AAIS COMMERCIAL OUTPUT PROGRAM DEDUCTIBLE OPTIONS

(August 2019)

INTRODUCTION

The Commercial Output Program is designed for the larger and more complex commercial property accounts. Because of their size or complexity, many of these risks need deductible options beyond the single deductible in the CO 1000–Commercial Output Program – Property Coverage Part. This article will explore those options and review the following endorsements:

· CO 1084–Windstorm or Hail Schedule

· CO 1085–Multiple Deductible Schedule – Scheduled Perils and Locations

· CO 1220–Windstorm and Hail Deductible

· CO 1234–Multiple Deductible – Scheduled Perils

· CO 1235–Multiple Deductible – Scheduled Locations and Property

· CO 1237–Multiple Deductible – Schedules Perils and Locations

· CO 1280–Property and Income Coverage Deductible

STANDARD DEDUCTIBLES OR WAITING PERIODS

CO 1000–Commercial Output Program – Property Coverage Part

The standard direct damage deductible is described in the How Much We Pay section of the CO 1000. The insurance company pays only the amount of the loss that is in excess of the deductible shown on the schedule of coverages. This deductible applies only once per occurrence and is applied after coinsurance or reporting form penalties.

Example: Maribell Industries has 15 separate locations.

Scenario 1: All locations are within the same city. A tornado tears through that city and damages all 15 locations. The deductible of $1,000 applies only once because there was a single occurrence.

Scenario 2: The locations are spread throughout the Midwest. A massive wave of thunderstorms tears through the Midwest and damages 10 different locations at different times throughout a 24-hour period. A $1,000 deductible applies to each location because there were 10 different occurrences.

CO 1001–Commercial Output Program – Income Coverage Part

The standard income coverage part has no deductible and no waiting period.

DEDUCTIBLE SCHEDULES

CO 1084–Windstorm or Hail Schedule

The schedule applies per location. The location number and its description are entered and then either a flat deductible is entered or a percentage deductible of 1%, 2% or 5% is entered. Only two locations may be entered on a single schedule so multiple CO 1084s may be required. This schedule is used only with CO 1220–Windstorm and Hail Deductible.

CO 1085–Multiple Deductible Schedule – Scheduled Perils and Locations

This schedule applies per location. The location number and its description are entered. The peril to which the scheduled deductible applies must be described and then either a flat deductible is entered or a percentage deductible of 1%, 2% or 5% is entered. The final entry on the endorsement is the deductible that applies to all other covered perils. Only two locations may be entered on a single schedule so multiple CO 1085s may be required. This is used only with CO 1237–Multiple Deductible – Scheduled Perils and Locations.

ENDORSEMENTS

CO 1220–Windstorm or Hail Deductible

This endorsement is used only when CO 1084–Windstorm or Hail Schedule is attached. The only change to the policy is in the How Much We Pay Section.

The deductible provision in the CO 1000 is replaced by either the Flat Deductible or the Percentage Deductible sections in this endorsement.

The deductible on the schedule (either flat or percentage) applies to damage that is caused either directly or indirectly by windstorm or hail.

In addition, any weather-related covered loss that would not have happened without windstorm or hail occurring is considered part of the windstorm or hail loss and is subject to that deductible.

Example: Windstorm tears the roof of a building and rain pours in, destroying the personal property and interior. The damage to the building interior and personal property is not considered windstorm or hail but because the damage would not have occurred without the windstorm first occurring, it is considered part of the windstorm occurrence and subject to its deductible.

When the windstorm deductible is based on a flat amount, no loss is paid until that deductible has been satisfied in a single occurrence.

When the windstorm deductible is based on a percentage, the deductible is calculated by multiplying the percentage times the value, at the time of loss:

· The specific covered damaged building and, if covered, any business personal property in that building

· The covered damaged business personal property in a specific building, when building is not covered

· The damaged covered business personal property in the open or that is contained within a vehicle.

That calculated deductible must be paid by the named insured before the insurance company pays anything.

Example: A windstorm damaged one of Maribell’s building and the property inside it, property that was in the open and personal property in a non-owned building. All property was subject to a 3% windstorm deductible. The loss was calculated as follows:
Item	Value at time of loss	Deductible (3%)	Amount of loss	Payment
Building and BPP in building	$1,000,000	$30,000	$70,000	$40,000
BPP in non-owned building	$250,000	$7,500	$35,000	$27,500
BPP in open	$25,000	$750	$1,000	$250
Total		$38,750	$106,000	$67,750
Maribel was not pleased with the settlement because they had anticipated a deductible of 3% of the loss, not the value. They ended up paying a deductible of 46% of the loss.

CO 1234–Multiple Deductible – Scheduled Perils

This endorsement does not require a separate schedule. It replaces the standard deductible provision for all locations. The first entry on the schedule is the deductible that applies for any peril that is not specifically scheduled.

The next four entries require a peril description and then the flat deductible amount that applies to that particular peril.

Example: Quickplus, Inc. stock is very valuable and attractive to thieves. The pricing for theft is extremely high so Quickplus requests a policy with $1,000 deductible for all perils except for theft. The theft peril deductible is $100,000. If a loss occurs, other than theft, the $1,000 deductible applies but if a theft occurs, Quickplus must first pay the $100,000 before the insurance company will pay.

CO 1235–Multiple Deductible – Scheduled Locations and Property

This endorsement is used to provide deductibles that vary by location and by type of coverage. It replaces the deductible in the CO 1000.

The first entry on the schedule is the deductible that applies to those locations that are not scheduled on the endorsement.

The remaining entries are the location number, the description of the location (multiple locations can be listed), the property or coverage at that location that is subject to the deductible and the deductible that applies.

Example: Journey of a Lifetime, Inc. has five locations. Three are retail and two are manufacturing. They decide that a $1,000 deductible is appropriate at the retail locations but that a $10,000 building deductible and $5,000 business personal property deductible are appropriate at the manufacturing locations. Entries on the CO 1235 are $1,000 for the all other covered locations entry. The manufacturing location deductibles are entered as follows:
Location No.	Location Description	Property/Coverage	Deductible
1	345 Elm, Mainville, KY	Building	$10,000
1	345 Mainville, KY	Business Personal Property	$5,000
2	92657 Hwy 35, Quincy, IL	Building	$10,000
2	92657 Hwy 35, Quincy, IL	Business Personal Property	$5,000

CO 1237–Multiple Deductible – Scheduled Perils and Locations

This endorsement must be used in conjunction with the CO 1085–Multiple Deductible Schedule – Schedules Perils and Locations. An entry is required on this endorsement that provides the deductible that will apply for locations and perils that are not specifically scheduled on the CO 1085. This is needed because the deductible that applies on the CO 1000 is completely replaced by the wording of this endorsement.

The deductible on the CO 1085 schedule (either flat or percentage) applies to damage at the scheduled location that is caused by the scheduled peril.

The flat deductible on the CO 1085 schedule applies to damages from any other covered perils at that scheduled location.

When the deductible is based on a flat amount, no loss is paid until that deductible has been satisfied in a single occurrence.

When the specific peril deductible is based on a percentage, the deductible is calculated by multiplying the percentage times the value, at the time of loss:

· The specific covered damaged building and, if covered, any business personal property in that building

· The covered damaged business personal property in a specific building, when building is not covered

· The damaged covered business personal property in the open or that is contained within a vehicle.

That calculated deductible must be paid by the named insured before the insurance company pays anything.

CO 1280–Property and Income Coverage Deductible

This endorsement does not require a separate schedule because all entries are made on the endorsement itself. A major difference between it and the other deductible endorsements is that it is the only one that includes an income deductible option.

SCHEDULE

The schedule on this endorsement applies over all locations. A flat deductible for the Property coverage may be entered.

When an income coverage deductible applies, one of the following combinations must be entered:

Type of Deductible Entry (on 2^nd line)	Deductible Modification
Flat Dollar	Dollar Amount
Average Daily Value (ADV)	Number of Days
Hours	Number of Hours
Days	Number of Days
Combined	A percentage plus a minimum and maximum dollar amount

Other coverages and deductibles may be entered. The Other coverage must be described carefully in order to prevent any confusion as to how the deductible is to be used.

HOW MUCH WE PAY

This deductible section replaces the deductible section in the CO 1000.

The Property Coverage deductible in the Schedule applies to the coverage in the CO 1000 and the Income Coverage deductible applies to the coverages in the CO 1001.

When a dollar amount is shown on the schedule, no loss is paid until the loss exceeds that amount.

Example: The Property Coverage deductible is $1,000 and the Income Coverage deductible is $5,000. A loss occurs and the property damage is $6,000 and the income loss is $2,000. The insurance company pays $5,000 for the property loss but nothing on the Income loss.

When ADV applies, first the ADV must be calculated. It is determined by determining the operating expenses that would have been incurred during the restoration period if no loss had occurred. Operating expenses are considered net income and payroll expense plus interest and any other type of expenses that continue during the restoration period. The operating expenses are divided by the number of days in the restoration period in order to compute the ADV.

The ADV is then multiplied by the number of days in the deductible schedule to develop the deductible dollar amount. The insurance company pays only the amount of loss that exceeds that deductible dollar amount.

Example: The Property Coverage deductible is $1,000 and the Income Coverage deductible is 5 ADV. A loss occurs and the property damage is $10,000 and the business must be closed for 10 days. The operating expenses for those 10 days are $20,000. The ADV is $20,000/10 = $2,000. Multiply $2,000 by 5 = $10,000. The insurance company pays $9,000 ($10,000 - $1,000) for the property damage loss and $10,000 ($20,000-$10,000) for the income loss.

When the time deductible applies, all loss that is incurred within that time period entered on the schedule is the responsibility of the insured. The insurance company begins paying after the entered number of hours or days. When days are used, a day equals 24 consecutive hours.

Example: The Property Coverage deductible is $1,000 and the Income Coverage deductible is 2 days. A loss occurs and the property damage is $15,000 and the business must be closed for three days. The loss occurred on a Friday night and the business had no weekend hours. The insurance company pays $14,000 ($15,000 - $1,000) for the property damage loss. The business incurred no loss of income for the first two days because it would not have been open, so the only income loss was that incurred on Monday. That entire income loss would be covered.

When combined deductible applies, a percentage must be entered that applies to the amount of the loss. In addition, a maximum dollar amount deductible and a minimum dollar amount deductible must be entered. When a loss occurs, the gross amount of the loss (prior to coinsurance and deductible) is multiplied by the entered percentage. That computed amount is the deductible amount. It is then compared to the minimum and the maximum deductible. If it is less than the minimum deductible, the minimum deductible applies. If it is more than the maximum, then the maximum deductible applies.

Example: Monty’s policy contains a combined deductible of 3% with a minimum of $500 and a maximum of $5,000. A loss occurs and the business is closed for 45 days. The total amount of the income loss is $70,000. The deductible is computed as .03 X $70,000 = $2,100. Because it is more than the minimum and less than the maximum, the computed deductible is used and the total paid is $70,000-$2,100 = $67,900.

Note: Two important points:

1) The Combined or Percentage of Loss Deductible does not state that it is only for income coverage, but the schedule only permits such entry for the income coverage.

2) The percentage is not of the total values but instead, it is based on the actual loss. This differs from the windstorm and hail percentage deductible that applies to total values at the time of the loss.