not apply when construction materials are defective, weak, inadequate, faulty, or unsound, regardless of whether they are on or off covered locations. Coverage also does not apply to the cost to make good on a design error, data processing errors, or omissions in programming, or giving incorrect instructions.

Loss to business personal property caused by deficiencies or defects in design, specifications, materials, or workmanship are not covered and there is no payment for losses caused by latent or inherent defects.

When an excluded defect, error, or omission result in a covered peril any resulting loss from that covered peril is covered unless that particular loss is excluded in this coverage form.

f. Electrical Currents

Loss caused by electrical currents or arcing is not covered. The exception is that loss is covered when caused by a specific peril resulting from the electrical current or arcing. 

g. Explosion, Rupture, or Bursting (04 07 changes)

The insurance company does not pay for loss when steam boilers, pipes, and engines or steam and gas turbines explode, rupture, or burst. This exclusion is limited to only loss or damage to the object in which the loss occurred. This means that loss or damage to the building and personal property adjacent to the damaged object is covered.

h. Freezing

Loss or damage caused when water, other liquids, powder, or molten material leak from plumbing, heating, or air conditioning systems or when appliances freeze is not covered. There are two exceptions:

i. Increased Hazard

There is no coverage for a loss that occurs during the period when the hazard is materially increased by any means within the named insured's knowledge or control.

Note: The interesting part of this is that there is no requirement that the increased hazard causes the loss.

 

Example: Misty Melody Publishing Company agrees to lease warehouse space for two months to July 4th Enterprises. This is a significant increase in fire hazard because July 4th Enterprises stores its fireworks there. A windstorm destroys the building. Misty Melody submits a claim that the insurance company denies. The claim adjustor learns of the increased hazard at the time of loss and determines that Misty did not tell the insurance company about it.

 

j. Loss of Use

There is no coverage for loss caused by or that results from delay, loss of use, or loss of market.

k. Mechanical Breakdown (04 07 change)

Loss caused by mechanical breakdown is excluded. Damage to moving parts of machinery because of centrifugal force is also excluded. However, if any type of loss results in a covered peril occurring, the loss or damage it causes is covered.

Note: The Neglect exclusion in the previous edition is not in this edition.

l. Missing Property

The unexplained or mysterious disappearance of covered property is excluded when there is no physical evidence to suggest what happened to it and the only proof that a loss occurred is based on an audit or physical inventory. This exclusion does not apply to covered property in the custody of carriers for hire.

m. Named Perils (04 07 addition)

Coverage does not apply to loss a named peril causes. The only exception is the type of loss that Coverage Extensions 3. Limited Fungus Coverage insures.

n. Pollutants (04 07 change)

There is no coverage for loss from any release, discharge, seepage, migration, dispersal, or escape of pollutants unless a named peril causes the event. The other exception is the coverage that Supplemental Coverages 6. Pollutant Cleanup and Removal provides.

o. Seepage

The insurance company does not pay for loss when due to repeated or continuous seepage or leakage of water that occurs continuously for 14 or more days.

p. Settling, Cracking, Shrinking, Bulging, or Expanding

Coverage does not apply to loss from settling, cracking, shrinking, bulging, or expansion of pavements, footings, foundations, walls, ceilings, or roofs. Any resulting loss or damage caused by building glass breaking is covered.

q. Smog, Smoke, Vapor, or Gas

There is no coverage for loss from smog, smoke, vapor, or gas from industrial operations or agricultural smudging.

Note: The Specified Perils exclusion in the previous edition is not in this edition.

r. Temperature/Humidity (04 07 addition)

Loss or damage caused by dryness, dampness, humidity, changes in, or extremes of temperature is excluded. If any of these events results in a covered peril occurring, the resulting loss or damage that peril causes is covered.

s. Voluntary Parting

Loss to covered property voluntarily given to others is excluded. There is no coverage even if the surrender was due to a fraudulent scheme, trick, or false pretense.

t. Wear and Tear (04 07 change)

Loss caused by wear, tear, marring, or scratching is excluded. If any of these events results in a covered peril occurring, the resulting loss or damage that peril causes is covered.

Additional Property Not Covered or Subject to Limitations

1. Boilers

There is no coverage for loss to steam boilers, steam pipes, steam turbines, or steam engines that a condition inside them causes. In addition, coverage does not apply to hot water boilers or heaters for damage that any condition inside them causes, including bursting, cracking, or rupturing.

Note: Coverage for this should be provided through an Equipment Breakdown Protection coverage form.

Related Article: ISO Equipment Breakdown Protection Coverage Form Overview

2. Earthquake

Coverage does not apply to loss from earthquake that began before this coverage form's inception date.

Note: Most earthquake coverage forms extend coverage beyond the policy expiration date because of the potential for aftershocks. The policy in effect when the initial earthquake occurs covers all losses occurring over a 168 hour time period without regard to the expiration date.

3. Glassware/Fragile Articles

Breakage of fragile articles such as glassware, statuary, porcelains, bric-a-brac, or building glass is not covered. There are four exceptions

4. Gutters and Downspouts

There is no coverage for loss to downspouts and gutters when the reason for the loss is the weight of ice, sleet, or snow.

5. Interior of Buildings

Coverage does not apply to loss to the interior of buildings or structures from rain, snow, sleet, ice, sand, or dust. There are two exceptions. There is coverage if these items enter through an opening in the building that a named peril first makes. Coverage also applies if the loss results from the thawing of ice, sleet, or snow that is on the building or structure.

6. Masonry Veneer

Earthquake damage to masonry veneer that is on wood frame walls is excluded. When this limitation applies, the value of masonry veneer is not included in the value of the covered property or the amount of loss when the earthquake deductible is applied.

This limitation has three exceptions:

Note: Missing Property in the previous edition is not in this edition.

7. Personal Property in the Open

Rain, snow, ice, or sleet causing damage to personal property in the open is not covered. This exclusion does not apply to covered property while in the custody of a transportation company or a carrier for hire.

8. Transferred Property

Loss to property that occurs because it was transferred to a person or place away from a covered location based on instructions that are determined to have been authorized is not covered.

 

Example: Eddie receives a call from Lorenzo telling him to ship furniture to an important client. Lorenzo emphasizes how important this is so Eddie makes it a top priority. When the invoice is not paid Eddie tracks down Lorenzo who denies he made any such call. There is no coverage when the furniture cannot be located.

OTHER COVERAGES

1. Collapse (04 07 addition)

Note: The previous edition did not exclude collapse. Because it is excluded in this edition, the Collapse coverage is added in this section. This is similar to how most property coverage forms and policies handle collapse.

a. Loss from a direct physical loss that involves collapse as defined below is covered. Coverage applies to a building or structure, a part of a building or structure, or personal property that is inside a building or structure.

b. The only collapse coverage provided is collapse caused by the following:

c. Collapse is the sudden and unexpected falling in or caving in of a building or structure (or any part of it) that prevents the building from being occupied for its intended purpose.

d. The following buildings and structures are not considered to be in a state of collapse:

 

Example: The loud sound of a crack disturbs a prayer service at the church on a Sunday morning. A second crack alerts the loss prevention members in the congregation and they advise everyone to evacuate the building. The church hires a contractor to inspect the building. The report states that the main beam that supports the roof is rotted through and the roof is in imminent danger of collapse. The church sends a claim to the insurance company for collapse but coverage is denied because the roof has not yet collapsed.

 

2. Tearing Out and Replacing

Water, other liquids, powder, or molten material are escaping from a system or appliance and the named insured tears out part of the building or structure to access and repair the system or appliance where the escape is occurring. While the insurance company will not pay to repair the system or appliance itself it will pay for the cost of tearing out part of the building and repairing that torn out part of the building. The insurance company also pays the cost to repair damaged parts of fire extinguishing equipment and systems if the damage resulted in discharging any substance from such a system or if freezing directly caused the damage.

 

Example: Tearing Out and Replacing covers the following situations:

  • A water pipe bursts inside the second-floor wall but the wall is not damaged and the situation goes unnoticed. Water starts to drip through the first-floor ceiling and the plumber traces the problem to the second-floor pipe. The plumber must remove part of the second-floor wall to gain access to the pipe to repair it. Coverage applies to the damage to the ceiling that the water caused because it covers both building and business personal property. This Other Coverage pays the costs to tear out the second-floor wall to remove and repair the piping. It does not cover the cost to repair the damaged pipe itself.
  • When the sprinkler system discharges, the discharge causes some of the older pipes to burst. Coverage applies to both the damage that the water caused and the damage to the sprinkler system.

What Must Be Done In Case Of Loss

1. Notice

The named insured must give prompt notice of a loss to the insurance company or its agent. The notice must describe the property lost or damaged. If a criminal act caused the loss, the appropriate law enforcement agency must also be notified. The insurance company has the right to require that the notice is in writing.

2. You Must Protect Property

During and after a loss, the named insured must take all reasonable steps to protect covered property from further loss. The insurance company pays reasonable costs the named insured incurs to do so if the named insured maintains accurate records to substantiate the costs. Paying these costs is not in addition to the policy limits. There is no coverage for any repairs or emergency measures performed on property not already damaged by a covered peril.

Note: Such costs incurred reduce the amount available to pay the actual loss.

 

Example: The cost of sandbags used to protect the property from an imminent flood is not covered, even if flood is an insured peril. However, when flood is a covered peril and the flood causes damage to covered property the cost of additional emergency measures is covered.

3. Proof of Loss

The named insured must complete and return the insurance company's prescribed proof of loss forms within 60 days after the company requests it. The information provided must include the time, place, and circumstances involved with the loss and information on any other insurance coverage that may apply. It must also include the named insured’s interest and the interest of others with respect to the property involved, including lienholders, loss payees, and mortgagees. Any changes in the title to the property during the policy period must be disclosed, in addition to providing any other reasonable information the company may require to adjust and settle the loss.

4. Examination

Examination under oath may be required in matters that relate to the loss. The insurance company may request these examinations more than once but such requests must be reasonable. If multiple persons are examined, the company has the right to examine each individual separately.

5. Records

The named insured must maintain and produce any records related to the loss. The insurance company must be allowed to make copies and take extracts of them as often as it reasonably requests. Records include tax returns and bank microfilms of all related cancelled checks but records are not limited to just these.

Related Court Case: Church Financial Records Held Subject to Review by Insurer

6. Damaged Property

Both damaged and undamaged property must be made available for the insurance company's inspection as often as reasonably necessary. It must also be allowed to take samples of the property to the extent necessary to adjust and settle the loss.

7. Volunteer Payments

The named insured may not voluntarily make payments, assume obligations, pay or offer rewards, or incur other expenses without the insurance company's express approval. If it does, it does so at its own expense. The only exceptions are those costs incurred to protect property as item 2. above describes.

8. Abandonment

The named insured may not abandon damaged property to the insurance company without its written consent.

9. Cooperation

The named insured must cooperate with the insurance company and perform all acts this coverage form requires.

Valuation

1. Actual Cash Value

When actual cash value valuation is selected on the schedule of coverages, the value of the covered property is its actual cash value at the time of loss. Actual cash is replacement cost new minus depreciation. Items 3 through 6 below further limit this valuation.

Note: Actual cash value is not the same as market value. Market value is the amount the named insured could get by selling the property on the open market.

2. Replacement Cost

When covered property is valued at its replacement cost, the value is based on its replacement cost without a deduction for depreciation. This is further limited by items 3 through 6 below and the following:

3. Loss to Parts

The value of a lost or damaged part of the property that consists of several parts is the cost to repair or replace only the lost or damaged part.

4. Merchandise Sold

The value of merchandise that has been sold but not yet delivered at the time of loss is valued on its selling price that is then reduced by all discounts and expenses that had not yet incurred.

 

Example: Elmo’s Electronics sells three televisions to Greg. The retail price is $500 each but Elmo discounts the cost to $425 each because Greg purchases three of them. The retail price also includes a delivery fee of $25 each. Before Elmo can deliver the televisions to Greg, a flood at the store destroys all of Elmo’s stock. The value of the televisions is $500 each, reduced by the $75 discount and the $25 delivery expense. As a result, the value of the three televisions is $400 each or $1,200 total.

 

5. Pair or Set

The value of a loss that involves loss or damage of one part of a pair or set is based on a reasonable proportion of the value of the entire pair or set. Loss of one part of a pair or set is not considered a total loss.

Note: This recognizes that the value of the whole is greater than the value of individual parts but that the remaining parts still have value as separates.

 

Example: Chester's chess set is valued at $1,000. After the force of a tornado scatters the set, all the pieces are located except for a rook and the queen. Because of the type of wood used to construct the set, the missing items cannot be replaced. Because the estimated value of the incomplete set is $750, the insurance company pays $250, the reduction of the set's value.

6. Tenants Improvements

The value of tenants improvements losses is based on their actual cash value if the named insured repairs or replaces them at its expense within a reasonable period of time.

If the improvements are not repaired or replaced, the value is based on a portion of the named insured's original cost. The portion is developed in a formula stated as A divided by B multiplied by C, where:

b. If the lease has a renewal option, the last date in the option is used as the new expiration date.

c. There is no coverage if repairs are made at the expense of others.

Related Article: Improvements and Betterments

How Much We Pay

1. Insurable Interest

The insurance company does not pay more than the named insured's insurable interest in the covered property at the time of loss.

Note: Insurance is meant to restore a person’s pre-loss financial position, not to improve or enhance it.

2. Deductible (04 07 change)

The insurance company pays only the amount of loss in any single occurrence that exceeds the deductible amount on the schedule of coverages.

 

Examples:

  • The loss is $1,000 and the deductible is $5,000. There is no payment.
  • The loss is $5,000 and the deductible is $1,000. The amount paid is $4,000.
  • The limit of insurance is $100,000. The loss is $110,000 and the deductible is $5,000. The full $100,000 limit is paid because the loss exceeds the deductible and the amount of loss is more than the limit of insurance.

Note: All examples assume that the coinsurance clause does not apply.

 

3. Earthquake Period

Earthquakes that occur within a 168-consecutive hour period are considered a single loss. This time period is not limited by the expiration date.

Note: Earthquakes are subject to aftershocks. If each is treated as a separate occurrence, the deductible is applied to each occurrence. For this reason, all events that take place within 168 consecutive hours are treated as one occurrence and are not limited by the expiration date.

 

Example: The policy period is 01/01/18 to 01/01/19. The first earthquake shock occurs on 12/31/18. The named insured’s brick veneering falls off following an aftershock that occurs on 01/02/19. This loss is covered under the 01/01/18 to 01/01/19 policy period because it is within 168 hours of the first earthquake shock.

4. Loss Settlement Terms

The insurance company pays the least of the following:

The insurance company does not pay more during a 12-month period than the catastrophe limit on the schedule of coverages, regardless of the number of locations involved.

5. Insurance under More Than One Coverage

Two or more coverages in the coverage form may apply to the same loss. In that case, the insurance company does not pay more than the value of the actual claim, loss, or damage sustained.

6. Excess Insurance

The named insured has the right to purchase insurance in amounts that exceed the limits on the schedule of coverages. That excess insurance is not considered when applying any pro rata or apportionment provision.

Note: This is very important when multiple layers of DIC coverage is purchased to cover mega-million dollar property schedules.

Loss Payment

1. Loss Payment Options

a. Our Options

The insurance company has four loss payment options if a covered loss occurs.

b. Notice of Our Intent to Rebuild, Repair, or Replace

The insurance company must notify the named insured of its intent to rebuild, repair, or replace within 30 days after it receives a properly completed proof of loss.

Note: The first two options involve only money transactions. The second two directly involve the insurance company with the property itself. Once the named insured submits the required proof of loss, the insurance company must inform the named insured of the option it plans to use within 30 days of the date the proof of loss was submitted.

 

Example: Friendly Insurance Company informs Atlas Axles that it will use the first option above for the building loss and pays $1,000,000 so Atlas can rebuild. Friendly uses the last option above with respect to Atlas' stock and pays $500,000 based on the stock's appraised value. Friendly keeps the stock to sell as salvage.

2. Your Losses

a. Adjustment and Payment of Loss

The insurance company adjusts all losses with and pays the named insured, unless another loss payee named in the policy is involved.

b. Conditions for Payment of Loss

The insurance company pays a covered loss within 30 days after it receives a properly prepared proof of loss and the amount of loss is established. The amount of loss is determined by either a written agreement between the company and the named insured or after an appraisal award is filed with the company.

3. Property of Others

a. Adjustment and Payment of Loss to Property of Others

The insurance company can adjust and pay losses that involve property of others to either the named insured acting on the property owner’s behalf or directly to the property owner. There is no statement as to who makes the decision.  

b. We Do Not Have To Pay You If We Pay the Owner

When the insurance company pays the property owner, it is not obligated to pay the named insured. In addition, if the property owner sues the named insured, the company has the option to defend the named insured in that suit.

Other Conditions

1. Appraisal

The insurance company and the insured may not always agree on a covered claim’s value. This condition provides one method to resolve disputed claims.

Either party can request an appraisal to determine a disputed claim’s value. Once requested, the parties have 20 days to obtain their own independent and competent appraisers and give their appraiser's name to the other party. The two appraisers then have 15 days to select a competent impartial umpire. If they cannot agree on an umpire within that time period, either can request that a judge in the court of record in the state where the property is located appoint one.

The appraisers then determine the claim’s value. They submit any differences to the umpire. Once any two of the three parties agree, the amount of loss is set.

Each party pays its own appraiser. Both parties share the umpire’s cost and other expenses equally.

2. Benefit to Others

The insurance provided is for the benefit of the named insured. It is not to directly or indirectly benefit any party that has custody of the named insured's property.

3. Conformity with Statute

Any condition in this coverage form that conflicts with any applicable law is amended to conform to that law.

Note: The Control of Property condition in the previous edition is not in this edition.

4. Estates

Note: This condition applies only if the named insured is an individual.

a. Your Death

If the named insured dies, the person who has custody of the named insured's property is an insured until a qualified legal representative is appointed. The named insured’s legal representative becomes an insured once he or she is appointed. Both are insureds but only with respect to the property this coverage form insures.

b. Policy Period Is Not Extended (04 07 change)

This coverage does not extend past the coverage expiration date.

Notes:

This was the Death condition in the previous edition.

The Liberalization condition in the previous edition is not in this edition.

5. Misrepresentation, Concealment, or Fraud

This coverage is void if any insured at any time willfully concealed or misrepresented a material fact that relates to the insurance provided, the property covered, or its interest in the property. It is also void if fraud or false swearing by any insured took place concerning the insurance provided or the property covered.

Note: The named insured must deal with the insurance company honestly. Its rights of recovery may be voided if it intentionally misrepresents or conceals a material fact or information. This means that the insurance is treated as simply having never existed versus denying a particular claim.

6. Policy Period

Only covered losses that occur during the policy period are paid.

7. Recoveries

Paying the loss does not end the obligations of the named insured and the insurance company toward one another. Additional provisions apply if the insurance company pays a loss and the lost or damaged property is subsequently recovered or the parties responsible for the loss pay for it.

Either party that recovers property or payment must inform the other. Recovery expenses that either party incurred are reimbursed first. If the named insured keeps the recovered property, it must refund the amount of the claim the insurance company paid, unless the company agrees to a different amount. If the claim paid is less than the agreed loss due to applying a deductible or another limitation, any recovery is prorated between the named insured and the insurance company based on the company's respective interest in the loss.

8. Restoration of Limits (04 07 change)

Payment of a claim does not reduce the applicable limits available for future claims except under Limited Fungus Coverage and subject to the aggregate limit and the catastrophe limit. (04 07 addition)

Note: The 04 07 change made this restoration of limits subject to the aggregate limit and the catastrophe limits definitions and by doing so resolved a conflict and reduced coverage. The prior edition did not mention the aggregate or catastrophe limits which could have led to an ambiguity because while this condition restores limits to the status prior to the loss the defined aggregate and catastrophe limits reduce available limits every time a loss is paid within a 12 month policy period. Another way of stating this is that the occurrence limits are restored but not the aggregate or catastrophe limits.

 

Example: Marvin carries a $15,000,000 blanket occurrence limit, a $15,000,000 aggregate limit and a $30,000,000 catastrophe limit. He carries only a $1,000,000 earthquake occurrence, $1,000,000 earthquake aggregate and $2,000,000 earthquake catastrophe. An earthquake hits and causes $1,000,000 earthquake and $2,000,000 resulting fire damage. The earthquake occurrence limit of $1,000,000 is restored but the aggregate is not. The non-earthquake aggregate is reduced by $2,000,000 even though the occurrence is restored.

Another earthquake comes through in the same policy period. Marvin has no earthquake coverage because the aggregate was exhausted by the prior loss. Marvin has coverage for the resulting fire loss but while the occurrence limit has been restored to $15,000,000 the available aggregate is only $13,000,000.

 

 

9. Subrogation

The insurance company acquires the named insured's rights of recovery from third parties after it pays a loss. The named insured must help the insurance company secure those rights. The company is not obligated to pay a loss if the named insured hinders or impairs the company's rights of subrogation. However, the named insured can agree in writing to waive recovery rights from others before a loss occurs.

 

Examples:

  • The named insured may tell a client that a loss the client caused was not its fault so that client is not required to pay for the damage. This statement jeopardizes the insurance company's subrogation rights. The insurance company could refuse to pay the claim based on this violation of the subrogation condition.
  • The named insured and its client agree in their written contract to mutually waive any rights of recovery against each other. If a covered loss occurs, coverage applies because the agreement was executed in writing before the loss occurred.

 

Related Article: Transfer of the Rights of Recovery (Subrogation)

Related Court Case: Mutual Subrogation Waiver Clause Barred Recovery by Property Owners Insurer

10. Suit against Us

The insurance company cannot be sued by anyone for any coverage until all the terms of the coverage form are met. Suits must be brought within two years after the named insured first knew about a loss. If a state law invalidates this condition, any suit brought must comply with the provisions of that law and begin within the shortest period of time allowed by law.

Note: It is normal for a basic coverage form to be modified by mandatory state-specific endorsements that address issues that relate to that specific state.

11. Territorial Limits

Covered property must be located in the United States, its territories, and possessions, Canada, or Puerto Rico in order for coverage to apply.

Note: The Vacancy–Unoccupancy condition in the previous edition is not in this edition. It is in Additional Coverage Limitations analyzed below.

12. Carriers for Hire (04 07 addition)

The named insured is granted permission to accept shipping documents from transportation companies that limit the carrier's liability to amounts that are less than the covered property’s replacement cost or actual cash value.

Additional Coverage Limitations

Vacancy/Unoccupancy (04 07 formatting change only)

1. When Vacant or Unoccupied We Do Not Pay For

Loss caused by or that results from attempted theft, breakage of building glass, sprinkler leakage (unless the system was protected against freezing), theft, vandalism, or water damage is not covered if the building or structure had been either of the following at the time of loss:

2. Reduction in Payment

The amount paid for any one loss not otherwise excluded is reduced by 15%.

3. Unoccupied Means

An unoccupied location is one where customary activities or operations are no longer being conducted but where business personal property remains. A location is considered vacant when the occupants have completely vacated the premises and removed virtually all business personal property. Buildings or structures under construction are neither vacant nor unoccupied.

Definitions

Defined terms are used throughout the coverage form. Restricting their meaning to the definition in it is how all parties have a clearer understanding of the coverage intended. Fourteen terms are defined:

1. Aggregate limit

The limit or amount of coverage that applies to loss at a covered location during each separate 12-month coverage period. It is limited by the expiration or anniversary date.

2. Catastrophe limit

The limit or amount of coverage that applies to all loss at all covered locations during each separate 12-month coverage period. It is limited by the expiration or anniversary date.

3. Covered locations

This term has different meanings:

4. Earth Movement (04 07 changes)

The following earth actions are considered earth movement:

Note: There is no specific mention of sinkhole collapse not being considered earth movement.

5. Flood (04 07 changes)

This is any condition that inundates land that is usually dry. It can be general or temporary and can be partial or complete. A number of situations can cause such inundation:

Note: The previous edition considered water that backed up through a sewer or drain and water below the surface as flood. These are not part of the current edition’s definition.

6. Fungus (04 07 addition)

Fungus is part of this definition but it is not limited to only mold and mildew. It includes protists such as algae and slime mold as well as other protists. Wet rot, dry rot, and bacterium are also considered fungus. Chemicals, matter, or compounds that any of the above items produce or release are also fungus, including their toxins, spores, fragments, and metabolites, such as microbial volatile organic compounds.

7. Limit

This is the amount of coverage that applies to the insured property.

8. Named Perils (04 07 addition)

These are the perils common to basic property coverage forms: fire, lightning, explosion, windstorm, hail, smoke that causes sudden or accidental loss or damage, physical contact with and loss or damage that results from aircraft, vehicles, or falling objects. It also is riot, civil commotion, vandalism, sprinkler leakage (or discharge of water or other substances from an automatic sprinkler system), sinkhole collapse, and volcanic action.

Falling objects requires further explanation. Loss personal property that is stored in the open is not covered for falling objects. Damage to the interior of buildings or personal property that is stored in buildings is not considered falling objects unless such an object first breaches the building's exterior.

9. Occurrence limit

How much coverage applies at each covered location in a single occurrence.

10. Pollutant

This is a broad and expansive term. It is solids, liquids, thermal or radioactive contaminants, and irritants. It includes, but is not limited to, acids, alkalis, chemicals, fumes, smoke, soot, vapor, and waste. Waste includes materials intended for recycling, reclamation, and reconditioning, as well as for disposal. Visible and invisible electrical or magnetic emissions and sound emissions are also considered pollutants.

11. Schedule of coverages

This is any page labeled as such that contains coverage information, including declarations or supplemental declarations.

12. Sinkhole collapse

When the earth’s surface suddenly settles or collapses into an underground opening that has been created by water acting on limestone or some other rock formation. Sinkhole collapse does not include either the land’s value or the cost to fill sinkholes.

Note: The definition of Specified Perils in the previous edition is not in this edition.

13. Terms

These are all provisions, limitations, exclusions, conditions, and definitions that apply to this coverage.

14. Volcanic action

This is an airborne volcanic blast or shock waves, ash, dust, and particulate matter. It includes lava flow but does not include the cost to remove dust, ash, or particulate matter that does not directly damage covered property.

ENDORSEMENTS AND SCHEDULES

AAIS has developed the following endorsements and schedules to use with the Difference in Conditions–Property Coverage Part.

IM 7801–Difference in Conditions Form–Property Coverage Part–Excess Coverage

This basic coverage form is actually a coverage part and is virtually identical to IM 7800–Difference in Conditions–Property Coverage Part. However, it is used only when Difference in Conditions is written on an excess basis. Because it is excess it does not contain any Coverage Extensions, Supplemental Coverages, or deductible provisions because the primary coverage form or policy provides them. There are no separate limits for flood, earthquake, and all other perils because the named insured's participating layer applies to all covered perils.

IM 7806–Locations Schedule–Difference in Conditions (01 12 changes)

(Use with IM 7800)

This endorsement lists and describes locations where coverage applies. The 01 12 edition added a space to enter the policy number.

IM 7808–Schedule of Coverages–Difference in Conditions–Excess Coverage (01 12 changes)

(Use with IM 7801)

This endorsement provides limits, valuation, and available income coverage options that apply.

IM 7810–Difference in Conditions–Income Coverage Part

(Use with IM 7800)

This endorsement is a coverage part for loss of income as a result of loss or damage from a covered peril to covered property at a covered location. Loss of income coverage is available for earnings, rents and extra expense, or earnings and extra expense.

IM 7813–Excess Coverage Schedule (01 12 changes)

(Use with IM 7801)

This schedule identifies the name of the insurance company or companies, their policy number(s), and their corresponding limits for primary policies and the insurance companies that provide coverage on an excess layer basis. The 01 12 edition added a space to enter the policy number. It also added quotation marks around the word Limit (“Limit”) because Limit is a defined word.

Note: Difference In Conditions coverage forms and policies vary by insurance company. As a result, each policy, along with all its related coverage forms and endorsements, must be reviewed to determine coverages and restrictions that apply.

IM 7814–Difference in Conditions–Income Coverage Part–Excess Coverage

(Use with IM 7801)

This endorsement is a coverage part for loss of income as a result of loss or damage from a covered peril to covered property at a covered location. Loss of income coverage is available for earnings, rents and extra expense, or earnings and extra expense.

IM 7815–Mortgageholders Endorsement

(Use with IM 7800 and IM 7801)

This endorsement provides mortgage provisions that apply to mortgagees named in the coverage form. It provides the number of days’ notice the mortgagee receives in case of cancellation or non-renewal in addition to information on premium and loss payments.

IM 7817–Schedule of Limits–Difference in Conditions (01 12 change)

(Use with IM 7800 and IM 7801)

This schedule allows for separate limits for specific locations. The 01 12 edition added a space to enter the policy number.

UNDERWRITING

Underwriting Difference in Conditions (DIC) coverage involves four distinct types of exposure.

1. Primary exposures

The DIC provides drop down coverage for differences in conditions between the primary policy and the DIC. According to the Nationwide Inland Marine Definition, the DIC must not provide fire or explosion coverage. Only the primary policy will insure those perils. Because most DIC's are written over "All Risk," "Risks of Direct Physical Loss or Damage" or “Special Causes of Loss” coverage forms and policies, there are only a few coverages to underwrite with respect to the drop down feature.

One essential element of underwriting is analyzing all underlying coverage forms and endorsements. If standard Insurance Services Office (ISO) or AAIS forms are used, the review should be fairly simple and straightforward. However, if manuscript coverage forms or unusual endorsements are involved, a much more careful review is needed. Rating and premium calculations for the DIC do not contemplate any part of it dropping down and being primary on some peril that the primary or other excess underlying policy should cover.

2. Earthquake exposures

Earthquake coverage is usually written on a primary basis on the DIC. The three key factors in underwriting earthquake coverage are the location(s) involved, soil conditions, and building construction.

Fracking has added earthquake hazards in areas previously considered low earthquake hazard. Recent increases of earthquake activity should be reviewed.

Earthquake deductibles are used as an underwriting tool. The more earthquake-prone areas may require a deductible of 10% or more of the property limit, while less susceptible areas may be written with a flat deductible or a lower percentage deductible.

3. Flood exposures

The National Flood Insurance Program (NFIP) is the primary source for coverage for buildings situated in flood-prone areas as determined by the Army Corps of Engineers. A DIC is usually used as excess coverage over the NFIP and very rarely is the primary coverage. Significant flood issues include proximity to oceans, lakes, streams, creeks, rivers, and other bodies of water. Flash flooding after a heavy rain in normally dry rivers or streambeds can be an area of concern. The flood history of an area enters into any decision to write or refuse to write flood coverage in that area.

Basements and sub-basement areas are more prone to flood damage and distribution of values at the property location is important in any loss evaluation. Property highly sensitive to water damage should be kept at or above grade level.

Deductibles for this coverage are used as an underwriting tool. The more difficult and susceptible areas frequently require a deductible of 10% or more of the property limit while less susceptible areas may be written with a flat deductible or a lower percentage deductible.

4. Excess coverage

When the DIC is used as excess coverage, the most important part of the underwriting process is a clear understanding of the coverages, restrictions, and conditions contained in all underlying coverage forms and policies. Any gaps between the underlying coverage and the excess could result in unplanned and undesirable drop down situations. All underlying policies should be written by financially stable companies able to respond to any loss that could occur. Most insurance companies that write this coverage usually agree to write excess over insurance companies with a certain minimum financial rating by the A.M. Best Company or one of the other financial rating organizations. This financial rating requirement also holds true for any company they participate with on an excess basis.