CO 1000–COMMERCIAL OUTPUT PROGRAM PROPERTY COVERAGE PART ANALYSIS
(August 2019)
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INTRODUCTION
The Commercial Output Program (COP) is the American Association of
Insurance Services, Inc. (AAIS) expanded property coverage form that is similar
to a manufacturer’s output policy. The CO 1000 is the mandatory form that
supports the entire program’s other coverages.
This analysis is based on the Edition 3.0 version of the form. This form
was last updated in 2002 and changes
from the previous edition are in bold print.
Related Article: Compare: Commercial Output Program Edition 3.0 to Commercial Output Program Edition 2.0
AGREEMENT
The insurance company agrees to provide coverage in exchange for the named insured's payment of the required premium. The coverage provided is described in the coverage form and is subject to all policy terms and conditions. The Schedule of Coverages is treated as part of this policy as are conditions relating to assignment, transfer of rights, cancellation, policy changes, inspections and examinations of books and records that are part of CL 0100–Common Policy Conditions.
Related Article: CL 0100–AAIS Common Policy Conditions
Endorsements and schedules included with the policy at inception are listed as such on the Schedule of Coverages. Words having specific meanings are explained in the policy's Definitions section and are noted by quotation marks in the coverage form.
DEFINITIONS
Defined words are used
throughout the policy. Restricting their meaning to the definition in the
policy provides the means for all parties involved with the policy to have a
clearer understanding of the coverage intended.
Note: Coverage is given and also taken away through the use of definitions. Whenever a defined word is used in a form, review its definition carefully in order to understand its impact on the coverage.
1. You and Your
The named insured. These are the persons or organizations named as insureds in the Schedule of Coverages. If a business purchases, sells, or creates new entities during the policy period, it is important to add these new entities. Using all-encompassing language, such as et al or similar omnibus language is not acceptable. Each covered entity must be listed, and additions and deletions handled as needed during the policy period.
Related Court Case: Seller of Restaurant Held Not Entitled to Policy Proceeds Despite Security Agreement with Buyer
2. We, us and our
The insurance company providing coverage.
3. Accident (2002 addition)
Note: This term is used only with equipment breakdown coverage.
Direct physical loss from one or more of the following:
- Mechanical
breakdown
- Moving parts
of machinery that burst or rupture because of centrifugal force
- Arcing or
electric currents. Loss caused by lightning is excluded
- The named
insured’s owned, leased or controlled steam boilers, pipes, turbines or
engines exploding
- A condition or
event that occurs inside steam boilers, pipes, turbines or engines causing
it to damage itself
- A condition or
event that occurs inside hot water heaters or boilers causing it to damage itself
4. Business (2002 addition)
Normal business activities that occur at locations covered by the
policy. When coverage includes rents, business
also means the operations that are conducted to keep the rental properties available
for occupancy.
5. Computers
This term means not only the computer-related hardware that is owned or in the care, custody or control of the named insured, but also its software.
Hardware and software are specifically defined elsewhere in the definitions section. While hardware must be owned or be the property of others in the named insured’s care, custody, or control, software is not subject to that limitation. This means that software can be a product the named insured owns, leases or loans to others or may be software of others in the named insured’s possession. The software could even be in the cloud!
6. Computer hacking (2002 addition)
This definition consists of two parts. First, there must be unauthorized
entry by outside parties or employees into a computer, website, or network.
Second, some level of damage must result from that entry. Following are damages
that might occur, but other types of damage could also be included under this
definition:
- Damage to
software by destruction, deletion, modification or generation
- Contamination,
corruption, degradation, destruction or alteration that impacts software
integrity, quality or performance
- The copying or
scanning of data records, programs, applications, and proprietary programs.
The viewing or observation of these items is also considered damage.
- Hardware destruction,
inadequacy, malfunction, degradation, or corruption. Similar actions to
the media used with the hardware are also damage.
- Service or
access to or from the website, network, or computer is denied.
7. Computer virus (2002 addition)
A malicious, self-replicating electronic data processing code
introduced into a computer, network, or website. The intent of the introduction
is to damage the computer, network, or website. The following is illustrative
of the term, but other types of damage could qualify under the term:
- The software
could be destroyed or deleted. It could also be damaged by modification or
the software could be generated.
- The integrity
of the software could be compromised through contamination, corruption,
degradation, destruction, or alteration. The damage could also be the
resulting reduced quality or performance, hardware destruction,
inadequacy, malfunction, degradation, or corruption. Similar actions to
the media used with the hardware are also damage.
- Service or
access to or from the website, network, or computer is denied.
Note: The listing is identical to the listing under computer
hacking except for the removal of the copying, scanning,
and viewing of data records.
8. Covered equipment (2002 addition)
Note: This term is used only with equipment breakdown coverage.
There are two types of covered equipment. One type is machinery or
items involved with generating, transmitting, or using energy. Another is the
type that operates under vacuum or pressure environments during normal usage. The
equipment must also be considered covered property as described in the Covered
Property section of this coverage form.
It does not include any of the following:
- Items
manufactured by the named insured with the intent to sell them
- The buildings,
structures or compartments that either house or cover the equipment
- Foundations or
underpinning that supports the equipment
- Underground
piping and vessels, sewage piping, water piping or sprinkler system
piping. However, boiler feedwater and condensate return piping and water
piping that is used with heating, air conditioning, or refrigeration
systems are covered equipment.
- Mobile
equipment of any kind
- Aircraft and
watercraft. Their equipment, motors, and accessories are also not covered
equipment.
- Motor vehicles
of every kind and description, including automobiles, trailers, and
tractors. Their equipment motors and accessories are also not covered
equipment. There is an exception. If
the motor vehicle is stationary property and permanently installed at a
location, it is covered equipment but only if its electrical equipment is powered
by an external source.
- Computers
9. Covered location (2002 change)
A premises or location
where the named insured has buildings, structures, or business personal
property that are insured under this coverage form. A vehicle containing covered property is not a covered location unless
it is within 1,000 feet of a covered building or structure.
Note: If this definition is considered too broad for a given risk, CO 1052–Location Schedule can be used to limit coverage to apply only at specifically scheduled locations.
10. Data records (2002
addition)
Files, documents and other types of information that are in an electronic
form and stored on media.
11. Dependent locations (2002 addition)
Locations upon which the named insured’s business depends. These locations cannot be operated by
the named insured. The following are examples of dependent locations, but the
list is not limited:
- Contributing locations supply the named insured with materials or services or supply others on behalf of the named insured. This does not include water, telecommunications, and internet or power providers. Examples would be vendors and contractors.
- Recipient locations are those that receive the named insured’s products. These would include customers and clients.
- Leader locations are activities or businesses that attract customers to the named insured’s business such as shopping centers, museums, amusement parks, or educational institutions located near the named insured’s business.
- Manufacturing locations are businesses that are under contract to the named insured to make products for delivery to its customers. Examples would be machine or job shops and manufacturers who use manufacturers' representatives as their sales force.
12. Fine arts
Authenticated works of art which are rare, historical or have artistic merit. Items that could qualify include paintings, etchings, pictures, tapestries, and art glass windows, but this list could be expanded. As could be expected, the qualification of some objects as fine arts after a loss occurs may be disputed.
13. Flood (2002 addition)
Flood is flood but flood is also surface water, waves, tidal water,
or the simple general overflow of any body of water, whether driven by wind or not, is flood.
Spray resulting from any of these is also considered flood.
Because the definition of flood also includes the word flood, the
dictionary definition of flood must be used in conjunction with the rest of the
definition to obtain a true definition of the term.
Note: In this edition, the previously single Water exclusion has been separated into two different exclusions, Flood and Sewer Backup and Water Below the Surface. As a result, the definitions have also been separated.
14. Hardware
Any network of electronic machine components that is capable of accepting instructions and information, processing such information and using the instructions so that the desired result occurs. This definition includes all types of computers, peripherals, printers, fax machines, photocopiers, calculators, hand-held, and laptop computers.
15. Limit
The amount of coverage provided. Limits can be found on the Schedule of Coverages and in specific coverage extensions and supplemental coverages.
16. Media (2002 addition)
Films, tapes, cards, discs, drums, cartridges, cells, DVDs, CD-ROMs,
flash drives, and similar items used with hardware to record data records. Media
is also used to store data records, programs, and proprietary programs to be used
with computers.
17. Mobile equipment
Equipment that is not considered stationary. It must be contractors equipment or similar to it. Self-propelled vehicles that carry equipment mounted on them are also considered mobile equipment if the primary purpose and design of the vehicle is to carry such equipment. Another category is unlicensed vehicles that, although designed for highway use and are not used on public roads.
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18. Money (2002 addition)
Currency, bullion, coins, banknotes
that are in current circulation. Travelers checks, register checks, and money
orders held for sale are also considered money.
Note: There is no requirement that the currency is U.S. currency.
19. Off-site server
(2002 addition)
A computer or network that
is used with the named insured’s website but that is not located on the named insured's
premises. It must be located at the premises of the named insured’s web host.
The web host can be either an independent contractor or the named insured’s
internet service provider.
20. One accident (2002 addition)
Note: This term is used only with equipment breakdown coverage.
An initial accident and all results or accidents that trigger from that
initial accident. Every accident that starts from the same occurrence is
treated as the same accident. This is important for the purposes of applying
deductibles and establishing limits of insurance.
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Example: A boiler explodes. The explosion rips through the
electrical wires causing a sudden loss in centrifugal force resulting in a
machine bursting apart due to being thrown off balance. All of the damage is
the result of the same occurrence and is therefore considered only one
accident. |
21. Perishable stock (2002 addition)
Personal property that is kept under controlled conditions because it could
be damaged if those conditions change.
Commonly, perishable stocks are those requiring refrigeration, but this term also includes property susceptible to changes in humidity and light.
22. Pollutant is almost any kind of solid, gas, thermal, electromagnetic, or sound contaminant, or irritant. Waste includes any material intended for recycling, reclamation, or reconditioning, in addition to waste to be disposed of. It also includes visible or invisible electrical or magnetic emissions and sound emissions. Electrical or magnetic emissions are not defined but could include stray voltage, microwave radiation, excessive light from lamps and high-tension wire radiation. Sound emissions are not defined in the form but could include loud music, machinery noise, and damage resulting from excessive vibration due to sound.
23. Programs and applications (2002 addition)
Operating software programs that were purchased separately by the named
insured and stored on media or purchased along with the hardware. Examples are
word processing, spreadsheets, and graphic design programs.
24. Proprietary programs (2002 addition)
Programs and applications that are developed by or for the named insured
and that are stored on its media and/or hardware.
25. Rents (2002 addition)
This is not a single item. It is the sum of the following items which
is lost to the named insured.
- Rental income
from a covered location. This amount is reduced by the amount of any
non-continuing expenses;
- The fair
rental value of any part of a covered location the named insured occupied.
This amount is reduced by the amount of any non-continuing expenses;
- Tenant
obligations for which the named insured becomes responsible following a
loss.
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Example: Rudolph manufactures plastic novelty items. He owns the building he occupies for his business and rents part of the building to a machine shop operation. Rudolph negotiated for an electric power supply at an attractive rate for both his business and the machine shop. However, the arrangement cannot be discontinued for any reason except complete destruction of the property. A fire completely destroys the machine shop and moderately damages Rudolph's operation. The machine shop operator decides to take his insurance proceeds and retire. The following items are considered rents:
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26. Restoration period (2002 addition)
The amount of time following a loss that is needed to bring a business
back to the level of operation at the time the loss occurred. The period begins
when a direct physical loss caused by a covered peril occurs at a covered
location and ends when the named insured should
be able to resume operations, whether it does so or not.
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Example: Fully Functional Furniture is damaged by fire. Fully's
owner decides to do some remodeling at the same time as making the repairs.
Fully could have resumed operations in three months but it took six months
because of the remodeling. The period of restoration,
in this case, is only three months. |
Restoration period includes any additional time required to comply with
ordinances or laws regulating the use or construction of a building even if
demolition of undamaged property or relocation is required. In order to be
covered, the ordinance or law must have been in effect before the loss
occurred. If the ordinance or law involves the cleanup of pollutants, that
cleanup is not covered except under Supplemental Income Coverage Pollutant
Cleanup and Removal.
The definition changes when used with dependent properties. It means
the time the named insured operation will take to resume normal activity following
covered damage to a dependent property. The period begins at the time of the
damage and ends when the dependent property should
be rebuilt or when business resumes at a new location. (The form uses the
word business–not dependent property–so it is unclear as to which business is
resumed at the new location.)
The definition also changes with respect to off premises utility service interruption, property in transit, on
exhibition or in the custody of sales representatives. The period of
restoration begins when a covered loss occurs at a property owned by a utility,
to an offsite server or to property in transit, on exhibition or in the custody
of sales representatives. It ends when the property should be repaired, replaced,
or rebuilt.
The expiration date of the policy does not affect the period of restoration. As long as the direct loss occurs prior to the policy expiration date, there is coverage until the end of the restoration period or when the limit of insurance is exhausted.
27. Schedule of coverages (2002 addition)
Page in the policy referred to as schedules or declarations and
supplemental declarations that pertain to the coverage.
28. Securities
Negotiable and nonnegotiable instruments and other contracts that represent money or property. Money is not securities.
Stock certificates, tokens, tickets, and stamps in current use, including the unused value in a metered machine are all considered securities. Credit, debit and charge card receipts, or other evidences of debt issued by the named insured are also securities.
29. Sinkhole collapse
A sinkhole collapse must be sudden. The earth must collapse because water has created openings and voids below ground in limestone or other rock formations. Sinkhole collapse coverage does not apply to the cost of the land or costs related to filling-in sunken land.
Note: Sinkholes may also occur as a result of subterranean rivers, excessive water flow after heavy rains that seep into the ground or burst pipes that cause land subsidence but, because of this definition, these are not considered sinkhole collapse and are therefore not covered.
30. Software
The media on which the data and programs are stored and the data and programs themselves.
31. Specified perils
Falling objects must be
explained further. It does not include loss to personal property stored in the
open. It also does not include damage to the interior of buildings or personal
property stored in buildings unless a falling object first breaches the
building's exterior.
Water damage also requires
further explanation. It is the sudden or accidental discharge or leakage of
water or steam. However, it must be a direct result of a part of the system or
appliance that holds the water or steam cracking or breaking.
32. Spoilage (2002 addition)
Damage caused to perishable stock by a change in its physical state.
The change must be detrimental to be considered spoilage. The following are
examples of such a change:
- Thawing and warming
of refrigerated goods
- Solidification
of molten materials
- Chemical
changes to materials that are in process
- Reduction in the
value of materials that are time
sensitive
33. Terms
All provisions, limitations, exclusions, conditions, and definitions that apply with respect to the policy or coverage form.
34. Theft (2002 addition)
Burglary, robbery or any other type or act of stealing.
35. Valuable papers
Handwritten or printed documents or material on films. Manuscripts, motion picture and other films, blueprints, charts, graphs, books, deeds, abstracts, mortgages, maps, and other paper records are all valuable papers. Operations manuals, sketches of ideas and patents are also considered valuable papers.
36. Volcanic action
Airborne volcanic blast; ash, dust or particles; and shock waves. Lava flow is also considered volcanic action. Coverage applies to the damage caused by the volcanic action, including the cleaning up of the damaged building and business personal property. However, the cost to remove ash, dust or other material from undamaged property is not covered.
PROPERTY COVERED
The property listed in this section is covered if it sustains direct physical damage by a covered peril at a covered location during the policy period. This protection is limited later in the coverage form in the Property Not Covered section and the Additional Property Not Covered or Subject to Limitations section.
Building Property
1. Covered Building Property (2002 changes)
- Buildings
- Structures
- Completed additions.
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Note: This is a stand-alone statement without further clarification, but it must be read with the opening statement that says, “buildings and structures and;” This construction would, therefore, lead to a conclusion that these must be additions to existing buildings and structures. Additions that are under construction are not covered in this item but are discussed in the building under construction item described below.
- Fixtures, machinery or equipment but only when a permanent part of a covered building or structure
- Outdoor fixtures. The term fixture implies an element of permanence, so it does not include portable property. Fountains, streetlights, sprinkler irrigation systems and other fixed property are examples of outdoor fixtures.
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- Personal property used to maintain or service a covered building, structure or the insured premises. This includes lawn and garden tractors, snow removal equipment and water hoses. Property specifically identified includes air conditioning equipment, fire extinguishers, sprinkler systems, and floor coverings. Refrigeration, cooking, dishwashing, and laundering equipment are also listed. As a result, refrigeration and cooking equipment in the employee cafeteria and dishwashing and laundry equipment is all considered part of the building. However, only such property that is owned by the named insured is covered.
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Example: Snow removal equipment, lawn and garden tractors, and vacuums and other cleaning equipment are used to maintain the premises and kept on the premises. Scenario 1: All items are owned by the named insured. These are covered even if used by an independent contractor. Scenario 2: All items are owned by the independent contractor who maintains the premises for the named insured. None of the items are covered. |
- Buildings and any additions that are under construction, renovation, or repair are covered only when not covered elsewhere. The COP can be a substitute for a builders risk policy but its coverage ends when specific builders risk coverage is written elsewhere. Property that can be covered is:
- Equipment, materials, supplies, and limited time/use structures, such as a tent or shed, on or within 1,000 feet of a covered location, subject to such property eventually being used in the construction, repair, or addition of buildings.
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- The
contractual obligation of the named insured for the interest of
contractors and subcontractors in the materials to be used for additions,
repair, or construction of buildings within 1,000 feet of a covered
location. (2002 addition)
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Example: Mabel hires Fritz Air
Conditioning to install a new heating and air conditioning system in her
building. The project is scheduled to be finished in 30 days. Mabel signs an
agreement for the installation but doesn’t read the fine print that requires
her to be responsible for all of Fritz’s equipment while he is working on her
premises. A sudden windstorm levels the building on the jobsite containing Fritz’s equipment. Because
Fritz has no insurance coverage for his property on the job site, Mabel’s
coverage under the COP pays the loss. |
- Building glass. This normally includes glass building blocks, windows, and glass in exterior or interior doors. Glass objects, glass dials on equipment not related to the building and stocks of glass are not considered building glass.
- Radio and television towers, satellite dishes, lead-in wiring, support wires, their foundations, and any equipment attached to any of this property, including transmitters, transponders, backup generators, are covered. However, coverage applies only if the item is located within 1,000 feet of a covered building or structure. Fences, awnings, and canopies are also covered but subject to the same 1,000 feet of a covered building or structure limitation.
- Signs are covered without restriction to location. They may be attached to a covered building or structure or may be freestanding.
Note: The lead into the Property Covered section states that all items must be at a covered location, but the definition of covered location is any location where the named insured has structures, buildings or personal property. Other items listed in this section refer back to a building or structure, but the sign item does not. Therefore, an argument can be made that freestanding signs are covered both on and off premises.
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Example: Woody's
Vending Company has 100 signs at various locations throughout the county,
each valued at $2,500. A violent storm with strong straight-line winds sweeps
across the county and destroys more
than two dozen of Woody’s signs. The damage to these signs is covered. |
- Foundations
that support buildings, structures, boilers, or machinery. (2002 addition)
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Example: An explosion at Harvey
Rubber Manufacturing starts a fire in the stock of tires. It takes days for
the fire department to totally extinguish the blaze. The fire’s intense heat caused
the foundation of some processing machinery to crumble. The damage to the
foundation is covered. |
2. Building Property That Is Not Covered (2002
changes)
Certain types of building property are ineligible for coverage. Remember to also review the Property Not Covered and the Additional Property Not Covered or Subject to Limitations sections for additional items that are not covered.
The following items are not covered as building property:
- Pilings,
piers, wharves, docks or retaining walls (2002 addition)
- Underground
pipes, flues or drains (2002 addition)
- Bridges,
walkways, roadways and similar paved surfaces (2002 addition)
Note: There is coverage for some of these items under Supplemental Coverages – Underground Pipes, Pilings, Bridges, and Roadways.
Business Personal Property
1. Covered Business Personal Property (2002
changes)
The named insured’s business personal property that is located at any of the following:
- Inside buildings or structures at a covered location
- In the open but only if the property is on a covered location or within 1,000 feet of it
- Inside a vehicle but only when the vehicle is on a covered location or within 1,000 feet of it.
Such covered property includes:
- The named insured’s use interest in building improvements.
Coverage applies only if the named insured is a tenant in the building and
is not permitted to remove the improvements. The improvement must have
been made or acquired at the named insured’s expense. Improvements are fixtures,
alterations, installations, and additions. Some common examples are false
ceilings, internal walls, light fixtures, improved wiring, telephone
switching systems, cooking equipment, HVAC improvements, carpeting,
built-in shelving and common renovations like new roofs installed by a
tenant with a long-term lease.
In addition to coverage on damaged improvements,
coverage also applies to undamaged improvements that cannot be used because a
covered loss terminates the lease. (2002 addition)
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Example: Phil’s Shoe Store occupies a space in a strip shopping
center. Phil adds $25,000 in improvements shortly after he moves in. After a
fire destroys 75% of the shopping center including part of the shoe store’s
entrance, the owner decides to demolish the entire center and rebuild. Phil’s
lease permits this and Phil loses his remaining interest in the improvements.
Under the COP, this event is a covered loss even though the improvements in Phil’s
store were not damaged by the fire. |
- Leased property is covered if the lease requires the named insured to provide the insurance. Common examples of leased personal property are computers, photocopiers, printing equipment, machine tools, and diagnostic equipment. Leased mobile equipment can also be covered as business personal property. Lease is not a defined term.
- If the named insured repairs, improves, processes, modifies, or enhances a property of others, the value of the named insured's labor, materials, and other services is treated as insured personal property.
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Example: Cammon, Inc.
refurbishes industrial machinery. Each job takes between 1 and 45 days to
complete. A windstorm sweeps through and destroys Cammon’s building and the
equipment inside. In addition to its own personal property being covered,
Cammon is paid for 180 accumulated days of labor included in the various
items being refurbished and the $30,000 of parts that had been installed in
the customers’ machinery that was still on site. |
- Computers are covered only if they are not insured under another policy or coverage part. It is important to compare the coverage provided in this form to that provided in a current computer specific coverage form before recommending that a customer abandons that coverage for what is provided by this form. Be sure to include the Supplemental Marine Coverages later is this form in your review.
Related Articles:
AAIS Electronic Data Processing Equipment and Business Computer Coverage Forms
ISO Computer Systems Coverage Form
- Personal property that will become part of the named insured’s installation, fabrication, or erection project is covered while on the jobsite. It is also covered when in storage waiting to be delivered to the jobsite. This type of personal property is not subject to the COP location restrictions.
This coverage is available for building or renovation contractors, millwrights, machine installers and others that work on real or personal property away from their premises. Materials covered include, but are not limited to, lumber, steel, machines, heating, ventilation, air conditioning and plumbing supplies, signs, machine parts, carpeting, flooring, brick, fencing, and cement slabs. The property eligible for coverage under this provision is very broad and could even replace an installation floater if the transit limits are high enough. However, before recommending that the specific coverage be abandoned, compare coverages under the other form to identify possible coverage gaps.
Related Articles:
AAIS Installation Floater Coverage Forms
ISO Installation Coverage Form
- Mobile equipment is covered but only if not insured separately elsewhere. Because none of the COP location restrictions apply, this coverage could be used to insure contractors’ equipment and other defined mobile equipment. However, before recommending that the specific coverage be abandoned, compare coverages under the other form to identify possible coverage gaps.
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Related Articles:
AAIS Contractors' Equipment Coverage Forms
ISO Contractors’ Equipment Coverage Form
- Personal property of other parties that is in the named insured's care, custody, or control. There are no restrictions as to what can be included. It is further expanded to include property sold under an installation agreement but only if the named insured is responsible for providing coverage until the purchaser accepts the property. The 1,000 feet restriction continues to apply though so this could not be used for customer property located off the covered location.
Note: This provision is for personal property only, so it does not apply to real property and permanent structures, including machinery, equipment, heating, ventilation, air conditioning, and plumbing considered to be part of the building. Payment for any covered loss is made only for the benefit of the property owner, not the named insured. Real property can be covered through specific property insurance in the case of leased buildings. It can also be covered under a Legal Liability Property or a Commercial General Liability coverage form.
Related Articles:
CP 00 40–Legal Liability Coverage Form Analysis
AAIS Commercial Liability Coverage Form Analysis
ISO Commercial General Liability Coverage Forms Analysis
Note: Coverage is adequate only if the limit of insurance is sufficiently high to cover the value of personal property of others.
2. Business Personal Property Not Covered (2002
change)
Only a few personal property items are not covered. However, remember to review the Property Not Covered and the Additional Property Not Covered or Subject to Limitations sections for additional items that are not covered.
The following items are not covered as
business personal property:
- Any computer
server that is not off-site
- The following
property, except for coverage provided under the Supplemental Marine
Coverages:
- Personal
property in transit if it meets the coverage description of Property in
Transit
- Fine arts if
it meets the coverage description of Fine Arts
- Computers when
away from a covered location as described in Off Premises Computers
- Property
away from the covered location on display or exhibit if it meets the
coverage definition of Property On Exhibition
- Sales
samples of the named insured's stock if it meets the coverage definition
of Sales Representative Samples
- Any backup
or duplicate software if it meets the coverage description of Software
Storage
PROPERTY NOT COVERED
The following property is not covered but many of these items have exceptions where some coverage applies. Each must be examined carefully to determine the nature and extent of any coverage provided.
1. Airborne or Waterborne Property
When personal property becomes airborne or waterborne it is not covered.
There are two exceptions. If the property is on a regularly scheduled airline or a ferry service, it is covered. The question is, what is regularly scheduled airlines and ferry service?
The COP coverage
territory is the
Regularly scheduled airlines do not include charter services, but would a regularly scheduled airfreight-forwarding firm be considered an airline? Without defining airline any further, this may be an area of confusion.
2. Aircraft and Watercraft
When aircraft and watercraft are operated primarily away from a covered location they are not covered. In addition to the aircraft and watercraft not being covered, their accessories, motors, and equipment are also not covered There are exceptions. The named insured’s manufactured, processed, warehoused aircraft or watercraft or ones that are held for sale by the named insured are covered. Rowboats and canoes are also covered if they are out of the water and at a covered location.
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Example: Macafee Boats is located on a small retention pond with
a dock. Occasionally boats are placed as advertising displays, but they are
not regularly operated on the pond. If a covered loss would occur to such a
boat while it is out of the water, it would be considered covered property. |
3. Animals (2002 change)
Animals are not covered personal property. The word animals is not explained except to say that it includes birds and fish but does not limit the word to only birds and fish. There are two exceptions. If the animals are owned by others and are being boarded by the named insured, they are covered. In addition, if the named insured owns the animals and is holding them for sale inside a building, they are also covered.
Note: Please refer to the Additional Property Not Covered or Subject to Limitation for a significant animal-related limitation.
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4. Automobiles and Vehicles
Conveyances designed and used to transport people and/or cargos over the road are not covered. Examples of what is not covered are trucks, tractors, and trailers. There are two exceptions. Property that is considered mobile equipment is covered. In addition, automobiles and vehicles manufactured, processed or warehoused by the named insured, are covered property. Automobiles or vehicles held for sale or for lease, loan, or rental continue to not be covered.
5. Checked Luggage (2002 addition)
If computer laptops, palmtops, notebook PCs and similar types of
portable computers are in transit and checked as luggage, they are not covered property but only when the loss is caused by theft or disappearance.
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Example: Paula places her laptop in her checked luggage but keeps her tablet to use on the plane. Scenario 1: A fire occurs in the terminal and her luggage, including the laptop, is destroyed. The laptop is covered. Scenario 2: The laptop
is not in her luggage when she opens it at the hotel. The laptop is not
covered because the loss was due to disappearance. Scenario 3: Paula has her tablet in her purse.
As she is walking through the terminal her purse is snatched. The loss of the
tablet is covered even though it was due to theft. |
6. Contraband
All contraband is excluded. In addition, legal property that is part of illegal transportation or trade is also not covered.
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Example: Sheila’s Restaurant Wholesalers supplies food and beverages to its customers. However, in addition to its legal activities, it also arranges for shipments of cigarettes to be moved from Kentucky to New York in order to avoid the higher state cigarette tax. A load of cigarettes is damaged when the transporting truck overturned. There was no coverage for the loss. |
7. Cost of Excavation (2002 Change)
The insurance company
does not cover the costs of excavation, grading, filing, or backfilling. There is one exception. If a covered loss to covered underground
property occurs, the insurer pays the necessary costs to repair, rebuild, or
replace that property and that includes the cost of excavation.
Note: Cost of Excavation was previously combined with Land and
Water as not covered. This change moves it and provides an exception.
8. Crops While Outside of Buildings
Grain, hay, straw, and other crops are not covered when they are not inside a building. This means that wheat in grain elevators or storage bins pending processing into flour, indoor gardens, nursery greenhouse stock, and grain in laboratories involved with creating hybrid strains would be covered.
9. Exports and Imports
Exported and imported properties are not covered under this coverage form while they are covered under an ocean marine cargo or similar policy. It does not matter who is the ocean marine policyholder. However, if an ocean marine cargo policy excludes a specific loss that is not excluded by the COP, coverage might be available under the COP but only if the loss occurs in the COP coverage territory.
Related Article: Ocean Marine Insurance Overview
10. Land, Water, and Growing Crops (2002 change)
Land, water, and growing crops are not covered.
11. Money, Securities, Accounts and Valuable Papers (2002 change)
Money, securities, accounts, bills, and the cost to reproduce, replace, or restore valuable papers and lost information are not covered.
Note: Limited coverage for such property does exist in other sections of the policy.
12. Outdoor Trees, Shrubs, Plants or Lawns (2002 addition)
Trees, shrubs, plants, and lawns that are held as stock by the named
insured are covered. However, all other such items are not covered except under
Supplemental Coverages.
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Example: A fire destroyed Perry’s Wholesale Florist. All stock
was covered but the trees, lawn, and plants used for Perry’s landscaping were
not covered except for the limited amount provided by Supplemental Coverages. |
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Note: This item is labeled as “Outdoor” trees, etc., but the
wording of the item does not mention outdoor. Therefore, if a building has
indoor trees and landscaping is there coverage? What if there is an open
atrium? |
13. Property More Specifically Insured
When a coverage form is purchased to specifically cover an item that is also covered under this coverage, it is not covered by this coverage form. If the loss exceeds what is available under that specific coverage form, this coverage form will respond but only as excess. If the other carrier refuses to pay for whatever reason, this coverage still responds only in excess of the other coverage amount.
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Example: Marshmallow Industries has a $500,000 EDP policy and a $5,000,000 COP. A tornado tears the roof off the building. The EDP policy is expected to respond for its entire $500,000 limit and the COP will respond for its own coverage plus $200,000 in excess coverage for the EDP equipment. However, the EDP carrier denies all coverage and refuses to pay. The COP will still pay only the $200,000. |
14. Property of Others
Property of others is not covered when the named insured is a carrier for hire or a transportation arranger for the property and responsible for the property. This coverage should be obtained through an Inland Marine Motor Truck Cargo Legal Liability or Carriers Coverage Form.
Related Articles:
AAIS Motor Truck Cargo Legal Liability Coverage Form
ISO Motor Truck Cargo Carriers Coverage Form
15. Property You Have Sold
Any property that has been sold by the named insured and delivered is not covered. The one exception is property sold using an installation agreement.
COVERAGE EXTENSIONS
This section was titled Additional Coverages in the previous edition of the COP. Most of the coverages provided in this section have separate insurance limits included. It is important to understand how the limits work.
First, the limits provided are part of the limit for Covered Property
in the Schedule of Coverages. This means that limits in the extensions are not in
addition to the coverage property limits.
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Example: The limit of insurance is $1,000,000. The Off Premises
Utility Service Interruption limit is $50,000. If a total loss occurs
involving both a standard peril and the Off Premises Utility Service
Interruption, the limit available to pay the loss is only $1,000,000, not $50,000
plus $1,000,000. |
Second, if a limit is
not shown for a coverage extension, the limit is the policy limit. This limit
is still part of the limit for Covered Property and not in addition to it.
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Example: Limeland &
Company removed covered property under the Emergency Removal Coverage
Extension. Because this coverage does not have a separate limit, the total
amount available under Emergency Removal and all other coverages is the total
of the limit of insurance on the Schedule of Coverages. If a single
occurrence damages property at both the emergency location and Limeland’s other covered location, the total
payment available is the limit of insurance on the Schedule of Coverages. |
Third, the limits in the Coverage Extension can be changed on the
Schedule of Coverages. When such a limit appears, that amount replaces that Extension’s
default limit in the coverage form, but it is still subject to the Covered
Property limit on the Declarations.
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Example: The Debris Removal limit on the Schedule of Coverages is
changed to $100,000. This replaces the $50,000 standard limit provided in the
coverage form. The insured has a $100,000 limit available, not $150,000. |
Fourth, the limits are
not combined with or added to a limit for any other Coverage Extension or
Supplemental Coverage. This includes any coverage added by endorsement.
Finally, coinsurance
does not apply to any of the coverage extensions or in determining coinsurance
as it relates and applies to other coverages provided elsewhere in the coverage
form.
1. Consequential Loss (2002 change)
Note: This was
included in Supplemental Coverages in the previous edition.
Coverage applies to the loss in value of the undamaged business personal property as a result of damage to other
business personal property by a covered peril up to the coverage limit. The
business personal property is considered to have lost value if it is no longer
marketable.
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Example: |
Related Court Case: Consequential Loss Denied Under Direct Loss Scheduled Property
2. Debris Removal (2002 change)
The cost of removing the
debris of covered property after a covered loss is limited to 25% of the amount
paid for the direct loss plus $50,000.
The combined loss cannot be more than the limit of insurance plus the $50,000.
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Example: Scenario: 1 The coverage limit on Polly’s policy is $1,000,000. The covered fire loss is $900,000 and the expense to remove debris is $200,000. The debris removal expense limit is calculated as follows:
Scenario 2: The coverage limit is $1,000,000. The covered loss to property is $500,000 and the expense to remove debris is $300,000. The debris removal expense limit is calculated as follows:
In this scenario, the
capping of the debris removal expense at $175,000 represents the maximum
amount of debris removal expense to be paid, even though the actual expenses
were $300,000. |
Debris removal expense does not include the costs of extracting pollutants from land or water or the costs for removing, restoring, or replacing polluted land or water. Debris removal expenses must be reported in writing to the insurance company within 180 days after the direct physical loss to covered property.
Some examples of covered expenses are:
- Demolition
- Use of a wrecking ball
- Transporting debris
- Blasting the remains of a damaged structure to the ground
- Removal of damaged inventory or equipment
Costs required to repair or to shore up an undamaged building or costs to protect machinery, equipment and stock when debris is being removed is not considered debris removal. These costs are covered as direct property damage under the part of the coverage form that addresses protecting property from further damage after a covered loss.
3. Emergency Removal (2002 change)
Emergency removal applies to property moved by the named insured because the property is threatened by a covered peril. Coverage applies while the property is being moved in addition to when it is at another location or in storage. Emergency removal protects against loss from any direct physical loss peril.
Note: It is important to remember that no exclusions apply to the property while at the location to which it has been removed. However, the property must be moved to the emergency location or be in transit to it because of the threat of loss or damage from a covered peril. The coverage at the emergency location applies for as long as 365 days or the coverage expiration date, whichever occurs first.
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Example: A wildfire quickly gets out of control and the owners of S&B Fabric Shop remove as much of the shop inventory as possible, place it in rented vans and trucks and move it to a vacant warehouse beyond the range of the wildfire. An earthquake occurs three months later and destroys the warehouse, including the S&B inventory. The earthquake loss is covered because the inventory had been to this location due to the threat of the covered fire peril. |
4. Emergency Removal Expenses (2002 addition)
The insurance company
pays up to $5,000 for the cost to remove and/or store property threatened by a
covered peril. Coverage applies for 365 days or until the expiration date of
the policy, whichever occurs first. This amount is in addition to the policy
limits.
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Example: In the S&B Fabric Shop example above, S&B spent
$1,000 to rent the vans and trucks and the warehouse rental was $750 per
month. These expenses are covered under Emergency Removal Expenses. |
5. Fraud and Deceit (2002 addition)
If covered property
is lost because it is given to any persons who represent themselves as
authorized persons or present fraudulent bills of lading or receipts, there is
$5,000 coverage available. This is important because exclusion u. bars coverage
for Voluntary Parting.
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6. Damage from Theft (2002 addition)
If the named insured is a tenant renting space in a non-owned building,
coverage is provided for damage by theft or attempted theft to the rented building
and to non-owned maintenance or servicing personal property in that building.
This coverage extension applies only when a contractual obligation in the lease
to pay for such damages exists.
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Example: Precious Collection’s lease obligates it to pay for
damage to the building it leases as a result of any break-ins or attempted
break-ins. A thief pries open the
building door and gains entry. The
terms of this coverage extension apply to the damage to the door, even though
the door is non-owned building property. In this case, the building owner is
the contractual beneficiary. |
7. Off Premises Utility Service Interruption (2002 addition)
Direct physical damage to covered property at a covered location is
provided when the loss is caused by utility service interruption. The utility property
must be off premises and the interruption must be caused by a covered peril. The
utility services can be power, gas, water, or telecommunications services. The
coverage includes damage to overhead transmission lines unless checked as
excluded on the Schedule of Coverages. There is no coverage for damage to
perishable stock by spoilage because of fluctuations in, or loss of, electrical
current. The maximum limit available under this extension is $50,000.
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Example: MJ Glass Works produces blown glass products. Electrical
power is lost when the power lines are damaged by wind. The glass hardens and cannot be used. MJ's $13,000 loss is
not covered because the hardened glass is perishable stock. |
SUPPLEMENTAL COVERAGES
The limits for Supplemental Coverage are not part of the limit for
covered property on the Schedule of Coverages. The limit is in addition to the
policy limit of insurance. It is the only limit available to pay for the
supplemental coverage loss, but it is not a sublimit
of any other limit.
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Example: The limit of insurance on the Schedule of Coverages is
$1,000,000. The Brands and Labels Expense limit is $50,000. In the case of a total covered fire loss, if the
insured wants all labeling removed from potential salvage, the entire $50,000
limit is the amount available for that activity. If $1,000,000 is paid out
for the direct damage loss, the $50,000 remains available to pay for the
removal of the labeling. |
If a limit is not
provided, the limit for the coverage is the policy limit.
The limits in the Supplemental Coverages can be changed on the Schedule
of Coverages. When such a limit appears, that amount replaces the limit in the
policy. In this case, the amount is a substitution or replacement amount and
not an additional amount.
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Example: The Brands and Labels Expense limit on the Schedule of
Coverages is changed to $100,000. This replaces the $50,000 standard limit
provided in the coverage form. The insured has a $100,000 limit available,
not $150,000. |
The limits are not
combined with or added to a limit for any other Supplemental Coverage or
Coverage Extension. This includes any coverage added by endorsement.
Supplemental Coverages apply to covered property at covered locations
or within 1,000 feet of a covered location.
If coinsurance applies to any coverage, none of the Supplemental
Coverages are considered when determining the required limits of insurance.
1. Brands or Labels Expense
This is a two-part coverage and it applies only after a covered loss to business personal property.
The first part, which may be the most important one to the named insured, is that all brands and labels on salvageable personal property can be removed as long as the removal does not damage the property. Certain labels may contain information required by law in which case the items must be re-labeled in accordance with the law. The labels and branding can be removed from both the business personal property and its containers. This is permitted even though doing so could significantly reduce the salvage value to the insurance company. The decision by the named insured to do this will not impact the value of the loss to the named insured. There is no separate limit of insurance for this part of the coverage.
The second part is that the insurance company pays the expense the named insured incurs to remove the labels and brand marking. A $50,000 limit is available to pay for this expense.
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Example: Snobby Threadz is a high fashion men's clothing store that sustains a great deal of smoke damage to its merchandise from a comparatively small fire. The salvaged clothing is dry-cleaned and most of the smoke damage is removed but the owners and the insurance company both agree that Snobby's customers are unlikely to purchase clothing damaged by smoke at any price. In addition, the contracts Snobby has with three different specialty clothing manufacturers prohibit the sale of any of their labeled merchandise damaged in any manner. Snobby arranges for all
labeling and branding to be removed. The insurance company pays Snobby’s
expenses and sells the items to a third-party salvage company. |
2. Expediting Expenses (2002 addition)
Once the property is damaged by a
covered peril, $50,000 is available to pay expenses to encourage the quick
repair of the property. Examples of such expenses are overtime pay, additional
labor costs, and transportation costs but these are not the only expenses that
can be paid. It also pays for temporary repairs to covered damaged property.
3. Fire Department Service Charges (2002 change)
If the named insured has a contractual agreement to pay for fire department service charges, the coverage pays up to $25,000 to cover those charges. The agreement must have been in force prior to the loss. The only charges covered are those incurred while the fire department was attempting to save or protect property from a covered peril. This Supplemental Coverage is not subject to a deductible.
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Example: The management
of Felling Apartments asks the fire department to come and remove a
tenant's kitten from one of the trees in the complex. Felling submits the
charges to the insurance company. The insurance company denies the claim for
payment because the covered property
was not threatened by a covered peril. |
4. Inventory and Appraisals Expenses (2002 change)
Up to $50,000 is available to the named insured to cover the costs it incurs because the insurance company has requested that it take an inventory and/or perform an appraisal.
The request must be related to a covered property loss and must be designed to assist the insurance company in determining the amount of the loss.
This supplemental
coverage does not cover any of the costs associated with the Other
Conditions–Appraisals. It also does not
cover fees for public adjusters and/or attorneys.
Examples of covered expenses
include hiring part-time individuals to sift through and record inventory and
paying the daily fees, transportation and living expenses of a recognized
expert to appraise certain fine arts lost in a fire.
5. Ordinance or Law (Undamaged Parts of a Building) (2002 change)
If a covered peril damages
covered property and an ordinance or law requires
demolition of the entire building, this supplemental coverage applies to the
loss of value of the undamaged portion of the building that must be demolished.
The ordinance or law must regulate construction or land use, be in effect at
the time of the loss and require the demolition. However, this coverage does
not apply to any costs related to pollution. This coverage does not have a
separate limit but is included in the limit of the covered property on the
Schedule of Coverages.
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Example: Percy’s Hotel, located in the downtown section of a
small city, is a five-story brick building with ordinary wood floor and roof supports. Because it was constructed
before any building construction ordinances or laws were on the books, it is
grandfathered, or exempt, from the requirement, that all buildings over three
stories high be of at least masonry noncombustible construction. In addition,
other ordinances require that if a grandfathered building experiences damage to
more than 50% of its total area, the entire building must be demolished and rebuilt to meet current construction
standards. The Hotel was struck by a tornado that damaged nearly 60% of the
structure. The ordinance was enforced, and this Supplemental Coverage paid
for the value of the undamaged portion of the building that had to be torn
down. |
Note: Ordinance or Law Coverage was one of the Supplemental Coverages in the previous edition, but this version is almost a complete rewrite. The coverage is separated into two different Supplemental Coverages in this edition and each must be reviewed to determine the complete extent of the coverage provided.
Related Article: CP 04 04–Ordinance or Law Coverage
6. Ordinance or Law (Increased Cost to Repair and Cost to Demolish and Clear Site) (2002 change)
Ordinance or Law Supplemental Coverage Item 5 above pays the loss of
value of the undamaged portion of the building but does not pay the costs to
demolish the building or to re-build it
to meet current ordinances and laws. This Supplemental Coverage applies to
those costs, but it also applies to increased costs to repair that don’t
involve demolishing undamaged portions of the building. The limit for combined
costs is $100,000. The coverage provided addresses demolition costs and
increased cost of construction as two separate items:
- Increased Cost
to Repair covers the increased costs
that must be incurred to comply with the enforcement of imposed ordinances
or laws. This coverage applies to those costs only if the ordinance or law
was in place and effective at the time of loss. In order to be covered the
repairs or replacements must occur and be finished within two years after
the date of loss.
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Example: Marcy's Day Care
is damaged by fire and smoke. When the contractors doing the repairs
apply for the necessary building permits, they are informed that the building
must first be brought up to current code. This includes widening hallways and
increasing the size of the bathrooms. Because the ordinances and laws
requiring these improvements were in effect on the date of loss and they had
been grandfathered, the additional costs are covered. |
- Cost to Demolish and Clear Site pays the
costs and expenses necessary to demolish the undamaged portion of the building
damaged by a covered peril. It also pays the necessary costs to clear the
site and prepare it for rebuilding. The
removal of the damaged portion of the building is covered under Debris
Removal.
- The insurance
company does not cover any cost associated with enforcing either of the
following ordinances or laws:
- Those requiring
a response or assessment of the effects of pollution in any manner
- Those which
the named insured was required to comply with before the loss occurred
which the named insured failed to comply.
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Example: In the example
above, prior to the loss, Marcy's Day Care had received notice from
the health department that its kitchen had to be updated in order to meet
current regulations. Because the cost of doing so was more than Marcy could
afford at the time, she decided not to comply. After the loss, Marcy notified
the insurance company of the requirement to update the kitchen with the hope
that the coverage provided would respond to the expense. The insurance
company refused to pay the expense because the obligation to comply with the
change existed before the loss occurred. |
- If the
building is repaired or replaced the actual costs to demolish and clear
the site plus the increased cost of construction of a similar structure or
$100,000 is paid, whichever is less.
- If the building
is not repaired or replaced the lesser of either the actual demolition
costs plus the amounts the insured would have spent to replace with
similar property (including a similar property use), or $100,000 is paid.
7. Personal Effects (2002 change)
This Supplemental Coverage pays up to $15,000 for loss or damage caused by a covered peril to personal effects of the named insured, its officers, partners, or employees. Examples of covered personal effects are clothing, knick-knacks, briefcases, plaques, awards, fine arts, software or furniture that are owned by the individual. The $15,000 limit does not apply per person but applies per occurrence or per location. This could present an ambiguity when one occurrence involves more than one location.
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Example: Rough and Ready Tool and Die has three locations in
town. It is located close to manufacturing plants in order to provide fast
service. A severe windstorm damages two of the three locations. The employees
and officers file claims for $12,000 at one location and $10,000 at the
second location. Does the loss get capped at $15,000 because there was only
one occurrence? On the other hand, is the limit applied per location? |
8. Pollutant Cleanup and Removal (2002 change)
This Supplemental Coverage pays up to $50,000 per site annual
aggregate for the costs of extracting pollutants from land or water if the
pollution is caused by a covered peril.
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Example: A pesticide tank located above ground is damaged and
releases chemicals after a roof collapses on it due to the weight of ice and
snow. |
The incident must occur during the policy period and the expenses must be
reported in writing to the insurance company within 180 days of the date on
which the covered peril occurs.
Note that this may not necessarily be the same date as the pollution incident.
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Example: On 4/1/19, a fire loss at the insured's building causes
a floor to collapse. The collapse damages the concrete basement and cracks an
underground oil tank. On 9/1/19, oil is discovered in and around the private
well providing an auxiliary water supply to the insured's building. After
analyzing all the details and information, the conclusion is that the oil
must have escaped from that damaged tank but went unnoticed. Because the fire was the proximate cause of the oil
escape, the removal of the oil-soaked dirt is covered, up to the $50,000
limit, provided the expenses are reported to the insurance company in writing
by 9/30/19. |
Extracting pollutants includes
activities such as digging, dredging, well drilling, scraping, and transporting
the pollutants to an approved disposal site or facility. Coverage does not
apply to any form of soil testing, test wells, chemical analyses, and analyses
of wells or laboratory studies. Expenses do not include any court or defense
costs associated with a pollution event.
It is unlikely that the $50,000 limit is sufficient to pay for most pollutant cleanup situations. Consult The Insurance Marketplace, a publication of The Rough Notes Company, Inc., for sources available to provide higher limits for this coverage.
9. Recharge of Fire Extinguishing Equipment (2002 change)
The insurance company pays up to $50,000
to reimburse the named insured for expenses it incurs to recharge any type of fire
extinguishing equipment after it has been discharged in fighting a fire. It
also pays if the discharge was caused by a covered peril or was due to an
accidental discharge. It does not pay expenses to recharge equipment
discharged during testing or installation. Examples of covered expenses are the
refilling of Halon or Ansul systems, the costs of filling private water
reservoirs for automatic sprinkler systems and recharging or refilling all
other types of fire extinguishing equipment. The insurance company has the
option of replacing equipment if doing so is less expensive than recharging it.
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Example: Gary, an assistant chef at Eatum's Cookery, is speaking to his girlfriend on the phone. As
the conversation goes on, |
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10. Rewards (2002 change)
A reward of up to $10,000 is available as a reward for information leading to a conviction for theft, arson, or vandalism that had a caused a covered loss. The amount paid is for each loss and not for each person providing information.
Note: The insurance company and the named insured always have the option to offer rewards. Under this coverage, the named insured knows that the insurance company will pay up to $10,000 even when the insurance company does not believe a reward may be necessary.
11. Sewer Backup and Water Below the Surface (2002 change)
Coverage applies for a limit of $25,000 in
any one occurrence for loss or damage caused by the following:
- Water that
backs up through a sewer or a drain
- Water below
the surface
Loss or damage due to water pressure or the flowing, seeping or leaking
of water into buildings, sidewalks, driveways, swimming pools, and similar or
related types of covered property are examples of covered loss, but they are
not the only covered loss.
12. Trees, Shrubs and Plants (2002 change)
The insurance company covers direct physical loss or damage, including debris removal expenses, to outdoor trees, shrubs, plants, and lawns at covered locations. Coverage applies only to loss or damage caused by fire, lightning, explosion, riot or civil commotion, falling objects or vandalism. The limit is $50,000 in any one occurrence.
Note: The coverage provided by this Supplementary Coverage does not apply to stocks of this property held by the insured for sale because they are not subject to any limitation and therefore not in need of this coverage.
Trees, shrubs, plants, and lawns are property not covered elsewhere in the coverage form. This Supplemental Coverage gives back some limited coverage for the described perils. It is important to consider the losses that are not covered such as those from wind, hail, rain, vehicles, animal, chemicals, or pest damage.
To find broader coverage
for additional perils on crops and other plants, refer to The Insurance Marketplace, a publication of The Rough Notes Company,
Inc.
13. Underground Pipes, Pilings, Bridges and Roadways (2002 change)
Underground pipes, pilings, bridges, and roadways are listed as Property
Not Covered. This Supplemental Coverage provides a limit of $250,000 at any one
covered location or in a single occurrence for
damage to these items but only if the loss is caused by a covered peril.
Note: The ambiguity of per location or per occurrence could be a
problem. If two locations are damaged in the same occurrence, is there $250,000
coverage available for each location or is the total loss capped at $250,000?
SUPPLEMENTAL MARINE COVERAGES
Most of the following coverages have a limit of insurance. It is
important to understand how the limit works.
- The limit for each is an additional amount of insurance and is not a part of the limit for Covered Property on the Schedule of Coverages unless stated otherwise in the specific Supplemental Marine Coverage.
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Example: The limit of insurance is $1,000,000. The Accounts
Receivable Supplemental Marine Coverage limit is $50,000. If a total loss
involving both covered property on the Schedule of Coverages and Accounts
Receivable occurs, the $1,000,000 limit applies to the covered property and
the $50,000 limit applies to Accounts Receivable. |
- If a limit for a Supplemental Marine Coverage is not provided, the limit is the full limit for the applicable coverage, unless a different limit is shown on the Schedule of Coverages. This limit is not an additional limit.
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Example: An electrical disturbance occurs and damages computers.
This coverage provides up to, but not more than, the policy limits for
business personal property. |
- The limits for the Supplemental Marine Coverages can be changed on the Schedule of Coverages. When a limit for a Supplemental Marine Coverage is on the Schedule of Coverages, it replaces the limit shown in the coverage form and is not in addition to it.
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Example: The Accounts Receivable limit on the Schedule of Coverages is changed to $100,000. This limit replaces the standard $50,000 limit in the coverage form and is not in addition to it. In this case, the limit available to the insured is $100,000, not $150,000. |
- The limits provided are not combined with or added
to a limit for any other Supplemental Marine Coverage, Coverage Extension,
or Supplemental Coverage, including those added by endorsement.
- If coinsurance applies to any policy items, none of the Supplemental Marine Coverages are considered when determining the required amounts of insurance or limits to carry.
1. Accounts Receivable (2002 change)
This coverage reimburses the insured for sums it cannot collect from its customers as a result of direct physical loss or damage by a covered peril to its records of accounts receivable. It also covers the interest the insured must pay a bank if a loan must be taken against the receivables to provide the operating capital necessary to continue its operations. Furthermore, extra expenses beyond the normal amount required to collect monies owed and costs to reconstruct accounts receivable records in either paper, disk or tape format are also paid. The limit for this Supplemental Marine Coverage is $50,000.
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Example: After a devastating fire destroyed its accounts receivable records, Weaklee Rentalls hired several accountant temporaries for three weeks at a cost of $10,000 to help the Chief Financial Officer (CFO) reconstruct the accounts receivable records. The CFO herself spent 90 hours at the task at a cost of $6,750, based on her standard wage rate of $75 multiplied by 90 hours. Many of Weaklee's customers decided to withhold payment on their account balances until Weaklee could prove the amounts owed. Records for $10,000 of the normal accounts receivable could not be recovered, and the destroyed accounts were not paid. Weaklee then dispatched its sales force to spend weeks tracking down late payers at an allocated payroll cost of $4,000. Because receivables trickled in at only 25% of the pre-loss levels, the company took out a 90-day bank loan against their probable collectibles. The interest on the loan amounted to $650. The insurance company paid $10,000 for the accountant temporaries, the $6,750 allocated for the CFO expense, the $10,000 in lost receivables, the $4,000 sales force additional cost to collect receivables and the $650 loan interest for a total of $31,400. The value of lost sales
opportunities for the weeks the salespeople spent collecting money is not a
reimbursable expense. |
2. Electrical or Magnetic Disturbance of Computers (2002 addition)
The direct physical loss from electrical or magnetic damage to
computers and the loss of electronic records that are damaged, erased, or
disturbed is covered. The loss must be caused by a disturbance of electrical or
magnetic origin. Because this Supplemental Marine Coverage does not have a
specific sublimit, the coverage provided is part of the property covered policy
limits.
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Example: Drake is not pleased when he learns his job is being moved overseas and he is considered redundant. On his last day, he brings a magnet with him and moves around the office intentionally damaging as much of the equipment as possible. The loss is covered because of this coverage. If Drake had stolen
items, it would not be covered because of the Criminal, Fraudulent, Dishonest,
or Illegal Acts exclusions but an exception to that exclusion provides
coverage when employees destroy property.
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3. Power Supply Disturbance of Computers (2002 addition)
If a power supply is disturbed and the computer sustains a direct
physical loss because of it, there is coverage. Examples of such a disturbance
are power supply interruption, power surge, blackout, or brownout. Because this
Supplemental Marine Coverage does not have a specific sublimit, the coverage
provided is part of the property covered policy limits.
4. Virus and Hacking Coverage (2002 addition)
When computer hacking or a virus causes a direct physical loss or
damage to computers or the named insured’s computer network or its website there
is coverage. However, the following items limit the coverage provided:
- When data
records or proprietary programs are copied, scanned or altered the loss which
results because their exclusivity is compromised is not covered.
- When data
records or proprietary programs are copied, scanned or altered any
reduction in their value that results is
not covered.
- When
confidential information that is part of proprietary programs or data
records is observed, there is no theft coverage when there is no other
physical loss or damage to the programs or records.
- When access to computers or from the named insured’s network or its website is denied there is no coverage.
If CO 1001–AAIS Commercial Output Program Income Coverage Part is attached to this policy, some coverage may be available in its Supplemental Income Coverages section.
The limit is $25,000 in a single occurrence, subject to a 12-month policy
period aggregate limit of $50,000.
5. Fine Arts (2002 change)
The named insured’s fine arts are covered for direct physical loss up to $100,000 at a single location or in a single occurrence. Loss or damage must be caused by a covered peril at a covered location. Fine arts are also covered while being displayed or exhibited away from a covered location and while in transit between the exhibit location and the covered location.
Note: If there is a single
occurrence over multiple locations, will the loss be capped at the $100,000
occurrence limit or will each location have up to the $100,000 coverage?
6. Off Premises Computers (2002 addition)
This coverage is for computers that are away from a covered location.
They are covered only if they are in the named insured's custody, or in the
custody of an officer, partner, or employee. They are also covered while in
transit between a covered location and the named insured, its officers, its partners,
or employees. Coverage is limited to direct physical damage of the computer for no more than $25,000 in a
single occurrence.
Note: Review the Checked Luggage Exclusion which removes coverage for any computer in transit that is checked as luggage. It could be problematic that this coverage does not make specific reference to the “Check Luggage” exclusion.
A question arises with the in-transit coverage. The computer is covered while it is in transit between the covered location and the persons who are supposed to have custody of it. Does this mean the computer can be in transit, NOT in that person’s custody and covered? If custody is required, the statement appears to be a redundant addition to the coverage.
7. Property on Exhibition (2002 addition)
Business personal property temporarily on display or exhibited at locations not regularly occupied by the named insured is covered for direct physical damage if caused by a covered peril. The limit is $50,000 in any one occurrence, regardless of the number of locations where the property is exhibited. Exhibitions include trade shows and flea markets.
Note: Business personal property is not limited to only property owned by the named insured.
8. Property in Transit
Business personal property in transit is covered for direct physical loss if caused by a covered peril. The limit is $50,000 in a single occurrence.
This Supplemental Marine Coverage has two
coverage extensions and two conditions:
- Property sold that
is being shipped by the named insured at the purchaser’s risk is covered only
for the return trip. If a purchaser rejects the sold property because it
is damaged and the property owner refuses to pay the named insured that
rejected property is covered for the trip back to the named insured.
- Any shipment
that is rejected is covered during its return transit to the named insured
and also while it is in storage and waiting to be returned.
- The named
insured has permission to accept a bill of lading from carriers for hire limiting
the carrier’s liability to less than the actual cash value of the covered
property.
- There is no coverage for perishable stock loss or damage that is due to a breakdown of refrigeration equipment on any vehicle or conveyance.
9. Sales Representative Samples
Direct physical loss or damage caused by a covered peril to samples of the named insured's product, including containers and similar property of others is covered. This coverage applies only when the property is with the named insured’s sales representatives, is in the named insured's custody while acting as a sales representative or while in transit between a covered location and a sales representative. The limit of insurance is $50,000 per occurrence.
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Example: On a Wednesday, Cumulous Bedding has a one-day, mandatory, regional sales meeting at a hotel for all of its sale representatives. The representatives bring their sales boxes in their cars so they can handle sales calls before and after the meeting. A tornado strikes and
the meeting hotel’s parking lot was part of the tornado’s path. It destroys
most of the Cumulous reps’ cars. Each of the 50 sales representatives
affected had carried $1,000 worth of samples and the sample boxes were each
worth $2,500. While the total loss amounted to $175,000, the coverage
available under this Supplemental Marine Coverage is limited to the single
occurrence limit of $50,000. |
0. Software Storage (2002 addition)
Duplicate and backup software kept
at a software storage location is covered for direct physical damage when
caused by a covered loss. The software storage building must be at least 100
feet away from a covered location. The limit of insurance is $50,000 in any one
occurrence.
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Example: Nankin Products keeps all its software records at an
offsite facility owned by its accountant. That building burns down and every
backup is destroyed. The cost to duplicate and create a new backup set of software is covered up to the
$50,000 limit. |
11. Valuable Papers (2002 change)
The cost of research and other expenses necessary to reproduce, replace or restore lost information as a result of direct physical loss caused by a covered peril to the named insured’s valuable papers is covered. The limit is $100,000 without reference to occurrence, location, or aggregate.
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Example: Simmons Architects has a major fire. Many of the older
drawings lost or damaged were on CAD-CAM,
while duplicate records were stored at an offsite location. These records
were reinstalled on new equipment purchased to replace the damaged workstations,
but the installation encountered a major conversion problem. While all the
data converted, outside programmers were paid $3,500 for the conversion. In
addition, the architects had to incur $3,000 in costs to duplicate other
records. They had to search through customer records to replicate plans and
drawings of current projects. The total payroll cost amounted to $15,000.
This expense added to the $6,500 of
duplication expense, brought the total value of the covered loss to $21,500. |
Note: Valuable Papers no longer includes electronic or magnetic media records protection.
PERILS COVERED
Risks of direct physical loss or damage are covered by the insurance carrier. This broad statement is modified to not apply if the loss is either limited or is caused by an excluded peril.
Note: Direct physical loss or damage does not include loss of use or the loss in perceived value of goods in the marketplace.
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Example: A new model of a crane manufactured by the insured
catches fire during an equipment dealer’s convention. As a result, potential
customers become leery and decide not to purchase the product. While the
damage to the crane is covered, the resulting loss of income and diminished value
are not. |
PERILS EXCLUDED
1. The doctrine of concurrent causation holds that coverage applies to a property loss that can be attributed to a covered source of loss even if it is accompanied by one or more excluded sources. As a result, coverage has been found for earth movement, flood, and other specifically excluded events. This set of exclusions attempts to avoid concurrent causation by stating that the event is excluded, regardless of any other causes that contribute to or aggravate the loss. With this approach, there is no coverage for concurrent loss situations. This is considered to be anti-concurrent causation language.
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Example: An earthquake occurs. It topples a huge tree that falls
onto and collapses the roof of the insured’s factory. At the same time, the
quake damages one of the factory’s walls. Coverage usually applies to damage
caused by falling objects but, because the tree-fall
was a result of the earthquake, neither event is covered. |
Related Article: Concurrent Causation and Anti-concurrent Causation Clauses–A Discussion
a. Ordinance or Law (2002 change)
Any increased cost or
loss caused by the enforcement of any building code or law is not covered
except as covered under the Supplemental Coverages. Coverage does not apply even if the loss itself is due to
enforcement of a code in an undamaged building or is due to increased costs
incurred following a direct physical loss
to the property.
Related Court Case: Building Code Compliance Held Compensable By Reasonable Expectations of Insured
b. Earth Movement
Damage to covered property caused by earth movement, other than sinkhole collapse, or caused by eruption, explosion, or effusion of a volcano is not covered. Examples of earth movement are earthquake, landslide, mudflow, mudslide, mine subsidence, and the sinking, rising or shifting of the earth.
There are exceptions. When direct loss by fire, explosion, or volcanic action occurs that was caused by and resulted from either earth movement, or the eruption, explosion or effusion of a volcano there is coverage for that fire, explosion, or volcanic action loss.
Computers, mobile equipment, and the Supplemental Marine Coverages are not subject to this exclusion.
Related Article: CO 1221–AAIS Commercial Output Program Earthquake Endorsement
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Example: Pete’s building is damaged by an earthquake. This
results in cracked walls and collapsed shelving. The shifting earth causes a
gas main to rupture and the resulting fire burns the building to the ground.
The earthquake damage to the building is $200,000 and the total loss estimate
is $1,000,000. In adjusting the loss, the insurance company may deduct the
$200,000 in earthquake damage and pay only the $800,000 loss caused by the
fire. |
c. Civil Authority
Loss or damage caused by the order of any civil authority is excluded. Seizure, confiscation, destruction, and quarantine of any property are examples of excluded civil authority actions. There is one exception. If the civil authority destroys the named insured’s property as a means of preventing the spread of a fire, there is coverage but only if the fire itself is a covered peril.
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Example: The local fire department burns down the insured’s garage in order to create a firebreak against an advancing forest fire. Scenario 1: The forest fire was started by a lightning strike. The garage loss is covered. Scenario 2: The named
insured intentionally started the fire that went out of control and became a
forest fire. The garage loss is not covered. |
d. Nuclear Hazard
Loss caused by nuclear reaction, nuclear radiation, or radioactive contamination is not covered. Any loss that is caused by the nuclear hazard is not considered a loss caused by fire, explosion, or smoke. There is one exception. If a direct loss by fire results from the nuclear hazard there is coverage.
Coverage for nuclear risk is available only through nuclear coverage associations.
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Example: Enterprising Hospital's radiation unit is located next
to the boiler room. An explosion in the boiler room causes the walls in the
unit to crack, resulting in the release of radiation into other areas of the
hospital. There is no coverage for the damage caused by the radioactivity. |
e. War and Military Action (2002 change)
There is no coverage for loss or damage caused by any of the following:
- War even if the war is not declared or if it is a civil war
- Warlike action by a military force. Actions taken by the government to prevent or defend against an expected or actual attack by any government or other authority using military personnel or agents is also excluded.
- Rebellion, revolution, insurrection, or unlawful seizure of power. Actions taken by the government to prevent or defend any of these is also excluded.
If any action above involves nuclear reaction, nuclear radiation, or radioactive contamination, this exclusion applies in place of the Nuclear Hazard exclusion. There are no exceptions in this exclusion.
f. Flood
There is no coverage for loss or damage caused by flood. There are exceptions. There is coverage if fire, explosion, or sprinkler leakage as a result of flood occurs. In addition, this exclusion does not apply to computers, mobile equipment, and the Supplemental Marine Coverages.
Note: Flood is a very expansive term, so it is important to review the definition of flood in the Definitions section. This exclusion was part of the Water Exclusion in the prior edition. The term flood is now a defined term, but the definition is very similar to the descriptions of water damage that was excluded in the prior edition Water exclusion.
Related Article: CO 1223–AAIS Commercial Output Program Flood Endorsement
g. Utility Failure
When an offsite utility is unable to supply services to the covered location, there is no coverage for any resulting loss or loss caused by that failure of utility services at the covered location. There are exceptions. If a covered peril results from the utility service failure, the loss or damage caused by that covered peril is covered. In addition, this exclusion does not apply to computers, mobile equipment, or any of the Supplemental Marine Coverages. Lastly, limited coverage for utility failure is available under Coverage Extensions–Off Premises Utility Service Interruption.
h. Sewer Backup and Water Below the Surface
(2002 change)
Loss or damage caused by the backup of sewers and drains is not covered. Damage caused by the pressure of groundwater is also excluded. Examples of the types of losses that are not covered are damage caused by water pressure or the flowing, seeping or leaking of water into buildings, sidewalks, driveways, swimming pools and similar or related types of covered property.
There are exceptions. If sewer backup or water below the surface results in fire, explosion or sprinkler leakage, the loss or damage from those events is covered. The exclusion does not apply at all to computers, mobile equipment, or the Supplemental Marine Coverages. A limited amount of coverage is provided under Supplemental Coverages–Sewer Backup and Water Below the Surface.
Note: In the prior edition this exclusion was part of the Water
exclusion. The wording of this part of that exclusion is similar.
2. The second group of
exclusions applies to loss, damage caused
by, or resulting from any of the following loss events. Some of these
exclusions have exceptions, conditions, or limitations that should be noted and
reviewed carefully.
Note: The Freezing exclusion
was eliminated with the 2002 edition.
a. Animal Nesting, Infestation or Discharge
(2002 change)
This exclusion excludes the damage that results from animal nesting, infesting, discharging, or releasing
of waste products or other animal secretions. The term animal is extended to
include birds, insects, and vermin but is not limited to them.
There is an exception. If any of the above results in breakage of building glass or it triggers a specified peril, coverage applies to that particular loss or resulting damage.
Note: Prior editions excluded loss caused by animals while this one only excludes certain animal activities.
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Example: Bats nest in the attic of an old church. Coverage does
not apply to the waste materials on the floor of the attic. However, when a
bat bites some electrical wiring which then causes a fire, coverage applies
to the resulting fire damage. |
b. Collapse
Loss or damage caused by collapse is excluded. There are three exceptions.
- If the collapse results in the occurrence of any covered peril, coverage applies to the loss or damage caused by that covered peril.
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Example: A shelf collapses, knocks over a Bunsen burner, and causes a fire in the laboratory. The damage resulting from the collapse of the shelf is not covered but the damage caused by the ensuing fire is covered. |
- It does not apply to computers, mobile equipment, or the Supplemental Marine Coverages.
- Limited coverage is provided by Other Coverages–Collapse located elsewhere in the policy.
c. Computer Virus or Computer Hacking (2002
addition)
Computer virus or
hacking caused loss or damage is not covered. This applies whether the damage
is direct, indirect, or resulting from loss of access, use, or functionality.
The one exception is the limited coverage provided under Supplemental Marine
Coverages–Virus and Hacking Coverage.
d. Contamination or
Deterioration
There is no coverage when contamination or deterioration is the cause of loss or damage. Examples of contamination and deterioration are corrosion, decay, fungus, mildew, mold, rot, and rust. Contamination or deterioration is also any quality, fault or the nature of the covered property that causes it to damage or destroy itself.
There are two exceptions. If contamination or deterioration results in a specified peril or breakage of building glass, coverage applies to the loss or damage caused by those events.
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Example: A portion of the roof above a restaurant dining area
collapsed due to the wood joists rotting. The collapse overturned candles
burning on the tables. The candles ignited the tablecloths, furniture, and
carpeting. The damage to that ceiling because of the rotting wood joists is
not covered, the damage because of the collapse is not covered, but the
damage from the resulting fire is covered. |
Also, if an air conditioning system that services the computers sustains direct physical damage caused by a covered loss and the damaged system results in corrosion, decay, fungus, mildew, mold, rot or rust to damage the computer, that computer damage is covered.
e. Criminal, Fraudulent, Dishonest or
Illegal Acts
Loss caused by criminal, fraudulent, or dishonest acts is not covered if the act(s) is committed alone or in collusion with others by any of the following:
- The named insured
- Any party having an interest in the property
- Any party entrusted with the property
- Partners, officers, directors, trustees, joint venturers
- Employees or agents of any of the above
There are two exceptions. First, loss due to acts of destruction by the named insured's employees is covered. However, if theft by employees occurs, there is no coverage.
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Example: During a strike at Amalgamated Manufacturing, disgruntled strikers break ten windows in the plant building. This damage is covered. However, there is no coverage when two employees take advantage of the situation and break into Amalgamated's offices to steal money, securities, and other property from the safe. |
Second, covered property in the custody of a carrier for hire is not subject to this exclusion.
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Example: First Rate Products hires Great Trucking to deliver products to a number of stores, but three packages never reach their destinations. It turns out that the packages were stolen by the trucker’s employees and were not recovered. This loss is eligible because it occurred while the packages were in a hired carrier’s possession. |
f. Defects, Errors
and Omissions
The following losses are not covered:
- Loss that is due to any error, omission, or act that relates to one or more of the following either on or off a covered location. The loss is not covered whether or not there is negligence.
° Land use
° Design, specification, construction, installation, or maintenance of property
° Planning, zoning, development, siting, surveying, grading, compaction
° Property maintenance
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Example: The Smallville City Council delays preventive
maintenance on a floodwall. The wall collapses and floods Healthy
Manufacturing. Healthy Manufacturing knows they have no flood coverage, so
they file a claim stating the loss is not due to flood but instead is due to the Smallville City Council’s poor
decisions. Healthy’s claim is still denied because of this exclusion. |
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- Loss caused by material that is used for construction or for repairs and which is defective, weak, inadequate, faulty, or unsound. This applies even if the repair or construction happens off premises.
- Loss that is the cost of correcting an error in design
- Loss due to data processing or programming errors or because of the giving of improper instructions
- Business personal property losses that are due to defect or deficiencies in design, specifications, materials or workmanship or that are the result of defects that are latent or inherent.
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Example: As a result of this exclusion, the following situations are not covered:
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There is one exception. If any of the situations described in this exclusion cause a covered peril to occur, coverage applies to the loss or damage caused by the covered peril.
g. Electrical Currents (2002 change)
Loss that is caused by electrical arcing or electrical currents of any kind other than lightning is excluded. There are three exceptions.
- The exclusion
does not apply to computers.
- If excluded arcing or currents results in a fire, coverage applies to the damage caused by the fire.
- If an interruption of power or other utility service results in a direct loss from a covered peril at a covered location, there is coverage for that direct loss.
h. Steam Boiler Explosion (2002 title
change)
When the named insured owns, leases, or operates steam boilers, steam pipes, steam turbines or steam engines there is no coverage for any loss that occurs because one or more explodes. There are two exceptions. If an explosion in one of these objects causes a fire or a combustion explosion, the resulting loss or damage is covered. In addition, loss or damage due to an explosion in a firebox, combustion chamber, or flue because of accumulated gas is covered.
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Example: Coverage applies to the following situations:
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Example: Coverage does
not apply to the following situations:
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i. Increased Hazard
If a loss occurs while a hazard, which is within the named insured’s control and knowledge, is materially increased, there is no coverage for that loss.
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Examples:
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Note: Businesses routinely make significant changes. It is important that agents make their clients aware of this particular exclusion. It may encourage them to send notice of such changes.
j. Loss
of Use
The following losses are not covered:
- Loss of use. This is any type of loss sustained because the named insured or its customers cannot use the property.
- Delay. This is when economic benefits are lost because a deadline was not met, or a season of sales opportunity was missed or similar type delay.
- Loss of market. This is when the loss of current customers as well as the loss of potential customers and similar types of loss of market.
Some loss of use situations can be covered by loss of income coverage forms. Others are economic or market losses not normally insured under standard policies.
Related Article: CO 1001–AAIS Commercial Output Program Income Coverage
k. Mechanical Breakdown
Any loss due to mechanical breakdown is excluded. In addition, when a centrifugal force causes a machine’s moving parts to rupture or burst there is also no coverage. There are exceptions. If either of these excluded situations causes a specified peril, breakage of building glass, or elevator collision to occur, the insurance company covers the loss or damage resulting from those events. This exclusion also does not apply to computers.
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Example: Coverage should not
apply to the following situations:
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Example: Coverage should
apply in the following situations:
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Related Article: CO 1003–AAIS Commercial Output Program Equipment Breakdown Coverage
l. Neglect
Insurance coverage is issued with the anticipation that the named insured will operate in a reasonable manner to protect property before, during and following a loss. If the named insured does not take such reasonable measures, the insurance coverage should not be expected to respond. This exclusion reinforces that concept by not covering loss or damage caused by the named insured failing to use reasonable means available to save covered property during and after the occurrence of a loss. In addition, there is no coverage for loss caused when a named insured fails to make reasonable and available efforts to protect threatened property.
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Example: Coverage may be denied in the following situations:
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Note: These situations illustrate the problem of defining what a reasonable person should do. In the first, the lack of action could be explained by the insured having an unusual fear of fire of any kind. In the second, an argument could be made in favor of coverage if the insured was not aware of the approach of the storm, was physically unable to take the action required or simply didn’t realize the extent of the damage.
m. Pollutants
There is no coverage for loss caused by any action of pollutants. There are three exceptions.
- The pollution event is caused by a specified peril.
- If the pollution event causes a specified peril, the damages caused by that specified perils are covered.
- The pollutant event is covered under Supplemental Coverages–Pollutant Cleanup and Removal.
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Example: Coverage may apply in the following situations:
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n. Seepage
This is really another case of not paying for neglect. If water or steam is seeping and leaking for 14 days or more and this seeping or leaking causes loss or damage, there is no coverage for that loss or damage.
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Example: A slow leak goes on for months; it is not discovered
until the sheetrock wall is thoroughly soaked and has collapsed. There is no
coverage because the seepage occurred over a period of more than 14 days. |
o. Settling, Cracking, Shrinking, Bulging
or Expanding
Loss or damage due to the settling, cracking, shrinking, bulging or expanding of any pavement, footings, foundations, walls, ceilings or roofs is not covered. There are exceptions. If any of these excluded events results in a specified peril or breakage of building glass, coverage applies but only to the loss or damage caused by the specified peril of breakage of glass. In addition, this exclusion does not apply to computers or mobile equipment.
p. Smoke, Vapor or Gas (2002 change)
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This exclusion does not apply to all smoke, vapor,
or gas. It applies only when smoke, vapor, or gas causing the loss comes from agricultural
smudging or industrial operations. This exclusion also does not apply to
computers and mobile equipment.
Note: Industrial incinerators may release harsh acids and chemicals into the air, resulting in bleached or chipped paint or damage to plastic and rubber products. Some agricultural smudging operations conducted to reduce insect infestations or to keep crops from freezing release greasy smoke that can discolor paint and do other damage to nearby buildings.
Smog was part of this exclusion but in the 2002 edition smog became a
unique exclusion.
q. Smog (2002 change)
Loss or damage due to smog
is excluded. There are exceptions. If
the smog causes a specified peril or breakage of building glass to occur, the
loss or damage caused by the specified peril or glass breakage is covered. In
addition, this exclusion does not apply to computers and mobile equipment.
r. Temperature/Humidity (2002 change)
Personal property or
perishable stock that sustains loss or damage because of dryness, dampness, humidity,
or extremes of temperature is not covered. There are three exceptions.
- If the damaged personal property or perishable stock causes a specified peril or building glass breakage, then any resulting damage from those perils is covered.
- Loss or damage to computers is covered when due to direct physical loss or damage by a covered peril to the air conditioning system servicing the computers.
- Coverage that is provided in the Coverage Extension–Off Premises Utility Service Interruption
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Example: Coverage does
not apply to the following situations:
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Example: Coverage applies to the following situations:
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s. Wear And Tear
Loss or damage due to wear and tear, marring or scratching is excluded. These losses are more in the line of costs of doing business. There are exceptions. If these losses result in the occurrence of a specified peril or the breakage of building glass, coverage applies to the resulting loss or damage from the specified peril or the building glass breakage. However, there remains no coverage for the wear and tear, marring, or scratching.
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Example: The chandelier’s chain broke because of its age. The
damage to the chandelier is not covered but the table and chairs that are
destroyed by the chandelier’s fall are covered. |
t. Weather
If a weather condition contributes to a peril excluded in the paragraph 1 exclusions (ordinance or law, earthquake, civil authority, nuclear hazard, flood, utility failure, war, sewer backup), then the damage caused by the weather condition is also excluded. However, if weather conditions contribute to a loss caused by a covered peril there is coverage. This is an anti-concurrent causation exclusion.
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Example: Coverage does
not apply to the following situations:
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Related Article: Concurrent Causation and Anti-Concurrent Causation Clauses–A Discussion
u. Voluntary Parting (2002 change)
If the property is voluntarily given to another party, there is no coverage. There is no coverage even if the receiving party was part of a fraudulent trick or scheme.
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Example: Coverage does
not apply to the following situations:
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Some limited coverage is provided in Coverage Extensions–Fraud and
Deceit.
ADDITIONAL PROPERTY NOT COVERED OR SUBJECT TO LIMITATIONS
Note: The restriction
of gutters and downspouts not being covered for the weight of ice, sleet or snow
was removed in the 2002 edition. In addition, the requirement that interior
rain, snow, sleet, ice, sand, or dust damage is covered only after an opening
was created in the exterior was eliminated in the 2002 edition.
1. Accounts Receivable
Accounts receivable
losses that occur as a result of bookkeeping, accounting, or billing errors are
not covered. Coverage also does not apply if the only proof that a loss
occurred is a discrepancy discovered in an audit or during the taking of
inventory.
2. Animals
This item does not mesh with the Animals as Property Not Covered. That Not Covered item states that animals, including fish and birds, are not covered. However, it does provide two exceptions:
- Animals held for sale by the named insured provided they are inside a building.
- Animals that are owned by others but that are being boarded by the named insured.
This item states that loss to animals, including birds and fish, is not covered. It provides only the following single exception.
- Death or required destruction of an animal that is being held for sale is covered but only when the loss is caused by specified perils of building glass breakage.
This discrepancy could result in full coverage for animals that are property of others while being boarded by the named insured due to the ambiguity of this item.
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Example: It Takes a Village Pet Shop sells fish and reptiles. It also boards dogs and cats. A fire occurs. The fish and reptiles die, and coverage is provided for that loss because it was due to a specified cause of loss and the animals died. Four dogs and three cats that were being boarded were also in the shop when the fire broke out. All were saved by the fire department, but all needed to be treated by veterinarians. Because of the ambiguity of the wording, the cost of the veterinarian services could be paid because nothing in the policy addresses limitations to the covered boarded animals. |
3. Boilers
Loss or damage to steam boilers, pipes, turbines, and engines caused by a condition or event inside this equipment is not covered. There is an exception. If the loss or damage is caused by an explosion of gas or fuel in a firebox, flue or combustion chamber, there is coverage.
There is also no coverage for loss or damage to hot water boilers or heaters caused by any condition or event inside this equipment such as bursting, cracking, or rupturing. The one exception is an explosion.
Related Article: CO 1003–AAIS Commercial Output Program Equipment Breakdown Coverage
4. Contamination of Perishable Stock Due to Release of Refrigerant (2002 addition)
There is no coverage
when perishable stock is contaminated by
the release of refrigerant. The exclusion specifically mentions ammonia but
does not limit the exclusion to ammonia.
Related Article: CO 1004 and CO 1005–AAIS Commercial Output
Program Spoilage Coverage Parts
5. Furs
Coverage applies to the full value of furs except for the peril of theft. The sub-limit of insurance for theft coverage on furs is $10,000 per occurrence.
Related Article:
Furriers Block Policy
6. Glassware/Fragile Articles
Breakage of fragile articles is not covered. There are exceptions.
- When the breakage is due to a specified peril or breakage of building glass it is covered.
- Breakage of glass that is part of a building is covered.
- Breakage of containers including bottles are covered but only if held for sale
- Breakage of lenses is covered if the lenses are for photographic or scientific instruments.
- Fine arts as described under Supplemental Marine Coverages are also not subject to this limitation.
Related Articles:
AAIS Commercial Fine Arts Coverage Forms
ISO Commercial Fine Arts Coverage Form
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Example: There is no coverage on
glass statuary knocked to the floor by a customer, but coverage applies to
statuary that melts due to the excessive heat of a fire. |
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7. Jewelry, Watches, and Precious Stones
The only limitation of coverage for jewelry, watches, precious stones, watch movements, pearls, and semi-precious stones is for the peril of theft. Theft is covered but the limit of insurance is subject to a sublimit of $10,000 per occurrence.
The only exception is that items with individual values less than $100 are not subject to the limitation.
Related Articles:
ISO Jewelers Block Coverage Form (Filed)
AAIS Jewelry Dealers Coverage (Filed)
ISO Jewelers Block Coverage Form (Non-filed)
Jewelers Block Policy (Independent)
8. Missing Property
There is no coverage for property discovered to be missing based only on a shortage discovered while taking inventory, as an accounting or bookkeeping transaction or by any other circumstance where no physical evidence indicates what happened to the property. The one exception is for property in the possession of carriers for hire.
9. Personal Property in the Open
Rain, snow, sleet, or ice damage to property in the open is excluded. There are two exceptions. This limitation does not apply to mobile equipment or to property while it is in the custody of a carrier for hire.
10. Stamps, Tickets and/or Letters Of Credit
This is another theft limitation. Stamps, tickets, and letters of credit are covered for theft, but the loss amount is capped at $5,000 in a single occurrence. Tickets are described as including lottery tickets being held for sale, but other types of tickets are also limited.
Full coverage for this property is available under different commercial crime coverage forms and policies.
Related Article: ISO Commercial Crime Coverages Forms Overview
11. Unauthorized or Fraudulent Transfer (2002 change in title)
When covered property is transferred via the computer or is delivered to a person or place, there is no coverage for any loss or damage to the property if the transaction was the result of unauthorized or false instructions no matter how the instructions were transmitted (even electronically). The only exception is the limited coverage provided under Coverage Extensions–Fraud and Deceit.
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Example: Got Smokes Distributors received a faxed request from
Drained Rivers, Inc. for thirty cases of cigarettes. Got Smokes sent the
cigarette shipment to the listed location in |
12. Valuable Papers (2002 change)
There is no coverage for loss to valuable papers as a result of errors or omissions in copying or processing them. There are no exceptions.
OTHER COVERAGES
1. Collapse
a. Collapse of a building, structure, or personal property may occur for a number of reasons. Rather than cover all possible building collapses, undefined collapse is excluded. In this other coverage, collapse is added back but only for a select number of perils. The causes of collapse of a building or structure that are covered are only the following:
- Specified perils or building glass breakage but only if covered within this coverage form.
- Decay that is both hidden and unknown to the named insured
- Insect or vermin damage that is both hidden and unknown to the named insured
- Weight of people or personal property (not limited to only business personal property)
- Weight of rain that pools on top of a roof
- Defective material or defective methods but only if the collapse occurs while the building or structure is being remodeled, constructed or renovated. Collapse due to defective material or a method is covered after construction only if one of the five other causes of collapse were at least part of the collapse cause.
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Example: The following are collapse situations:
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b. Collapse coverage is further restricted for the following properties:
- Radio or television antennas that are outside. This includes their towers, wiring, and masts
- Gutters, downspouts, fences, and awnings
- Fixtures that are in the yard
- Swimming pools that are outside
- Docks, wharves, piers, bulkheads
- Platforms for beaches or diving including attachments
- Retaining walls but only when the wall is not part of a building
- Paved surfaces such as bridges, walkways, and roadways
These properties are covered for collapse loss or damage only if the loss or damage is the result of a building or structure collapse. Furthermore, that building, or structure collapse must be due to the causes of loss described in 1. a. or due to a specified peril or building glass breakage.
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Example: The following situations are intended to clarify the intent of this limitation:
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Collapse is the falling-in or caving-in of a building or any
part of the building. It must be both unexpected and sudden. In addition, the
result of the collapse must be such that the building or the portion of the
building where the collapse occurred can no longer be occupied in the same
manner it was prior to the collapse.
A building or structure, or any portion of
the building or structure that remains standing after the rest has collapsed, is
not in a state of collapse in the following situations:
- It remains
standing even when evidence is present of bending, bulging, cracking,
expansion, leaning, sagging, settling, or shrinking.
- It is in
danger of falling or caving in.
- It has
separated from the rest of the building but remains standing.
It is important to remember that just because a building looks like it
is about to collapse, or if engineers say it is in imminent danger of collapse,
it has not yet collapsed and is not covered.
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Example: The loud “crack” disturbs a prayer service at the church
on a Sunday morning. A second crack alerts the trustees of the congregation
who advise all to evacuate the building. The church hires a contractor to
inspect the building. The report states that the main beam supporting the
roof is rotted through and the roof is in imminent danger of collapse. The
church sends a claim to the insurance company for collapse, but coverage is
denied because the roof has not yet collapsed. |
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It is also important to remember that just because part of a building or structure has collapsed it does not mean that the remainder of the building is also in a state of collapse.
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Example: An interior supporting beam gives way resulting in the collapse of 1/3 of the roof into the Manweather Warehouse. The supporting beam collapsed because of hidden decay so collapse coverage applies to the loss. Building inspectors discover that similar problems exist in all supporting beams and condemn the building because it is in imminent danger of collapse. Manweather submits a claim for total loss of the building. The insurance company pays only for the 1/3 roof damage to the roof because the rest of the building remains standing. |
Related Court Case: Imminent Collapse Covered Under Hidden Decay Provision – this ruling is one among many that caused the collapse provision to be rewritten.
2. Tearing Out and Replacing
Water and process piping usually run through walls, above ceilings, and under flooring. This means that in order to find the source of a leak, openings may need to be created in undamaged walls, floors, or ceilings. Insurance coverage doesn’t extend to intentional damage so all damage caused while searching for the leak would be uncovered if not for this additional protection.
This coverage specifically provides for the tearing out and the replacing of undamaged property but only if damaged by water, other liquids, powders or molten material is covered and the building or structure is covered property. Damage to the system itself is not covered. The one exception to damage to the system not being covered for damage is for a fire extinguishing system that is caused either by the discharge of any substance from an automatic fire protection system or by freezing.
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Examples:
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WHAT MUST BE DONE IN CASE OF LOSS
1. Notice
The named insured or its agent must give the insurance company prompt notice of the claim, including a description of the property. The insurer must state when it requires that a written notice be provided. If the loss is the result of a crime, the police must be notified. In the event of a loss involving a credit card, the credit card company must also be notified. The policy does not define prompt notification, but any unreasonable delay could be cause for the company to deny the claim because of lack of cooperation.
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Example: Jasper noticed that the lock was broken to his storeroom and also noticed that items were missing. He decided to not report the loss at the time but did repair the lock and replace the lost items. One month later the lock was again broken but this time, almost all of his stock was removed. He reported this loss immediately to both the police and the insurance company and also reported the prior loss to both. The insurance company agrees to pay the current loss but denies the first loss due to late reporting. |
2. Protect Property
Once a covered loss has occurred, the named insured must take steps to protect covered property from further damage. The insurance company wants to encourage this type of behavior, so it pays for reasonable repairs and emergency measures taken to protect the property against further damage by covered perils. The named insured must keep accurate records of the cost of these repairs. Emergency repair costs also do not increase the limit of insurance.
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Example: The following situations are intended to clarify the named insured's responsibilities:
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This condition could be viewed as the carrot while the Neglect Exclusion discussed earlier in this analysis is the stick. The insurance company encourages the insured to take positive actions in protecting property by paying necessarily incurred expenses and also paying for the loss. If the insured chooses to not take positive actions, then the insurance company will deny loss when that delay results in additional damage.
One final statement is necessary, though. The insurance company does not pay for any anticipatory repairs or emergency measures against an insured peril that has not yet occurred.
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Example: The following situations are intended to clarify what is not covered:
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3. Proof of Loss
The named insured must submit a signed and sworn proof of loss to the insurance company within 60 days of the insurer’s request to do so. While the named insured is not required to be proactive in submitting information, it should be carefully accumulating the needed information in order to comply with the request for it when arrives. The proof of loss must include all of the following:
- When, where and how the loss occurred
- Other insurance policies that may apply to the same loss
- The interest the named insured has in the damaged property and the interest of any others, including mortgagees and lienholders, who have an interest in the property. Information concerning any changes in the title of the covered property that occurred during the policy period must also be provided.
- Information on any change of occupancy that occurred during the policy period
- Repair and replacement estimates
- Inventories of both damaged and undamaged covered property. The inventory must provide detailed quantities, descriptions, costs, the actual cash value and the amount of loss. The inventory must be substantiated so bills, receipts, and other documents must be attached to it.
The proof of loss is the most important document presented to the insurance company and it should be done thoroughly. The fact that it is signed and sworn means that any inaccuracies may be considered fraudulent and subject to criminal prosecution. When a fraudulent proof of loss is mailed it is also subject to federal mail fraud statutes.
Editorial note: The policy states that the actual cash value of the items in the inventory is to be provided. However, this policy is a replacement cost policy unless changed to ACV on the Declaration. This would seem to suggest that if the settlement is expected to be on a replacement cost basis, the replacement cost valuation should be provided and not the actual cash value.
4. Examination
The insurance company can request that the named insured submit to an examination under oath as often as reasonably necessary. It can also ask that all answers to questions be considered sworn statements. The insurance company has the option to request that each individual involved be questioned separately and out of the presence of all other individuals in order to prevent story collusion.
The named insured always has the right to refuse examination but then the insurance company has the right to deny coverage because of breach of contract.
Related Court Case: Insured's Failure to Cooperate Relieved Carrier of Its Obligation to Pay Claim
5. Records
Because the insurance company needs to understand all aspects of the loss, it can request records of property inventory, values, and loss, including any tax records, bank records, computer records, paper records, or other documents. The named insured must produce these records as often as the insurance company requests. There is an important limitation: the insurance company requests must be considered reasonable.
Related Court Case: Church Financial Records Held Subject to Review by Insurer
6. Damaged Property
The named insured must show the insurance company the damaged and undamaged property as often as the insurance company asks. However, the requests need to be reasonable. In addition, the named insured must be permitted to take samples of both the damaged and undamaged property. Samples are important as a means to determine the extent of loss to certain property items where the amount of loss may not be obvious.
7. Volunteer Payments
After a loss, the objective of the named insured should be to get back into business as quickly as possible. The insurer, ideally, wants to fairly evaluate the loss so that payment, if made, is equitable. The named insured can start spending money immediately on whatever it desires in order to resume operations. However, this money may or may not be reimbursed by the insurance company. The named insured cannot create an obligation for the insurance company by the way of its voluntary spending. The only money that the named insured is authorized to spend is whatever is needed for emergency repairs to protect property from additional damage.
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Example: A fire damages Barry’s Burgers in July and the insurance
company investigates the loss. Barry’s is in a college town and Barry knows
he will lose most of his business if he does not reopen when the fall
semester begins. He awards repair contracts before knowing the amount of
insurance available to pay the loss. While he is able to reopen his
restaurant on the day that the students arrive, the insurer’s settlement of
$75,000 is $15,000 less than what he spent. However, his business will
continue while he argues about the $15,000 difference. |
8. Abandonment
The insured is not permitted to abandon property to the insurance company without its consent. Because the insurer decides what property it will take, the named insured remains responsible for the damaged property until that decision is made. The insurance company has the right to pay the loss and not take any of the salvage.
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Example: Lively Lindy’s is located at the intersection of four
different gang’s “turf.” It is heavily damaged as a result of a gun battle
between two gangs. The owners are not interested in continuing operations and
request an actual cash value settlement. They are interested in leaving town
as soon as possible and offer the salvage to the insurance company. However,
the insurance company decides not to take the property because of the
substantial costs of taxes and demolition plus the fact that, due to its
location, the land is virtually worthless. |
9. Cooperation
The named insured must cooperate with the insurance company in performing all acts required by the policy. Lack of cooperation for reasonable requests can lead to the claim being denied.
Related Court Case: Insured Fails to Produce Required Documents Following Fire Loss
VALUATION
1. Replacement Cost (2002 change)
Replacement cost valuation applies unless actual cash value valuation is selected on the Schedule of Coverages. Replacement cost is the cost to repair or replace damaged property with similar materials on the same site and used for the same purpose. It is limited to the amount actually spent for the repairs or replacement. Replacement cost is paid only if the damaged property is actually repaired or replaced. The named insured has the right to make a claim for actual cash value and then request replacement cost. However, the change to replacement cost must be made no more than 180 days after the date of loss.
Note: Items 3 through 13 in this section are not valued on a replacement cost basis.
2. Actual Cash Value (2002 change)
When Actual Cash Value
is selected in the Schedule of Coverages, the value of covered property, except for items 3 through 13 of this section, is
valued at its actual cash value as of the date of loss. Actual cash value is
not defined but common usage of the term is replacement cost with a deduction
for physical depreciation.
Depreciation is also not defined. Stock does not normally depreciate unless it is obsolete. Buildings depreciate at various rates, with brick and concrete construction declining more slowly than frame construction. Roofs depreciate more quickly than the building itself. Some types of machinery and equipment are functionally used up or obsolete in months while others are still perfectly useful after decades of use. Computers tend to depreciate rapidly. Automobile depreciation is expressed in terms of years and miles, while sturdy construction equipment and forklifts may depreciate more slowly.
Note: Actual cash value is not the same as market value. Market value is the amount the insured could get by selling the property on the open market.
3. Fine Arts (2002 change)
Fine arts are valued at the fair market value of the property at the time of loss. Current appraisals and accurate inventories are important in settling fine arts losses. Photographs are important because object condition affects the appraisal value. Registering the fine art can be particularly helpful if there is a loss.
Related Article: Art Identification and Registration
4. Glass
The value of damaged or destroyed glass includes the cost of safety glazing material, but only when the material is required by law, ordinance, or code. Glass losses are paid on a replacement cost basis, without a deduction for depreciation.
Note: This item does not apply to stained glass because stained glass is considered fine art.
5. Hardware (2002 addition)
- Hardware that is replaced is valued at the cost of
replacing it with new functionally similar equipment
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Example: Regina purchased five top-of-the-line computers for
$40,000 each in 2009. They are all destroyed in 2013 and the replacement cost
for similar functionality and quality is $10,000 each due to the rapid
changes in computer technology. |
- Hardware not repaired or replaced is valued at its
actual cash value as of the date of loss
- Partial losses are paid only to the extent the restoration
of the partially damaged property returns it to the condition that existed
before the loss or damage occurred.
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Example: Phil’s computer network was operating at
90% capacity when a covered partial loss occurred. While it was being repaired
Phil had its capacity increased so that following the repair it was operating
at 30% capacity. The insurance company pays only the repairs that would have
returned it to the 90% capacity so Phil must pay the upgrading costs. |
6. Software (2002 addition)
Note: Remember this policy has a 2002 edition date. Many programs are now accessible through downloads, applications and through the cloud. This valuation does not take into consideration any of those options but because their cost would be less than purchasing discs, etc.; these options will probably be considered during settlement.
- Programs and
applications are valued at the cost to reinstall them from licensed media
used in the original installation of the programs or applications. If the
licensed media is damaged or is no longer available, the value is based on
the cost of the most recent version of the program or application.
- Proprietary
programs are valued on the basis of the cost to reproduce the program from
duplicate copies. This includes the cost of labor to copy or transcribe
but is not limited to only those costs. If no duplicates exist, the value
is the cost of research and other expenses necessary to restore the lost
proprietary programs.
- Data records
are valued based on the cost to reproduce them from duplicate records.
This includes the cost of labor to copy or transcribe but is not limited
to only those expenses. If no duplicates exist, the value is the cost of
research and other expenses incurred to restore the lost information and
replace the data records.
- Media is
valued at the cost to repair or replace the damaged media with that of
similar quality and of the same kind.
7. Merchandise Sold
Merchandise sold but not yet delivered is valued at its net selling price at the time of loss. Net selling price is the selling price less all applicable discounts and unincurred expenses.
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Example: Rick’s Electronics sells some of its televisions to
Greg. Their full retail price is $500 each but Rick discounts the cost to
$425 each because Greg purchases three
of them. The retail price also includes a delivery fee of $25 each. Before
Rick can deliver the televisions to Greg, a fire at the store destroys all of
Rick’s stock. The value of the televisions is $500 each, reduced by the $75
discount and the $25 delivery expense. As a result, the settlement value of
the three televisions is $400 each or $1,200 total. |
8. Manufactured Stock (2002 addition)
Stock manufactured by the named insured is valued at the price it would
have sold for if the loss did not occur, reduced by the value of all discounts
and unincurred expenses.
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Example: Dryden’s Machine
Shop’s corner bead stock is destroyed by a covered loss. It would have sold
for $25,000 but the standard discount for payments received within 30 days of
purchase is 10%. Dryden’s loss is settled for $22,500, reflecting the $2,500
discount for payments received within 30 days of purchase. |
9. Pair or Set
Pairs and sets are worth more as a complete pair or set than
the individual pieces are without their partners. Thus, after a loss to only a
few pieces of the set, the reduction in value to the set is greater than the
loss to the damaged individual piece(s). The loss is adjusted based on the
reasonable proportion of the value of the entire set or piece. This means that
the value of the set is considered rather than just the value of each piece in
isolation. Once the value is established, the loss to one or more pieces is calculated based on their proportional
value to that pair or set. The
proportional value must be considered reasonable.
The loss of one
piece of a pair or set is never considered a total loss.
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Example: The named insured's chess set is valued at $1,000. After
the set is scattered by the force of a tornado, all the pieces are located
except for a rook and a queen. Because of the type of wood used in the
construction of the set, the missing items cannot be replaced. The values of
the rook and queen as single pieces are $10.00 and $15.00 respectively but
their proportional value is at least $31.25 ($1,000/32) and probably more
because they are larger pieces and therefore more valuable to the set. |
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10. Loss to Parts
If a covered property item is made of many parts and one of the parts is lost or damaged, only the value of the lost or damaged part or the cost to repair or replace it is paid.
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Example: The
electric motor is a key part of a
machine manufactured by a company. Without it, the machine is virtually
worthless. With the motor, the value of the machine is greater than the value
of the motor or the other equipment without it. When the motor is destroyed,
coverage applies to only the cost to repair or replace the motor. |
11. Tenants Improvements (2002 change)
Coverage applies to both damaged and undamaged tenants’ improvements and this impacts the valuation. The value of both damaged and undamaged tenants improvements is replacement cost but only if repaired or replaced at the named insured's expense within 24 months. Coverage for undamaged improvements applies only if the named insured’s lease is cancelled as a result of the covered loss.
If the improvements are not repaired or replaced within the 24 month timeframe the loss is paid proportionally using the formula A divided by B multiplied by C, where:
- A is the number of days between the date of loss and the end of the lease
- B is the number of days from the date the improvements were installed to the expiration date of the lease
- C is the original cost of the tenants' improvements.
Note: If the lease has a renewal option, use the last date in the option as the new expiration date.
There is no coverage if repairs are made at the expense of others.
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Example: On June 1, 2014, Ann enters into a three-year lease for her store space in a mall with a two-year renewal option. She pays $5,000 for improvements that she cannot remove them if she leaves. On June 1, 2017, a fire sweeps through most of the mall but her store is undamaged. However, the mall owner decides to destroy the mall and build fresh. Ann’s lease permits the mall owner to do this. Ann loses all of her improvements and the mall is not rebuilding in such a way that Ann can move back in. The loss to her improvements is calculated as follows:
Based on the formula above, 1,095 divided by 1,825 multiplied by $5,000 equals $3,000. Ann receives $3,000. |
Related Article: Improvements and Betterments
12. Valuable Papers (2002 change)
Valuable papers are valued at their actual cash value as of the date of loss.
Note: This valuation may not be acceptable to insureds that have irreplaceable valuable papers. These should be covered under a Valuable Papers and Records policy.
Related Articles:
AAIS Valuable Papers and Records Coverage
ISO Valuable Papers and Records Coverage Form
13. Accounts Receivable (2002 addition)
The value begins with
the total of all accounts receivable due. The insurance company then deducts
the following from that starting figure:
- Amounts due from records of accounts receivable
that are not lost
- Amounts due that can be established (and therefore
are collectible) by use of other means
- Amounts due that are collected by the named insured
even though the records are lost
- All unearned interest and service charges
- An amount that is calculated to provide for bad
debts. This would be based on the history of the named insured’s
collection ratio.
If the insured cannot
establish the actual accounts receivables due, the insurance company determines
the average monthly accounts receivable amounts for the 12 months prior to loss and adjusts it for variances in the month
in which the loss occurred.
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Example: Jan’s Manufacturing loses its accounts receivable records in a fire. There are no duplicates. Her accounts receivable loss is valued as follows: Total amount of accounts receivable due based on the average of the prior 12 months is $500,000 Jan found three records that were not destroyed. - 30,000 Twelve customers mailed in their accounts based on agreed upon terms. - 70,000 Jan calculates her average service charges -1,000 The average bad debt is 5% -50,000 Value of Jan’s accounts receivable loss is $349,000 |
HOW MUCH WE PAY
1. Insurable Interest
A named insured is paid no more than that particular named insured’s insurable interest in the damaged property.
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Example: The following situations illustrate this point:
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Note: If the loss is to the property of others the named insured has an insurable interest because of its legal responsibility for the property but the value of that interest may be difficult to establish. There is also no statement as to what the insurable interest requirement is for the property owner of the property of others.
2. Deductible
If a deductible applies, the insurance company pays only loss amounts that exceed the deductible listed on the Schedule of Coverages. The deductible applies to each occurrence and is applied before the application of any coinsurance or reporting provisions.
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Example:
Note: All
examples assume that the coinsurance clause does not apply. |
3. Earthquake Period (2002 addition)
Earthquakes and
volcanoes are subject to aftershocks. Because each would trigger a new
occurrence and a new deductible application, it is agreed that all activity
within a 168-hour period is considered one occurrence and is not limited by the policy expiration date.
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Example: A policy
period is 1/1/19 to 1/1/20. An initial earthquake shock hit on 12/31/19. The
insured’s brick veneering falls off following an aftershock that occurs on
1/2/20. This loss is covered under the 1/1/19-1/1/20 policy period because it
is within 168 hours of the initial shock. |
4. Loss Settlement Terms
This is a small item with very important ramifications because it ties together three different sections and explains exactly what the insurance company will pay. Although it may be further limited by the other terms of this particular section and any applicable coinsurance penalty the most that is paid is the least of the following:
- The amount determined in the Valuation section
- The cost to actually repair, rebuild or replace the damaged or lost property. This is qualified that the replacement must be of like kind or quality
- The limit that applies to the damaged or lost property.
Once the least of the three has been established, the other items in How
Much We Pay section and the coinsurance penalty, if any, are applied.
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Example: Carrie’s building is destroyed. The
replacement cost valuation of the building is $1,200,000. The actual cost to
replace the building is $1,000,000, because of costs adjustments Carrie is
willing to make on rebuilding. The limit on the policy is $900,000. The
maximum settlement is, therefore,
$900,000 because that is the least of the three. |
5. Insurance Under More Than One Coverage
If two or more coverages provided by the form apply to the same loss, the insurance company pays only the actual amount of the claim, loss, or damage incurred. No party should receive duplicate payments because there are overlapping coverages.
6. Insurance Under More Than One Policy
If the named insured has other coverage identical to that provided in this form, the insurance company pays only its proportion or share of a covered loss, based on the proportion that the limit for the coverage under this policy bears to the limits for all coverages provided on the same basis.
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Example: Policy #1 has a $100,000 limit and Policy #2 has a $50,000 limit. The loss before application of any deductible is $10,000. Policy #1 pays $6,667 or 66 2/3% of the loss and Policy #2 pays $3333 or 33 1/3% of the loss. |
If a coverage other than as described above (this coverage is NOT required to be owned by the named insured) applies to a covered loss, the insurance company pays only the amount of loss that exceeds the amount due from the other coverage, whether or not the named insured is able to collect that other insurance. The maximum the insurance company will pay is this insurance coverage’s limit.
Related Court Case:
Other Insurance Clauses Held To Pro Rate Despite Standard and Super
Escape Differences
7. Automatic Increase (2002 addition)
The limit on the Schedule of Coverages is automatically increased every
year by the percentage shown on the Schedule of Coverages.
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Example: The building and personal property limit of insurance is $1,000,000 and the policy is written for a
three-year term. The insured selects an automatic annual increase of 3%. At
the first anniversary date, the limit increases to $1,030,000 without an
endorsement. At the second anniversary, the limit increases to $1,060,900
without an endorsement. |
Note: This is not the same as the automatic increase in Insurance Services Office (ISO) coverage forms that provide incremental increases throughout the policy year.
LOSS PAYMENT
1. Our Options
The insurance company has four options. It can do any of the following:
- Pay the property value
- Pay the cost to repair or replace the lost or damaged property
- Actually rebuild, repair or replace the property with similar property, to the extent possible and within a reasonable time
- Take the property based on the agreed upon or appraised settlement.
The first two options involve only money transactions. The third one involves the insurance company taking control of property and making decisions regarding how it is to be repaired, replaced, or rebuilt. The insurance company is required to notify the named insured within 30 days of the proof of loss if it is going to exercise option three.
The last option works with the other three options. It explains that the insurance company can decide that it will take the salvage, but it is an option, not a requirement.
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Example: Friendly Insurance Company informs Prines Manufacturing that it is exercising
the first option above for the building loss and pays $1,000,000 so Prines can rebuild. Friendly exercises the
first option and the fourth option with respect to Prines' stock and pays $500,000 based on the appraised value of
the stock and takes the stock to sell as salvage. |
2. Your Losses
The insurance company adjusts losses with the named insured. Payment is made to the named insured unless there is a loss payee specifically named on the policy. The insurance company must pay the claim within 30 days of receiving satisfactory proof of loss but only after the amount of loss has been established by either a written agreement with the named insured by an appraisal award with the company.
Please note the two very important conditional statements in this item. The word “satisfactory” is used with proof of loss. The insurance company can refuse to pay until the proof of loss is considered satisfactory. In addition, the amount of loss must be established. As long as the named insured and the insurance company disagrees about the amount of loss, no payment is required to be made.
3. Property of Others
The insurance company reserves the right to adjust losses directly with the party that owns the property of others, but it can also adjust the loss with the named insured who then will pay the third party. Once the payment is made, no further payment will be made. If the owner of the property sues the named insured, the insurance company may agree to defend it at the insurance company’s expense.
OTHER CONDITIONS
1. Appraisal
Appraisal is a condition found in all policies and forms that cover property. The process is simple.
- If the named insured and the insurance company cannot agree on the amount of a covered loss, either can demand an appraisal.
- The named insured and the insurance company then each hire competent appraisers within 20 days of the written demand for an appraisal.
- The two appraisers hire an umpire within 15 days or ask the court having jurisdiction to appoint one.
- The appraisers determine the value of the property and the amount of the loss.
- If the two appraisers can't agree within a reasonable period of time, the umpire is asked to add a second vote to break the tie but only on the differences.
- Each party pays the appraiser it hired. Both parties share the expense of the umpire equally and any other shared expenses.
2. Benefit to Others
Insurance coverage does not directly or indirectly benefit anyone that has custody of the named insured’s property.
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Example: Harold’s Heat Treating has custody of My Product Manufacturing’s fenders. They have treated 75% of the batch when a loss at Harold’s destroyed all of the fenders. Harold claims coverage under My Product Manufacturing for the value of the heat-treating it had performed. That claim is rejected because Harold cannot benefit from this insurance. Harold must obtain coverage from its own carrier. |
3. Conformity with Statute
This form automatically conforms to any state law with which it might be in conflict.
4. Control of Property
The coverages provided by the form are not affected by any act or neglect that was beyond the control of the named insured.
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Examples:
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5. Death
If the named insured dies, the rights and duties of that named insured
pass to the party acting as that named insured’s legal representative. If there
is no duly appointed legal representative, the party having proper temporary
custody of the property has those rights and duties.
This section is particularly relevant when sole proprietorships are named
insureds on the policy. Individuals die but corporations do not. Partnerships
dissolve immediately on the passing of one of the partners and the surviving
partner or partners are absolutely responsible for the assets of the
partnership after the death of another partner. Limited Liability Companies
dissolve when a member dies unless the Operating Agreement has been amended.
6. Liberalization
If a COP form or endorsement is broadened during the policy term or within the six months before the coverage effective date and there is no charge for it, the broadened coverage applies to this policy.
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Example: Mindy’s policy is effective 8/1/19. The insurance
company changes the form on 1/1/20 to eliminate the application of
deductibles in cases of total loss and there is no change in the premium for
the upgrade. Mindy’s building is totally destroyed by a tornado on 4/20/20.
Because of the form revision and the application of the liberalization
clause, the deductible does not apply to Mindy's loss. |
7. Misrepresentation, Concealment or Fraud
Coverage is void to the named insured and any other insured if, before or after a loss, any insured (not just the named insured) did any of the following:
- Willfully concealed or misrepresented a material fact or circumstance relating to the insurance or to the item(s) being insured
- Willfully concealed or misrepresented the interest of the named insured’s interest in the item(s) being insured
- Engaged in fraud or false swearing concerning any matter relating to this insurance
Note: This is an extremely important condition because insurance coverages and policies are issued in utmost good faith. The insurance company must be able to believe its customer when issuing a policy. On the other hand, such instances have to be material (significant). If some minor item that has no bearing on the insurance contract occurs, it would be unfair to allow a loss of coverage merely due to a technicality.
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Example: Entrenched Casualty issues a policy to Timid Limited and the policy includes coverage for some improvements Timid made. The policy indicates that the improvements were made in Jan. 2018. After a loss involving the improvements, Entrenched discovers that the improvements were made in Dec. 2017. For some reason, Timid’s owners felt it was important to use a 2018 date instead of the end of 2017. Entrenched would be justified in making any adjustment in payment due to the month’s difference, but not to deny coverage. |
Related Court Cases:
Insured's Material Misrepresentation in Application Warranted Denial of Coverage
Insurer Can Rescind Policy Based On Insured's Material Misrepresentations on Application
8. Policy Period
A loss must be considered covered and it must occur during the policy period shown on the Declarations in order to be paid by the insurance company.
9. Recoveries
If the insurance company pays a covered loss and the lost or damaged property paid for is subsequently recovered or those responsible for the loss make payment, the following provisions apply:
- The named insured must promptly notify the insurance company of any property that it has recovered or payment that it has received.
- The insurance company must promptly notify the named insured of any property that it has recovered or payment that it has received.
- Expenses incurred in the recovery process, by the recovering party, are reimbursed before the recovered proceeds are divided.
- The named insured must decide whether to accept the recovered property. If it decides to not accept the recovered property, the insurance company takes custody and has all rights to the salvage. If it decides to take the recovered property, it must refund the amount paid by the insurance company for that property or a negotiated lower amount.
- If the claim amount paid to the named insured was less than the agreed upon loss amount because of a deductible or due to other terms or conditions in the coverage form the amount of the recovery amount is prorated between the two parties based on their respective interests in the loss.
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Example: Mary’s business is broken into and $50,000 of property is stolen. The adjustment is complicated because of the theft limitations on certain items and the deductible. Total payment from the carrier is only $30,000. Two years after the
loss, the items are found in an abandoned storage locker and Mary is
notified. She is thrilled and notifies the company. She chooses to keep some
of the items and return the payment to the carrier but keeps part of the
payment and returns the salvage to the carrier on other items. The company
and Mary work together to develop a prorated recovery. |
10. Restoration of Limits
Payments made for covered loss or damage do not reduce the limit of insurance available for future losses.
There are two exceptions. Supplemental Coverages–Pollutant Cleanup and Removal and Supplemental Marine Coverages–Virus and Hacking Coverage both are subject to aggregates which mean that any loss payments made under either of these coverages reduce the limits available to pay future losses but only for that particular coverage.
Note: The restoration of limit is immediate. This means that if a
loss occurs and then another loss occurs immediately thereafter but is not
proximate to it, the full limits are available to both losses.
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Example: A semi-trailer rig driver is distracted, loses control, and plows through the plate glass window at the Plainville Shopping Center. Two minutes later a tornado rips open the roof at Plainville Shopping Center. These are two separate occurrences and both losses would be adjusted with full property limits. |
11. Subrogation
If the insurance company pays a loss that may have been caused by others, it has the right to require that the named insured assign its rights of recovery against others to it. The named insured must do everything it can to secure those rights for the benefit of the insurer and do nothing to impair them. If it does interfere the insurer has the right to deny payment. There is an exception. If the named insured waived its rights of recovery against others in writing before a loss occurs, the insurance carrier also has no rights of recovery, but the named insured can still be paid.
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Example: Patricia is renting an apartment over John’s clothing store. Patricia leaves a candle burning in her bedroom when she leaves to run errands. She returns three hours later to find her apartment and the store below on fire. John tells Patricia not to worry because he would never sue her. Scenario 1: There is no lease in place and no waiver of subrogation prior to the loss. Because of John’s statement to Patricia, he has violated the subrogation condition and the insurance company may not be required to pay the named insured for this claim. Scenario 2: There is a
lease in place that includes a mutual waiver of subrogation clauses. John
will receive payment even though the insurer cannot subrogate against Patricia
because the subrogation waiver was executed in writing prior to the loss. |
Related Article: Transfer Of the Rights of Recovery (Subrogation)
Related Court Cases:
Lease Releases Landlord and Tenant
Waiver of Subrogation in Alarm Monitoring Service Agreement Barred Carrier from Recovery
Waivers of
Subrogation and Definition of Work to Be Insured Were Ambiguous
Waiver of Subrogation Applies To All Losses
12. Suit Against Us
The named insured cannot sue the insurance company unless it has first complied with all the terms of the coverage form. The action must then be brought within two years of the date on which the named insured first had knowledge of the loss. The two-year time frame may be expanded if state law requires it, but it is expanded only to the shortest time permitted by the state.
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Example: Kathy’s roof was damaged by hail in April 2017. She was
unsuccessful in finding a contractor to inspect her damage due to the volume
of claims. She decided to wait until the following spring, contacted a
contractor who verified the damage and then submitted a claim to the
insurance company. The company denied the claim because of the length of time
between the damage and the notice. Kathy responded to this by arguing that
she could not file a claim until she knew that a loss actually occurred. The
company changed its mind and entered into discussions with the contractor.
The company offered $10,000 but the contractor insisted that the cost was
$25,000. Because neither was willing to compromise and the two-year time
limit was approaching, Kathy filed suit against the insurance company just
prior to the April 2019 deadline. |
13. Territorial Limits
Property must be in the United States, its territories, and possessions, Canada or Puerto Rico in order to be covered.
A statement is added that foreign shipments are covered as described in Overseas Transit. The only references made to Overseas Transit in the COP Program are in CO 1282–Overseas Transit and Location and CO 1283–Overseas Transit and Location – Property and Income Coverage endorsements.
14. Mortgage Provisions
The insurance company has specific obligations to the mortgagee named on the policy. If more than one mortgage is involved, losses are paid in the order of precedence.
Insurance for the benefit of the mortgagee continues, regardless of any actions by the named insured that may void coverage. It does not continue if the mortgagee was aware of changes in ownership or increases in hazard and did not notify the insurance company of them.
The insurance company must give the mortgagee at least 10 days’ notice of cancellation if the named insured does not pay the premium or 30 days’ notice if the cancellation is for any other reason. The insurance company may request that the mortgagee pay the premium if the named insured does not.
If the mortgagee is paid for a loss in a case where the insurance coverage for the benefit of the insured is void, the mortgagee's right for that portion of the mortgage debt transfers to the insurance company but does not affect the mortgagee's right to collect the remaining amount of the mortgage debt from the named insured.
As an option, the insurance company may pay the mortgagee the remaining principal and accrued interest in exchange for a full assignment of the mortgagee's interest and any other instruments given as security for the mortgage debt. This may be worthwhile to the company if it believes it can earn more interest income on the mortgage in relation to its current investments or can sell the mortgage for a premium.
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Example: Lou’s commercial building is insured with Beta Insurance
for $500,000. First Guaranty holds a
$300,000 mortgage on the property. Lou agrees to a dynamite company moving
into the building and an explosion causes a $100,000 loss. The insurance
company denies Lou’s claim because of the increase in hazard exclusion.
Because First Guaranty was unaware of the increase of hazard, Beta pays it
the $100,000 and the insurance company takes over $100,000 of Lou’s mortgage.
Lou now has two mortgages. One is with First Guaranty for $200,000 and the
other is with Beta Insurance Company for $100,000. |
Related Court Cases:
Insurer Cancellation Procedures Met Notification Obligations
Cancellation Validated By Proof of Mailing of Notice
Payment of Policy Proceeds to Insured Did Not Relieve Insurer of Obligation to Mortgagee
15. Vacancy–Unoccupancy
The vacancy or unoccupancy clause restricts coverage by not paying losses caused by theft, attempted theft, glass breakage or sprinkler leakage if, at the time of the loss, the building or structure had been vacant for more than 60 consecutive days. Sprinkler leakage is not subject to this paragraph if the named insured has protected it from freezing.
Coverage is similarly restricted if, at the time of the loss, the property had been unoccupied for more than 60 days. However, the time period can be longer if there is a usual or incidental unoccupancy. In those instances, the coverage is not restricted until after the usual unoccupancy timeframe or 60 days occurs, whichever is longer.
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Example: Summer Time Treats is open for business from March 1 through October 30 every year. It is unoccupied from November 15 through February 15 and the insurance company is aware that this is Summer Time’s regular unoccupancy time period. Scenario 1: A theft occurs on January 15. Even though it is unoccupied, because the theft occurs during its regular period of unoccupancy, theft coverage applies. Scenario 2: A theft occurs on February 17. The building remained unoccupied beyond its normal unoccupancy. Because the theft occurs 60 days after the building became unoccupied and 2 days after its normal unoccupancy, the loss theft coverage is denied. |
Coverage is reduced by 15% for any loss by a covered peril not otherwise excluded in this condition if the vacancy or unoccupancy is as described above.
Vacancy means that the occupants have moved, and the building is empty or contains only limited personal property. Unoccupancy means that customary activities are suspended with business personal property remaining in the building.
When a building or structure is under construction, it is neither vacant nor unoccupied, so it is not subject to this restriction.
Related Court Cases:
Extensive Renovation Qualifies Property for Vacancy Clause Exception
Parties Dispute Meaning Of "Occurred"
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