OP 00 01–CAPITAL ASSETS PROGRAM COVERAGE FORM (OUTPUT POLICY) ANALYSIS

(December 2019)

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Introduction

OP 00 01–Capital Assets Program Coverage Form (Output Policy) Analysis

A. Coverage

1. Covered Property

2. Property Not Covered

3. Additional Coverages

4. Additional Coverages Each with a $100,000 Limit (Except as Otherwise Indicated)

5. Additional Coverages Each with a $50,000 Limit (Except as Otherwise Indicated)

6. Additional Crime Coverages

7. Business Income and Extra Expense

B. Covered Causes of Loss

C. Exclusions

D. Limitations

E. Additional Coverage–Collapse

F. Limits of Insurance

G. Deductible

H. Loss Conditions

I. Additional Conditions

J. Capital Assets Program Coverage Form Conditions

K. Optional Coverages

L. Definitions

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INTRODUCTION

OP 00 01–Capital Assets Program (CAP) Coverage Form (Output Policy) provides extremely broad coverage. It combines many of the best features of a number of different Insurance Services Office (ISO) property coverage forms and then builds on them. The coverage provided is very attractive to the right risk.

OP 00 01–CAPITAL ASSETS PROGRAM COVERAGE FORM (OUTPUT POLICY) ANALYSIS

Note: This analysis is of the 04 13 edition. Changes from the 10 10 edition are in bold print.

The opening statement cautions the named insured that certain provisions restrict coverage and encourages reading the coverage form carefully and completely to understand its various rights and duties in addition to what is and what is not covered. It defines the words “you” or “your” as the named insured on the declarations and “we," "us" and "our” as the insurance company that provides coverage. “Named insured” is not defined. As a result, it applies to any and all entities named on the declarations. There is no coverage for property owned by any entity not named on the declarations, even if the property is listed and described.

A. COVERAGE

The insurance company pays for direct physical loss of or damage to covered property. The property must be at a covered location. The loss or damage must be caused by or result from a covered cause of loss.

This paragraph provides the basis for all coverage and can be clarified as follows:

• The insurance company promises to pay for covered loss or damage.
• Direct physical loss or damage means that the loss must be definite in terms of place and time, not abstract or imaginary. The loss must be clearly evident.
• OP 00 01 identifies covered property by explaining what it covers as well as what it excludes.
• Covered location is an important definition. OP 00 01 provides coverage on a blanket basis. As a result, referring to the declarations does not reveal the location where coverage applies. Section L. Definitions must be examined to determine if a location is covered.
• Section B. Covered Causes of Loss explains the types of losses that are covered and that are not covered.

1. Covered Property

The following described items are Covered Property. However, Item, 2. Property Not Covered must also be examined carefully to determine precisely what property is eligible for coverage. . If the item is covered, there is one further limitation – there must be a limit of insurance on the declaration for that type of property.

Example: Olivia purchases a CAP for her building. The only limit of insurance shown is for building. A fire occurs and she has the following losses:

Building - covered

Fences – covered

Refrigeration units – covered

Stock – not covered

Business personal property – not covered

a. Building is covered if a limit for it is on the declarations. It extends to building and structures as well as the following:

• Completed additions to any covered building or structure
• Building glass or glass that makes up part of a structure
• Indoor and outdoor fixtures
• Equipment, machinery, platforms, and bins but only if permanently installed

• The named insured’s owned personal property that is used to maintain or service buildings and structures at covered locations. This includes floor coverings, outdoor furniture, appliances for cooking, washing, laundering, refrigerating, and ventilating. It also includes equipment for heating, air conditioning, and ventilating and fire extinguishing equipment but is not limited to just these.
• Builders risk but only if other insurance does not cover it. The Definitions Section describes the property considered builders risk. In addition, the named insured's legal liability for similar property of others with respect to fixtures, machinery, and equipment in that definition of builders risk is also covered.

Example: Phillips Fencing, Inc. decides to build a new storage building on its premises. It purchases the necessary materials and places them in the area where construction is to take place. The first shift workers construct the building and the second shift workers continue fence production. The first shift workers arrive one morning to discover all the materials gone and a jimmied lock is evidence of a break-in. This loss is covered under the definition of building because the material was part of a construction project.

• Awnings and canopies situated on or within 1,000 feet of a covered building
• Fences
• Television and radio towers that are situated within 1,000 feet of a covered building. Antennas, satellite dishes, guy wires, lead-in wiring, masts, and property permanently mounted or attached to such property are also building if located within 1,000 feet of a covered building.
• Signs
• Foundations for buildings and structures in addition to foundations placed for boilers and machinery
• Docks, piers, wharves, pilings, and bulkheads
• Underground pipes, drains, and flues
• Retaining walls

b. Business Personal Property located on or in buildings or structures at covered locations is protected only if there is a limit for business personal property on the declarations. The same property that is within 1,000 feet of the covered location in the open or in or on vehicles is also covered. Business Personal Property includes the following:

• Furniture and fixtures
• Machinery and equipment
• Stock
• Other personal property the named insured owns AND uses in the business
• Labor, material, or services the named insured furnishes or arranges on personal property of others

Example: C & A Tool and Die repairs molds that its customers own. A tornado strikes and destroys C & A's building. Its insurance company pays the value of the lost molds to their owners and pays C & A for its labor and materials invested in the molds.

• The named insured's use interest in improvements and betterments, if it is a tenant

Note: These are fixtures, alterations, installations, or additions made or added to a building the named insured does not own that it acquired or made at its expense that it cannot legally remove.

• Personal property the named insured leases but only when the named insured has a contractual responsibility to insure it.
• Personal property that is intended to become part of the named insured's installation, erection, or fabrication project. The property can be at a jobsite or in temporary storage pending its delivery to a jobsite. It is not subject to the within 1,000 feet restriction. This provision does not apply if the property is within the definition of builders risk.

• Mobile equipment wherever located in the coverage territory but only if other insurance does not cover it

Example: Murphy keeps an old unlicensed pickup truck on the plant property to move small quantities of goods between buildings. It was on his automobile insurance policy but, when he no longer licensed it, he deleted the physical damage insurance coverage on it. A fire occurs in one of the buildings and the truck parked inside is destroyed. The truck is covered property.

• Personal property of others while it is in the named insured's care, custody, or control. Property that is sold under an installation agreement is included in this item if the named insured's responsibility does not end until the purchaser accepts the property. This coverage is for only the benefit of the property owner.

2. Property Not Covered

OP 00 01 covers many different forms of property. However, it excludes the following property:

a. Accounts, bills, currency, food stamps, other evidences of debt, money, notes, securities, and valuable papers and records. This does not restrict coverage that is specifically provided for any of these items elsewhere in the policy.

Note: OP 00 01 provides limited coverage for some of this property elsewhere on the policy.

b. Aircraft and watercraft. Equipment and parts of such aircraft and watercraft are also not covered. However, the following exceptions apply:

• Rowboats, canoes, and their equipment or parts are covered but only when out of the water at the named insured's covered location.
• Aircraft and watercraft that the named insured manufactures and sells to others.

c. Animals. The following are exceptions:

• Animals owned by others that are being boarded by the named insured are covered.
• Animals that the named insured owns as stock, but only during a time when they are inside a building.

Example: Marybelle, a greyhound, escapes and is struck and killed by a car.

Scenario 1: Marybelle was being boarded at Kelly’s Doggie Daycare. Marybelle would be considered covered property.

Scenario 2: Marybelle was stock at Kelly’s Pet Store. Marybelle would not be considered covered property because she was not inside a building at the time of accident.

d. Motor vehicles, such as automobiles, motorcycles, motor trucks, motor homes, tractors, and mobile equipment that are held for sale, lease, rental, or loan

e. Business personal property that is in transit by water or air. The exception is when such property is being transported by a regularly scheduled airline or ferry service.

f. Bridges and roadways, walks, patios, and other paved surfaces

Note: The cost to insure this property probably outweighs the chance of it being damaged in a covered loss.

g. Property that is in the course of illegal transportation or trade and contraband.

h. Costs of excavating, grading, filling, or backfilling. The only exception is that the costs that must be incurred to rebuild, repair, or replace other covered property are covered. However, cost or expense incurred to stabilize or reconstruct land in any way remains uncovered.

i. Electronic data is not covered but there are exceptions:

• Electronic data that operates lighting, heating, ventilating, air conditioning, elevators, or security systems is covered (04 13 change)
• Stocks of prepackaged software are covered
• Coverage provided within Electronic Data Additional Coverage is not subject to this item.

j. Any import or export property that is covered under an ocean marine cargo or similar policy. This applies regardless of who purchases the coverage.

Example: Mel regularly ships certain kinds of covered property to Puerto Rico. He hires Fergus Shipping to handle all transportation and shipping transactions. A customer calls to complain that a shipment did not arrive. Mel checks on this with Fergus, Fergus investigates, and discovers that the cargo pallet that contained Mel's property is lost. Fergus purchases ocean marine coverage on all shipments that leave the country. Because Fergus had purchased coverage on the shipment, Mel will receive no payment under his CAP for the cargo loss. However, Mel can expect payment from Fergus Shipping’s insurance carrier.

k. Fine arts. The only exception is the coverage provided by Fine Arts Additional Coverages Each with a $100,000 Limit (Except as Otherwise Indicated).

l. Crops located outside buildings. Examples of such crops are hay, grain, and straw.

Note: The same property inside buildings is covered.

m. Land, water, lawns, and growing crops. The only exception is the coverage provided for lawns that are part of vegetated roofs. (04 13 change)

Note: Growing crops are different from harvested crops.

n. Property that is in transit. The only exception is coverage provided in Property In Transit Additional Coverages Each with a $50,000 Limit (Except as Otherwise Indicated).

o. Property that another insurance coverage form or policy specifically covers. However, OP 00 01 responds on an excess basis over the limits and coverage of that other coverage form or policy. If that other coverage cannot be collected this policy still pays only over the other policy’s limit so the named insured would be responsible for that underlying amount.

Example: George is insured under OP 00 01–Capital Assets Program Coverage Form. He also has separate Electronic Data Processing (EDP) coverage for his computer and electrical equipment in the office with a $50,000 limit. A fire destroys the office and the EDP equipment loss is $60,000.

Scenario 1: The EDP coverage responds for $50,000. OP 00 01 has a $20,000 limit for EDP equipment. OP 00 01 pays only $10,000 because that is all that is needed to complete the loss.

Scenario 2: The EDP coverage does not respond because the insurance company is insolvent. OP 00 01 has a $20,000 limit for EDP equipment. OP 00 01 still pays only $10,000 even though the other coverage is uncollectible.

p. Property of others the named insured is legally responsible for as a carrier-for-hire. In addition, property of others the named insured is legally responsible for as a business that makes transportation arrangements. Exceptions may be found in other places within this policy.

q. Property that has been sold and delivered. Property the named insured sold under an installation agreement is an exception.

r. Property that is sold under an installment sales and similar type contracts is excluded. Property that is leased to others or that is out on approval is also excluded.

This exclusion does not apply to Installment Sales Property Additional Coverage.

s. Trees, shrubs, and plants are excluded. There are two exceptions:

• Trees, shrubs, and plants that are part of vegetated roofs are covered. (04 13 change).
• Coverage provided under the Trees, Shrubs, and Plants Additional Coverage.

t. Vehicles and self-propelled machines. This applies only if they are licensed so that they may be used on public roads. There are two exceptions:

• Any of such property that the named insured manufactures, processes, or warehouses
• Any of such property that the named insured holds for sale, lease, loan, or rental. However, motor vehicles, such as automobiles, motorcycles, motor trucks, motor homes, tractors, and mobile equipment remain excluded because they are excluded under paragraph d. above.

Example: Kelley Sports makes go-carts and motorized skateboards and is insured under an OP 00 01. Kelly's products are covered because he manufactures them.

3. Additional Coverages

The limits for the additional coverages described in this section are included within the limits and do not provide any additional limits of insurance. The limits shown are sub-limits of the limits of insurance on the declarations. The only exceptions to this are the additional limits provided under c. Automatic Increase.

Example: Maribel Designs sustains a total smoke damage loss. The $3,000,000 inventory is salvageable, but Maribel Designs does not want its name associated with salvaged material. Maribel pays to remove all of the labels from the items and also all packaging. The cost to remove the labels and replace them with acceptable labels is $150,000. Although the claim is fully compensable, the entire $3,000,000 limit was needed to compensate Maribel for the direct loss, so no additional limit was available to pay for the relabeling.

Note: When recommending limits of insurance, it is very important to consider how the insured will utilize the various coverages in this section so that limits are increased limits accordingly. The usefulness of a great coverage is diminished when its limit of insurance is used up.

a. Brands and Labels Expense

The insurance company may exercise its option to take all or part of branded or labeled covered property a covered cause of loss damages and pay the agreed or appraisal value. The insurance company will then sell the merchandise as salvage.

However, because of this additional coverage, the named insured has the right to remove all branding or labeling or to stamp the word salvage on the merchandise as long as doing so does not physically damage the merchandise. The insurance company will even pay the expenses incurred to do so.

Example: Cherie worked for years to get her line of blouses to be number one in the market. She currently sells them for $1,000 or more each. Her warehouse has a covered water damage loss and the damaged blouses must be sold on the salvage market even though they are salvageable after dry cleaning. Cherie demands that the labels be removed so the blouses cannot be identified. OP 00 01 covers the $25,000 expense to remove the labels because the overall limit of insurance is adequate. The loss of the labels reduces the salvage value of the property from $250,000 to $50,000 but Cherie is still fully compensated for her loss.

b. Debris Removal (04 13 changes)

After a covered cause of loss causes physical loss or damage, debris remains that must be removed. This additional coverage applies to the costs to do so. This coverage is explained as follows:

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

• The named insured actually incurs the debris removal expenses.
• The debris to be removed is covered property.
• The debris to be removed is not covered property but meets the criteria in this paragraph and the criteria in paragraph (2) below. (04 13 addition)
• The covered property became debris because a covered cause of loss occurred.
• The loss occurs during the policy period.
• The expenses are reported within 180 days of the date of direct physical loss or damage.

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

(2) The 04 13 edition changes this paragraph significantly. The 10 10 edition limited itself to only items related to pollutants. This expansion of the paragraph is needed because paragraph (1) is broadened to include debris of non-owned property. This paragraph limits that broadening of debris coverage. These items appear to be limiting but, instead, they establish the boundaries for the broadened coverage in paragraph (1).

There is no coverage for the costs to remove the following items:

• Debris that belongs to the named insured that is either not insured or is considered property not covered.
• Landlord’s property when the named insured is a tenant. However, it is still covered if the named insured is contractually obligated to insure the property.
• Any property described in 2. Property Not Covered. This also applies to property that has limited coverage under Additional Coverages h. Trees, Shrubs, and Plants.

Note: This means that debris of trees, shrubs, and plants is not covered debris.

• Any property that belongs to others that this coverage form does not include as Covered Property
• Mud or dirt deposited on the grounds of the premises during a covered loss
• Any pollutants from land or water
• Polluted land or waters. The cost to restore or replace the polluted land or waters is also excluded.

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

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

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

· The limit of insurance for the damaged covered property

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

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

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

· The actual debris removal expense

If there is no direct physical loss or damage to covered property, the most the insurance company pays to remove the debris of other property is $5,000 per location, subject to other items in this additional coverage.

(4) This paragraph provides an additional amount of insurance to remove debris if one of the limitations in paragraph (3) above applies. The additional amount of coverage is $50,000, subject to the following:

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

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

· The limit of insurance for the damaged covered property PLUS $50,000 Debris Removal Additional Coverage

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

· The total of the amount paid for the direct physical loss plus any applicable deductible amount multiplied by a factor of .25 PLUS $50,000. The formula is [(Paid loss amount + deductible amount) x .25] + $50,000 = Debris Removal Coverage Amount.

· The actual debris removal expense

The last point to make with respect to this coverage is that the maximum amount of insurance available for direct physical loss and debris removal expense does not exceed the coverage limit of insurance plus $50,000.

Example: St. Peter’s Chapel is located in a state forest. The amount of loss is $200,000. Debris removal is extremely difficult because of the limited access and the care that must be taken to prevent damage to the environment. The debris removal expense is $90,000. In addition, there is some discussion about pollution as a result of the fire because of the asbestos that was part of the building. The state government insists on testing the land for pollutants and other environmental impact. The cost of the testing is $10,000. The debris removal limit available is $50,000, the $200,000 amount of loss multiplied by 25%. Add the $50,000 additional debris limit for a total limit of $100,000. The debris removal expense is $90,000 and another $10,000 is for the tests for pollution testing. The $90,000 debris removal expense is covered but the $10,000 for pollution testing is not.

Note: OP 00 01 provides two examples that explain the effect of the deductible on calculating the debris removal expense.

c. Automatic Increase

The limits of insurance for Building and Business Personal Property automatically increase by 2% each year. This percent can be changed on the declarations or on OP 14 01–Scheduled Location. OP 00 01 states that OP 14 05–Scheduled Mobile Equipment can also be changed but this must be done manually because the form does not include a place to enter the percentage.

To determine the amount of increase available on the date of loss, divide the number of days since policy inception by 365. Then multiply the result by .02 (or the percentage that applies). Finally, multiply this result by the limit of insurance.

Example: The limit of insurance is $2,000,000, the increase percentage is 2%, and the loss occurs 260 days into the policy term. The $2,000,000 limit is multiplied by the proportion of 260 days of coverage divided by 365 days in a year, or .712. That figure is multiplied by 2% for a total additional limit of $28,480 on the date of loss.

Note: As stated above, the percentage increase can be changed. The annual increase amount must be added to the original limit at policy renewal. Otherwise, the limit is actually reduced if the insured "renews as is."

Example: Polly’s blanket limit on 01/01/20 is $2,000,000. Her coverage form has a 3% automatic increase. On 12/31/20 her limit should be the original $2,000,000 limit increased by 3%, or a total of $2,060,000. If the 01/01/21 renewal is for the same limit that was in effect on 01/01/20, the limit is actually lower because the automatic increase starts over on each renewal date or anniversary.

d. Fire Department Service Charge (04 13 change)

Some rural and suburban areas charge a fire department service fee to supplement their tax revenues. If the named insured must pay a service fee because it signed a contract before the loss occurred or must do so because of a local ordinance or law, this coverage reimburses it for such fees up to $10,000 per covered location. The $10,000 limit applies regardless of the number of departments that respond or the number of services provided. The limit can be increased.

Note: Prior editions of OP 00 01 were open-ended and subject to various interpretations. One interpretation was that each fire department service was subject to the $10,000 limit. If multiple departments responded, each fee charged was capped at $10,000. Under this new wording, the single $10,000 limit applies if multiple departments respond. This could be a significant restriction of coverage in situations where multiple departments respond.

This additional coverage is not subject to a deductible.

e. Ordinance or Law

This additional coverage deals with each of the three distinct types of ordinance or law coverages.

(1) Coverage (04 13 changes)

(a) Coverage A applies to the undamaged portions of a building that must be demolished in order to comply with an ordinance or law. Coverage applies if a covered cause of loss damages the building and there is a local ordinance or law that requires demolishing the undamaged portion of the building because of damage to the rest of the building. The amount of this loss is only the loss in value of the undamaged portion of the building because of the ordinance. It does not pay demolition expenses.

Note: This coverage is included within the limit of insurance on the declarations that applies to the covered building, not in addition to it.

Example: The Madison Hotel is a landmark. The five-story joisted masonry building is well over 100 years old and is located in the center of town. It has been remodeled over the years, but it still does not comply with many current codes and ordinances. The Madison has been grandfathered from having to comply with these ordinances because it was built prior to their enactment. A late October hurricane damages more than 60% of the building. According to current ordinances, any structure damaged 50% or more must be brought into compliance with all current codes. Current codes restrict joisted masonry construction to a maximum of two stories high. In this case, the undamaged portion of the building above two stories must be torn down or the entire building must be torn down and rebuilt. Coverage A applies to the undamaged portion of the building. This coverage therefore changes a partial loss to a total loss.

(b) Coverage B pays the costs to demolish the undamaged portion of the building and to remove the demolition’s debris. The limit for this coverage is $100,000 unless there is a different limit on the declarations. This limit is part of the limit of insurance on the declarations, not in addition to it.

Note: If the direct damage loss including Coverage A uses up the limits, nothing remains for Coverage B. If the limit for Coverage B is increased, the named insured should consider increasing the blanket limit of insurance by the same amount.

Example: Continuing the example above, Coverage B pays the costs to demolish the undamaged portion.
E. Additional Coverages b. Debris Removal applies to the damaged portion, but Coverage B additional limits apply to the debris removal costs of the undamaged portion. The building construction was solid and the only practical way to demolish it was by implosion. The $100,000 limit pays for both the demolition and the debris removal.

(c) Coverage C pays the additional costs to rebuild or repair the building in order to comply with the minimum standards of ordinances or laws. The limit for this coverage is $100,000 unless there is a different limit on the declarations. This limit is part of the limit of insurance on the declarations, not in addition to it.

Note: If the direct damage loss including Coverage A uses up the limits, nothing remains for Coverage C. If the limit for Coverage C is increased, the named insured should consider increasing the blanket limit of insurance by the same amount.

Example: Continuing the example above, Coverage C pays for the upgrades needed to comply with current codes. Because the hotel must be rebuilt, the $100,000 can be used to improve the building and enable it to meet current codes. The $100,000 can be used to pay the difference between joisted masonry construction and masonry noncombustible, make the building handicapped accessible, and other improvements the ordinance requires.

This coverage is not provided to help the named insured correct problems that should have been corrected before, but which were ignored. The named insured must pay for any outstanding violations that apply to it that it did not correct, not the insurance company.

Example: Part of the expense for the Madison to rebuild is due to its ignoring required compliance with certain aspects of the Americans with Disabilities Act (ADA) and several fire safety codes that were not subject to grandfathering. These costs are ineligible for coverage.

In addition, this coverage does not apply with respect to any ordinances or laws that relate to pollution.

(2) Application of Coverage(s)

The coverage described above applies only if qualifications (a) and (b) below are met. Item (c) below explains how partially covered losses are handled.

(a) Ordinance or Law

This coverage applies to only specific types of ordinances or laws. They must establish land use or zoning in relation to demolishing, building, or repairing buildings. They must apply to the covered location and be in effect at the time of loss. In addition, the coverage provided responds to only the ordinance or law's minimum requirements. Costs incurred to comply with recommendations above the minimum requirements are not covered.

(b) Ordinance or Law–Direct Physical Damage

The covered building must sustain direct physical damage by a covered cause of loss. The loss must then result in the named insured having to comply with the ordinance or law.

When a covered building must comply with an ordinance or law because of a combination of both covered and uncovered loss, this coverage continues to apply but is subject to limitation (c) below.

Coverage does not apply when the direct physical damage to the building is excluded and such damage is the only reason the insured must comply with the ordinance or law.

(c) Limitation

When both a loss that is covered and a loss that is not covered cause damage to a building, the insurance company pays only the part of any ordinance or law loss that represents the proportion that the covered direct physical damage bears to the total of such damage.

The insurance company pays the entire loss otherwise payable under Coverages A, B, or C if the covered direct physical damage by itself resulted in the requirement to comply with an ordinance or law.

Example: Fabio’s Department store is three stories high and is located in a downtown business area. It was built in 1965 and is grandfathered from many current building codes and ordinances. A windstorm with storm surge occurs that damages the building. The building is 85% damaged. One of the new code requirements is that if more than 60% of a building is damaged then the entire building must be demolished. The rebuilt building must then meet all current building codes. The building limit is $8,000,000 but while $1,200,000 of the building is undamaged it must be torn down. The cost to demolish is $50,000 and the cost to meet current codes is $2,500,000. Scenario 1: It is determined that 45% of building damage was due to wind and 40% was due to storm surge. Coverage A is covered for $1,200,000 X .45 = $540,000. Coverage B has a value of $100,000. The cost to demolish the undamaged portion is $50,000 but the most paid is 45% of the $50,000 cost to demolish the undamaged portion, or $22,500. Coverage C has a limit of $100,000. While the cost to meet current codes is $2,500,000 the payment is limited to 45% of $100,000, or $45,000. Scenario 2: It is determined that 65% of building damage was due to wind and 20% was due to storm surge. Sylvester’s full value limit of insurance is $5,000,000. Because the wind damage triggered the ordinance, the entire amount of the ordinance is covered. Therefore $1,200,000 Coverage A, $50,000 coverage B and $100,000 Coverage C limits are paid.

(3) The Insurance Company Does Not Pay for:

(a) Bringing a building into compliance with or because of enforcing any ordinance or law that requires that covered property be demolished, repaired, replaced, reconstructed, remodeled, or remediated due to contamination by pollutants or any presence or activity of fungi, wet rot, or dry rot

(b) Any costs in conjunction with complying with or enforcing any ordinance or law that requires any insured or others to act in any way to respond to or assess pollutants, fungi, wet rot, or dry rot

(4) H. Loss Conditions, 4. Loss Payment, c. Ordinance or Law applies to this Additional Coverage.

(5) The terms of this Additional Coverage apply separately to each covered building.

(6) This Additional Coverage does not apply to ordinances or laws that the named insured was required to comply with prior to the loss but did not.

(7) An example of proportionate loss payment is provided.

f. Personal Effects

Personal effects that the named insured, its officers, partners, and employees own are covered for up to $10,000 in a single occurrence for loss or damage caused by or that results from covered causes of loss. There are two important exceptions. There is no coverage for theft and coverage applies only if Business Personal Property coverage is provided.

The $10,000 is a sublimit of the limit of insurance for Business Personal Property. The sublimit can be increased.

g. Reward Payment

The named insured can offer rewards for any legal purpose. This coverage does not restrict that right. However, the insurance company will pay a reward only in two situations.

• The reward is granted for information that leads to the arrest and conviction of the person or persons who committed a crime that was a covered cause of loss to covered property.
• The reward is for the return of stolen property.

The most this Additional Coverage pays is a sublimit of $10,000. This is further limited to no more than the replacement cost value of the item or items damaged or stolen. The $10,000 limit can be increased.

The only persons who can receive a reward payment are those not associated with the named insured or the crime. Only one reward payment applies to each occurrence. The reward notice must be posted before the informant provides the information. No payment is made until after the person or persons responsible are convicted or the property is returned.

Note: Insurance companies can and do offer rewards as part of their claim handling procedures. This reward payment option provides a reward amount that the insured can offer without first asking permission to do so.

Example: Karen owns a very successful shop called “Kitty’s Place.” Kitty is a gray and white cat that entertains customers with her antics. Karen opened the shop one day and discovered Kitty missing. Karen was frantic and put out flyers offering a $1,000 reward for the cat’s return. Kitty was returned two days later, and Karen handed over the $1,000. Karen requested reimbursement from the insurance company, but the company denied her request. The theft loss was not covered because Kitty was excluded as covered property.

h. Trees, Shrubs, and Plants (04 13 changes)

This is part of the Business Personal Property limit. Coverage is extended to apply to outdoor trees, shrubs, and plants, including the expenses incurred after a loss to remove their debris. This additional coverage does not apply to stocks of trees, shrubs, or plants. It also does not apply to such property that is part of vegetated roofs. Coverage applies for the specified causes of loss of fire, lightning, explosion, hail, smoke, aircraft, vehicles, riot, civil commotion, vandalism, leakage from fire extinguishing equipment, sinkhole collapse, volcanic action, falling objects, or water damage as limited in the definition of Specified Causes of Loss. Smoke includes emission or puff back of smoke, soot, fumes, or vapors from boilers, furnaces, or related equipment. Losses due to wind, weight of snow, ice, or sleet, and vehicles are excluded.

In addition, removing trees, shrubs, and plants that belong to others that are deposited as debris on covered locations is covered. This does not apply if the named insured is a tenant and the landlord owns the debris.

The most the insurance company pays in any one occurrence is $25,000, limited to $1,000 for each tree, shrub, or plant, regardless of the number or types lost or damaged in that occurrence.

Note: This is a per occurrence limit. It is not a per covered location loss. Also note that debris removal is not covered under 3. Additional Coverages b. Debris Removal. It is part of the limits of $25,000 and $1,000.

i. Electronic Data (04 13 change)

This Additional Coverage does not apply to stocks of pre-packaged software or to electronic data that is combined with and that controls or operates the building’s heating, air conditioning, ventilating, lighting, elevator, or security systems. This wording has been added because all of these are exceptions to the electronic data not covered property provision and therefore considered covered property.

This additional coverage applies to the cost to replace or restore destroyed or corrupted electronic data. The data must be corrupted by the specified causes of loss of fire, lightning, wind, explosion, hail, smoke, aircraft, vehicles, riot, civil commotion, vandalism, leakage from fire extinguishing equipment, sinkhole collapse, volcanic action, falling objects, weight of snow, ice or sleet or water damage as limited in the definition of Specified Causes of Loss, collapse, virus, harmful code, or similar instruction introduced into the system. Smoke includes emission or puff back of smoke, soot, fumes, or vapors from boilers, furnaces, or related equipment.

The virus, harmful code, or similar destructive code must have been introduced with the intention to cause damage. Coverage does not apply if damage is caused by employees or contracted entities that operate outside of their responsibilities. If the electronic data is not replaced, the insurance company pays only the cost of blank media used to store the data or the data’s value, whichever is less. The $100,000 limit applies as an aggregate amount in any single policy year. Damage that begins in one year and continues to another period is considered to be a single occurrence within the first year and is subject to the one limit as of the initial date of damage.

Example: Pamela is warned not to open unsolicited email but this one looks official. It takes only a moment for the computer virus to infiltrate and corrupt the system. All computers in the company are on the same network and the virus soon works its way through the entire system. Pamela calls an outside expert to decontaminate her network and retrieve data. The expense is $25,000. Thanks to this additional coverage, the expense is covered.

j. Limited Coverage for Fungi, Wet Rot, and Dry Rot (04 13 change)

(1) This coverage applies only when fungi, wet rot, or dry rot results from a Specified Cause of Loss (other than fire or lightning) or flood (if OP 10 04–Flood Coverage insures the affected location) that occurs during the policy period. Every reasonable measure must have been taken to protect and preserve the property from additional damage both when the loss occurred and afterwards. Plants, trees, and shrubs that are part of vegetated roofs are not covered under this Additional Coverage. (04 13 addition)

(2) The insurance company pays for loss or damage to covered property due to fungi, wet rot, or dry rot. Loss or damage means:

• Direct physical loss or damage to covered property that fungi, wet rot, or dry rot causes

Note: This includes removal costs.

• Necessary costs to tear out and replace parts of the building or property in order to reach the fungi, wet rot, or dry rot
• If there are any reasons to believe that fungi, wet rot, or dry rot is still present after the damaged property is removed, repaired, replaced, or restored, the costs of necessary testing that must be done

(3) The most paid during a 12-month policy period is $15,000. However, a higher limit can be entered. This limit applies to each location only if OP 14 01–Scheduled Location option is selected. The limit applies regardless of the number of claims that arise out of all occurrences of covered causes of loss, even if the fungi, wet rot, or dry rot continues to be present, active, or recurs in later policy periods.

(4) The limit for this coverage is a sub-limit. It does not increase the Limit of Insurance that applies to any covered property. It is the most paid in case a particular loss involves loss or damage by fungi, wet rot, or dry rot and other covered loss or damage.

(5) This coverage does not change the coverage that E. Additional Coverage–Collapse provides or C. Exclusions 2. g. Frozen Plumbing.

(6) If 7. Business Income and Extra Expense Coverage applies to the covered location and if the operations suspended meets its terms and conditions, one of the following applies:

• The insurance company's payment is limited to the amount of loss and/or expense sustained in up to a 90-day period if the loss that results in fungi, wet rot, or dry rot did not require such suspension, but the suspension was due to the loss or damage they caused. A different number of days can be selected. The days do not have to be consecutive.
• If a covered suspension was caused by loss or damage other than fungi, wet rot, or dry rot but remediating them lengthens the period of restoration, the insurance company pays such loss and/or expense sustained during the delay for up to 90 days. A different number of days can be selected. The days are not required to be consecutive.

k. Water Damage

The insurance company pays the necessary costs to tear out and replace parts of the building or structure in order to gain access to and repair a damaged system. Costs to repair the defect that caused the water or steam to escape from the system that contained it are excluded.

This Additional Coverage applies only when a covered water damage loss occurs as a result of plumbing, heating, air conditioning, ventilation, or a sprinkler system. It does not apply to sumps, sump pumps, or related equipment.

Note: This coverage is needed because intentional damage to undamaged property walls, floors, and ceilings is not covered even if the reason for the destruction is to find and repair a system causing a leak. This Additional Coverage is a practical solution to encourage the named insured to take the necessary steps to stop a potentially much larger loss if the system continued to leak.

4. Additional Coverages Each with a $100,000 Limit (Except as Otherwise Indicated)

Each of the following coverages has a $100,000 limit except as otherwise indicated. The limit applies separately to each coverage and is not considered within the limit of insurance. As a result, losses paid under these coverages do not reduce the limit of insurance on the declarations or the scheduled location endorsement that applies to the covered property.

a. Accounts Receivable

If a covered cause of loss damages customer records to the extent that the named insured cannot collect monies owed it, Business Personal Property insurance extends to apply to the expenses incurred to recreate financial records, and to pay interest charges on loans taken out to offset the loss, collection expenses, and other related expenses. Coverage does not apply to accounts receivables that exist only as electronic data. The $100,000 limit can be increased.

The named insured is to be indemnified for a loss but not rewarded. As a result, undamaged accounts, accounts that can be collected, allowances for bad debts, and unearned interest and service charges are deducted from the amount of loss paid.

A customer's previous 12-month history can be used in cases where accurate records cannot be reconstructed any other way.

Example: An explosion next door starts a fire in Fred's office that destroys the file cabinet that contains his customer records. Fred knows his customers owe him about $100,000 because of his financial statements. The insurance company works with his accountant to establish a value. Fred incurs expenses to recreate the accounts receivable based on customer list, past purchase, inventory and shipping records and other ancillary reports. Fred then bills the customers and is able to collect almost $65,000. He incurred $15,000 to recreate the records. This means that Fred is paid $35,000 for the uncollectible receivables plus $15,000 for his re-creation expenses.

b. Business Personal Property Off Covered Location

This additional coverage is for Business Personal Property that is located more than 1,000 feet from the covered location. The coverage territory for Business Personal Property temporarily away from the named insured's covered location is any place in the world. There are three restrictions:

· The named insured cannot own or lease the location

· The property cannot be in transit

· The property cannot be in any country or jurisdiction subject to United States of America embargo, trade, or other economic sanctions.

The coverage applies only if the country or jurisdiction allows the insurance to apply. Any coverage dispute must be filed and resolved in courts in the basic territory. Payments are made using U.S. currency and are based on the rate of exchange at the time of loss or damage. The $100,000 limit can be increased.

Example: James is in Portugal on a buying trip. He purchases items and has them shipped to his primary hotel. After finishing his travels, he plans to take the items with him on the cruise ship as he returns home. A fire occurs at the hotel and destroys the items he purchased. The exchange rate on the date of loss values the loss at $50,000 but it is $35,000 on the date the loss is settled. James receives $50,000.

c. Fine Arts

This additional coverage extends Business Personal Property coverage to apply to fine arts. The important point is that it values them at their market value not at replacement cost or actual cash value. The $100,000 limit of insurance applies in a single occurrence and can be increased.

Note: While there is no requirement to provide a schedule of fine arts, having proper documentation of property values at the time of loss is helpful. However, when larger values or more property is involved, a separate inland marine scheduled fine arts coverage form, or policy may be more appropriate.

d. Valuable Papers and Records

This additional coverage extends Business Personal Property coverage to apply to valuable papers and records the named insured owns and similar property of others in its care, custody, and control. The limit of $100,000 can be increased.

Coverage does not apply to valuable papers and records in electronic data form, property held as samples, or for property already sold and awaiting delivery.

Valuable papers or records that cannot be replaced with property of like kind and quality are excluded unless they are specifically listed and described on the declarations.

Example: Peter is happy to learn that his policy has automatic valuable papers coverage because he has a large collection of rare books that are not otherwise insured. He used a scheduled policy in the past and disliked having to describe each book. An insured loss occurs that also affects his collection and he presents a claim for $55,000. Peter is very disappointed when the claim is denied because the books in his collection cannot be replaced with books of like kind and quality and are not covered because they were not scheduled.

5. Additional Coverages Each with a $50,000 Limit (Except as Otherwise Indicated)

Each of the following coverages has a $50,000 limit although some may have a different limit. The limit applies separately to each coverage and is not considered within the limit of insurance. As a result, losses paid under these coverages do not reduce the limit of insurance on the declarations or the scheduled location endorsement that applies to the covered property.

a. Consequential Loss

This additional coverage responds to the reduction in value of a part or parts of business personal property that cannot be marketed because of covered loss or damage to other parts of the same product. The $50,000 limit can be increased.

Example: Both the jacket and the trousers of a suit are cut from the same material, but the jacket is sewn in one part of the building and the trousers in another. If a fire occurs and destroys the jacket section of the plant while not affecting the trouser section, the trousers lose much of their value because they can be sold only as separates and not as a complete suit. This coverage pays for the reduction in the trousers’ value due to the jacket’s loss.

b. Fire Extinguisher Systems Expense

This additional coverage applies to two separate items. It pays the named insured's costs to recharge or replace (whichever is less) its fire extinguishers and fire extinguishing systems, including related hydrostatic testing, when the need to do so is caused by or results from a covered cause of loss. It also pays for loss or damage to covered property that results from accidental discharge of chemicals from such a system. However, it does not pay for loss or damage that arises out of installing or testing such systems. The limit of $50,000 can be increased.

Example: The electricity goes out and Marcy feels around for switches to activate her office’s auxiliary lighting. Unfortunately, her groping causes her to flip the manual switch for the fire extinguishing system. When the power returns, she sees the damage that was done. The office interior and its contents must be washed down and the extinguishing chemicals replaced. Marcy's mistake costs $15,000 but this coverage pays the entire amount.

c. Inventory and Appraisal Expense

This additional coverage extends Business Personal Property coverage to pay for the cost of inventories and appraisals but only if the insurance company requires them. It does not apply to any expenses for public adjusters, public accountants (or their associates and subordinates) to costs that H. Loss Conditions 2. Appraisal, addresses or that are due to disagreements the named insured has with the insurance company. The $50,000 limit can be increased.

Note: The named insured must provide a complete inventory of damaged and undamaged property when the insurance company requests it. This information is important to accurately value a loss. Inventories can be expensive and without this coverage the named insured must bear the entire cost. However, this is not automatic coverage. The inventory and appraisal expenses are paid only if the insurance company asks for the inventory and appraisal.

d. Pollution Cleanup and Removal

The expense of extracting pollutants from land or water is covered if a covered cause of loss caused the event that resulted in the pollution damage. The named insured is required to report the incident to the insurance company within 180 days following the event. The $50,000 limit at each covered location is an aggregate amount that applies to the entire policy period and is not an occurrence limit. This Additional Coverage does not apply to expenses to test for, monitor, or assess the effects of pollutants, except for those that occur during the cleanup process. It also does not apply to the extent of the coverage provided under 3. Additional Coverages g. Bulk Liquid Tank Storage. The limit can be increased.

e. Property in Transit

(1) This additional coverage extends Business Personal Property insurance to apply to covered property away from covered locations while it is being moved between points within the coverage territory. Coverage applies on all types of carriers and transport.

(2) Covered business personal property in transit does not include:

• Property in the possession of the postal service of a government
• Property of others the named insured handles as a carrier-for-hire
• Imported shipments until the date the shipment is discharged from the import conveyance or until the ocean marine coverage ends, whichever date is later
• Exported shipments after the date on which the ocean marine policy takes effect or until the shipment is placed on the outgoing conveyance, whichever date is earlier
• Works of fine art when they are not described on the declarations

(3) Property is covered while with a carrier-for-hire until it either is delivered or is returned to the named insured. It is also covered during the time the carrier-for-hire holds it in storage but only if the storage is temporary while awaiting delivery. If the named insured transports the property, coverage begins when the vehicle leaves the premises and ends when it arrives at its destination.

(4) The two coverage extensions provided do not increase the limit of insurance. One extends coverage to apply while the property is with a packing or consolidating company. The other extends coverage to apply to the insured’s interest in property that is sold Free On Board (FOB) Point of Origin.

(5) There are two additional exclusions that apply specifically to this coverage:

• There is no coverage if the loss is due to improper packing, stowage, or general rough handling.
• There is no coverage if the loss is due to a breakdown of the refrigeration equipment. The only exception is when the equipment belongs to others that are carriers for hire.

(6) H. Loss Conditions 7. Valuation does not apply and is replaced with respect to transported property by three possible valuations. These must be considered in order. The second valuation applies only if the first does not. The third valuation applies only if the second does not.

• If a value for the property is established and both the shipper and the insured agree to it before a loss occurs, that value is used.
• If the named insured and the shipper did not establish a value before a loss occurs, the value is based on the applicable net invoice price or cost.
• If neither of the methods above determines a value, the value is either the actual net cost, the cost to restore the property to its condition prior to the loss, or the property’s replacement cost, whichever is less.

Regardless of the method used, prepaid freight charges and other shipping charges the named insured incurs are also included.

The coverage territory is expanded. The standard coverage territory that requires that covered property must be located within the United States, its territories and possessions, Puerto Rico, and Canada still applies. The expansion is that property is also covered during transportation by air between points in the standard coverage territory.

A condition is added. It allows the insured to accept Released Bills of Lading that limit the amount of a carrier’s responsibility to pay the named insured in case of loss.

The $50,000 limit of insurance applies in any one occurrence, regardless of the number of vehicles, conveyances, containers or other methods or modes of transportation involved in the loss. The limit can be increased.

f. Installment Sales Property

(1) Business personal property coverage extends to apply to two additional types of property. One is property the named insured sold under an installment type sales contract. This includes deferred or delayed payment and conditional sales agreements. The second type is property leased to others as described in Section L. Definitions which includes property that is with a customer and awaiting final acceptance.

(2) Coverage for these types of property applies for only the named insured's interest. It can also apply on a dual interest basis, being both the named insured and the purchaser's interests if there is an entry for dual interests on the declarations. The $50,000 limit can be increased.

(3) Property sold on an installment sales basis is covered until the purchaser makes the final payment on it. Leased property is covered until the end of the lease period. Either way, coverage does not apply beyond the policy’s expiration date.

(4) This insurance does not apply to any covered property after the named insured's interest in it ends.

Example: Mimi purchased a refrigerator from Highman’s Appliances under a 36-month installment payment plan. Highman’s OP 00 01 provides dual interest coverage. Mimi made the final payment in May. A fire occurred in June that damaged her house and also destroyed the refrigerator. No payment is made for the loss because Highman’s no longer has an interest in the refrigerator.

(5) Valuation of covered property under this additional coverage is on one of two bases:

• Property sold but not yet delivered is valued at the named insured's net selling price after all discounts and allowances.
• Under single interest installment sales, the insurance company pays only the proportion of any loss or damage that the amount of the named insured's interest bears to the property's value.

(6) When dual interest coverage is selected, these provisions are binding on all parties to a dual interest installment sales contract. However, the protection that applies to one party is not impaired if the other party with interest in the property does not comply with the provisions, as long as the first party tried to get the second party to comply.

Example: Grist, Inc. sold a drill press to Mary’s Machine shop under a five-year installment plan. A fire sweeps through Mary’s and the drill press is damaged. Grist is paid its interest in the drill press as of the date of loss, but Mary does not receive anything from Grist’s carrier because she was not willing to submit to examination by the insurance company representative. This was despite the fact that Grist contacted Mary repeatedly and asked her to meet with the insurance company representative.

g. Bulk Liquid Tank Storage

(1) This additional coverage is actually an additional covered cause of loss. It covers the unintended leakage of bulk liquids that are stored in covered aboveground tanks that does not result from another covered cause of loss. The most paid is $50,000 per occurrence, subject to a $100,000 annual aggregate limit of insurance. The limits can be increased.

This additional coverage does not apply to costs to test for, monitor, or assess pollutants. However, the cost of testing done in conjunction with extracting pollutants from the land or water at the named insured's covered location is covered.

(2) H. Loss Conditions 7. Valuation does not apply to this additional coverage. Bulk liquid that the named insured owns or leases and bulk liquids of others in its care, custody, or control are valued at the liquids' replacement cost. Bulk liquid sold but not yet delivered is valued at the named insured's net selling price after all discounts and allowances.

Example: The valve on the LPG tank at Lacy’s Furniture was mysteriously left open. However, nobody noticed it until there was no more heat in the plant. The loss was confirmed and the value of both the LPG and the cost to extract the LPG from the surrounding ground was covered.

h. Business Personal Property Temporarily in Portable Storage Units (04 13 addition)

Business personal property stored in a portable storage unit is covered subject to the following criteria:

• The unit is located within 1000 feet of a covered location.
• The storage unit is portable. It may be a detached trailer.
• The unit is in use for no more than 90 days.
• Any coverage limitation with respect to sand, dust, sleet, snow, ice, or rain within a structure applies to any property within the storage unit.

The business personal property items are covered for not more than 90 days once placed in the storage unit.

This $50,000 limit applies to business personal property lost or damaged in an occurrence regardless of how many storage units are involved in the occurrence. A higher limit may be entered on the Declarations.

There is no coverage for the storage unit. Coverage also does not apply to loss or damage covered elsewhere in the coverage form.

Example: Heaven’s Sake had a great buying opportunity. It made the purchase and had two semi-trailers parked on their premises to use as storage because there was no room in the warehouse. Thieves broke into the trailers and stole $30,000 of items. There is coverage for the theft provided the semi-trailers had been on site for less than 90 days. There is no coverage for the damage to the semi-trailers though.

6. Additional Crime Coverages

Each of these crime coverages has limits separate and apart from other limits in the coverage form. Some of these limits can be increased.

a. Employee Theft

This coverage applies when an employee steals the named insured's property, whether money, securities, or other property. Theft is covered whether the employee acts alone or in collusion with others. Coverage applies even if the specific employee cannot be identified. An employee theft may not be discovered until long after it occurs. As a result, coverage applies to thefts discovered during the policy period and within 60 days after expiration. The actual occurrence could have taken place prior to the policy period.

If a loss takes place over a number of policy periods, the limit of insurance is not cumulative. This means only one set of limits applies to a single loss. There must be actual evidence or proof that a loss occurred. A loss is not covered if it is based only on assumptions as a result of shortages disclosed after taking inventory or on a profit and loss statement. These items can be used as supporting documents for an otherwise covered loss but are not necessarily the only evidence.

Theft caused by any employee is covered. However, coverage does not apply for loss caused by an employee who had committed previous dishonest or illegal acts AND an insured was aware of it. An exception applies when the insured who was aware of the employee’s previous dishonesty colluded with that employee to commit the theft.

The $25,000 limit can be increased.

Example: Ferdinand’s Finery performs thorough background checks on all employees and pays particular attention to any previous criminal activity. Carol is worried when she applies for a job because of some past criminal incidents. John is the human resources director and interviews all prospective employees. He reviews the application and background check. He suggests that they work together in an embezzling scheme and Carol agrees. Their successful enterprise ends when they are caught because Carol becomes ill and another employee covers her desk while she is out. When Carol’s background is revealed, the insurance company initially denies coverage but when Carol's statement implicates John in the scheme, the company reverses its position and honors the claim.

b. Forgery or Alteration

Any of a number of negotiable instruments can be forged to transfer funds from the named insured. Most standard coverage forms and policies exclude these losses. This coverage insures losses that involve forgery or alteration to any promise or order made or drawn, or that was drawn upon by the named insured, or made or drawn by one acting as its agent. One limitation is that there is no coverage for forgeries by the named insured or its employees. As it relates to this coverage, a substitute check as the Check Clearing for the 21st Century Act defines is treated the same as the original it replaces. The $25,000 limit can be increased.

Example: Phil stays at his girlfriend's house while her parents are away on vacation and notices a checkbook in the name of her father's company. He steals it and later uses it to shop on the Internet. Her father is unpleasantly surprised when the bank president informs him that his account is overdrawn. Although the bank eventually replaces the funds, the insurance company steps in and fills the gap until the bank completes its investigation.

c. Money and Securities

Property Not Covered specifically excludes money and securities. This coverage fills that gap and insures losses to money and securities due to theft, disappearance, or destruction. The money and securities must be in a covered building, in a bank or safe depository institution building, or in the custody of a messenger or armored car company. Coverage is limited in that employees are not covered.

Note: The wording “covered building” is problematic because the term itself is not defined. If the named insured does not own a building but only occupies a unit within a building, does the named insured have coverage and if so, where? This problem also arises with the banking or safe depository buildings when the bank or safe depository does not own and occupy the entire building. In crime forms the defined term “premises” is used instead of building. It is limited to the interior of the part of a building the named insured occupies. The good news for the named insured is that the lack of clarity will make this coverage broader than that available under the crime forms although it could result in some denials that will need to be reconsidered.

The $25,000 limit inside the building is reduced to $10,000 when a loss occurs outside the building, such as when the money and securities are in the custody of a messenger or an armored car service. The limits can be increased.

d. Money Orders and Counterfeit Money

Business Personal Property insurance extends to cover losses that result from the named insured accepting, in good faith, and in exchange for merchandise, services, or money:

• Money orders that any bank, express company, or post office issued that are not honored when presented for payment
• Counterfeit money the named insured accepts during a business transaction

This Additional Coverage is subject to a $5,000 limit of insurance. The limit can be increased.

Note: This Additional Coverage is not subject to a deductible.

7. Business Income and Extra Expense

This coverage applies if there is a limit on the declarations for one or more of three different options. The options are:

• Option 1–Business Income and Extra Expense including Rental Value
• Option 2–Business Income and Extra Expense other than Rental Value
• Option 3–Rental Value and Extra Expense

Note: While all three options may be used at the same time, the declarations is not designed to accommodate them. In such a situation, a manuscript schedule must be used to identify the option that applies to each location.

a. Business Income

When the named insured must suspend operations, there is coverage for the loss of business income the named insured sustains during the period of restoration. Coverage applies only if the suspension is the result of a direct physical loss or damage to property at the named insured’s covered location. When the suspension is because of damage to Business Personal Property that is not in a building, that property must be within 1,000 feet of the covered location, either in the open or in or on a vehicle. When only part of the location is occupied by the named insured, there is coverage when the named insured’s operations must be suspended because it cannot be accessed due to a covered loss damaging another part of the location.

Example: Melanie has a great location in the shopping mall. It is on the second level close to a very popular restaurant. The elevator that services the second floor is located in that restaurant’s lobby so that when an explosion damages the restaurant, all access to Melanie's ends. Her business income coverage applies because a covered cause of loss temporarily denied access to her premises.

Business income is the net profit or loss before income taxes added to payroll and other continuing operating expenses. The net sales value of production is included in the definition of net income for manufacturing operations.

Example: Mark's Metals' financial statement for the last 12 months shows a net loss of $100,000. The expenses that would be expected to continue and payroll were $1,100,000 during that time frame. Looking forward, it appears that Mark's will turn a net profit of $50,000 and continuing expenses and payroll will be only $750,000. Because business income always looks forward, the business income limit should be the net profit of $50,000 added to $750,000 in continuing expenses and payroll for a total of $800,000.

b. Extra Expense

This coverage applies to the extra expenses incurred during the period of restoration that would not have been incurred if a covered loss had not occurred. Three types of extra expense are covered.

· One type is the extra expense that is incurred in order to keep the business operating. These expenses may be incurred at a covered location or at a replacement or temporary location. The expenses to move the operations to another temporary or replacement location and to equip that location are part of this type of extra expense. The payment is NOT restricted to only how much the business income loss is reduced because of the incurred extra expense.

· Another type is the extra expense incurred when a business is forced to suspense operations and the extra expense is used to reduce the amount of time the operations are suspended. The payment is NOT restricted to only how much the business income loss is reduced because of the incurred extra expense.

· The final type is the extra expense incurred to expedite the repair or replacement of ANY property or to research, replace, or restore damaged or lost valuable papers and records information. This type of extra expense is paid ONLY if the resulting reduction in the loss of income is equal to or more than the incurred extra expense.

c. Additional Limitation–Interruption of Computer Operations (04 13 change)

Coverage does not apply to loss of business income or extra expense as a result of interruption of operations due to any loss, damage, destruction, or corruption of electronic data. There are two exceptions:

• Coverage applies when the loss is due to damage to electronic data that is a part of a buildings elevator, heating, ventilating, security, or air conditioning system. The electronic data must operate or control these systems. (04 13 change)
• Coverage provided under paragraph e. (7) Additional Coverage–Interruption of Computer Operations, below.

d. Additional Coverages

The limits for the following coverages are part of the limits of insurance on the declarations or on the scheduled location endorsement. This means that they are sublimits that are within the limit of insurance. The only exception is the (6) Newly Acquired Locations coverage.

(1) Civil Authority

Government authorities have the right to restrict access to certain areas for the public good at certain times, such as during wildfires, floods, earthquakes, civil commotion and other widespread events that must be contained. It is easier for government authorities to control the situation, look for victims, and control looting if people are prohibited from entering the area. This coverage applies to such situations but only if the damage is due to a covered cause of loss. For example, coverage applies if access is denied because of wind damage but it does not apply if access is denied because of flooding unless flood coverage is provided.

This Additional Coverage provides up to four consecutive weeks of lost business income or extra expense at covered locations but only if the civil authority action is a response to property damage resulting from a covered cause of loss. The insurance company pays for the actual loss of business income and necessary extra expense when a civil authority prohibits access to the covered location. However, this is subject to two conditions:

• The civil authority must prohibit access to the area immediately surrounding the damaged property as a result of the damage and the covered location must be within that area but not more than one mile from the damaged property.

Note: In an urban area one mile may be sufficient. However, in most other locations this one-mile limitation could basically nullify coverage. Some carriers may consider increasing this limitation, if requested.

Related Article: CP 15 32–Civil Authority Changes provides options to the one-mile limitation on the CP 00 30–Business Income (Extra Expense) Coverage Form. This endorsement could be used as a template to develop a similar endorsement for this Capital Assets Coverage Form.

• The civil authority's actions must be taken because of either of the following:
• A response to dangerous physical conditions as a result of the damage or as a continuation of the covered cause of loss
• The need of the civil authority to maintain unobstructed access to the damaged property.

Example: The bridge that leads to Jeremiah's Machine Shop is the main route firefighters use to access a wildfire approximately 10 miles away. Local authorities close the bridge to all traffic except for that related to the firefighting activities. This forces Jeremiah to close his machine shop for almost two weeks. This loss is not covered because the fire is more than one mile away.

(2) Alterations and New Buildings

This Additional Coverage extends Business Income and Extra Expense coverage to new buildings at covered locations and to alterations and additions to existing buildings at covered buildings. Coverage applies if they are complete or are under construction at the time of loss.

This Additional Coverage also extends to any machinery, equipment, supplies, or building materials on or within 1,000 feet of the insured location. In order for coverage to apply, the machinery, equipment, supplies, or building materials must be used in the construction or have something to do with occupying the new building.

If direct physical loss or damage causes the start of operations to be delayed, the business income period of restoration begins on the date operations would have begun if there was no loss.

(3) Extended Business Income

It normally takes a business a certain amount of time to return to pre-loss revenue after a loss occurs. This Additional Coverage acknowledges that and provides time for the named insured to return operations to normal revenue levels. Coverage applies for up to 90 days, but the number of days can be increased. Coverage ends when operations return to pre-loss levels, even if doing so takes less than 90 days.

Example: Bonnie's Diner has a loyal following of daily diners. A fire forces her to close for three months and most of her regular patrons find new places to eat. Upon reopening, Bonnie is concerned when her first week’s receipts are only 70% of what they were before the loss. However, business picks up as the weeks go by and things are back to normal two months after the business re-opens. The insurance company makes up the difference for those two months because Bonnie's limits were sufficient to pay for both the loss of business income and the extended period of time needed for normal operations to resume.

However, coverage does not apply if the reason business does not return to pre-loss levels is business considerations in the area.

Example: Let’s revise Bonnie’s example above. During Bonnie’s rebuilding, the nearby military base announces that it will close, and a drawdown begins. Over 50% of Bonnie’s clientele was military personnel. When she reopens her receipts are only 50% of what they were before the loss. However, because the reduction is due to the base, not to Bonnie’s being closed for three months, there is no extended business income coverage.

(4) Contractual Penalties

Many companies enter into agreements with their customers that provide for penalties if a job is not completed by a certain time. The supplier must pay the penalty unless there is a release clause, even if a fire or other type of fortuitous event causes the delay. When the named insured has such a written contract or agreement and is required to pay a penalty because a covered loss resulted in a missed deadline, this coverage responds. The limit if $25,000 in a single occurrence, subject to an annual aggregate of $100,000. However, the penalty is paid only if all three of the following conditions apply:

• The named insured fails to deliver its product at the time(s) the contract prescribes
• The reason for the missed deadline is because of a direct physical loss to covered property that results from a covered cause of loss
• The named insured paid the penalty to the customer(s)

Example: Melvin’s MetalWorks bids on a job to supply beams to a railcar manufacturer. Any delay in its shipments will delay the entire job. The contract has a 15% penalty clause written into it for any missed deadline. A tornado causes extensive damage to Melvin's building. He gets back in production rather quickly, but he misses one delivery deadline. He is fined and pays $10,000 under the contract penalty provision. This coverage reimburses Melvin for his payment.

(5) Business Income and Extra Expense Caused by Dependent Properties

A dependent property is any non-owned location that has an impact on the named insured’s income. It can be a supplier, a customer, or a natural draw but the important factors are that the named insured has no ownership or control of the operation and that the operation being damaged has a direct impact on the named insured’s income. This Additional Coverage pays up to $100,000 in a single occurrence for the actual loss of business income the named insured sustains and/or the necessary extra expenses it incurs because of direct physical loss or damage by a covered cause of loss at a dependent property's premises. The coverage applies only if OP 00 01 provides Business Income and Extra Expense coverage.

Necessary extra expenses are those the named insured incurs during the period of restoration that it would not have incurred if there was no loss. These expenses allow the named insured to continue operations or reduce the amount of time the operation must be suspended.

Example: Mark runs a successful business selling souvenirs to tourists who pass his store on their way to Fun Land. A five-alarm fire damages much of Fun Land and it closes for repairs. Mark’s business immediately drops to almost nothing. Because Mark's policy provides this coverage and because Fun Land was damaged by fire, he has a $100,000 limit to apply to the loss of business income during the time that Fun Land is closed. If the loss had been due to earthquake and Mark's policy did not provide earthquake coverage, his loss of business income would not have been covered.

(6) Newly Acquired Locations

When the named insured acquires a new location during the policy period, this Additional Coverage extends Business Income and Extra Expense coverage for up to $250,000 at each such location. This coverage does not apply to fairs or exhibitions. Coverage ends at the earliest of 90 days after the acquisition, at policy expiration, or when the named insured reports the values to the insurance company. Additional premium is charged for the values reported from the date of acquisition. Coinsurance does not apply because this extension is additional insurance.

This coverage is available only when OP 14 01–Scheduled Location is attached. It is not needed on the unendorsed CAP because all premises where the named insured owns, leases, or operates buildings or structures are covered without restriction.

(7) Interruption of Computer Operations (04 13 change)

This Additional Coverage extends Business Income and Extra Expense coverage. It applies when operations are suspended because of an interruption in computer operations. The interruption must be due to either of the following:

• Electronic data being destroyed or corrupted by one of the Specified Causes of Loss or Collapse.
• A virus or a similar instruction is introduced into a computer system with the intent to damage or destroy the data.

The $50,000 annual aggregate limit is the most paid for all loss sustained and expenses incurred in any one-policy year, regardless of the number of events, computer systems, or locations involved.

This Additional Coverage does not apply to losses or expenses after the period of restoration ends, even in cases where part of the annual aggregate limit remains.

Example: Pamela sustains yet another problem after she opens an email that shuts down her system with the Melissa virus. Her business is closed for a week. Thanks to this coverage, Pamela's loss of business income during the down time is covered.

This coverage does not apply to losses that are covered as exceptions to the Additional Limitation – Interruption of Computer Operations. (04 13 change)

(8) Food Contamination (04 13 changes)

This Additional Coverage pays for loss of income and certain expenses if the Board of Health or another authorized governmental entity closes the named insured's business at a covered location because the authority discovers or suspects food contamination. The items covered are:

• Expenses the named insured incurs to clean equipment to meet governmental requirements
• The named insured’s actual costs to replace food that was either suspected to be or actually was contaminated
• Unless covered by workers compensation insurance, all expenses the named insured paid to provide the necessary medical tests or vaccinations for employees who may have been infected by the food contamination. The term employee in this case includes temporary employees and leased employees. (04 13 addition)
• Loss of business income sustained because the business is closed. There is a 24-hour waiting period before the part of the coverage begins.
• Advertising expenses the named insured incurs specifically to restore its reputation

The most paid for the first four items above in a single occurrence is $25,000. An additional $10,000 is available to pay for advertising expenses. These limits can be increased.

Coverage does not apply to any fines or penalties imposed on the named insured as a result of actual or suspected food contamination at the covered location.

Food contamination is defined. It is an outbreak of either a food-related illness or food poisoning. One or more persons must be impacted. The outbreak must result from one of the following:

• Tainted food the named insured purchased or distributed
• Food that, in the named insured’s business operations, was improperly stored, handled, or prepared.
• Virus or bacteria transmitted by an employee (04 13 change)

Example: Joe became very ill. He went to the emergency room where he discovered two other people that he had seen the night before at Arni’s Place. Upon comparing notes and realizing they had eaten the same fish entrée; they reported the information to the health department and Arni’s.

The board of health closed Arni’s for three days as it conducted a thorough investigation. The coverage paid Arni for two of his three-day suspension, the cost to replace the contaminated fish, and the cost to have a professional cleaning company wash down all food preparation surfaces. Arni also had a grand reopening party and he advertised in newspapers and on the radio inviting his customers back. This coverage also paid those costs.

B. COVERED CAUSES OF LOSS (04 13 change)

A covered cause of loss means direct physical loss or damage. This is a very broad statement that is then limited by stating that losses may be excluded or limited in the policy. (The 04 13 edition removes the words “risks of” in the 10 10 edition.)

The exclusions are found mainly in the Exclusions Section and the limits are found mainly in the Limitations Section. However, the wording does not mention either of those sections. It is important to realize that losses may be excluded or limited in any section of the policy and by endorsements. Exclusions and limitations can show up in some very unexpected place such as Definitions.

C. EXCLUSIONS

1. Primary Exclusions

The first group of exclusions applies whether the loss event results in widespread damage or affects a significant geographical area or not and are essentially absolute. Subject to specific exceptions, 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 resulting from any of these events.

Related Court Case: Flood Exclusion Held Applicable When Determined to be Proximate Cause despite Vandalism

a. Earth Movement (04 13 changes)

There is no coverage, except for sinkhole collapse, for loss or damage caused by or that results from earthquake, landslide, mine subsidence, or earth sinking. However, if any of these cause fire or explosion, coverage applies to the loss or damage from the ensuing fire or explosion.

Coverage also does not apply to volcanic eruption, explosion, or effusion. However, if any of these causes fire, breakage of building glass, or volcanic action, the insurance company pays for the loss or damage from the ensuing fire, breakage of building glass, or volcanic action.

Volcanic action is loss or damage from airborne volcanic blast or airborne shockwaves, particulate matter, ash or dust, and lava flow. Volcanic action does not include the expenses to remove the matter, ash, or dust from undamaged property. All volcanic action eruptions that occur within any 168-hour period are considered a single occurrence.

What causes the earth movement to occur is not relevant. The underlying cause may be an act of nature or may not be. No matter the underlying cause, if earth movement as described in this exclusion occurs, it is excluded. (04 13 addition)

Example: Halebern Manufacturing is located in an area where there is significant natural gas exploration activity. A series of small earthquakes that occurred recently damaged Halebern’s plant. Halebern files a claim that states that natural gas exploration caused the earthquakes and coverage should apply because natural gas exploration is not excluded. The insurance company denies the claim because of this.

Note: The company would have denied coverage because of the anti-concurrent causation exclusion elsewhere in OP 00 01. However, it helps to have this clarifying language within the exclusion.

This exclusion does not apply to some of the inland marine additional coverages that OP 00 01 includes, specifically accounts receivable, computers, property on exhibition, fine arts, mobile equipment, property in transit, salespersons samples, and valuable papers and records.

b. Governmental Action

Loss or damage to covered property caused by order of any governmental authority to seize or destroy it is excluded. However, the insurance company does pay for such loss or damage done at the time of a fire to keep it from spreading. This exception applies only when the fire is a covered cause of loss under this coverage form.

Example: A field executive for a Federal Emergency Management Agency (FEMA) flood catastrophe unit orders that several storage buildings that A&E Electrical owns be destroyed to divert floodwaters away from the town’s only hospital. OP 00 01 does not cover this loss. There may be some compensation available from FEMA. However, the loss IS covered if FEMA orders the destruction to divert a wildfire.

c. Intentional Loss

Coverage does not apply to loss or damage caused when an insured commits an act with the intent to cause a loss. There is no coverage even for an innocent insured that did not participate or conspire in the intentional action.

Example: Paul and Paula own Magnificent Malls consisting of three strip shopping centers. They are both named as insureds on the policy. Paula has divorce papers sent to Paul during a meeting at one of the malls. He is enraged, begins to destroy the room, and continues to do so until the police arrive. The $50,000 in damage is excluded because Paul is an insured and he intentionally caused the damage. Paula has no recourse even though she did not consider that Paul would be so destructive when she filed the papers.

d. Nuclear Hazard

There is no coverage for loss or damage caused by nuclear reaction, radiation, or radioactive contamination, regardless of cause. If a fire results from the nuclear event, coverage applies to only the loss or damage the fire causes.

e. Utility Services

Loss or damage because a power, water, communication, or other utility service fails to provide or provides insufficient capacity is excluded. However, this exclusion applies only when the failure originates at an off-site location. When a power failure causes a power surge, the damage from that surge is also excluded.

There are two exceptions:

• An ensuing loss that results from a utility failure or power surge causing a covered cause of loss is covered.
• Resulting loss to computers is covered.

Communication services is a broad term that includes Internet access or access to any electronic, cellular, or satellite network. However, the term is not limited to just these.

f. War and Military Action

Coverage does not apply to loss or damage caused by or that result from war, undeclared war, or civil war. This includes any warlike action by a military force or actions to hinder or defend against an actual or expected attack by any government or sovereign authority that uses military personnel or other agents. It also includes acts of insurrection, rebellion, revolution, usurped power, action any government authority takes to hinder or defend against any of these actions.

Note: This exclusion does not apply to terrorism.

Related Court Case: “Insurrection” Definition Held Applicable to Events Causing Business Losses

g. Water

Loss or damage caused by action of water outside the building is excluded. This exclusion breaks down into five separate sections to make it clearer.

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

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

(3) There is no coverage when water discharges in any way from a sewer, drain, sump, or sump pump. There is also no coverage if the discharge is from related equipment. Related equipment is not defined. Examples of discharge are back up and overflows, but the term is not limited to just these.

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

(5) Damage caused when waters described in (1), (3), and (4) above carry waterborne material is excluded. Coverage also does not apply when the damage is caused when such material is moved or carried by mudslides or mudflow described in (2) above.

Example: A storm surge picked up part of the boardwalk and threw it in Sassy’s Salty Taffy’s display window. There is no coverage for the damage to the window or for the damage to her contents.

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

Much like other exclusions, if fire or explosion occurs because of any action of water, coverage applies to the loss or damage the fire or explosion causes. In addition, if a sprinkler leakage loss occurs due to these actions of water, coverage applies to the loss or damage the sprinkler leakage causes. Sprinkler leakage coverage applies only if
OP 00 01 includes sprinkler leakage as a covered cause of loss.

Example: Sassy’s Salty Taffy loss gets worse. This is because sparks flew as cooking areas were disrupted when the storm surge entered the store. Gas lines were broken at the same time and an explosion occurred. Coverage applies to all damage that can be clearly identified as caused by the fire and explosion.

This exclusion does not apply to accounts receivable, computers, property on exhibition, fine arts, mobile equipment, property in transit, salespersons samples, or valuable papers and records.

h. Certain Computer-Related Losses

The insurance company does not pay for loss or damage caused by or that results from the failure, malfunction, or inadequacy of any computer, computer application, computer operation system, computer network, microprocessor, or any other computerized part or any other product that depends on computers because of its inability to accept or process a date or time. In addition, coverage does not apply to the cost of anything the named insured must do to remedy such problems.

Coverage does apply if the computer’s inability to accept or process a time or date results in a specified cause of loss occurring or in elevator collision that results from mechanical breakdown but only for the loss or damage they cause. In addition, the insurance company does not pay to repair, replace, or modify any of these items to correct deficiencies or change any of their features.

Note: This exclusion continues the Y2K exclusions enacted prior to the year 2000 as a reaction to computer programming problems that caused unpredictable results when the century changed. This exclusion refers to the Y2K problem as an example but damages from any such date and time computer problems are excluded.

i. Ordinance or Law (04 13 change)

Loss or damage that is caused because certain ordinances or laws are enforced or because they must be complied with is not covered. The types of ordinances or laws are those that do any of the following:

• Regulate how a property can be constructed, repaired, or used.
• Require that a property must be torn down and its debris removed.

This exclusion applies whether or not the loss results from either of the following:

• The ordinance or law being enforced even though the property has not been damaged
• The property has been damaged and compliance with the ordinance or law is required during the construction, demolition, repair, renovation or the removal of the debris.

The only exception to this exclusion is the coverage that is provided in 3. Additional Coverages e. Ordinance or Law.

Note: Local governments develop ordinances and laws that apply to what types of occupancies are permitted, the construction materials that can be used and use and accessibility of the property. This exclusion applies to all costs associated with meeting them. This exclusion applies to all of them – not only the ones that were previously grandfathered but that are enforced following a property damage loss.

j. Fungi or Wet or Dry Rot

There is no coverage for any aspect of fungi, wet rot, or dry rot. There are three exceptions:

• If fungi, wet rot, or dry rot cause a specified cause of loss, coverage applies to any damage resulting from that specific cause of loss.
• When the fungi, wet or dry rot results from fire or lightning, this exclusion does not apply
• Any coverage that is provided under Additional Coverages j. Limited Coverage for Fungi, Wet Rot, and Dry Rot.

Example: The building is inspected for contaminants when two different hairdressers complain of being ill. The mold count is extremely high and appears to be the cause of the illnesses. The cost to remediate the building is $25,000. This cost is not covered.

k. Virus or Bacteria

Coverage does not apply to loss or damage caused by or that result from any virus, bacteria, or other microorganism that is capable of inducing physical distress, illness, or disease. This exclusion supersedes any pollution exclusion.

There are two exceptions.

• The exclusion does not apply to loss or damage due to fungi, wet rot, or dry rot because those items are covered in their own exclusion.
• Any coverage that is provided in 7. Business Income and Extra Expense d. Additional Coverages (8) Food Contamination is not excluded.

Example: Phyllis suddenly felt weak at her association convention. The weakness continued even as she pushed herself to attend the meetings. She fainted at the grand dinner and was taken to the hospital. She was not alone as 20 other conventioneers were also taken to the hospital. Investigation by the physicians determined the illness was due to bacteria in the ventilation system. The cost to clean the ventilation system is not covered.

2. Secondary Exclusions

The second group of exclusions applies to loss or damage caused by or that result 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 resulting from any of these events.

a. Electrical Apparatus

There is no coverage for loss or damage caused by or that results from artificially generated electrical, magnetic, or electromagnetic energy that damages, disrupts, disturbs, or otherwise interferes with any electrical or electronic wires, devices, appliances, systems, or networks. This includes devices, appliances, systems, or networks that utilize cellular or satellite technology.

The definition of electrical, magnetic, or electromagnetic energy within this exclusion is very broad because electrical current (including arcing), electrical charges that magnetic, or electromagnetic fields produce, electromagnetic energy pulses, and electromagnetic waves or microwaves are only examples, not limitations. If fire results, the loss or damage it causes is covered.

The two exceptions are:

• Loss or damage caused by any resulting fire is covered.
• Any damage to a computer that results from any of the described events in this exclusion is covered.

b. Consequential Loss

Indirect losses that result from another loss are excluded. The items listed are loss of market, loss of use, delay, or loss of business income and extra expense. The exception to this exclusion is the coverage that 7. Business Income and Extra Expense provides.

c. Smoke, Vapor, Gas

The insurance company does not pay for loss or damage that arises out of smoke, vapor, or gas from industrial or agricultural smudging operations. There are two exceptions:

• Coverage applies for loss or damage caused by emissions or puff backs of smoke, soot, fumes, or vapors from boilers, furnaces, or related equipment.
• This exclusion does not apply to mobile equipment.

d. Other Types of Losses

This exclusion has eight sub-exclusions of a primarily natural or wear and tear type. Most are usually included in the cost of doing business and are therefore not considered insurable losses.

• Wear and tear

This is loss or damage that results from the intended use of the property or simply because it exists. This is considered a maintenance issue and not an insurance issue.

• Rust or other corrosion, decay, or deterioration

This includes hidden or latent defect or any quality in the property that causes it to damage or destroy itself.

Related Court Case: Inherent Vice/Latent Defect Exclusion Held Applicable to Disputed Claim

• Smog

This is fog that has become mixed and polluted with smoke. It is a form of air pollution.

• Shrinking, expanding, cracking, bulging, and settling

These normal events apply to virtually all buildings and some types of business personal property. They must be anticipated and addressed in construction and design for buildings and in storage issues with respect to business personal property.

• Nesting or infestation

This is loss or damage caused by the nesting or infestation of animals, birds, insects, or rodents. Loss or damage from discharge or secretion of animal, bird, insect, or rodent waste products is also excluded.

Note: The damage itself and the cost of cleanup all can be significant.

Example: A swarm of Africanized honeybees made themselves at home inside the walls of Elfin Enterprises. Their aggressive ways required specialized treatment to remove them and it took a number of days to coordinate efforts. Elfin could not continue operations while the bees were inside because of concerns about injuries to workers. The bees built hives and produced honey while they occupied the space. Elfin has no coverage for the cost to remove the bees, the damage to the building the bees caused, or the lost income for the period of time that the business was closed.

• Mechanical breakdown

This is excluded because all machines and machinery eventually break down. Loss or damage caused by rupture and bursting due to centrifugal force is considered mechanical breakdown and is also excluded.

When an elevator collision due to mechanical breakdown causes loss or damage, there is coverage for both the elevator and property that the elevator strikes and damages.

• Dampness or dryness of atmosphere/changes in or extremes of temperature

These exclusions apply to only business personal property. The only exception is for computers that are damaged by temperature extremes when these extremes are the result of the air conditioning system which services the computer failing, but only when the cause of the failure is loss or damage from a covered cause of loss.

• Marring or scratching

This applies to only business personal property. This type of damage is inevitable, should be expected, and is excluded.

Note: If any of these excluded other types of losses results in a specified cause of loss or glass breakage, coverage applies to the ensuing loss or damage.

e. Explosion

Loss or damage caused by or that results from explosion of alcohol stills, steam generators, steam boilers, steam pipes, steam engines, or steam turbines that the named insured owns or operates or has in its care, custody, or control is excluded. Loss or damage caused by or that results from electric arcing, rupture, or bursting of water pipes, rupture, bursting, or operation of pressure relief devices, or rupture or bursting due to expansion or swelling of the contents of any building or structure caused by or that results from water is also excluded.

If an alcohol still, steam generator, steam boiler, steam pipe, steam engine, or steam turbine explodes and results in fire or a combustion explosion, coverage applies to the resulting loss or damage. Coverage also applies to loss or damage caused by or that results from explosion of gases or fuel inside a fired vessel's furnace or inside flues or passageways that combustion gases pass through. It also does not apply to any humidity, moisture, vapor, or liquid.

f. Liquid Seepage or Leakage

This exclusion is about basic maintenance and neglect. When liquid is seeping or leaking over 14 or more days there is no coverage for the loss or damage caused by that liquid. This applies if the seeping or leakage is continuous or occurs repeatedly. This exclusion also applies to such damage when it is due to the condensation of humidity, moisture, or vapor.

Example: Funny Valentine, Inc. suspends operations for the month of March to completely retool and prepare for the next year’s activities. The designers and executive staff are on premises, but the plant is otherwise unoccupied. A plumbing leak in the plant’s restroom is unnoticed until the last week of the shutdown. The damage to the flooring, walls, and surrounding areas was extensive but it was excluded because the loss investigation revealed that the leak began the same day that the plant shut down – 21 days before it was discovered.

There are two exceptions.

• This exclusion does not apply to unintended leakage coverage provided by g. Bulk Liquid Tank Storage Additional Coverage.
• Liquid that is a pollutant is not part of this exclusion. The condensation of vapor that is a pollutant is also not part of this exclusion. However, this does mean coverage exists for damage caused by them. Instead refer to the Pollution exclusion below to see how they are excluded.

g. Frozen Plumbing

Loss or damage caused by water, other liquids, powder, or molten material that flows or leaks from heating, air conditioning, plumbing, ventilating, or other equipment caused by or those results from freezing is excluded.

There are three exceptions to this exclusion:

· If the named insured maintains heat in the building, this exclusion does not apply.

· If the named insured drains and shuts off the supply of any of the systems described, this exclusion does not apply.

· This exclusion does not apply to any fire protection devices.

When a covered water, other liquids, powder, or molten material loss occurs there is also coverage for the tearing out, repairing or replacing any building walls damaged to gain access to the leak.

Note: The placement of this paragraph is odd because it does not refer to the frozen plumbing and does not appear to be an exception to it. It is more of a standalone extension of coverage but without a specific limit of insurance.
3. Additional Coverages k. Water Damage provides this same type of coverage.

h. Dishonesty (04 13 changes)

Coverage does not apply to dishonest or criminal acts by the named insured, its partners, members of a limited liability company (LLC), officers of a corporation, managers, employees, or authorized representatives. This exclusion applies whether these parties act alone, in collusion with each other, or in collusion with any other party.

Whenever this exclusion uses the term “employee,” it applies to permanent, leased, and temporary employees. The phrase “dishonest or criminal act” includes theft.

There is also no coverage for theft that anyone else entrusted with property commits. This exclusion applies whether the person who committed the theft acts alone or in collusion with others.

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.

There is one exception. There is coverage if employees or authorized representatives destroy property. This destruction exception does not extend to theft.

This exclusion does not apply with respect to Employee Theft coverage or to carriers-for-hire.

Example: Frank, John, and Phil are furious. They hear through the grapevine that they will be laid off at the end of the week, so they decide to make sure they'll be missed. They enter the building at night and steal several computers and other valuable office equipment. They then set the building on fire to cover their tracks. However, all three are arrested because of solid police work and a thorough investigation. The insurance company pays for the fire damage but not for any of the stolen property because theft by employees is excluded while damage to property by employees is covered.

i. False Pretense

The insurance company does not pay for loss if the named insured or someone entrusted with covered property is duped in some way into giving it away, other than as OP 00 01 specifically provides for elsewhere.

Example: Brenda takes the day's receipts after the business closes and deposits them at the bank every night. While doing so one evening, a gentleman approaches her and identifies himself as the bank’s assistant manager. He informs Brenda that the night depository door is broken, and he is personally collecting deposits. After he provides her with a receipt, she is on her way. When Brenda’s boss balances the books, he notices the bank did not record that deposit and the bank informs him that no deposit was received. He draws this matter to Brenda's attention, and she tells him what happened. It turns out that the bank’s night depository was not broken, the "gentleman" was a thief, and this loss was excluded.

j. Exposed Property

There is no coverage for loss or damage to covered business personal property that is in the open when caused by rain, snow, ice, or sleet. There are two exceptions. Business personal property that is mobile equipment or that is in the custody of carriers for hire is covered for rain, snow, ice, or sleet even while in the open.

k. Pollution

Loss or damage caused by or that result from any action of pollutants is excluded. There are two exceptions. If a specified cause of loss results in a pollution event, the loss or damage from that pollution event is covered. If the pollution event causes a specified cause of loss, coverage applies to the loss or damage from the specified cause of loss.

Examples:

• A manufacturer’s production facility catches fire. The greasy smoke pours into an adjacent storage building and ruins upholstered chairs being held for sale. This pollution damage is covered.
• The summer heat causes fumes from adhesives to permeate the storage building and embed themselves into manufactured chairs being held for sale. The odor cannot be removed from the chairs and they must be destroyed. There is no coverage for this pollution damage.
• The summer heat causes fumes from adhesives to permeate the storage building and a spark causes the fumes to ignite. The fire destroys the manufactured chairs being held for sale. This loss is covered.

l. Neglect

There is no coverage for any resulting damage to covered property when an insured does not use every reasonable means to save and preserve property from further damage after a covered loss. This includes damage at both the time of and following the loss.

Note: This includes acts such as placing tarps over property, hiring security personnel to guard against theft, erecting temporary fencing, boarding up windows, patching a damaged roof, and similar preventive measures but is not limited to just them.

m. Errors or Omissions

Coverage does not apply to computer errors or omissions. These are oversights or mistakes in processing, recording, or storing information on media or computers.

However, coverage does apply to loss or damage if fire or explosion ensues from such errors or omission but only if OP 00 01 covers the fire or explosion.

n. Installation, Testing, Repair

Loss or damage caused by or that results from installing, testing, repairing, or servicing computers or their software is excluded. Coverage does apply to loss or damage due to fire or explosion if OP 00 01 includes them as covered causes of loss.

o. Collapse

Collapse is excluded. The following property conditions are also considered collapse and 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 exceptions:

• The coverage provided under Additional Coverage–Collapse
• When a collapse causes a covered cause of loss, the loss or damage due to that resulting cause of loss is covered.
• Loss or damage from a collapse that is caused by any of the following or a combination of any of the following is covered:

o Specified causes of loss

o Building glass breakage

o Weight from rain that accumulates on a roof

Note: This applies to only rain on a roof. This means that collapse due to weight of rain on awnings, canopies, tents and other property or overhangs remains excluded.

o Weight from people or personal property. There is no restriction as to what must collapse because of this weight.

Example: Jeremy and Sal liked to sit on the canopy over the loading dock when they ate their lunches. Kevin and Josh decided to join them, and it soon became a regular lunchtime activity. Unfortunately, the canopy could not bear the weight and it collapsed, injuring the workers and destroying the canopy. This loss is covered.

Note: The idea of providing collapse coverage by first excluding it may appear contradictory but is actually quite logical. Insurance companies must be absolutely certain that the coverage provided is limited to what they intend. In this case, the intent is to provide only limited coverage for collapse. One way to be certain that coverage is limited is to first completely exclude it and then create a carefully written exception.

3. Anti-Concurrent Causation Exclusions

The third group of exclusions applies to loss or damage caused by or that result from any of the following loss events. In every case, if loss or damage by a covered cause of loss occurs as a result of the occurrence of one of these excluded events, coverage applies to the loss or damage because of the covered cause of loss event. However, there is no coverage if one of the following events causes a loss that is excluded elsewhere in the policy.

Note: These exclusions are sometimes referred to as the anti-concurrent causation exclusions. They are unique because, if coverage applies to a loss under one of the covered causes of loss, except for these exclusions, the loss is still covered. On the other hand, if the loss would have been excluded anyway, it is still excluded.

Related Article: Concurrent Causation and Anti-Concurrent Causation Clauses–a Discussion

a. Weather Conditions

Loss or damage caused by or that result from any condition of the weather is excluded but only if the weather condition contributes to a cause or event excluded in C. Exclusions Paragraph 1.

Example: Excessive unexpected rain causes creeks to rise well above flood stage. Marty previously decided not to purchase flood coverage due to the expense, but he rethinks his position and starts to look for coverage after losing his $1,000,000 building. Because rain is a covered cause of loss, he claims that the unusual precipitation caused the loss and intentionally neglects to mention flood. The proximate cause of this loss is weather conditions. However, the weather exclusion applies and there is no coverage because flood is excluded.

b. Acts or Decisions

Acts or decisions that any person, group, organization, or government entity makes that result in loss or damage are excluded. This includes failing to act or to make decisions.

Example: The Sunspot, California town council knows it needs to upgrade several bridges and other structures to make them more earthquake resistive. It holds a series of meetings and develops a ten-year plan to upgrade crucial aspects of the infrastructure. An earthquake occurs five years after the plan goes into effect but only half of the plan’s projects are complete. Pete decides that the uninsured damage to his business is not caused by the earthquake but by the city’s lack of planning. Pete submits a claim on that basis. Because earthquake is not a covered cause of loss, the city council’s decisions and actions are also excluded.

c. Plan, Design Faults

This is very broad exclusion and applies to property at any location, whether covered or not. Any loss or damage to covered property is excluded when due to any faulty, inadequate, or defective:

• Planning, zoning, development, surveying, or siting
• Design, specifications, workmanship, repair, construction, renovation, remodeling, grading or compacting
• Material that was used for repair, construction, renovation or remodeling
• Maintenance

Example: Ellettstown zones the area below the dam for industrial and residential use and a number of buildings and structures are built there. The dam collapses and the surge of water released swamps the area. Gracious Living Manufacturing submits a claim to its carrier, explaining that its loss is due to the city not properly zoning the property where its plant is located. Gracious explains that it would not have built at the particular location and would not have had a loss if its own board had known about the problem. The claim is denied because of this exclusion and because Gracious Living decided not to purchase flood coverage.

4. Special Exclusions

These exclusions and their provisions apply only to certain coverages.

a. Business Income and Extra Expense Coverage

• Loss to finished stock. There is also no coverage for the time that is required to reproduce the finished stock.

This exclusion does not apply to Extra Expense because these are time-related incidents.

Example: A windstorm destroys the contents of Woody's Factory Warehouse, but the only stock destroyed is finished stock awaiting shipment to customers. Woody adds the time needed to reproduce the property to his business income loss, but the insurance company denies that part of the claim. The company explains that the loss to finished stock is paid based on its selling price and paying for the time to reproduce it constitutes a double payment.

• Loss as a result of physical loss or damage to radio or television antennas and satellite dishes is excluded. This exclusion applies even if the damage is to only the lead-in wiring, masts, or towers.
• Increases in the amount of loss because strikers or others interfere at the location where rebuilding is taking place are excluded. However, such increases are covered if the strikers or others are at other locations.
• Any increase because a contract, lease, or license is suspended is excluded. However, coverage applies if the lapse or cancellation results from a covered loss event but only for the amount of loss that occurs during the period of restoration and the extended business income time period.

Example: Jacob has a 10-year contract with Manufacturing, Inc. to supply component parts. Two years into the contract Jacob has a fire that results in a six-month period of restoration. Manufacturing, Inc. cancels the contract and awards it to a competitor. Jacob is paid for the loss due to the contract during the six-month period of restoration and for the 90 days extended business income time period. Jacob is not compensated for the income that would have been received for the remaining seven years of the contract.

• There is no coverage under Extra Expense if a license, lease, or contract is suspended, lapses, or cancels beyond the period of restoration even if caused by a covered cause of loss.
• Consequential losses that are not business income or extra expense are excluded.

b. Valuable Papers and Records

There is no coverage for errors or omissions that occur when valuable papers or records are being copied or processed. There is also no coverage when electronic records are damaged because of electrical or magnetic injury, disturbance, or when the records are erased. Coverage also does not apply when the following of unauthorized instructions results in valuable papers or records being transferred to a place or person resulting in a loss.

Example: Freda is a new secretary at the law firm of Pell and Pell. She receives a telephone call from the senior Mr. Pell instructing her to bring the Judith Flanders will to a bank in town and to give it to the bank manager for an important meeting regarding the Flanders Estate. When she gets to the bank, a secretary informs her that the manager is in a meeting and cannot be interrupted. She asks Freda to leave the will with her and promises to give it to the bank manager. Freda does so and leaves. When Judith Flanders dies later that year, the will cannot be located. The story comes out and it appears that Freda was duped as part of an elaborate hoax. Coverage does not apply to the cost and expense of trying to retrieve and/or reconstruct the will document.

c. Accounts Receivable

Three unique exclusions apply to accounts receivable coverage. There is no payment for loss or damage:

• Caused when records are altered, concealed, falsified, or destroyed. However, this is only if such actions were taken to conceal that money, securities, or other property were wrongfully taken, withheld, or given.
• That is the result of errors or omissions in bookkeeping, accounting, or billing
• When the only proof of loss is an inventory computation or an audit of the records

5. Additional Exclusion

The insurance company does not pay for loss or damage to merchandise, goods, or products if the loss or damage is related to work being performed on it. Loss or damage caused by or that results from errors or omissions in any stage of development, production, or use of the product is excluded. The exclusion applies during planning, testing, processing, packaging, installation, maintenance, or repair.

This exclusion applies to anything that compromises any characteristic of the product. However, if an error or omission results in a covered cause of loss, the loss or damage it causes is covered.

Example: Jeremy’s Toys designed a model with 96 separate pieces. Different entities manufactured different parts. When the parts are received and assembly begins, Jeremy discovers that the pieces do not fit together. The product is useless, but this insurance does not cover it. If a fire occurred in the warehouse where the pieces were kept, that loss would be covered, although it might be very difficult to value.

D. LIMITATIONS

Limitations must be read carefully. They do not exclude coverage entirely, but instead provide very specific conditions as to when and how coverage is provided.

1. The insurance company does not pay for loss or damage to the following property. It also does not pay for loss that arises out of loss or damage to this property. However, each item has a limited amount of coverage provided.

a. Loss or damage to steam boilers, pipes, engines, or turbines is excluded when a condition within them causes or results in the damage.

The only exception is when a gas or fuel inside the furnace of a fired vessel or inside a flue that combustible gases pass through explodes.

b. Loss or damage to any water-heating device caused by or that result from a condition or event within it is excluded. Water heaters and hot water boilers are examples of water-heating devices.

The only exception is when an explosion occurs.

c. Loss or damage to the interior of a building and business personal property inside the building caused by rain, snow, sleet, ice, sand, or dust is excluded.

The exception is that coverage applies when a covered cause of loss first damages the building walls or roof and the excluded elements enter through the opening the damage created. Coverage also applies if snow, sleet, or ice on the building thaws and causes the loss.

Note: Leaving doors and windows open is not the same as an opening that damage to the building makes. Any loss that results is excluded.

Example: A major dust storm hits Mike's Massive Metals Manufacturing. After it passes, Mike finds that dust covers just about everything. The walls and roof are not damaged and there is no obvious point of entry. The insurance company determines that the dust entered through poorly fitting windows. Mike must clean and remove the dust at his own expense.

d. The insurance company does not pay any property loss that can be proved based on only an inventory shortage. The exception is that this limitation does not apply to 6. Additional Crime Coverages c. Money and Securities.

e. There is no coverage when property sustains loss or damage because it was transferred to a person or place off the premises based on unauthorized instructions.

f. (04 13 addition) Lawns, trees, shrubs, and plants that are part of vegetated roofs are covered. However, this coverage is limited for certain weather-related conditions that are primarily maintenance issues, not loss situations. There is no coverage for loss or damage due to any of the following:

• Soil that supports the vegetated roof being too damp or too dry
• Atmosphere that is too damp or too dry
• Temperature fluctuations or extremes
• Disease of any kind
• Rain, snow, ice, sleet, frost, or hail

2. The insurance company does not pay for loss or damage to the following property unless a Specified Cause of Loss or breakage of building glass causes the loss or damage:

a. Live animals. One very important additional limitation applies. There is no coverage for treating an injured animal. Coverage applies only if the animal dies or must be destroyed.
Note: Animals are listed as Property Not Covered. However, there are two exceptions. This limitation applies to animals covered under those exceptions.

Example: The kennel’s roof collapses. Four puppies are killed, and a veterinarian must treat eight adult dogs. All the remaining dogs are in satisfactory condition. When the bill is presented to the insurance company, it pays only the value of the puppies that died and denies the costs of treatment for the other dogs.

b. Breakage of fragile articles, such as statuary, marbles, chinaware, and porcelains.

This limitation does not apply to building glass, containers that hold property for sale, photographic lenses, or lenses used with scientific instruments or fine arts.

c. Builders' machinery, tools, and equipment that is either owned by or entrusted to the named insured. This limitation does not apply if the property is within 1,000 feet of the covered location. It also does not apply to any coverage available under the Business Income and Extra Expense Additional Coverage.

3. The following covered property is subject to special sub-limits for theft that are part of the limit of insurance for covered property, not in addition to it. These limitations do not apply to Business Income and Extra Expense coverage. The following sublimits are occurrence based and apply only to theft losses.

• $10,000 on furs, fur garments, and fur-trimmed garments
• $25,000 on jewelry, watches, watch movements, jewels, pearls, gold, and similar property

This limitation does not apply to jewelry and watches valued at less than $100 each.

• $5,000 on stamps, tickets, and letters of credit. It also applies to lottery tickets when being held for sale.

4. There is no coverage for the cost to repair a defect in a system through which water, other liquids, powder, or molten material is escaping.

The only exception is when such a defect is in a fire extinguishing system. However, even this exception is limited. It applies only when the damage is causing a substance discharge from automatic protection system or when the loss is directly due to freezing.

This entire limitation does not apply to Business Income and Extra Expense coverage.

E. ADDITIONAL COVERAGE–COLLAPSE

This additional coverage provides protection against abrupt collapse. It is subject to the following limitations.

Note: The approach to first exclude collapse as a covered cause of loss and then to add it back as a defined cause of loss was developed after a number of court cases interpreted the collapse coverage that previous forms and policies provided more broadly than insurance companies intended.

Related Court Case: Claim Payment Hinges on Definition of Roof’s Collapse

1. Abrupt collapse is specifically defined with respect to this additional coverage. It is the abrupt caving in or falling down of a building (or any part of it) where the end result is that the building (or a part of it) cannot be occupied or used as intended.

Example: The building inspector comes to the apartment building because one of its tenants complained. He goes through the building, finds severe termite infestation, declares the building to be in imminent danger of collapse, and condemns it. The building owner submits a claim to the insurance company that it denies because the building is still standing and has not abruptly collapsed.

2. The insurance company pays for direct physical loss or damage to covered property caused by the abrupt collapse of a covered building, any part of a covered building, or that contains covered property if the collapse is caused by:

a. Building decay that is not visible or that is hidden from view. This applies only if the insured was unaware of the decay before the abrupt collapse took place.

Related Court Case: Support Beam Failure Excluded Under the Policy

b. Insect or vermin damage that is not visible or that is hidden from view. This applies only if the insured was unaware of the damage before the abrupt collapse took place.

c. Using defective construction, remodeling, or renovation methods or materials. This applies only if the abrupt collapse takes place during construction, remodeling, or renovation.

Example: A new building being constructed for Kramer's Foundry will be two stories tall and will be used to store molds and dies. Construction is nearly complete when the building suddenly collapses and is completely destroyed. The investigation determines that the trusses were not attached properly. This loss is covered. The insurance company can subrogate against the contractor and seek recovery.

d. Using defective construction, remodeling, or renovation methods or materials. This applies only if the abrupt collapse takes place after construction, remodeling, or renovation was complete and is caused in part by any of the following:

• A cause of loss as stated in paragraphs a. and b. above
• A Specified Cause of Loss
• Breakage of building glass
• Weight-load of people or property
• Weight-load of rain that accumulates on a roof

Example: In the example above, instead of the collapse happening before the building is complete, it collapsed after Kramer has accepted it as complete. The investigation again determines that the trusses were not attached properly. This loss is NOT covered because it was not caused by any of the five listed items in paragraph d. Kramer must sue the contractor for recovery.

3. Coverage does not apply in any of the following situations:

• When buildings or any part of them are at risk of caving in or falling down but have not yet caved in or fallen down
• When part of a building remains standing. It may be separated from another part of the building but as long as it stands, it has not collapsed and is therefore not covered.
• When a building or portion of a building remains standing. It may appear to be leaning, sagging, expanding, bulging, shrinking, bending, settling, or cracking but it is remains standing, it has not collapsed and is therefore not covered.

4. There is no coverage when any of the following property collapses independently:

a. Outdoor radio or television towers, antennas, satellite dishes, guy wires, their lead-in wiring, and masts

b. Awnings, canopies, gutters, downspouts, and fences

c. Yard fixtures

d. Outdoor swimming pools

e. Bulkheads, piers, pilings, wharves, and docks

f. Beach or diving platforms or appurtenances

g. Retaining walls

h. Undergrounds pipes, drains, and flues

i. Roadways, walks, and other paved surfaces

There is an exception. If the items above are covered under this policy, there is coverage when a covered collapse of a covered building causes the item to collapse.

Example: The roof on the ten-story hotel suddenly collapses. The satellite dishes, towers, guy wires, and outdoor swimming pool on the roof then collapse into the building. The roof collapse is covered because the loss was due to hidden decay. The damage to the other items damaged in the collapse is covered because the roof collapse was covered.

5. Personal property occasionally collapses but the building does not. In that case, the loss is covered only if all of the following apply:

• The collapse was due to a cause of loss as stated in 2. a., 2. b., 2. c. or 2. d. above.
• The personal property that collapses is inside a building.
• The personal property that collapses is not one of the kinds listed in paragraph 4. above, regardless of whether it is considered real or personal property.

Coverage does not apply if personal property collapses and marring or scratching is the only damage the collapse causes.

6. The personal property must abruptly cave in or fall down. It is not covered if it leans, sags, expands, bulges, shrinks, bends, settles, or cracks but did not abruptly cave in or fall down.

7. Collapse coverage as explained in this item is an additional covered cause of loss. It does not provide additional limits of insurance.

8. Whenever the term covered cause of loss is used in this policy, it includes this entire Additional Coverage-Collapse section.

F. LIMITS OF INSURANCE

The most the insurance company pays for loss or damage in a single occurrence is the Limit of Insurance on the declarations that applies to the particular coverage.

There are two exceptions, and both apply to only Business Income and Extra Expense Limit of Insurance.

1. The Additional Coverage - Newly Acquired Locations limit is in addition to the Limit of Insurance for Business Income and Extra Expense.

2. Loss payments under any of the following Business Income Additional Coverages do not increase the Limit of Insurance:

• Alterations and New Buildings
• Business Income and Extra Expense Caused by Dependent Properties
• Civil Authority
• Contractual Penalties
• Extended Business Income
• Food Contamination
• Interruption Of Computer Operations

G. DEDUCTIBLE

In case of loss or damage, deductibles apply per occurrence in the following sequence:

• The insurance company first reduces the amount of loss by any of the following that apply:
• Coinsurance
• Agreed Value
• Functional Replacement Cost
• The company does not pay anything if the amount of loss after these adjustments is equal to or less than the amount of deductible. However, if the amount of loss is more than the deductible, it pays the amount that remains after applying the deductible.

• If a loss event involves two or more items of covered property and limits, the losses are not combined to determine how the deductible is applied. It is applied only once in each occurrence.

Related Court Case: Vandalism and Arson in Area Held Not to be a “RIOT” and Not Subject to a Single Deductible

Two examples are provided in the coverage form to explain how deductibles are applied in an attempt to eliminate confusion.

H. LOSS CONDITIONS

This is the first of three separate sets of conditions. These are in addition to those in IL 00 17–Common Policy Conditions.

Related Article: IL 00 17–Common Policy Conditions Analysis

This arrangement may make locating a specific condition somewhat difficult but using the policy index can make it easier.

1. Abandonment

Property cannot be abandoned to the insurance company.

Note: The named insured owns the property after a loss unless and until the insurance company decides to accept it. As a result, it is responsible for all expenses associated with owning any property unless and until the insurance company accepts it and assumes ownership.

Example: The truck that carries Minerva's merchandise overturns, slides down a steep slope, lands on a beach, and the merchandise scatters. The beach is considered environmentally sensitive and the goods must be removed. Minerva knows that removal will be expensive and that the fines for not removing it will be very high. These are the reasons why she requests a total loss settlement, so the removal or fines are the insurance company's responsibility. However, the company does not go along with her scheme, refuses to take ownership, and Minerva remains responsible for the cleanup and the potential fines.

2. Appraisal

The insurance company and the named insured may not always agree. They may disagree on the value of the property, the amount of the net income and operating expense or on the amount of the loss. This condition is designed to establish a way to resolve such disputes.

• When the two parties cannot agree on the value of property, one of them submits a written request to the other for an appraisal.
• Each party then hires an independent, competent, and impartial appraiser.
• The appraisers then choose an umpire. If they cannot agree on one, they can request that a judge of a court in the jurisdiction do so.
• Each appraiser evaluates the items and declares a property value, net income and operating expense and the amount of the loss. The value is set if they agree on the amount. Disagreements and differences are submitted to the umpire.
• Any decision made or agreement reached by any two of the three parties is binding on all parties.

The expenses associated with this process are not included as part of the expenses the insurance company pays to settle the loss. Each party pays the costs of its appraiser. The named insured and the insurance company share the costs of the umpire and any other appraisal expenses equally.

A very important part of this condition is that even though the insurance company may complete the appraisal process and arrive at an agreement as to the value of the claim, it does not bind the insurance company to pay the claim. The insurance company retains the right to deny the claim at any time.

Example: Pelio’s Pianos was severely damaged when a fire swept through its warehouse. ABC Insurance began an investigation immediately but provided a reservation of rights letter to Pelio. Pelio submitted a complete inventory to ABC. ABC thought the values were very inflated and submitted what they believed was fair valuation. Pelio requested an appraisal. ABC and Pelio worked through the appraisal and an acceptable value was established. Pelio then expected to receive payment. Instead two weeks later he was arrested for arson and the claim denied.

3. Duties in the Event of Loss or Damage

a. The insurance company requires that the named insured act reasonably after a loss. If it does not, the company may refuse to pay the loss. The named insured is responsible for the following:

• Notify the police if there is reason to believe that a law may have been broken.

Note: While this appears logical, the named insured might not want to notify the police if a family member could be implicated or for fear of reprisal. The insurance company reserves the right to refuse to pay a loss if the named insured refuses to notify the police for any reason.

• Give the insurance company prompt notice of the loss or damage, including a description of the property involved.

Note: The notice is not an in-depth report but provides enough information for the insurance company to begin processing the claim and determining its response. The term "prompt" has been challenged in some court cases and usually means to inform the company as soon as it is known that a loss has occurred. The details are addressed and worked out later.

• Give the insurance company a description of how, when, and where the loss occurred as soon as possible.

Note: This differs from the notice of loss. The company initially wants to quickly know that a loss occurred and is not interested in the details. This is the point where the insurance company now wants to examine the details in order to determine if the loss is covered. "How" has to do with the cause of the loss and determining if it is a covered cause of loss. "When" refers to the exact time the loss occurred. Only losses that occur during the policy period are covered. "Where" refers to the location where the loss occurred.

• Employ reasonable measures to protect covered property from further damage; the insurance company will take into consideration the expenses incurred in taking protective measures when settling the loss. If further damage does occur, there is no coverage for such damage if that further damage is the result of a cause of loss that is not covered by this form. In addition, and if possible, the named insured should separate damaged property from undamaged property and set it aside for the insurance company to examine.

Note: This means to act as if there is no insurance coverage. The named insured should not decide to take a vacation immediately after a loss occurs. To employ reasonable measures to protect property means that unusual or extraordinary measures are not required. Placing tarps over property, boarding up windows, and hiring security guards are examples of reasonable measures to take after a loss. The insurance company takes any expenses the named insured incurs to protect property from further damage into consideration when it settles the loss but will not pay beyond the limit of insurance.

• Provide a complete inventory of both damaged and undamaged property when the insurance company asks for it, including quantities, costs, values, and the amount of loss claimed.

Note: This information is essential for the insurance company to determine a fair settlement. Because the named insured owns and controls the property, it is responsible for providing the information. Some of these costs may be covered under 5. Additional Coverages Each with a $50,000 Limit (Except as Otherwise Indicated) c. Inventory and Appraisal Expense.

• The insurance company has the right and duty to check the information the named insured provides to be reasonably certain it is correct. It must be allowed to inspect the property, examine and make copies of books and records, and take samples of damaged and undamaged property for inspection, testing, and analysis.

Note: The important part of this condition is that the company has the right to do this as often as it reasonably requires. It does not mean that it can harass the named insured or be unreasonable in its demands.

• Send the insurance company a signed and sworn proof of loss with the information it asks for to assist it in investigating the claim within 60 days of the request. The company must provide the necessary forms and specify the information it needs.
• Cooperate with the insurance company as it investigates and settles the claim.
• Do not involve the insurance company with settlements or any other arrangements without its permission. The named insured bears the costs of any voluntary payments it makes or expenses it incurs without the company's permission.

Example: Deering Cleaners incurs serious smoke damage due to a fire in an adjacent building. Its customers want to know what happened to their clothes. The named insured knows it has coverage for the property of its customers, decides to help the company, and attempts to explain the coverage to the customers. Deering actually reimburses a few of the losses out of its own pocket. When the insurance company finds out about these impromptu settlements, it informs Deering that it is not responsible for any of its promises and does not reimburse any payments made without its written permission.

• Get back into business as quickly as possible if it intends to resume operations and stay in business.

b. The insurance company may examine any insured under oath individually and not in the presence of any other insured at any reasonable time, as often as necessary. The examination can include anything that relates to the insurance or the claim. It can ask questions about the named insured's books and records. The named insured must acknowledge in writing that the answers given in any examination are true and factual to the best of its knowledge.

Note: Thorough investigation is an important part of the claims process. The insurance company must have access to some information that a given insured may not wish to divulge. Claims adjusters like to think their customers are honest, but the number of cases and the prevalence of fraud forces them to be cautious. The insurance company cannot harass the named insured or use strong-arm tactics in order to gather information, but it must be diligent in the process and protect its assets.

4. Loss Payment

a. The insurance company has four options to choose from to settle a covered loss. It may:

• Make a cash settlement for the value of the property that is lost or damaged
• Make a cash settlement for the cost of repairing or replacing the lost or damaged property. Because the coverage form includes some ordinance or law coverage, its impact on the loss payment is explained in item b. below.
• Take all or part of the property but only after its value is agreed upon by the parties or the appraisal condition is completed.
• Actually repair or rebuild the damaged property or replace damaged property with other property of similar kind and quality. Because this coverage includes some ordinance or law coverages, its impact on the loss payment is explained in item b. below.

Note: The insurance company controls these options, not the named insured.

Coverage Form Error Alert: Reference is made to item b in two specific places in paragraph a. This appears to be an error because it is the same reference that was made in the previous edition. Item b. in the previous edition was the ordinance or law paragraph. This leads to a further question as to whether the reference should be to only c. or to both b. and c.

b. Party Walls

When buildings abut one another, they often share a party wall. This wall separates the two buildings but is also part of each building. Loss settlements that involve these walls are unaffected if the same insured owns both buildings. However, if different insureds own the shared party wall, loss settlements may be more difficult.

When both building owners plan to repair and rebuild, the insurance company pays its insured’s proportional share of the damage to the party wall. However, the insurance company pays the full value of the party wall if the named insured plans to rebuild but the other building owner does not. It then has the right to subrogate against the adjoining building owner.

c. Ordinance or Law

The lead-in language in this section is confusing because of its numerical references. What it states is that all paragraphs in this particular item are subject to the apportionment procedure described in 3. Additional Coverages e. Ordinance or Law. Each coverage has its own unique loss payment provision.

• Loss payment under Coverage A cannot be for only the undamaged portion of the building. It must apply to both the damaged and undamaged portions of a building involved in a loss. Any payment made is subject to the limit of insurance on the declarations.

The most the insurance company pays depends on whether the building is being repaired, rebuilt, or replaced. If it is being repaired, rebuilt or replaced, the most paid is the cost to repair, rebuild, or reconstruct the property at the same location with a building similar to the one destroyed. It is not required to be rebuilt at the same location but changing locations will not increase the payment.

If the building is not repaired, rebuilt, or replaced, the most paid is the building’s actual cash value.

Example: A fire destroys 60% of Mary's hotel. Its replacement cost value is $5,000,000. It is five stories high, of joisted masonry construction, and was built during the art deco era. Based on current ordinances, it must be replaced with at least masonry non-combustible construction. The remaining part of the building is torn down because a new building will replace the old one. The architects propose a five-story art deco building similar in size and design but of masonry noncombustible material for a cost of $10,000,000. The insurance company pays only $5,000,000 because that is the replacement cost value. If Mary’s did not rebuild, it would pay only $2,500,000 which is the building’s actual cash value.

• The most paid to demolish the undamaged portions of a building required to be torn down due to an ordinance or law is the limit of insurance for Coverage B or the actual expenses, whichever is less.

Example: Mary’s hotel is wedged between two other buildings that were not damaged by the fire that destroyed hers. Because those buildings are in good condition, the options to demolish Mary’s hotel are limited. She chooses the least expensive workable option in demolishing the undamaged portion of her building which costs $150,000. Mary's limit for Coverage B is only $50,000 so she is responsible for the $100,000 difference.

• The most paid under Coverage C is the limit of insurance for the coverage. However, the property must actually be repaired or replaced as soon as reasonably possible, but no later than two years after the date of loss. The payment cannot be for more than the actual amount needed for the repairs at the loss location or at another location if required by ordinance or law.

Example: Half of the $10,000,000 cost to rebuild Mary’s hotel is to bring it up to current code. Those costs can be paid from this section, as long as the expenditures are actually made, and the limit is adequate. Mary chose to purchase only a $100,000 limit so there is little to apply to the additional cost.

d. The insurance company has 30 days to inform the insured of how it plans on settling the loss. The 30 days starts on the day it receives the sworn proof of loss.

e. The most the insurance company pays is the named insured's financial interest in the covered property.

Example: Scenario 1: Kelley and Steve owned a dress shop together. Things did not work out and Kelley bought out Steve's interest. About a week after the buyout, a fire destroyed the shop and the inventory. Steve saw an opportunity and submitted a claim for his interest, since his name was still on the policy. However, Kelley produced a copy of the buyout agreement and Steve’s claim was denied. Scenario 2: Kelley and Steve owned a dress shop together. This time, they decided to dissolve the partnership by Steve buying out Kelley's interest. About a week after the decision was made but before Steve paid Kelley, a fire destroyed the shop and the inventory before the deal closed. Kelley saw an opportunity and submitted a claim for her interest because her name was still on the policy. In this scenario, Steve and Kelley both document their ownership interests and the claim payment is split between them.

Related Court Case: Business Personal Property Meant All Merchandise the Retailer Had an Insurable Interest In

f. The insurance company adjusts claims for property the named insured does not own with that property’s owner. This payment must satisfy all claims for the property because the insurance company pays the value of the property only once. The most it pays is the property owner's financial interest in the property.

g. The insurance company can decide to defend the named insured against suits due to claims by the owners of property. If it does, it does so at its own expense.

h. Once the signed and sworn proof of loss is filed, the insurance company must pay the loss within 30 days of receiving it. This time frame applies only if the named insured has met all of its obligations within the policy’s terms and conditions and the amount of loss is established through an appraisal or a settlement agreement.

5. Recovered Property

When either the insurance company or the named insured recover property after the loss on it is paid, the party that recovers the property must promptly inform the other party. The named insured has the option to either return the claim payment and keep the recovered property or keep the payment and let the insurance company have the recovered property. The insurance company is responsible for the expense of the recovery and any needed repairs to the recovered property, subject to the limit of insurance.

Example: Burglars remove the entire inventory of compact discs (CD's) of the Hot Shots music store, which specializes in new music releases. The insurance company pays the entire loss. About six months later, the police recover the stolen CD's in a storage warehouse. They notify Hot Shots and Hot Shots notifies the insurance company. It offers to exchange the CD's for the claim payment made but Hot Shots refuses, because the titles are no longer new and saleable in its store. The insurance company takes the property as salvage and sells it at a much-reduced price. Hot Shots' refusal to accept the merchandise does not affect the claim.

6. Vacancy and Unoccupancy

a. Description of terms

This condition defines vacancy and unoccupancy as follows:

• If coverage applies to a tenant, "building" means the unit or suite rented or leased to it. As a result, the property is considered vacant only if the portion the tenant occupied does not contain enough business personal property to conduct customary operations.
• If coverage applies to a building owner or general lessee, "building" means the entire building. It is considered vacant unless at least 31% of the total square foot area is rented to a lessee or sub-lessee that is using it to conduct its customary operations. The same approach is used to evaluate the building owner with respect to its customary operations.

Note: The key word is "customary." For example, if the lessee, sub-lessee, or building owner is a retail operation and that is the customary operation, saying that the building is used for storage does not prevent the definition of vacancy from being applied.

• Buildings or structures are considered unoccupied when they have not been used for its customary operations for 60 or more consecutive days.

• Buildings under construction or renovation are not considered vacant or unoccupied.

Note: Just as the named insured may try to stretch the non-vacancy or unoccupancy issue from time to time, the insurance company may attempt to treat a building being remodeled as vacant or unoccupied. If the building or an area is temporarily vacated or unoccupied in order to perform major renovations, and the tenant will return as soon as the work is completed, the building is still treated as occupied and is not vacant or unoccupied.

b. Vacancy and Unoccupancy Provision

If the building that sustained covered loss or damage was vacant or unoccupied for 60 days consecutive days before the loss, the insurance company does not pay anything if the loss or damage is caused by or results from vandalism, breakage of building glass, water damage, theft, or attempted theft.

Sprinkler leakage coverage is not provided if the system has not been protected against freezing. If the system has been protected, sprinkler leakage coverage is provided but subject to a 15% reduction of coverage.

The insurance company reduces a loss amount by 15% if the loss was caused by any covered cause of loss other than those listed above.

Example: The Melrose Shopping Center has problems. The owner realizes that drastic steps are in order and decides to do a major renovation because it is only 50% occupied. The renovation forces some of the occupants to move elsewhere such that the occupancy rate drops to 25%. Some vandals enter the premises one night and use some of the construction equipment to destroy windows and some interior walls. The insurance company adjuster reviews the details of the loss, looks at the occupancy rate, and denies coverage. He changes his mind and pays the entire loss when the owner produces the contracts for the renovations and proves that they were under way.

Note: Insurance companies want to insure viable, ongoing businesses. Premiums charged are based on an active occupancy. Surcharges are made when a property is vacant or unoccupied. Since vacancy or unoccupancy may not be discovered until after a loss, the Loss Conditions limit coverage if such conditions are not disclosed before a loss occurs. However, the insurance company must define what it means by vacancy or unoccupancy before it imposes any restrictions.

7. Valuation

a. Coverage applies on a replacement cost basis unless another valuation approach applies. Replacement cost is based on the actual cost to repair or replace lost, damaged, or destroyed property without any reduction for depreciation. However, this is subject to a number of exceptions and requirements.

• Actual cash valuation applies to manuscripts and any contents in a residence. It also applies to mobile equipment unless mobile equipment replacement cost is stated on the declarations.
• Replacement cost is paid only after the work is complete. As a result, many insureds choose to first settle a claim on an actual cash basis. They can then exercise the replacement cost valuation option but only if they notify the insurance company within 180 days of the loss that they are going to do so.

Example: A fire destroys Lyster Plumbing’s building and business personal property. Lyster and its insurance company quickly agree to the amount of loss. Lyster must start rebuilding immediately and requests settlement on an actual cash value basis. It uses part as a down payment to the general contractor and part to order new business personal property. Lyster notifies the insurance company that the replacement cost valuation will be used once the building is complete and it receives the business personal property. Once all is in place, Lyster resubmits his claim as replacement cost and the insurance company issues a check for the difference between the actual cash value and the replacement cost.

• Replacement cost value is not paid until after the property is actually repaired or replaced on a timely basis. Otherwise, payment is on an actual cash value basis.

Note: The value of tenant's improvements and betterments not replaced cannot be paid as actual cash value. The procedure described in item d. below is used instead.

• The most paid on a replacement cost basis for covered loss or damage is the limit of insurance that applies, the cost to replace with similar materials that can be used for the same purpose at the same location, or the amount actually spent to repair the property, whichever is less.

Costs to construct buildings may be different at different locations. If a building is rebuilt at a different covered location, the cost to do so cannot exceed the cost that would have been incurred if it was rebuilt at the original covered location.

Example: Continuing the example above, Lyster Plumbing decided to relocate after the loss. The costs at the new location were higher because it required excavation and pouring new footers. Lyster was paid only the amount it would have paid to rebuild at the original location. The new location was closer to many of Lyster’s customers and it was willing to pay the additional costs.

b. Stock sold but not yet delivered is valued at its net selling price, reduced by any discounts and expenses such as shipping and handling costs.

Stock sold but not yet delivered

c. When glass that is not currently safety glazed is required by law to be replaced with glass that is safety glazed, the additional cost of the safely glazing is covered.

Note: If the glass is already safety glazed, the safety glazing is automatically covered because that is replacement cost with like kind and quality.

d. Valuation of tenant’s improvements and betterments is unique. While the tenant needs and uses them, it does not actually own them, and they remain with the building when it moves out. Three valuation methods are available.

• Replacement cost applies if the lost or damaged property is repaired or replaced on a timely basis.
• Only a portion of the original cost of the lost or damaged items is paid if repairs are either not made or not made on a timely basis. The amount paid is determined by multiplying the original cost by the number of days from the date of loss to the end of the lease. Divide this amount by the number of days from the date of installation of the improvement or betterment to the end of the lease.

Note: If the lease contains a renewal option, the renewal option expiration date replaces the expiration date of the lease provision in the formula.

• The named insured does not receive anything if someone else pays for the repairs or replacement.

Example: The Zebra Factory transforms a regular strip shopping center into a menagerie for its restaurant. Zebra cannot remove the $200,000 cost of the improvements and betterments if it decides to move out. As the restaurant celebrates completing two years in business, a tornado badly damages the building's roof. Zebra's owner is killed, the business is destroyed, and the owner's widow decides not to reopen. The restaurant has a five-year lease with a five-year renewal option. The value of the improvement and betterment loss is determined as follows:

1. Calculate the days remaining in the lease. 365 days multiplied by eight years equals 2,920 days.

2. Multiply the number of days left by the value of the improvements. $200,000 multiplied by 2,920 equals $584,000,000.

3. Determine the number of days the improvements and betterments would have been in place if no loss occurred. 365 days multiplied by 10 years equals 3,650.

4. Divide the results of Step 2 by Step 3 for the final value. $584,000,000 divided by 3,650 equals $160,000.

e. Pairs, sets, or parts

The insurance company will either repair any part of a pair or set to restore its value or pay the difference between the value of the set and the value of the remaining items.

Example: Jane’s diamond earrings are valued at $5,000. Unfortunately, one is destroyed, and the value of the single remaining earring is just the $1,000 value of the metal and the stone. The insurance company pays $4,000 because that amount is the difference between the value of the pair and the value of the single remaining earring.

If an item consists of many parts, the insurance company pays only the value of the damaged parts, not the value of the entire item.

f. Valuable papers and records are valued as follows.

• The value of each item listed and described on the declarations is the limit of insurance that applies to it.
• Items not listed and described are valued at their actual cash value on the date of loss.

8. Special Loss Conditions

This condition applies only to Business Income and Extra Expense.

a. Loss Determination

Business income loss amounts are based on the net income before the loss, the net income that would have been earned if there was no loss, operating expenses (including payroll expenses to resume operations), and other information sources used to determine the value of the loss. The other information sources might be records, bills, contracts, and other legal documents. The named insured cannot claim potential windfall profits that it might have made because of favorable conditions that arrive due to the loss that damaged it.

Example: Friendly Hardware is located in a small community. A huge wildfire damages Friendly and more than half of the rest of the community. Friendly attempts to add to its loss of income the amount it could have earned if it was open while customers purchased items to repair buildings following the huge wildfire. The insurance company explains that Friendly cannot benefit from that windfall and must use its normal receipts to determine the lost business income.

Extra expense valuation is based on those expenses that exceed the normal expenses that would not be incurred if there had been a loss. The salvage value of property purchased for temporary use and any extra expense that other insurance pays is deducted from the amount. In addition, expenses incurred that reduce the business income loss are paid.

Example: A tornado damages Johnson’s Pharmacy. Johnson knows his customers still need their prescriptions. He quickly purchases a trailer to use as an office and drives to nearby pharmaceutical warehouses to replenish its stock. All customer files were backed up on its computer system and Johnson purchases some used computers, downloads the records, and is back in business within 24 hours. Once the building is repaired, Johnson moves back in with all new equipment.

The costs of the office trailer and the used computers are extra expenses. The costs to drive to nearby warehouses to replenish pharmaceuticals are also extra expenses. Even the cost to download customer records to the computers is extra expense.

The office trailer and used computers are considered salvage when they are no longer needed. The amount the insurance company pays for them is their actual cost less the amount Johnson could obtain for them as salvage.

The insurance company reduces the amounts it pays for the named insured's:

· Business income losses to the extent that operations can be resumed by using damaged or undamaged property, merchandise, or stock at its covered location or elsewhere

· Extra expense losses to the extent that operations can be returned to normal and extra expenses discontinued

· Business income losses from dependent properties to the extent that operations can be resumed to any extent by using other sources of materials or outlets for its products that may be available

If operations are not resumed promptly or at all, the insurance company pays amounts based on only the amount of time it would have taken to resume them on a timely basis.

Example: Larry and Linda are partners in Panhandle Wire. A fire destroys Panhandle and it must be rebuilt. Unfortunately, Larry and Linda have problems communicating. One agrees on a set of plans but the other rescinds the decision. Two different architects give up and resign rather than work with them. The construction manager almost pulls out his remaining hair because certain work must be redone. After six long months, construction is complete, and Larry and Linda present the business income loss to the insurance company. The insurance company refuses to pay for the entire time period. It considers similar construction jobs and reduces the recovery period to three months which cuts the settlement amount requested in half. Larry and Linda were last heard bickering about whether or not to bring legal action against the insurance company.

b. Loss Payment

Once the signed and sworn proof of loss is filed, the insurance company must pay the loss within 30 days of receiving it. This applies only if the named insured has met all of its obligations within the policy’s terms and conditions and the amount of loss has been established. The amount of the loss can be established through an agreement between the named insured and the insurance company or through the appraisal condition.

I. ADDITIONAL CONDITIONS

1. Mortgageholders

a. Mortgageholder is not specifically defined but it also includes trustees.

b. The insurance company pays for covered loss or damage to buildings or structures to each mortgageholder listed in order of precedence and as its interest appear.

Note: The mortgageholder must prove its interest at the time of loss.

c. The mortgageholder retains the right to receive loss payments even if it has begun foreclosure proceedings or similar actions.

d. If the named insured’s claim is denied because of its actions or because it failed to comply with coverage terms and conditions, the mortgageholder still has the right to receive payment as long as it:

• Pays any premium due once the insurance company notifies it that the named insured did not pay
• Submits a signed, sworn proof of loss within 60 days after the insurance company notifies it that the named insured did not submit the required proof of loss
• Notifies the insurance company of any change in ownership, occupancy, or any substantial change in risk it knows about

When any one of the above occurs, the mortgageholder becomes directly subject to all the coverage form's terms and conditions.

e. The mortgageholder’s status changes if the insurance company pays the mortgageholder for any loss or damage but denies payment to the named insured because of its actions or non-compliance with the policy’s terms and conditions. The mortgageholder's rights under the mortgage transfer to the insurance company. However, the mortgageholder's right to recover the full amount of its claim is not impaired.

The insurance company has the option to pay the entire principal on the mortgage and any accrued interest to the mortgageholder. If it does, the mortgage and note transfer to the insurance company and the named insured pays its remaining mortgage debt to the insurance company. This payment to the mortgageholder under these circumstances results in the insurance company taking the mortgageholder’s place.

f. The insurance company must give the mortgageholder appropriate notice of its intent to cancel the policy. However, most states have their own cancellation notice requirements that must be followed instead of following those in
this policy.

Related Court Case: Payment of Policy Proceeds to Insured Did Not Relieve Insurer of Obligation to Mortgagee

g. The insurance company is obligated to give the mortgageholder at least 10 days prior written notice if it decides to not renew.

2. Coinsurance

The only coverage subject to coinsurance is Business Income and Extra Expense and then only if there is a coinsurance percentage on the declarations. Coinsurance applies to only business income losses. It does not apply to extra expense.

Note: Substantial credits apply to the rating when the named insured selects the coinsurance option. However, there is a significant penalty if the limits of insurance are inadequate.

a. The following coinsurance condition applies in addition to other conditions in the policy.

b. The insurance company does not pay the full amount of any business income loss if its limit of insurance is less than its coinsurance percentage multiplied by the total of its net income and all operating expenses. The net income and operating expenses used are what the named insured would have earned for the 12 months following the inception date if there had been no loss. If the policy is written for a multiple-years term, the latest anniversary date is used in place of the inception date.

The coinsurance penalty is developed as follows:

Step 1: Multiply the anticipated net income and operating expenses by the coinsurance percentage.

Step 2: Divide the limit of insurance by Step 1. A penalty is not applied if the result is 1.0 or higher. Proceed to Step 3 if the result is less than 1.0.

Step 3: Multiply the loss amount by the percentage from Step 2.

The most the insurance company will pay is the lesser of the amount determined in Step 3 or the limit of insurance. The named insured is responsible for the remainder from its own assets or from other insurance.

Note: Operating expenses are an important part of the calculation and it is important to be aware of anything that can be deducted from operating expenses. The eligible deductions are outgoing prepaid freight, returns and allowances, discounts, bad debts, collection expenses, cost of raw stock and factory supplies consumed (including transportation charges), cost of merchandise sold (including transportation charges), cost of other supplies consumed (including transportation charges), and cost of outside services to resell that do not continue under contract.

Other deductions are power, heat, and refrigeration costs not under contract but only if OP 15 08–Power, Heat, and Refrigeration Deduction is attached. All ordinary payroll expenses or the amount of payroll expense can be excluded if OP 15 07–Ordinary Payroll Limitation or Exclusion is attached. Certain special deductions apply to mining properties.

Example: An explosion badly damages Funny Shapes Candy Company. No one is injured but the plant is shut down for repairs. It takes almost four months to resume operations and the loss of business income amount is $360,000. The limit of insurance is $1,000,000 with 50% coinsurance. The net income and expenses for the 12 months beginning on the inception date is anticipated to be $2,200,000.

Step 1: $2,200,000 multiplied by .50 equals $1,100,000.

Step 2: $1,000,000 divided by $1,100,000 equals .909.

Step 3: $360,000 multiplied by .909 equals $327,000

Funny Shapes disputes some of the expenses the insurance company included when it offered to settle and is able to document the debt collection and transportation expenses that do not continue. Funny Shapes also shows that net income was trending downward due to trade problems in European Markets. This combination of factors causes the insurance company to revise the anticipated net income and expenses to $2,000,000 and it settles without a coinsurance penalty.

This section of the coverage form has two examples, one for underinsurance, and the other for adequate insurance.

This condition does not apply to extra expense.

Note: If the scheduled location option is chosen for building and business personal property coverage, coinsurance applies as OP 14 01–Scheduled Location explains.

3. When Builders Risk Coverage Ceases

Builders risk coverage ends on the earliest date that one of the following occurs:

a. The policy is cancelled or expires

b. The purchaser accepts the property

c. The named insured's financial interest in the property ends

d. The named insured abandons the construction project without any apparent intent to complete it

e. Ninety days after construction ends or 60 days after the building under construction is partially or completely occupied or 60 days after it is put to its intended use. This time frame can be changed but only if the insurance company does so in writing.

Note: It is very important to understand that coverage ends when the earliest date is met. This means that negotiating on item e. and getting the days to extend to 180 days or more is useless if the policy expires 10 days after construction ceases. Coverage ends when the policy term ends.

J. CAPITAL ASSETS PROGRAM COVERAGE FORM CONDITIONS

There are nine conditions.

1. Concealment, Misrepresentation, or Fraud

Coverage is void if the named insured or any other insured intentionally and fraudulently concealed or misrepresented a material fact. However, in order to void the policy that fact must relate to the coverage, the policy, the covered property, the named insured's interest in it, or to a claim.

Related Court Cases:

Insured Blames Agents for Its Misrepresentations

Misrepresentations Void Entire Policy

Note: Insurance companies provide coverage based on utmost good faith and trust the customer's word. The coverage provided, premium charged, and the terms and conditions that apply are based on full disclosure and a completely honest relationship. Coverage is void if the named or any other insured betrays that trust through any act of fraud, intentional concealment, or misrepresentation. Fraud is the most blatant offense and voids coverage the moment it is discovered.

Example: Bill decides to sell his factory to Crackers, Inc. It is not an easy decision and he is doing so only because of serious personal financial problems. The day after the sale closes, a fire destroys most of the building. Bill immediately submits a claim to his insurance company, states that he will not rebuild, and requests payment for the property’s actual cash value. His insurance company starts to work on the settlement. At the same time, Crackers requests a replacement cost settlement from its insurance company in order to rebuild. Bill's claim representative is quite surprised when he visits the loss location and sees a construction worker there. He decides to check a little further. Bill's insurance company voids the policy, contacts the police, and charges Bill with fraud.

2. Control of Property

This insurance is not affected by any act or neglect by any party the named insured does not control or direct.

In addition, if a condition is breached at one location, that breach does not affect coverage at any other location unless that same breach occurs at that other location.

3. Insurance Under Two or More Coverages

The insurance company does not pay more than the actual amount of loss or damage, regardless of the number of coverages that apply to it.

4. Legal Action Against Us

The insurance company cannot be sued or have any legal action brought against it with respect to this policy until and unless all the policy terms are complied with. If action is brought it must be brought within two years after the date of loss.

Note: Different time requirements may apply in certain states. In those cases, this condition is amended to comply with those requirements.

5. Liberalization

Any revision to the policy that broadens coverage without an additional premium charge automatically applies. This condition applies to changes introduced during the policy period as well as those made within 180 days before the effective date.

Example: The renewal policy for Kreamy Cookies is issued on October 1, even though it does not renew until January 1. A new and improved edition of OP 00 01 is introduced on December 1 and one of the additional features it includes without an additional premium charge is limited flood coverage. Heavy rains on April 1 cause a flood and damage at Kreamy but the insurance company denies Kreamy’s claim. The agent remembers the change in coverage and brings it to the claims adjuster's attention. The adjuster reverses his position and Kreamy is pleased with the amount paid due to the liberalization clause even though the coverage is not as broad as traditional flood coverage.

6. No Benefit to Bailee

Parties other than the named insured or any insured that have covered property in their custody do not benefit from this insurance.

Note: Insurance provided is for the insured’s benefit, not for any bailee. Bailees do not have an advantage simply because this insurance is in force. Bailees should have their own coverage to apply to loss or damage to property in their care, custody, or control.

7. Other Insurance

a. If the named insured has any other insurance identical to this coverage, the insurance company pays only its share of any covered loss or damage in the proportion of its limits to the total limits of all such insurance.

b. If other insurance is subject to different terms, this insurance is excess of amounts due from such other insurance, whether they can be collected or not.

c. If a service agreement also covers loss or damage, any payments that this policy makes are excess over amounts the service agreement pays. A service agreement is a warranty plan, such as a service plan, property restoration plan, or similar agreements. This applies even if the service agreement refers to itself as insurance.

8. Policy Period, Coverage Territory

The insurance company covers loss or damage that occurs during the policy period on the declarations and within the coverage territory consisting of the United States of America, its territories and possessions, Puerto Rico, and Canada. Another coverage territory described elsewhere in in the policy may apply to a specific coverage. In that case, the revised coverage territory applies instead of this coverage territory.

9. Transfer of Rights of Recovery Against Others to Us

When the insurance company pays any person or organization for a covered loss, it assumes the rights of recovery for damages against third parties that caused or contributed to the loss. The person or organization that the company paid must protect those rights and help the insurance company exercise them. However, the named insured can waive its rights of recovery against any party by doing so in writing before a loss occurs. It can also waive rights of recovery after a loss but only in one of the following three circumstances:

• The entity is insured under this policy.
• The other party is a business that the named insured owns or controls or a business that owns or controls the named insured.
• The other party is the named insured’s tenant.

Related Court Case: Property Owner’s Waiver of Subrogation Barred Action

Example: Crumpets Unlimited is a partnership made up of three doctors and a dentist. Crumpets own a number of apartment complexes and office buildings. Each partner is a tenant in a building that Crumpets owns. The dentist is not very diligent about properly maintaining his office equipment. An electrical overload in an ancient X-ray machine starts a fire that eventually completely guts the building. The insurance company wants to sue the dentist but cannot because the partnership waived its rights of recovery against the dentist as part of the group. As a result, the insurance company cannot initiate legal action against the dentist.

K. OPTIONAL COVERAGES

The following are changes in valuation options more than optional coverages. If desired, they must be selected on the Declarations for a specific coverage. The selection may vary by location.

1. Actual Cash Value

The Valuation Condition is automatically replacement cost unless ACV is entered on the Declarations. When selected, the actual cash value replaces the replacement cost valuation for the selected item. Actual cash value is not defined but is typically adjusted as replacement cost at the time of loss less depreciation.

2. Business Income and Extra Expense

The following valuation options can be used only if coinsurance is not selected for the same item.

a. Maximum Period of Indemnity

In case of direct physical loss or damage to covered property by a covered cause of loss, the insurance company pays the actual business income loss sustained and extra expenses for up to 120 days after the date of loss, or the limit of insurance on the declarations, whichever is less.

Example: The weekly sales at Dewey's Swanky Walkers (DSW) Shoe Store vary tremendously from one week to another but are fairly consistent over any given three-month period. Dewey figures he can be back in business shortly after a loss occurs, even if it is a total loss. This is because it is easy to obtain replacement stock and the availability of rental space available nearby. Dewey selects the Maximum Period of Indemnity because the time frames with the other methods are too long or too restrictive.

b. Monthly Limit of Indemnity

In case of direct physical loss or damage by a covered cause of loss to covered property, the most the insurance company pays in any 30-day period for a business income loss is the factor on the declarations multiplied by the limit of insurance on the declarations. This restricted limit does not apply to extra expense.

Example: Rodney’s Novelty Company depends on foreign markets for many of the products it stocks and sells. Rodney knows he can replace his entire inventory in less than 90 days. His warehouse location is quite large and finding similar space in the immediate area would be difficult, if space could be found at all. In spite of this, Rodney believes full operations could be resumed within four to six months after a total loss. He knows the amount of income he needs each month to remain in business, even though it is less than the amount the insurance company thinks he needs. Rodney selects the 1/6 Monthly Limit of Indemnity option because it does not have any penalties and provides the exact limits he feels he needs to continue in business.

This section of the coverage form has an example of adjusting a loss involving the monthly limit of indemnity.

Note: Coverage is not limited by time. It continues as long as operations are suspended, and limits remain available. Each month’s payment is limited to the lesser of the percentage of the limit of insurance, the actual amount of the loss, or the limit of insurance that remains. Extra expense incurred is not subject to the monthly limit but is still subject to the total limit of insurance.

c. Agreed Value

This is the most complicated, difficult, and time-consuming of the optional coverages. The named insured must first prepare a business income worksheet and submit it to the insurance company. The worksheet must include the actual financial data for the previous 12 months as well as estimated amounts of the same data for the next 12 months. The words "Agreed Value" and the appropriate coinsurance percentage must be on the declarations or the scheduled locations endorsement. The minimum agreed value amount is the estimated 12 expenses and net income multiplied by the coinsurance percentage that is entered on either the declarations or the scheduled locations endorsement. The limit of insurance entered on the declarations or the scheduled locations endorsements must be equal to or higher than the minimum agreed value amount. Coinsurance is suspended for 12 months or until coverage expires, whichever occurs first. A new worksheet must be prepared and submitted every 12 months in order for the agreed value arrangement to continue.

If the entered business income limit is less than minimum agreed value, any loss is reduced by multiplying the amount of loss by the product of the business income limit divided by that minimum agreed value.

Example: Mercy On Us Factory estimates it will take at least 12 months to resume operations if it sustains a total loss. Mercy is subject to the whims of the marketplace but has excellent records to use to make its projections. It develops a worksheet that shows the past 12 months business income and uses the previous five years in addition to its working knowledge of the marketplace to predict the next 12 months. All parties agree to the value and use it as the limit of insurance on a 100% coinsurance basis. This approach assures Mercy that it will have the coverage it needs at the time of loss without a coinsurance penalty in case its estimates are wrong. It also provides coverage at an attractive price because the rating is based on the 100% coinsurance rate.

Note: This section of the coverage form has an example of adjusting a loss that involves agreed value.

L. DEFINITIONS

This coverage form has 32 definitions. This is considerably more than the ISO Building and Personal Property Coverage Form that has only three definitions.

1. Accounts receivable

These are amounts customers owe to the named insured that cannot be collected, as well as extraordinary collection expenses resulting from the loss and other reasonable expenses incurred to recreate and re-establish records of accounts receivable. It also includes interest charges on loans taken out to bridge the gap until the insurance company pays the amounts due.

2. Builders risk

This is buildings and structures at covered locations that are in the course of construction, alteration, or repair. It includes property that is intended to be part of the permanent installation, such as fixtures and machinery, building materials and supplies used for construction, along with any building servicing equipment. Foundations of buildings or structures under construction, temporary structures on the site, cribbing, scaffolding, and construction forms are also included.

Building materials and supplies of others that are in the named insured's care, custody, and control are also covered, provided they are located on or in a covered building or within 1,000 feet of one.

3. Computer

This refers to programmable electronic devices that are used to work with data. It also includes any peripheral equipment and related air conditioning and fire suppression systems. This definition does not include or apply to data or media.

4. Counterfeit money

This is an imitation of real money. It is intended to deceive and to be accepted as genuine.

5. Covered location

The unendorsed OP 00 01 does not list covered locations so this definition is crucial to understanding coverage. A covered location is any premises, site, or location with buildings or structures owned, operated, or leased by the named insured.

6. Dependent property

The unendorsed OP 00 01 does not list dependent property locations. This means that the named insured has coverage for business income due to a loss from any dependent property that meets this definition.

A dependent property is any property operated by others and upon which the named insured depends on to deliver materials or services; accept the named insured's materials or services; manufactures products under contract of sale for delivery to the named insured's customers; or attract customers to its business.

Properties that deliver water, power, or communication services are not part of this definition.

7. Electronic data

Information, instructions, facts, or computer programs that are used to operate computers or similar and related devices. Information the insured develops regardless of where it is stored, unless it is stored in paper form, is also considered electronic data.

8. Employee

a. This term is expanded beyond the business’s full-time employees.

Seven different categories qualify as employees:

(1) An actual person (not a corporation) who the named insured pays and who is under its control with respect to performing his or her duties. The person remains an employee for 30 days after termination but only if termination was not related to dishonest actions.

(2) A person who is a substitute for an item (1) employee or who is hired for short temporary work is considered an employee while under the named insured’s control. This person is not an employee when caring for property off-premises.

(3) A person leased to the named insured that is not a person described in (2). above. An employment contract and a labor-leasing firm must be involved.

(4) A consultant for the named insured but only if he or she was formerly an employee, director, partner, member, trustee, or manager.

(5) A guest student or intern engaged in studies or performing duties. This person is not an employee when caring for property off-premises.

(6) An employee of an entity that merged with or was acquired by the named insured prior to the policy effective date.

(7) A Manager, director, or trustee but only when acting as an employee or while on a board performing specific tasks on behalf of the named insured.

b. Agents, brokers, factors, commission merchants, consignees, independent contractors, or similar parties that are not specified above are not employees.

9. Fine arts

These are different forms of artwork. Paintings, drawings, rugs, antique furniture, rare books, lithographs, tapestries, bronzes, statuary, porcelains, marbles, and rare books are considered fine arts. Other items with artistic value are also fine arts.

Note: ISO uses the term “bona fide items” which is not used in other forms. Such items must have artistic merit but are otherwise left open.

10. Finished stock

This is stock that the named insured manufactured. The following are not considered finished stock:

• Items at a retail store waiting to be sold
• For Business Income coverage that is subject to coinsurance, whiskey and other alcoholic beverages that are in the aging process.

11. Fungi

This is any type or form of fungus, mold, or mildew. It also includes mycotoxins, spores, scents, and by-products that fungi release or produce.

12. Leased property

This is not property the named insured leases for its own use, as used in other coverage forms. Instead, it is property that the named insured leases or rents to others or sends out to others for approval.

Editorial Note: This definition needs to be improved. This definition does not clearly state who must be the lessor and who must be the lessee. The explanation above is inferred based on the coverage provided.

13. Manager

This is a person who serves as a director of a limited liability company.

14. Market value

Editorial Note: This definition is more of a valuation term than a definition. It should be within the Valuation Condition.

It is the least of the following:

• The reasonable price a property should sell for in a fair and open market on the date of loss or damage
• The cost to reasonably restore the property
• The property’s replacement value

15. Member

An owner of a limited liability company represented by its membership interest. A member can also be a manager.

16. Messenger

The person who has control or custody of property while it is outside a covered building. The person must be the named insured, one of his or her relatives, a partner or member, or an employee.

Note: It is important to understand that the definition of employee specifically excludes certain persons when they are in control of property off premises. This means that they are not considered messengers under this definition and that there is no coverage for property taken from them.

Example: Kristen is an intern in Philly’s Best accounting department. Peter helps Kristen prepare the daily deposit and asks Kristen to make the deposit because he is called away to a meeting. Kristen drops her purse and the deposit bag on the sidewalk. A thief on a bike rides up and screeches to a halt, pushes Kristen to the sidewalk, and takes both her purse and the deposit bag. Kristen immediately runs upstairs and alerts Peter. There is no coverage for the loss because Kristen is not an employee while off premises.

17. Mobile equipment

Mobile equipment can be any of the following:

• Contractors' equipment and similar items, provided the similar items are mobile
• Vehicles built to be used on public roads but that are not licensed and are not used on such roads
• Self-propelled vehicles built to carry equipment that is attached to them and that are used for that purpose

18. Money

Money is currency, coins, and bank notes with a face value as long as they are in current circulation. Money orders, travelers’ checks, and register checks that are held for sale to the public are also money.

19. Occurrence

This term is defined for only certain coverages and has a slightly different meaning for each.

• Under Additional Crime Coverage–Employee Theft, an occurrence is one of three types of acts. It can be an individual act; the combined total of all separate related or unrelated acts; or a series of related or unrelated acts. An employee who acts alone or in collusion with others must commit the act(s) during and before the policy period.
• Under Additional Crime Coverage–Forgery or Alteration, the occurrence definition is the same as for employee theft, except the type of act must involve one or more instruments.
• Under Additional Crime Coverage–Money and Securities, the definition of occurrence is the same as for employee theft, except for three important differences:
• The term “act or event” is used in place of “act.”
• The term “employee” is removed.
• The act or event may be committed by a person who acts alone or in collusion with other or it may not have been committed by a person.

Example: The money for the Shilling, Inc.’s deposit is in a bag. The following are Money and Securities occurrences:

• The delivery girl from the You Betcha pizza delivery notices the bag and takes it as she leaves the premises.
• A member of the cleaning crew notices the bag and arranges for his girlfriend to drop by and take the bag after the crew leaves the area, so the crew is not suspected.
• A fire occurs and destroys the bag and the money inside it.

20. Operations

These are the named insured's business activities that take place at covered locations. When business income including rental value or the definition of rental value is provided, operations are the conditions needed to keep rental property available for tenants to occupy.

21. Other property

This is tangible property that has value based on what it is. Money and securities is not considered other property. In addition, computer programs, electronic data, or any not covered property is not considered other property.

22. Payroll

This is money paid out to employees. The following are also considered payroll:

• Employee benefits but only when they are directly tied to payroll
• Workers compensation premiums
• The named insured’s portions of FICA and union dues

23. Period of restoration

The time period that begins immediately after the date of direct physical loss or damage to covered property from a covered cause of loss at a covered or dependent property location. It ends on the date when the damaged property should have been repaired, replaced, or rebuilt with similar quality if done so in a timely basis. It does not include any increased period of time added to the repair because of the enforcing or compliance with an ordinance or law. It also does apply to the time needed for the named insured to comply with a required response to pollutants in any way.

The period of restoration is not affected by the expiration date.

24. Pollutants

These are any solid, liquid, gaseous, or thermal irritants or contaminants. They include smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste also includes anything intended to be recycled, reconditioned, or reclaimed.

25. Rental value

Rental value has three parts. The sum of the three parts equals rental value:

• The rental income expected from tenants that occupy the covered location. It is based on the named insured furnishing that location and properly equipping it for the expected occupancy.
• Charges that are the named insured’s tenant’s obligation but that become the named insured’s obligation if there is no tenant or if the tenant does not pay them
• The fair rental value of any building or structure the named insured occupies

Example: Piper Piping owns a small industrial park. Piper occupies one space, others occupy four spaces, and one space is vacant. Rental value is:

• The anticipated rental income is $24,000 X 5 = $120,000.
• The utilities and other tenant obligations that revert to the named insured is $6,000 x 5 = $30,000.
• The named insured’s fair rental value for its one space = $24,000.

Piper Piping’s rental value is $174,000.

26. Securities

These are negotiable and non-negotiable instruments or contracts that represent either money or other property. Tokens and tickets are examples whether they are in current use or not. Current or not current revenue or other types of stamps are also considered securities. Evidence used to collect money from a credit card company is securities provided the named insured did not issue the credit cards.

However, money and lottery tickets are not securities.

27. Specified causes of loss (04 13 changes)

These are fire, lightning, explosion, windstorm, hail, smoke, aircraft, vehicles, riot, civil commotion, vandalism, leakage from fire extinguishing equipment, sinkhole collapse, volcanic action, falling objects, weight of snow, ice or sleet or water damage. Smoke includes the emission or puff back of smoke, soot, fumes, or vapors from boilers, furnaces, or related equipment.

Related Court Case: Excavator was a Vehicle within Policy’s Meaning

The above specified causes of loss are subject to further clarifications:

a. Sinkhole collapse does not include sinking into any manmade structure, such as a mine, or costs to fill sinkholes. It does include land suddenly collapsing into underground voids and spaces created by underground water acting against limestone or dolomite.

b. Falling objects does not include loss or damage to personal property in the open. It also does not include loss or damage to the interior of a building or structure or to any property in it unless a falling object first damages the roof or an outside wall.

c. Water damage is accidental discharge or leakage of either of the following:

Note: The definition in the 10 10 edition was only the first bullet in this definition. The 04 13 edition adds the second bullet and the examples.

• Water or steam but only when caused by the plumbing or heating, ventilating, or air conditioning system or appliance on the described premises cracking or breaking apart. The system must contain water or steam. However, this coverage does not apply to sump systems.
• Water or waterborne material but only when caused by a water or sewer pipe located off premises cracking or breaking apart. The water or sewer pipe must be part of a municipal water supply system or municipal sanitary sewer system. Wear and tear must cause the pipe to crack or break.

This definition is limited by conditions in the Water Exclusion. Anything the Water Exclusion excludes is not considered water damage. The following are two examples of when situations that seem to be water damage are not water damage because they are excluded by the Water Exclusion.

• ISO Example 1: Weather induced flooding causes a pipe to break apart, causing water damage. There is no coverage even if wear and tear contributed to the pipe breaking because flooding caused the pipe to break.

Example: The Cumberland River crests at ten feet above flood stage. Listing Fineries’ first floor is flooded. The flood surge yanks old pipes away from the walls, causing water to enter areas of the building where the flood did not reach. There is no coverage because flood caused the pipes to break.

• ISO Example 2: A pipe breaks because of wear and tear. Damage that occurs following that break because of weather-induced flooding or that becomes worse because of it is excluded.

Example: The Cumberland River crests at ten feet above flood stage. Peggy at Genesis Manufacturing noticed a leak in the processing area earlier in the day and contacted a plumber. She turned off water to the pipe in order to prevent damage. Water from the Cumberland River enters the Genesis building before the plumber arrives and the water surge shears off the cut off valve. The water damage that occurs when the water is restored to the processing area is excluded because the weather-induced flood aggravated it.

28. Stock

Raw material that are in storage or that are in the process of being manufactured. Stock is also finished goods or merchandise that is in storage or being held for sale. Supplies that are used to pack and ship the goods and merchandise are also considered stock.

29. Suspension

Any slowdown or stoppage of business operations. As used in business income including rental value and rental value, it is also the inability to occupy a covered location or scheduled location.

30. Tank

A permanent structure specifically designed to contain liquid contents. This definition also includes the piping, pumps, and other equipment but only when they are part of the tank, are used to connect tanks to other tanks, or are within 100 feet of a covered tank.

31. Theft

This definition has two important features.

• There must be unlawful taking.
• That taking must deprive the insured.

Money, securities, or other properties are the items that can be taken.

Note: This term is very broad and open and does not establish any conditions as to how the items must be taken or any evidence as to how they were taken.

32. Valuable papers and records

These are documents, manuscripts and other written, printed, or inscribed records. They include mortgages, maps, films, drawings, books, deeds, and abstracts but it does not include money or securities.