ISO Installment Sales And Leased Property Coverage Form

ISO INSTALLMENT SALES AND LEASED PROPERTY COVERAGE FORM ANALYSIS

(April 2018)

 

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INTRODUCTION

The Insurance Services Office (ISO) Installment Sales and Leased Property Coverage Form is unusual because coverage takes place totally off premises and how the property is paid for determines if coverage applies. The property must have been sold under an installment sales contract, or it may be leased, rented, or simply be with the potential buyer for its approval. Any entity that fronts the money subsequently paid back in installments is eligible to purchase this coverage.

POLICY CONSTRUCTION

Installment Sales and Leased Property Coverage requires at least the following six forms:

Related Article: IL 00 17–Common Policy Conditions Analysis

Related Article: CM 00 01–Commercial Inland Marine Conditions

IH DS 88–INSTALLMENT SALES AND LEASED PROPERTY DECLARATIONS

The advisory Installment Sales and Leased Property Declarations does not have spaces for the named insured, its mailing address, other named insured information, the policy period, or the description of the insured business. That information is on the Common Policy Declarations. IH DS 88 contains the following information:

Insurance Company and Producer Name

The name of the insurance company that provides the coverage and the name of the agent or broker that produces the business are entered in the spaces provided.

Dual Interest

This coverage form provides coverage for only the financial interest of the named insured in the property. If this box is checked, this coverage form is changed to provide coverage for both the named insured’s interest in the property and the interest of the purchaser on that same property.

Description of Covered Property

A description of the covered property is entered in this section. Only property that matches this description is covered so the description is important.

Limits of Insurance

Two different limits must be entered for each of the following. One limit is for Installment Sales Limits; the other is for Leased Property:

This is the catastrophe limit. It is the most paid for a single occurrence regardless of the number of items of covered property damaged. It is unusual that there is a catastrophe limit for each type of financial arrangement.

Deductible

This section has a space to enter the amount of deductible that applies.

Rates and Premiums

This section has spaces to enter the Deposit Premium, Minimum Annual Premium, and Monthly Rate per $100.

Special Provisions

Any special provisions are entered in the space provided.

IH 00 88–INSTALLMENT SALES AND LEASED PROPERTY COVERAGE FORM ANALYSIS

This analysis is of the 12 13 edition. Changes from the previous edition are in bold print.

Introduction

This section encourages the careful reading of the entire coverage form to determine what is covered, what is not covered, rights, and duties. It defines we, us, and our as the insurance company that provides this insurance coverage. It also defines you and your as the named insured on the declarations. Other words that have special meaning are defined in F. Definitions.

A. Coverage

The insurance company pays for direct physical loss or damage to covered property but only when that loss is from a covered cause of loss.

1. Covered Property

The only property covered is the type described on the declarations. However, there is a further limitation. Coverage applies under if the described is subject to one of the following financial arrangements:

a. The property has been sold using an installment sales contract or similar agreement. Examples of these types of agreements are deferred or delayed payments or conditional sales agreements.

b. The property has been leased or rented to others or is with others in order to gain their approval.

 

Example: Adventure Appliances and Electronics sells small and large household appliances and home electronics. It arranges to finance under installment sales contracts. It also occasionally leases large, sophisticated, and expensive items to a select clientele. This coverage form insures Adventure's financial interest in such property.

 

2. Single or Dual Interest

a. Coverage applies for only the interest of the named insured in the covered property. The only exception is when the dual interest box is selected on the declarations

b. When the dual interest box is selected on the declarations, both the interest of the named insured and that property’s purchaser are covered.

3. When Coverage Applies

Coverage for a specific property applies until the following occurs:

 

Example: Adventure Appliances conditionally sells a large, high valued home theater system to an affluent customer who wants to first test it in his home before he decides to buy it. Adventure agrees to let him have and use the system for 30 days, after which time he will either purchase it or return it to Adventure's store without obligation. The time the system is in the customer's home for trial is known as being "sent out on approval." Coverage ends when the customer returns the item or purchases it. However, if he purchases in under an installment plan after the conditional approval, it would then again be covered but as Installment property instead of under approval coverage.

4. Property Not Covered

The following described property is excluded:

a. Property in which the named insured's interest has ended

 

Example: Adventure Appliances and Electronics sold a refrigerator to the Perkins family under a three-year installment sales plan three years ago. The Perkins family home burned down and the refrigerator was destroyed. However, the Perkins made the final installment payment on the refrigerator the month before the fire. As a result, Adventure no longer had a financial interest in the refrigerator and this coverage form did not cover the loss.

 

b. Automobiles, motor trucks, trailers, or other vehicles designed to be used on public highways

These vehicles are more properly covered under commercial auto coverage forms and policies.

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

 

Example: Tom is the brother of Adventure's owner. He owns a franchised automobile dealership. The brothers discuss insurance and how they insure merchandise sold on installment payments. Tom is convinced that his brother's program is superior to and less expensive than the floor plan arrangement he uses in his auto dealership. However, he is disappointed when he reviews Adventure’s Installment Sales and Leased Property Coverage Form and discovers that automobiles are excluded.

 

c. Aircraft or watercraft

d. Contraband.

Any property that is illegal for the named insured to own or that is in illegal trade or transportation is not covered.

5. Covered Causes of Loss

Covered causes of loss are direct physical loss or damage to covered property with the exception of causes of loss that are listed in the exclusions section.

6. Additional Coverages

Some of the following additional coverages are additional amounts of insurance.

a. Debris Removal

A property damage loss usually creates debris that must be removed. The insurance company pays the cost of removing the debris of a covered loss. The expenses must be reported to the insurance company in writing within 180 days of the date of loss. The most paid is 25% of the sum of the following:

Payments under this Additional Coverage do not increase the limit of insurance that applies. However, the insurance company pays an additional $5,000 per occurrence when the direct physical loss or damage combined with the debris removal expense exceeds the limit of insurance or when the debris removal expense is more than the amount payable under the above described 25% limitation.

This coverage does not apply to costs to extract pollutants from land or water or to remove, restore, or replace polluted land or water.

Note: Debris removal could be very expensive because the location where the property is taken is unknown to the insurance company. Property covered under this coverage could be anywhere within the coverage territory. Some locations could be difficult to access, which adds to debris removal expense.

b. Pollutant Clean Up and Removal

The insurance company pays to clean up pollutants caused by or that result from a covered cause of loss that occurs during the policy period. The most paid is $10,000 per premises as an aggregate amount during each separate 12-month policy period. The expenses are paid only if they are reported to the insurance company in writing within 180 days of the date of loss.

This coverage does not apply to costs to evaluate the presence or effects of pollutants. However, it does pay for testing that is part of the extracting of pollutants process from either land or water.

B. Exclusions

1. Primary Exclusions

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

a. Earth Movement

This exclusion consists of four separate components:

(1) Earthquake includes any sinking, rising, or shifting of the earth directly related to the earthquake.

(2) Landslide includes any sinking, rising, or shifting of the earth directly related to the landslide.

(3) Mine Subsidence applies to only man-made mines, whether they are operating or not.

Note: Mine subsidence is a specific problem in the Midwest. Mine subsidence coverage is an option that may be purchased separately. Some states require offering mine subsidence coverage in certain counties. If coverage applies to property located in Illinois, Indiana, Kentucky, Pennsylvania, or West Virginia, the laws in those states should be reviewed carefully to determine the way to handle this exposure.

(4) Sinkhole Collapse is covered but all other sinking, rising, shifting, eroding, contracting, or expanding of the earth is excluded. Loss or damage caused by or that result from water movement beneath the ground and poor soil conditions are also excluded.

However, if any of the events described above cause or result in a fire or explosion, the insurance company pays for the ensuing loss or damage the fire or explosion causes.

b. Governmental Action

This exclusion applies to the legal and authorized seizure or destruction of property by a government entity’s order. There is one exception. Loss or damage that is caused when the governmental entity orders property to be destroyed is covered if used as a method to prevent a fire from spreading is covered. However, this exception applies only if the fire being contained would have been a covered fire under this coverage form.

c. Nuclear Hazard

Nuclear reaction, radiation, or radioactive contamination is not covered. There is an exception. If a fire results from the nuclear reaction, radiation or radioactive contamination there is coverage for the direct loss or damage caused by that fire.

d. War and Military Action

This exclusion lists three specific warlike activities.

e. Water

Water is flood, surface water, waves, tidal water, tidal waves, tsunami, overflow of any body of water, or their spray, all whether wind driven or not. Loss or damage from waterborne material that any of this water described above moves or carries is also excluded.

This exclusion applies even if an act of nature or another event causes any of the above.

There is one exception. If any water listed and/or described in the first paragraph above results in fire, explosion, or theft, coverage applies to the loss or damage that fire, explosion, or theft causes. This applies only if this coverage form covers the fire, explosion, or theft.

 

Example: A flood occurs that swamps Bill and Ginny’s home. All items on the first floor are destroyed but the new stereo system they recently purchased from Alfred’s Fine Sound is on the second floor and undamaged. Bill thinks this is a perfect time to get out of his installment plan so he steals the stereo system, hides it in his storage unit, and notifies Alfred’s that the unit was stolen during the flood. The claims adjuster is surprised with the theft so investigates the loss more thoroughly and determines that Bill was the thief. Because theft by a party having a financial interest in the property is not covered theft under this coverage form, the theft is denied and Bill must continue paying his installment.

 

2. Secondary Exclusions

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

a. Delay, loss of use, and loss of market

These are consequential or indirect losses that develop as a result of a direct loss or damage.

b. Bankruptcy, foreclosure or similar proceedings

Note: This is an unexplained exclusion. There is no statement as to whose bankruptcy causes the loss. Is it both the named insured and the purchaser? Could coverage be excluded if it is determined that a fire started because a third party, neither the named insured nor the purchaser, was upset over a bankruptcy? The open-endedness of this exclusion may make this difficult to enforce.

c. Dishonest or criminal acts (12 13 changes)

These are any dishonest or criminal acts that the named insured, its partners, employees, temporary employees, leased workers, officers, directors, trustees, authorized representatives, or members and managers of a limited liability company commit. This also includes theft.

Such acts committed by anyone with an interest in the property, their employees, temporary employees, leased workers, or authorized representatives who act alone or who act in collusion with other parties or with each other are also excluded. This exclusion also applies whether or not the acts take place during regular working hours.

This exclusion does not apply to acts of destruction by the named insured’s employees, temporary employees, leased workers, or authorized representatives. However, there is no coverage for theft by the named insured’s employees, temporary employees, leased workers, or authorized representatives.

The 12 13 edition removed the part of the exclusion in the previous edition that applied to dishonest or criminal acts committed by anyone entrusted with the property for any reason.

d. Processing or work upon the property

This is loss or damage caused by or that results from the actual processing or work done on covered property.

The exception is that if the processing or work done results in a fire or explosion, and this insurance covers fire and explosion, coverage applies to the loss or damage that fire or explosion causes.

Note: There is no mention as to who must be doing the processing.

e. Breakage

Loss or damage due to glass or similar fragile property breaking is not covered.

The exception is that if fire, lightning, explosion, windstorm, earthquake, flood, vandalism, aircraft, rioters, strikers, theft, attempted theft, or accident to the vehicle that transports the property causes the breakage, coverage does apply but only if this coverage form covers that cause of loss.

f. Artificially generated electrical, magnetic, or electromagnetic energy

Loss or damage that is caused by or that results from artificially generated electrical, magnetic, or electromagnetic energy damaging, disturbing, disrupting, or interfering with any of the following:

Examples of this excluded energy are electrical current, charges a magnetic or electromagnetic field produces, and microwaves but are not limited to just these.

There are two exceptions.

g. Voluntary parting

The named insured or anyone else entrusted with the property being tricked or deceived into giving that property away.

h. Unauthorized instructions

When covered property is transferred to another person or place because unauthorized instructions were received to do so.

i. Neglect

Neglect on an insured’s part to do take reasonable measures to preserve and protect covered property from subsequent damage during and after the time of loss.

j. Theft (12 13 addition)

Theft by any person the named insured entrusts covered property to for any reason, whether they act alone or act in collusion with any other party. This exclusion applies 24 hours a day/7 days a week. There is one exception. Covered property that is in a carrier for hire’s care, custody, or control is not subject to this exclusion.

3. Other Exclusions

This group of exclusions applies to loss or damage caused by or that result from any of the following loss events. In every case, if loss or damage by a covered cause of loss occurs as a result of one of these excluded events, coverage applies to the loss or damage the resulting covered cause of loss causes. The insurance company does not pay for any loss or damage caused by or that results from any of these events.

a. Wear and tear, depreciation

This is loss or damage due to wear, tear, and depreciation.

Notes:

Wear and tear is damage that occurs naturally as a result of aging or normal wear.

Depreciation is loss of value due to wear.

b. Any quality in the property

These are any qualities in the property that cause it to destroy or damage itself.

Note: An example is loss or damage caused by hidden or latent defects in the property.

c. Mechanical breakdown

This is loss or damage caused by or that results from machines, tools, or mechanisms failing to operate or function properly.

d. Insects, vermin, or rodents

This is loss or damage to covered property caused by or that results from insects, vermin, or rodents.

Note: Some examples are damage from mice, rats, cockroaches, squirrels, beavers, spiders, ants, centipedes, and ticks. Each is characterized by destructive habits that cause damage, such as gnawing and nibbling.

e. Rust, other corrosion, dampness, or extremes of temperature

This is rust, other corrosion, dampness, or extremes of temperature that cause loss or damage to covered property.

Notes:

Rust and corrosion are low-temperature oxidation processes that result in deterioration over time due to inactivity or neglect.

Dampness and temperature extremes can affect the oxidation process that affects different forms of property and can have other effects on the same and other forms of property.

C. Limits of Insurance

The most the insurance company pays for loss or damage in a single occurrence is the limit of insurance on the declarations for the applicable coverage.

D. Deductible

The insurance company does not pay for loss or damage until the amount of the adjusted loss or damage (before capping with the limit of insurance that applies) exceeds the deductible on the declarations. It then pays the amount of the adjusted loss or damage that exceeds the deductible up to the applicable limit of insurance.

E. Additional Conditions

1. Valuation

This condition is added to the Valuation General Condition F. in the Commercial Inland Marine Conditions.

a. Sold Property Not Yet Delivered

When property has been sold but has not yet been delivered to the purchaser, the value of the property is the named insured's net selling price less discounts and other allowances that would have been provided to the purchaser.

b. Loss Limitation–Single Interest Installment Sales

The insurance company does not pay more than the amount of the named insured's interest in the covered property. This means that the property’s value on the date of loss must be established. This is determined by reviewing the Valuation Condition in the Commercial Inland Marine Conditions. The property is valued at actual cash value, the cost to replace the item or the cost to repair the item whichever is less.

Related Article: Related Article: CM 00 01–Commercial Inland Marine Conditions

Next, the proportion of the named insured’s financial interest as of the date of loss must then be calculated. One way to calculate it would be based on how much remains owed to the named insured on the property at the time of the loss. If the payments are for 36 months and only 2 months have been paid, the proportion would be 34/36 = .944. 

The calculated proportion must then be multiplied by the established value in order to determine the maximum value available.

 

Example: The covered property’s value on the date of loss is $100,000. The named insured has received only 2 payments out of 36 so the named insured’s proportion of financial interest is 34/36 = .944. The value of the loss is $50,000. The most the named insured will receive under this loss limitation is $50,000 X .944 = $47,200.

 

Note: There is no comment about any loss limitation for Dual Interest Installment Sales.

2. Other Conditions

These conditions apply in addition to the Commercial Inland Marine Conditions and the Common Policy Conditions.

a. Coverage Territory

The coverage territory is the United States of America, its territories and possessions, Puerto Rico, and Canada. This includes property that is shipped by air within and between these points.

b. Transit Coverage in the Event of Cancellation

Because property does not stop being sold due to a policy renewal or expiration date, there is the potential that property will be in transit at the time of a cancellation or expiration. When that occurs, the coverage form in effect at the time the property was shipped remains in effect for that property in transit until it reaches its destination.

c. Dual Interest Installment Sales

The provisions of this coverage form are binding on all parties that have an interest in covered property. If the party that is not the named insured but has a dual interest in the property does not comply with the terms of the coverages required, the named insured’s rights remain unimpaired provided the named insured attempts to get that dual interest holder to comply.

Note: There is no mention of what happens to the rights of the dual interest holder if the named insured does not comply.

d. Records

The named insured must keep accurate records of all property this insurance covers and retain them for three years after the policy expires. Records of the following must be maintained:

e. Reports and Premium

The named insured must report to the insurance company the items identified in d. Records above within 30 days after the end of each month.

The monthly rate on the declarations is applied to the reported values for all locations in order to develop the monthly premium. The first monthly premium is subtracted from the deposit premium and the amount left is the remaining deposit. The second monthly premium is subtracted from that remaining deposit to develop a new remaining deposit. This continues until a monthly premium exceeds the remaining deposit. At that point, the premium in excess of the remaining deposit is due from the named insured as are all future monthly premiums.

The named insured must pay at least the minimum annual premium on the declarations. This calculation is made at the end of the year. Any remaining deposit is returned to the named insured. However, if the earned premium is less than the minimum premium, only the difference between the initial deposit and the minimum premium is returned.

The required reports may not have been submitted at the time a covered loss or damage occurs. In that case, the insurance company does not pay more than the latest amounts reported. The insurance company does not pay more than 90% of the amount otherwise payable if no reports have been submitted at all.

The total values reported are used to calculate the earned premium. If they exceed the limit of insurance, the named insured must pay for the reported value but coverage is capped at the limit of insurance.

The last report of values before a covered loss or damage may be for amounts that are less than the total amount required to be reported. In that case, the insurance company pays only the portion of the loss or damage that the amounts last reported bear to the actual total value as of the last report.

This insurance coverage is subject to re-rating at each anniversary and the premium may change to reflect the rates in effect at that time. The named insured must provide the information the insurance company needs to re-rate the coverage within 30 days of the coverage anniversary date.

If coverage is cancelled, the named insured must report the total values, as the coverage form requires up to and including the cancellation date. The insurance company calculates and determines the premium for less than a full month on a pro-rata basis.

F. Definitions

There are two definitions.

1. Leased property

The term means more than just leased property. It includes property that named insured rents to others or also property that is sent out on approval.

2. Pollutants

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

ENDORSEMENTS

ISO has not developed any specific endorsements for exclusive use with the Installment Sales and Leased Property Coverage Form. ISO has developed one other endorsement that can be used to respond to a specific situation.

IH 99 19–Additional Covered Property

This endorsement is used to include coverage for types of property ordinarily excluded.

IH 99 20–Additional Property Not Covered

This endorsement is used to exclude certain types of property the coverage form insures.

IH 99 22-Loss Payable

Loss payees who have insurable interests in covered property are listed on this endorsement along with the property in which they have that interest.

IH 99 23–Theft from Unattended Vehicle Exclusion

This restrictive endorsement eliminates theft coverage from unattended vehicles. The only exception to this is if the vehicle is locked, compartments closed and windows up AND there is evidence that a forcible entry had occurred.

UNDERWRITING CONSIDERATIONS

Underwriting installment sales and leased property coverage involves carefully evaluating a broad range of covered property. This coverage is difficult to underwrite as defined in normal terms because of the lack of control over the covered property. The insurance company does not have any control over where the property is located or to whom they belong. Because of this, underwriting instead focuses on ownership and experience of the seller, loss experience for this line of business, the general characteristics of the customers who purchase the merchandise, and the type of property being sold.

The named insured (seller) should have successfully engaged in this type of business for at least five years. This ensures that it has likely survived some business cycles and has learned how to manage this unique and potentially difficult operation. It also usually means that the named insured is financially solvent and able to continue to survive as business conditions change over time. Knowing how to manage installment loans in good economic times can be much different than when the economy is down and unemployment is high.

Previous loss experience in this line is an excellent source of information to evaluate and use to determine future loss activity. This measure assumes that the ownership and management has been reasonably stable over time, changes in operations minor, and the same general type of merchandise has been handled throughout the period.

Customers must be evaluated to determine their eligibility to purchase merchandise on an installment payment basis. Established procedures should be in place and used to make this determination. Uniform background evaluations and credit checks should be used. The amount of deposit or down payment should be reasonable yet large enough to separate good customers from those that may default. The repossession rate should be reviewed carefully. It is a good predictor of future loss activity because property loses its value during repossession and losses are more likely to occur when payments are in arrears or if the customer defaults.

The type of merchandise sold also affects the underwriting process. Major household appliances and furniture are sold this way regularly and their loss record as a whole is generally good. However, computers, other electronic devices, and home entertainment systems have a less stable record. The default and repossession rates for this type of property are higher, the property depreciates or loses value more quickly, and it is more damageable and susceptible to electrical disturbances and other less frequent sources of loss. This type of property is also attractive from a theft standpoint and can be easily transported and disposed of on the black market.

In general, installment sales on certain types of merchandise are essential in today's economy and are the way business is usually done. Installment sales coverage can be underwritten successfully if the conditions that affect it are recognized, evaluated, and necessary adjustments or responses to conditions implemented.