(December 2019)
This endorsement is used with the Insurance Services Office (ISO) OP 00 01–Capital Assets Program Coverage Form (Output Policy). Earthquake and volcanic eruption are specifically excluded causes of loss. This endorsement covers earthquake and volcanic eruption. It only amends the Earth Movement exclusion in the coverage form but does not remove it. It contains numerous exceptions and deviations from the basic coverage form that affects the coverage provided and this analysis examines them.
This analysis is of the
04 13 edition. Changes from the 07 02 edition are in bold print.
This schedule is used with OP 10 01–Earthquake–Volcanic Eruption. It contains the following information:
Description of
Scheduled Location(s)
Only the location(s) that are listed and described in this space are covered.
Including Masonry Veneer Option
The masonry veneer coverage option must be accepted or rejected by checking the yes or no box.
Property Damage
Deductible
The percentage deductible that applies is entered in the space provided.
This deductible does not apply if Earthquake Sprinkler Leakage is the only coverage. (04 13 change)
Note: The Property Damage Deductible later in this analysis explains how this deductible is applied.
Earthquake–Sprinkler
Leakage Only
Checking the box means that coverage applies only to Earthquake–Sprinkler Leakage.
Note: Paragraph B.2. later in this analysis explains this coverage.
Earthquake–Volcanic
Eruption Limit(s) of Insurance
The limit or limits of insurance in this section are annual aggregate limits. They are explained under Limit of Insurance later in this analysis.
A. Blanket Limit
This limit applies to all locations listed in the description of scheduled locations above. If a separate blanket limit applies to other locations, a separate schedule is used to state the blanket limit for them, and the locations involved. The blanket limit can apply to buildings, business personal property, business income and extra expense, or specified other.
Note: The blanket limit does not apply separately to listed or scheduled locations, covered property, or coverages. It is the most the insurance company pays for all loss or damage to the covered property/coverage at the listed scheduled locations, subject to the provisions that apply to limits examined later in this analysis.
B. Separate Limits
If there is a separate limit of insurance in this section for a specific covered property/coverage, the blanket limit does not include that covered property/coverage.
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Example: Farrell’s Clothing describes five locations in the description of scheduled locations. A blanket limit of $10,000,000 is selected that applies to buildings, business personal property, and business income and extra expense. Farrell’s Clothing also specifically scheduled location number one for $1,500,000 on building, $500,000 on business personal property, and $200,000 on business income and extra expense. An earthquake damages only location one. The damage amounts are $2,000,000 on building, $700,000 on business personal property and $300,000 on business income and extra expense. Farrell wants to use some of the $10,000,000 blanket limit to make up the difference. However, the company informs Farrell that the blanket limit does not apply to a location with a specifically scheduled limit. |
Increased Annual
Aggregate Limit Option
An increased annual aggregate limit option is available if selected in this section. Paragraph E. 3. explains this option later in this analysis.
The lead language limits coverage to only the covered property and the coverages for which a limit of insurance for Earthquake–Volcanic Eruption is entered. The information can be provided either on the OP DS 04–Earthquake–Volcanic Eruption Coverage Schedule or on the declarations.
Note: “Other” can be selected on the DS 04. There is no definition as to what “Other” is.
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Example: Kalifornia Phoods is a multi-state grocery chain. It places its California high-risk buildings on one schedule, the low-risk buildings on another, and all other locations on a third. This gives Kalifornia the flexibility to use different options for deductibles, coverages, and limits at different locations. |
To fully understand the coverage provided, the earth movement exclusion in the policy must be reviewed thoroughly and carefully. Here’s an excerpt of the earth movement exclusion analysis from the PF&M Capital Assets Program Coverage Form Analysis:
a. Earth Movement (04 13 changes)
There is no coverage, except or 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, even when it is due to an act of nature. No matter
the underlying cause, if earth movement as described in this exclusion occurs,
it is excluded. (04 13
addition)
Related Article: OP 00 01–Capital Assets Program Coverage Form (Output Policy) Analysis
It is very important to remember that this endorsement addresses ONLY earthquake and volcanic eruption. This means that landslide, mine subsidence, and earth sinking remain excluded.
One of the two following causes of loss can be selected.
Note: Item 1
includes the cause of loss in item 2. As a result, selecting item 2 is not
necessary when item 1 is selected.
1. This item adds earthquake and volcanic eruption as covered causes of loss. Volcanic eruption is defined as eruption, explosion, or effusion of a volcano. All covered events that take place within any 168-hour period are treated as a single occurrence and are not affected by the expiration date.
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Example: Kelley Plumbing's OP 00 01 has OP 10 01 attached. The $10,000,000 blanket limit applies to building, business personal property, and business income and extra expense. The property damage deductible is 5%. The earthquake hits on July 1 and knocks some masonry off the building and inventory off the shelves. An aftershock on July 2 causes the sidewalls to collapse, leading to considerable damage to both the building and business personal property. Although these are two distinct loss events, this is treated as a single occurrence because both were losses were sustained during a 168-hour time period. |
2. This section limits earthquake and volcanic eruption coverage to the leakage damage that occurs because a sprinkler system is damaged. Volcanic eruption is defined as eruption, explosion, or effusion of a volcano. All covered events that take place within any 168-hour period are treated as single occurrence and are not affected by the expiration date.
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Example: Trains, Inc. takes the chance that its building can withstand an earthquake but is not as sure that its sprinkler system can and worries that a sprinkler system rupture could ruin its inventory. Trains decide to insure sprinkler leakage only. |
1. All exclusions and limitations in the policy apply to this endorsement's coverage except as stated in paragraphs 2. and 3. below.
2. The Earth Movement exclusion in the policy does not apply but only to the extent that it may conflict with this coverage.
3. The Collapse exclusion in the policy does not apply to collapse caused by or that results from earthquake or volcanic eruption.
4. Additional Coverage–Collapse in the policy does not apply to any collapse that is caused by the earthquake and volcanic eruption and covered under this endorsement.
5. Loss or damage that is caused in any way from tidal wave or tsunami is excluded, even if it that tidal wave or tsunami was caused by an earthquake or volcanic eruption.
6. There is no coverage for loss or damage due to any earthquake or volcanic eruption event that begins before this coverage’s effective date.
Note: This can be modified through the use of OP 10 02–Earthquake Inception Extension. It provides earthquake coverage for loss or damage that happens after the policy inception date even if the series of earthquake or volcanic eruptions that caused the damage started up to 72 hours prior to the policy inception date.
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Example: King Engines is unhappy with its insurance company and moves its coverage to another carrier on the current policy's 12/01/19 expiration date. An earthquake event occurs on 11/30/19 and aftershocks continue for five days. Scenario 1: The expiring coverage and the renewal coverage both include earthquake coverage. King's previous coverage applies to the damage due to all earthquake activity during that time period. The new coverage does not. Scenario 2: Only the expiring coverage provides earthquake coverage and that coverage continues for 168 hours following the start of the event. Only that policy responds to the loss. Scenario 3: Only the new policy provides earthquake coverage. No earthquake coverage is available because the earthquake event started before the policy inception. Scenario 4: Only the new policy provides earthquake coverage. OP 10 02–Earthquake Inception Extension is attached. Because the earthquake event started less than 72 hours prior to policy inception, coverage under the new policy applies to all loss occurring after 12/1/2019. |
7. There is no coverage for loss or damage by earthquake or volcanic eruption to exterior masonry veneer attached to wood frame walls unless YES is selected for masonry veneer coverage on the endorsement schedule, the masonry veneer covers less than 10% of the wall area, or the masonry veneer material is stucco.
Note: The value of masonry veneer that is not covered is not included in the building value or considered when determining the deductible.
8. The policy does not cover land, costs of backfilling, filling, grading, or excavating, except to repair or replace covered property. As a result, this endorsement also does not cover the cost to restore or remediate land unless doing so is required to repair or replace covered property.
No coinsurance provision in the policy applies to the coverage provided in this endorsement.
1. General Information
The term Limit of Insurance as used in this endorsement refers to the Earthquake–Volcanic Eruption Coverage Schedule or the Earthquake–Volcanic Eruption limit on the declarations schedule.
2. Annual Aggregate
Limit
The limit of insurance is an annual aggregate limit. It is the most the insurance company pays for the total of all loss or damage caused by or that results from earthquake or volcanic eruption in a 12-month period. Once it is used up, nothing remains for any other covered losses during the remainder of the policy term.
When an occurrence begins in one policy term and continues into the next, only the aggregate for the first policy term applies.
Note: Most property coverage forms are not subject to an aggregate. This means that the full limit on the declarations is available to pay each and every covered loss. An aggregate limit significantly limits coverage for an insured and should be carefully explained because it differs from the property coverage norm.
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Example: Linda's Bakery purchases earthquake coverage with a $1,000,000 limit. An earthquake event causes $750,000 in damage. Later in the policy term, another earthquake event causes $500,000 in damage. $750,000 was paid in the first loss so only $250,000 of the limit remains to apply to the $500,000 loss. After that, the limits are used up and Linda must make other arrangements to finance repair of the remaining damage. |
3. Increased Annual
Aggregate Limit Option
The named insured may be concerned that the annual aggregate is not enough. In such a case, it can purchase an additional annual aggregate by selecting the Increased Annual Aggregate Limit option on the schedule. This does not increase the limit available for each occurrence, but it does double the annual aggregate limit.
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Example: Phil of Phil’s Glass is concerned about earthquake and purchases coverage with a $500,000 limit. His agent convinces him to purchase the increased annual aggregate option. An earthquake event damages the property in the early part of the policy term and Phil uses the entire $500,000 limit to pay the loss. Near the end of the term, another earthquake event causes $100,000 in damage. The second loss is also covered because Phil purchased the increased annual aggregate. |
Note: An earthquake event that involves two policy periods is considered a single loss and the coverage available in the first policy period applies. The limit for the second policy term does not cover the shortfall if the annual aggregate limit for the first policy term is inadequate.
4. Additional
Coverages and Coverage Extensions
When additional coverage or coverage extension applies, any payment made is considered a sublimit only and does not increase the limit of insurance.
Note: Debris removal is a good example. The cost of the debris
removal due to an earthquake is covered but the amount is limited by the
earthquake limit of insurance. There is no additional limit above the
earthquake limit available. This is very important to consider when setting the
limit of insurance.
5. Limitations
Loss payments are limited in two ways. In one, the blanket insurance limit on the schedule is the most the insurance company pays. However, that amount may be further limited by the values scheduled on the declarations or listed on the statement of values on file for causes of loss other than Earthquake–Volcanic Eruption.
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Example: Furniture Favorites purchases blanket earthquake coverage on its building and business personal property at three locations for a $15,000,000 limit. The statement of values reflects limits of $1,500,000 for each building and $2,000,000 for business personal property at each location. An earthquake destroys one of the locations and the adjusted loss is $2,500,000 on the building and $3,000,000 on the business personal property. Furniture Favorites thinks the loss is fully covered because of the blanket limit but is unpleasantly surprised and very disappointed when this limitation is pointed out and the insurance company pays only $3,500,000 because that was the amount on the statement of values. |
6. Ensuing Loss
This is another limitation. The policy earth movement exclusion has an exception that if an earthquake or volcanic eruption causes a covered cause of loss to occur, the damage from that ensuing covered cause of loss is covered. This provision explains how that covered ensuing loss and the covered earthquake/volcanic eruption loss is settled. Instead of both limits applying, only the limit of insurance that applies to the ensuing cause of loss applies.
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Example: Mercury Metals insures
one of its buildings for $150,000. It has a blanket earthquake limit of
$300,000 that applies to all its buildings. The main building is destroyed
when an earthquake ruptures gas pipes and a spark ignites a fire that spreads
throughout the building. Both the policy and the endorsement provide coverage
but the most the insurance company pays is $150,000. |
Note: It is a benefit to the named insured that the other cause of loss limit applies because it is not subject to an aggregate. This section concludes with two examples that involve ensuing loss.
1. Property Damage
Deductible
The provisions in 3. below apply to all coverages except Business Income and Extra Expense.
2. This property damage deductible section does not apply to losses when only Earthquake-Sprinkler Leakage coverage is provided. The deductible that applies to fire coverage applies instead (04 13 addition).
3. Revised Deductible
Provision
This deductible provision replaces any other deductible provision in the policy. It differs significantly from the all other property coverage form deductible and therefore needs to be carefully reviewed to prevent any surprises.
a. General Information
Note: This means only the Earthquake Property Damage Deductible applies.
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Example: An earthquake occurs at Jameson Manufacturing. The earthquake breaks the gas lines, a fire ensues, and the entire building is destroyed. The property’s value on the latest statement of values is $1,500,000. The earthquake damage is $700,000 and the fire damage is $1,000,000. The earthquake deductible is $30,000 (.02 x $1,500,000) and the property damage deductible is $10,000. Only the $30,000 earthquake deductible is applied. |
b. Calculation of the Deductible
The deductible amount is determined by multiplying the deductible percentage on the schedule times the appropriate value. Determining the value to use is a complicated process that depends on how values are shown, and the type of coverage being provided. The six methods for displaying values are:
Reporting forms
1. Specific
2. Blanket
3. Builders Risk
Not reporting forms
4. Specific
5. Blanket
6. Builders Risk
Generally, the deductible is a percentage of the value that appears on the statement of value provided to the insurer. The Builders risk percentage is computed based on the replacement cost.
The difference between reporting and nonreporting is that the value
supplied on the last reporting form is used in computing the deductible for
reporting. Under specific reporting, if the reported value was not the actual
value that should have been reported, the deductible percentage is taken times
the report that should have been reported. This does not apply to blanket
reporting.
The difference between builders risk reporting and nonreporting is that
the value supplied on the last reporting form is used in computing the value for reporting. If the reported value was not
the actual value that should have been reported, the deductible percentage is
taken times the value that should have been reported.
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Example: The statement of values for Millie’s Cat Food Factory has values of $1,000,000 on building, $750,000 on business personal property, and $500,000 on business income and extra expense. An earthquake event causes $500,000 in building damage, $250,000 in business personal property damage, and a $200,000 business income loss. The deductible percentage is 5%. The building deductible is $50,000 ($1,000,000 X .05). The building payment is $450,000 ($500,000 less $50,000). The business personal property deductible is $37,500 ($750,000 X .05). The business personal property payment is $212,500 ($250,000 less $37,500). Business income does not have a deductible but the first 24 hours of income after the direct damage loss is not covered. The total loss is reduced by $5,000 so that portion of the settlement is $195,000 ($200,000 less $5,000). |
This section of the endorsement has an example that applies a deductible for specific or blanket insurance other than builders risk and not subject to value reporting forms.
The definition of the period of restoration in the policy is revised slightly to confirm that the 168-hour rule also applies to the beginning of the period of restoration. Because of this, the 24-hour deductible is applied only once and not each time an aftershock occurs.