130.4-2

CP 00 10–BUILDING AND PERSONAL PROPERTY COVERAGE FORM ANALYSIS

(June 2019)

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A. Coverage

1. Property Covered

2. Property Not Covered

3. Covered Causes of Loss

4. Additional Coverages

5. Coverage Extensions

B. Exclusions and Limitations

C. Limits of Insurance

D. Deductible

E. Loss Conditions

F. Additional Conditions

G. Optional Coverages

H. Definitions

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This analysis is based on the 10 12 edition of this coverage form. Changes from the 06 07 edition are in bold print.

INTRODUCTION

This coverage form opens by defining the terms "you or your" as the named insured and "we, us, and our" as the company that provides the insurance coverage. Named insured is not defined. As a result, it means only entities listed or named on the declarations. If a given entity is not listed, there is no coverage for its property except as personal property of others, if scheduled. This coverage form has other words that have special meanings. They are defined in H. Definitions.

A. COVERAGE

The coverage form obligates the insurance company to pay for direct physical loss or damage to certain types of property. The property must be at a location listed or described on the declarations. However, this is not open-ended coverage. The loss or damage must be the result of a cause of loss described in the causes of loss form attached to the policy in order for coverage to apply.

Related Article: Basic, Broad, and Special Causes of Loss Forms Analysis

Coverage applies to only loss or damage that occurs at a definite place and time. There is no coverage for a loss event that is not tangible or that is not capable of being measured.

The reference to premises means that coverage applies to only property located in or on the premises listed or described on the declarations. This is why the declarations is a very important document. Coverage does not apply if the location and type of property is not properly listed or described.

1. Covered Property

Covered Property is defined in two ways. In the first, the coverage form lists the types of property eligible for coverage. In the second, it provides information on the types of property not eligible for coverage. One way to determine if an item is covered is to take the following steps:

Step 1. Is the item described in the listings provided under Building, Your Personal Property, or Personal Property of Others? If the answer is no, there is no coverage. If yes, continue to Step 2.

Step 2. Is there a limit of insurance on the declarations for the qualifying type of property? If the answer is no, there is no coverage. If the answer is yes, continue to Step 3.

Step 3. Is the item of the type of property described in Property Not Covered? If the answer is yes, there is no coverage. If the answer is no, this coverage form should cover that item.

Example: Lydia’s declarations has a $50,000 limit of insurance for business personal property. There are no other limits on the declarations. When Lydia has a loss, she determines the items that are covered by using the step method described above:

Property Description	Step 1.	Step 2.	Step 3.	Coverage
Owned floor coverings	Yes	Yes	No	Covered
Owned grills and storage bins	Yes	Yes	No	Covered
Stock	Yes	Yes	No	Covered
$5,000 in cash	Yes	Yes	Yes	Not Covered
Borrowed desk and cabinets	Yes	No	Yes	Not Covered

a. Building

Building is the first type of covered property. The following property is covered in addition to the actual building or structure listed on the declarations:

• Completed additions

Note: This means an addition to the described structure during the policy term is covered even though it did not exist at policy inception.

Example: The Kingsley Office Plaza expanded its first floor and added extra storage in its most recent addition. The addition was made during the policy period and was considered building once it was complete and the builders’ risk policy no longer covered it.

• Fixtures, including outdoor fixtures. Light poles, fences, satellite dishes, and similar property are considered fixtures. Indoor light fixtures, cabinets, and restaurant booths are also considered fixtures.

The ceiling tiles, the lighting, the cabinets, and the sink in this lunchroom are all considered part of building because they are fixtures.

• Permanently installed machinery and equipment

Note: The key word is permanently. Machinery or equipment that is placed permanently is considered building. If it is not, it is considered personal property. This is a very important distinction when rating and pricing the exposure as well as at the time of loss or damage. In most cases, the premium charge for building property is significantly lower than the charge for personal property. The difference is because permanently installed property is usually considered less vulnerable to loss. This distinction is also important when determining whether the coverage is the landlord or the tenant's responsibility, as well as with respect to coinsurance issues.

This printing press is building, not personal property, because it is permanently installed.

• Owned personal property used to maintain or service the building

Note: Some property in this category, while appearing to be personal property because it is portable, is treated as building property because of its relationship to the building. Property such as fire extinguishing equipment, outdoor furniture, floor coverings, and appliances used for refrigerating, ventilating, cooking, dishwashing, or laundering is not personal property but is classified and treated as building property and should be listed as such. However, such listings are not necessarily exclusive. Other property used to service and maintain the premises not included on a list of property may still be treated as building property.

Related Court Case: Fixtures Pertaining to the Service of Building Defined By Court

• Two other types of property are covered but only if not covered elsewhere:
• Additions being built. Alterations and repairs to the building or structure are also included.
• Any materials, equipment, supplies, and temporary structures situated on the described premises or within 100 feet of it. These are building only if they are to be used to make additions, alterations, or repairs to the building or structure specifically described.

Note: This coverage is provided because of the way most building owners work on their buildings. Repairs and alterations are often handled as time and money permits. The materials and property may be obtained early and kept on site until the repairs or alternations can be made. These materials would be considered business personal property without this item.

The building addition under construction (and materials used in its construction) is covered as building but only if not covered elsewhere.

b. Your Business Personal Property (10 12 change)

The next type of covered property is Business Personal Property. There are three distinct conditions to meet in order for coverage to apply:

• The named insured must own the property.
• The property must be located or situated at any of the following:
• In or on a building listed or described on the declarations
• In or on a structure listed or described on the declarations
• In the open either within 100 feet of the building/structure or within 100 feet of the premises, whichever is greater
• In or on a vehicle either within 100 feet of building/structure or within 100 feet of the premises, whichever is greater

Note: A premises is not the same as a building. A premises is the land where the building is situated. This means personal property can be off the premises and still be covered. An example is personal property in a vehicle on the street in front of the premises. There is no coverage if it is parked down the street more than 100 feet from either the premises or the building.

This coverage form considers this truck’s cargo to be personal property if all of the following apply: The named insured owns the cargo. The vehicle is within 100 feet of the premises or the building. The coverage form considers the cargo to be personal property.

• The property must be considered as personal property.

The following is considered personal property. Certain provisions in 2. Property Not Covered limit this otherwise inclusive listing. Personal property is:

o Furniture and fixtures

Note: This could include the same fixtures included as building property. If the insured owns the building, the fixtures should be included in only the building coverage because payment is limited to not more than the item’s value, even if covered in more than one place.

o Machinery and equipment

Note: This does not refer to permanent or mobile, but both are eligible for coverage. If the insured owns the building, as well as the machinery or equipment, any permanently installed machinery and equipment should be covered under building coverage, not under personal property coverage. This is because duplicate coverage wastes premium but does not increase coverage.

This punch press is portable. As a result, it is considered business personal property.

o Stock as defined in H. Definitions

o All other personal property is covered if it passes a two-part test. The named insured must own it. The property must be used in its business.

Example: Bill owns a hardware store with a large basement. His family is rapidly outgrowing its home and he decides to move some extra household items to the hardware store’s basement instead of renting space in a storage facility. If a fire occurs, the Building and Personal Property Coverage Form does not pay anything for the household items damaged or destroyed. This is because the property is not used in the business, even though Bill owns it.

o Coverage applies to labor, materials, or services provided on personal property of others. However, there is no coverage for the personal property of others.

Example: Jeremy’s Machine Shop sends a customer’s die to a tool and die shop for repair. Jeremy pays for that service. The die is returned but a tornado rips through his building the following day and damages it. The damage to the die is not covered. The amount Jeremy paid to the tool and die shop is covered.

o Improvements and betterments that the insured cannot legally remove from a building have no value to the insured except for their use value. As a result, coverage does apply but is subject to both of the following limitations:

• The improvements must be in a building the named insured does not own.
• The named insured must have incurred the expense to install the improvements but not be legally permitted to remove them.

Use interest is the value the named insured invested in the improvements. It is generally based on the length of the lease agreement.

Related Article: Improvements and Betterments

Example: The insured leases a restaurant building for ten years and installs $50,000 in improvements that cannot be removed. If a loss occurs, the value is prorated based on the remaining term of the lease contract. If the loss happens on the named insured’s opening day, it should expect to receive a claim settlement equal to almost the entire initial investment. On the other hand, if the loss occurs toward the end of the lease, it should expect a much lower settlement amount.

o Coverage on personal property of others applies only if the named insured is contractually obligated to provide the coverage. Agreements for leased office equipment usually require that the named insured provide coverage on it. This provision responds to that requirement. However, this coverage is superseded if coverage under Personal Property of Others applies.

c. Personal Property of Others (10 12 change)

There is no coverage under Your Business Personal Property for Personal Property of Others, except for the coverage that a lease agreement requires. All other personal property of others is covered only if there is a limit for this type of property on the declarations. However, when there is a limit of insurance entered for this coverage, the automatic coverage for personal property of others subject to a lease agreement is moved from Business Personal Property to Personal Property of Others.

Example: Mary is under a lease agreement to insure cash registers that are valued at $15,000. She adds their value to her $100,000 stock for a total Business Personal Property limit of insurance of $115,000. During the year she accepts $25,000 property of others to sell on consignment. She requests that Personal Property of Others coverage be added for a limit of $25,000. However, she does not request a reduction in her business personal property limit for the leased equipment nor does she request that the personal property of others be increased for the leased equipment. A total loss occurs after the endorsement. Mary is very disappointed to learn that because the Personal Property of Others had been added, the $15,000 of leased cash registers had moved from your business personal property to personal property of others and she was underinsured by $15,000.
Type of coverage	Type of property	Value	Limit of Insurance	Fire loss payment
Business Personal Property	Stock Leased Property	$100,000 $ 15,000	$115,000
Personal Property of Others	None
Add Consigned Property coverage
Business Personal Property	Stock	$100,000	$115,000	$100,000
Personal Property of Others	Leased Property Property on Consignment	$15,000 $25,000	$25,000	$25,000

Coverage applies only for personal property in the insured's care, custody, or control and located or situated at any of the following:

• In or on a building listed or described on the declarations
• In or on a structure listed or described on the declarations
• In the open either within 100 feet of the building/structure or within 100 feet of the premises, whichever is greater
• In or on a vehicle either within 100 feet of the building/structure or within 100 feet of the premises, whichever is greater

Personal property of others does not have to be used in the named insured’s business in order for coverage to apply.

Example: Bill’s neighbor asks if he can keep some of his excess stock in the basement of Bill’s hardware store. If that property is damaged, coverage applies as long as a limit of insurance for personal property of others was on the declarations.

Note: The named insured should be informed that any loss settlement is with the personal property's owner, not with the named insured. This coverage is not the same as Bailees’ Coverage.

Related Article: Property of Others

2. Property Not Covered

This section modifies the Coverage section to apply to the typical insured's coverage needs. If coverage on any excluded property is needed, separate coverage options are often available for an additional premium charge.

The following property is not covered:

a. Accounts, bills, currency, deeds, food stamps, other evidences of debt, money, notes, or securities. Lottery tickets are a unique type of property. They are considered covered property only if they are held for sale. Otherwise, they are excluded. Most property excluded in this section can be covered under crime or inland marine coverage forms and policies.

Related Articles:

ISO Commercial Crime Coverage Forms Overview

Who Needs Inland Marine Coverage

b. All animals are not covered with two exceptions:

• Animals owned by others that the named insured boards
• Owned animals that are considered stock. A limitation to this exception is that are only covered while inside a building.

Note: It is important to review the causes of loss form animal limitation because coverage is further limited to apply if the animal is killed or must be destroyed. Veterinary services are not covered.

Related Article: Basic, Broad, and Special Causes of Loss Forms Analysis

c. Automobiles. This item applies only if the automobiles are held for sale. However, this is not the only automobile exclusion. Item p. below excludes other types of automobiles.

d. Bridges, roadways, walks, patios, or other paved surfaces. This property is considered fixtures and is treated as building property if covered. This type of property is not usually insured because of the comparatively high cost to do so and the low probability that it will sustain loss or damage. If an insured decides to cover this property, it can do so by attaching CP 14 10–Additional Covered Property and increasing the property limits.

Bridge coverage is also available under Inland Marine coverage forms because bridges are considered instrumentalities of transportation.

Related Article: Nationwide Inland Marine Definition

e. Any property involved with illegal transportation, trade, or related activities is not covered because insurance coverage is not intended to facilitate illegal activities.

Example: George "2Bad" Rotterbee has commercial property coverage on his small grocery store with Good-Deal Mutual Insurance. George operates a "Meth Lab" in the back of the building. George arrives at the store one morning and, upon entering the lab, discovers that a week’s supply of ether was stolen. Because ether is used to manufacture illegal drugs, Good-Deal's adjuster informs George that the property is excluded. The adjuster also notifies the police and tells Good Deal's underwriting department to expedite issuing a notice of cancellation.

f. Costs to excavate, grade, backfill, or fill. These costs are not covered because these expenses are usually associated with new construction and are not usually part of repairing existing construction. Most insureds do not want to pay the premiums required to cover these costs as part of building. However, coverage is available for an additional premium charge by using CP 14 10–Additional Covered Property and increasing the property limits.

g. Foundations at or below ground level. Foundations are not covered because of the minimal chance of loss or damage to them. This foundation exclusion applies to foundations of machinery and equipment as well as to the building and structure. Coverage is available for an additional premium charge by using CP 14 10–Additional Covered Property and increasing the property limits.

h. Land, water, lawns, and crops that have not yet been harvested, even though they have value. Growing crops can be covered under farm or agricultural coverage forms and policies. Lawns that are part of a vegetated roof are exceptions to this exclusion and are covered. (10 12 change)

i. Personal property in transit by air or water conveyances. While a small amount of transit coverage is provided in this form it, does not expand to air or water transport. Coverage on this property is available under Inland Marine coverage forms.

Related Articles:

AAIS Transportation Coverage Forms

ISO Annual Transit Coverage Form

ISO Motor Truck Cargo Carriers Coverage Form

ISO Motor Truck Cargo Owners Coverage Form

ISO Trip Transit Coverage Form

j. Bulkheads, pilings, piers, wharves, and docks. This property is excluded because most insureds do not have this type of property. Coverage is available for an additional premium charge by using CP 14 10–Additional Covered Property and increasing the property limits. In some cases, an Ocean Marine coverage form may be more appropriate.

Related Article: Ocean Marine Insurance Overview

This pier should be covered under an Ocean Marine coverage form or policy. However, this coverage form could cover a smaller one on a private pond by using CP 14 10–Additional Covered Property.

k. If other coverage more specifically insures property that the Building and Personal Property Coverage Form also covers, this coverage form treats that other coverage as primary and responds to losses on an excess basis.

Note: Even if the other coverage is exhausted, is not available, or cannot be collected for any reason, this coverage form still responds only on an excess basis over that other insurance.

Example: Mary’s Construction Company purchases a builders risk policy to cover the addition to John’s Restaurant. An arsonist burns down both the addition and the rest of the building. John’s insurance should pay for the loss to the restaurant and the builders risk policy should pay for the loss to the addition. However, Mary’s insurance company went into receivership just as it prepared to pay the claim. As a result, Mary's insurance company did not pay for the loss to the addition and John’s policy did not respond because Mary’s builders risk policy limits were sufficient to cover the loss if it had been able to respond.

l. Retaining walls but only if the walls are independent and are not part of the building. Coverage is available for an additional premium charge by using CP 14 10–Additional Covered Property and increasing the property limits.

m. Underground pipes, flues, or drains. This property is excluded because the potential for loss is fairly remote. Coverage is available for an additional premium charge by using CP 14 10–Additional Covered Property and increasing the property limits.

n. Electronic data. However, 4. Additional Coverages f. Electronic Data provides a nominal limit of insurance. Electronic data is defined as all programs, information, and data stored, created, transmitted, or used on computers. The data can be in the form of floppy disks, hard disks, CD-ROMS, tapes, flash drives, and similar storage media even when not on the computer.

Prepackaged software the named insured holds for sale is exempt from this item and is covered.

Electronic data that is an integral part of the building HVAC, elevator, and lighting or security systems is also exempt from this item and therefore covered. (10 12 change)

Coverage for all other electronic data can be provided on an electronic data processing coverage form or policy.

Related Articles:

AAIS Electronic Data Processing Equipment and Business Computer Coverage Forms

ISO Computer Systems Coverage Form

o. The cost to restore information on valuable papers and records. This exclusion also applies if the records are in electronic form. 5. Coverage Extensions c. Valuable Papers and Records (Other Than Electronic Data) provides a limited amount of coverage.

Valuable papers and records include proprietary information such as (but not limited to) accounts, books, deeds, card index systems, drawings, abstracts, and manuscripts.

This exclusion applies to only the cost to restore information. Valuable papers and records themselves are covered but, without restoration costs, the coverage is very limited.

p. Vehicles and self-propelled machines licensed for use on public roads, or that are operated primarily away from the described premises are not covered. Aircraft, autos and watercraft are three types of such machines. This property is excluded because it is correctly covered under automobile, inland marine, ocean marine, or aviation coverage forms designed for their specific exposures. However, this exclusion does not apply to the following covered property:

• Any such property the named insured manufactures, processes, or warehouses
• Vehicles or self-propelled machines the named insured is holding with the intent to sell. Autos held for sale are not part of this exception and therefore continue to be excluded.
• Rowboats or canoes that are at the described premises while out of the water
• Trailers to the extent that 5. Coverage Extensions f. Non-owned Detached Trailers provides

Example: Grady Auto Restoration Services has 40 vehicles on its premises. A break-in occurs. The coverage applies as follows: The 20 vehicles held for sale are excluded based on item d. The 10 vehicles licensed for use on the road are excluded based on item p. The 5 vehicles owned by others are excluded based on item p. The 5 vehicles Grady owns that are being restored are covered based on the item p. exception but only as long as they remain in process. Their status changes once restoration is complete.

q. Grain, hay, straw, and other crops. This property should be covered under farm or agricultural coverage forms or policies.

Related Article: Overview of the ISO Farm Program Coverage Forms

Fences, outdoor radio and television broadcasting and receiving equipment, and shrubs, plants, and trees, other than stock held for sale are also not covered except for the limited coverage provided under 5. Coverage Extensions e. Outdoor Property. Trees, shrubs, and plants that are part of a vegetated roof are exceptions to this item and are covered. (10 12 change)

Note: Coverage Extensions Outdoor Property provides coverage against specified perils for nominal limits of insurance. Other endorsements are available to provide additional coverage on this property. CP 14 10–Additional Covered Property can be used to extend coverage on fences. CP 14 30–Outdoor Trees, Shrubs, and Plants can be used to extend coverage for that property. CP 14 50–Radio or Television Antennas extends coverage for antennas, satellite dishes, and supporting equipment.

3. Covered Causes of Loss

This coverage form requires that one or more of the causes of loss forms be attached. Different types of property may have different causes of loss forms. The applicable cause of loss form is entered on the declarations.

Example: Crainston Furs purchases CP 10 30–Causes of Loss–Special Form on all building property and
CP 10 10–Causes of Loss–Basic Form for all business personal property because its furriers block policy covers all furs and fur-related property.

Related Article: Basic, Broad, and Special Causes Of Loss Forms Analysis

4. Additional Coverages

a. Debris Removal (10 12 change)

After a loss that involves physical loss or damage, debris must be removed. Coverage to pay for the removal costs is needed. Over the years, this relatively simple concept has become a hotly debated issue under commercial property coverage forms as insurance buyers search for alternate sources for pollution coverage. Debris removal coverage was never intended to be environmental clean-up coverage but in various court decisions prior policy language was found to cover such losses. Efforts to eliminate any misunderstanding have made this coverage much more complicated but the concept remains the same.

This coverage is explained as follows:

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

• The named insured actually incurs the debris removal expenses.
• The debris to be removed is covered property.
• The debris to be removed is not covered property but it meets all of the other criteria in this paragraph and also the criteria in paragraph (2) below. (10 12 addition)
• The property became debris because of a covered cause of loss
• The loss occurs during the policy period.
• The expenses are reported within 180 days of the direct physical loss.

Example: Martha’s Clothing House (a retail dress shop) is vandalized. The interior is completely trashed, and a significant amount of debris must be removed before replacement property can be brought in. The cost to remove the debris is covered provided Martha pays the costs of debris removal, the debris is actually removed, the personal property damaged is covered property, the loss occurs during the policy period, and Martha reports the expense to the insurance company within 180 days of the date of loss.

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

(2) The 10 12 edition broadens this paragraph significantly. The 06 07 edition limited itself to only pollutant-related items. This paragraph is needed because paragraph (1) is broadened to include debris of certain types of property that is not considered covered property. This paragraph limits that broadening of debris coverage. Although these items appear to be limiting, they actually establish the boundaries for the broadened coverage in paragraph (1).

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

• Debris that belongs to the named insured that is either not insured or is of the type of property listed under 2. Property Not Covered
• The debris of the landlord’s property when the named insured is a tenant. However, the costs ARE covered if both of the following apply:

o The named insured is contractually obligated to insure the landlord’s property.

o The landlord’s property is insured under this policy.

• Any property item described in 2. Property Not Covered. This also applies to property that has limited coverage under 5. Coverage Extensions e. Outdoor Property.

Note: This limitation does not mention debris of such property. It applies to the property itself.

• Any property belonging to others that is not considered Covered Property under this coverage form.

Note: This limitation does not mention debris of such property. It applies to the property itself.

• Mud or dirt that is deposited on the grounds of the premises
• Any pollutants from land or water
• Polluted land or waters. The cost to restore or replace the polluted land or waters is also excluded.

Example: As a final act of vandalism, the vandals find containers of dyes that Martha’s uses to customize clients clothing and throw them into the pond located behind the store. The lost dyes are covered but the cost to remove the dyes from the pond is not.

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

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

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

· The limit of insurance for the damaged covered property

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

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

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

· The actual debris removal expense

Example: Ken’s photography shop has a small fire. The actual paid physical loss amount is $5,000. The limit of insurance is $25,000 and the deductible is $500. The maximum debris removal expense available is $1,375 [($5,000 + $500) X .25]. The sum of $5,000 + $1,375 = $6,375. Because the sum is less than $25,000, $1.375 is the amount paid for debris removal.

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

(4) This paragraph provides an additional amount of insurance to remove debris if one of the limitations in paragraph (3) above applies. The additional amount of coverage is $25,000, subject to the following:

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

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

· The limit of insurance for the damaged covered property PLUS $25,000 Debris Removal Additional Coverage

Example: We’ll change the loss amount in the Ken's photography example to a $23,000 physical damage paid loss and $5,000 in debris removal expenses. The maximum debris removal expense available is $5,875 [($23,000 + $500) X .25]. However, because the limit of insurance is $25,000, the most paid for debris removal expense is $2,500 [$25,000 – ($23,000 + $500)]. This results in Ken having to pay $2,500 out of pocket. However, when the $25,000 Additional Coverage is used, Ken has full coverage and does not have any out of pocket expense.

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

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

· The actual debris removal expense

Example: Continuing the example above, the Ken’s photography loss involved chemicals. The chemicals had to be removed by environmental specialists and taken to a special disposal facility. The removal cost was $10,000. Because the debris removal expense in step (3) (b) is limited to $5,875, $4,125 of the loss is not covered. However, the additional $25,000 limit is (4) (b) provides the necessary coverage to fully fund the loss.

The last point to make with respect to this coverage is that the maximum amount of insurance available for direct physical loss and debris removal expense does not exceed the coverage limit of insurance plus $25,000.

Example: Gretel’s commercial property limit is $750,000. She sustains a huge grease fire loss and a large amount of debris remains. The direct damage paid loss is $735,000 and the debris removal cost is $44,000. In this case, Gretel absorbs the following out of pocket loss:

Direct Damage Paid Loss Amount	$735,000
Add Debris Removal Expense	+$44,000
Total Loss	$779,000
Limit Of Insurance	$750,000
Add Additional Debris Removal Amount	+$25,000
Available Limit of Insurance	$775,000
Debris Removal Expense Not Covered	$4,000

CP 04 15–Debris Removal Additional Limits is used to provide higher debris removal limits.

Related Article: Debris Removal Concerns

Related Court Case: Debris Removal Obligation Was Paid

b. Preservation of Property

If you do not have insurance, know that your business is being threatened, and have time to act, you probably start by moving your most valuable possessions out and away from danger. The same course of action is just as important when you do have insurance. The Building and Personal Property Coverage Form encourages the insured to protect its property by providing coverage as an incentive to do so.

If it is necessary to move covered property from an insured location in order to avoid it being damaged by a covered cause of loss, the insurance company pays for any direct loss or damage that such property sustains during the move. In addition, coverage applies at the location the property is stored at for up to 30 days after the date it is moved there.

There are several important points to consider:

• The only property insured is covered property at a location listed on the declarations. Property eligible for coverage moved from a location that is not covered does not create coverage.
• The potential loss or damage to the covered property must be from a covered cause of loss.

Example: Kermit moves his business furniture from his offices to protect it from rising floodwaters. He drops several pieces of furniture while loading them on a rented truck. This results in hundreds of dollars in damage. This Additional Coverage does not insure this damage because flood is not a covered cause of loss.

• While the property is being moved to and from and while at the "safe" location it is covered for ANY cause of loss. This coverage applies for up to 30 days.

Example: Miller’s Bakery is located in a rural area near a national forest. A major wild fire is nearby, and the wind is blowing in the wrong direction. Miller realizes its equipment is in the direct line of the fire and moves it to a safe location on the other side of the river. A heavy rain extinguishes the fire before it reaches his property. However, a new problem develops. Due to the heavy rain, a flash flood overflows the river’s banks and totally destroys Miller’s relocated property. Even though flood is not a covered cause of loss, the loss to the property moved is covered because it was moved to protect it from a fire, a covered cause of loss.

Note: The property removed must be moved back to the covered location or the temporary location must be added to the policy within 30 days from the date of the move. Otherwise, all coverage ends after 30 days.

c. Fire Department Service Charge (10 12 change)

This additional coverage responds to situations where the insured must pay for the expense of a fire department that responds to an emergency. The old maxim: "He who hesitates is lost" applies to this coverage. The sooner a fire is reported, the faster it is controlled. Taking the time to consider the cost of fire department response is time lost in fighting the fire. This coverage pays only if the insured is contractually obligated to pay for the expense of a fire department that responds to an emergency or is required to pay because of a local ordinance. It provides up to $1,000 per premises to apply to the service charge and is not subject to a deductible. Higher limits are available. The $1,000 is a premises limit that applies regardless of the number of departments that respond or the number of services provided. (10 12 change)

Note: This could be a significant reduction in coverage for certain enterprises. Higher limits should be recommended in such cases.

Example: Tricounty Industries is in a rural area and has service contracts with three different fire departments in case of an emergency. A fire occurs in the main production area and all three fire departments respond to the fire. One department provides both firefighting and EMT service for injured employees. Another sprays down other buildings on the premises as a precaution. The total charge for all departments and all services is $28,500. Tricounty has a $10,000 limit per premises and must pay the remaining $18,500 from its own resources.

d. Pollutant Clean-Up and Removal

The second paragraph of Debris Removal Additional Coverage specifically excludes expenses to extract pollutants from land or water. This additional coverage provides a limited amount of coverage for those expenses. Each of the following requirements must be met in order for coverage to apply:

• The expenses must be the insured’s actual expenses to extract pollutants from land or water at the described premises.
• The pollutants must result from a covered cause of loss.
• The covered cause of loss must occur during the policy period.
• All expenses must be reported to the insurance company within 180 days of the date that the covered loss occurred.
• The only covered expenses for testing, monitoring, or assessing for levels of pollution are tests conducted during the extraction process.

The $10,000 limit for this additional coverage is unusual because it is an aggregate limit and not an occurrence limit. It is the total amount available to a premises during a single annual coverage period. As a result, any and all losses that involve eligible expenses at the premises reduce the available $10,000 aggregate limit at that premises.

Example: Ace Manufacturing has five premises in Michigan. During the spring, a series of tornadoes damage two of them. Paint spills at one premises and toxic chemicals are released into a nearby pond at another. The pollutant clean-up cost at the first premises is $15,000 and $30,000 at the other. Because of the $10,000 aggregate coverage limitation applies per premises, $10,000 of the $15,000 expenses at the first location is paid and $10,000 is paid at the other. If another loss occurs at either of those locations in the same 12-month policy period, no pollutant clean-up and removal coverage is available. Each of the other premises continues to have coverage.

Note: CP 04 07–Pollutant Clean Up and Removal Additional Aggregate Limits of Insurance is used to increase the limit.

Related Article: ISO Commercial Property Program Available Endorsements and Their Uses

Related Court Case: Pollution Cleanup Coverage Inapplicable

e. Increased Cost of Construction (10 12 change)

This is welcome protection for any company subject to the Americans with Disabilities Act (ADA) or many local, state, and federal ordinances that are not enforced until a building requires significant renovations or repairs. These ordinances and codes are helpful to many people and their cost is relatively easily absorbed in new construction. However, updating an existing structure after a partial loss can add substantially to the costs to rebuild it and coverage for such costs are specifically excluded in the Causes of Loss Forms.

Related Articles:

Basic, Broad, and Special Causes Of Loss Forms Analysis

CP 04 05–Ordinance Or Law Coverage

Example: Havor Academy is a private school that has served elementary school children for over 100 years. The building is joisted masonry with plaster interior walls. The hallways in certain areas are rather narrow but lead to spacious areas. A fire starts in the academy’s kitchen and causes significant damage to the kitchen and dining hall. Havor obtains the required building permits for the reconstruction but is informed that the hallways must be widened to meet ADA standards. Because the walls that must be moved are not damaged, the only coverage available to pay to widen the hallways is the limited amount this Additional Coverage provides.

This coverage is explained in nine paragraphs.

(1) This paragraph states that coverage is conditional and not automatic. It applies only when the basic policy includes Replacement Cost Optional Coverage. While it is unusual to require including an optional coverage as a condition of an additional coverage, it is necessary in this case.

(2) This paragraph explains the coverage. It responds to additional costs that must be incurred in order to bring the building up to the existing minimum standards of the ordinances or codes. Coverage is subject to modifications in paragraphs e. (3) through (9). This coverage applies when all of the following events occur:

• A covered cause of loss damages covered property.
• The insured incurs increased costs to repair, rebuild, or replace the damaged portions of covered property.
• The increased costs are the result of compliance with an enforced ordinance or law.

Example: Havor Academy meets the requirements because covered property is damaged by fire, a covered cause of loss. Increased costs are incurred to rebuild, repair, or replace the damaged covered property. The increased costs result from Havor complying with an enforced ordinance or law. If Havor has Replacement Cost Optional Coverage, it is possible that coverage is available, subject to paragraphs (3) through (9).

(3) This paragraph states that the law or code in (2) above must meet two requirements before increased costs are covered:

• It must regulate construction or repair of buildings or must establish a zoning or land use requirement at the described premises.
• It must be in force at the time of loss.

Example: The town council was considering an ordinance that required installing sprinkler systems in all schools that exceed two stories in height when the Havor Academy loss occurred. The council voted and passed the ordinance two weeks after Havor's loss and the building inspector informed Havor of the change. This Additional Coverage does not apply to the cost to add the sprinkler system because the ordinance passed after Havor's loss.

(4) This paragraph relieves the insurance company of any costs due to ordinances or laws the insured should have complied with before the loss but hadn’t.

Example: Havor Academy and the town argued for years about the fire escape ordinance but Havor never had the funds to comply with it. It believed its evacuation procedure was more than adequate and that the town was unfair in requiring that it remodel its building. However, the town held the advantage after the fire loss and insisted that Havor either comply with the ordinance or the building would not be allowed to reopen. Havor turned to this additional coverage but, since installing the fire escape was required prior to the loss (and Havor chose not to act), the insurance company was not obligated to pay the added cost.

(5) This coverage form is not designed to cover pollutants. This item clearly excludes pollution. This additional coverage does not pay when local ordinances or laws force the insured to take actions because of pollutant contamination or the presence of fungus in a building. It also does not pay any costs associated with enforcing or complying with ordinances or laws that require the insured or others to test for, monitor, clean-up, remove, contain, treat, detoxify, neutralize, respond to, or assess the effects of pollutants, fungus, wet rot, dry rot, or bacteria.

(6) This paragraph states that the limit of insurance for this additional coverage is the lesser of $10,000, or 5% of the limit of insurance for the damaged building. If the damaged building is part of a blanket limit, the coverage is limited to the lesser of $10,000 or 5% of the value of the damaged building at the time of loss multiplied by the coinsurance percentage that applies.

Note: The blanket provision is important because it keeps the 5% from being applied to the blanket limit. Doing so would allow each building within the blanket to receive the maximum limit for this additional coverage even if the specific building was worth less than $10,000.

Example: Havor Academy has 20 buildings on its campus insured for a blanket limit of $25,000,000 at 100% coinsurance. The fire damaged three of them. The maximum increased cost of construction limit available to each building is:

Building Number	Value	Lesser of:	Maximum Paid
#1	$10,000,000	$500,000 or $10,000	$10,000
#2	$500,000	$25,000 or $10,000	$10,000
#3	$10,000	$500 or $10,000	$500

(7) This paragraph outlines the insured's options under this additional coverage after a loss.

• The insured can decide to not build or repair. If this is selected, no amount will be paid from this Additional coverage.
• The insured can repair the building or can rebuild at either the current location or at another location. Payment will be made under this Additional Coverage only if completed within two years of the loss. The time period can be extended by the insurance company. The most paid at a new location will be no more than what would be paid at the existing location.
• When the ordinance or law requires rebuilding at a different location, payment is made only if completed within two years of the loss. The time period can be extended by the insurance company.

Example: Havor Academy is unhappy with the loss settlement and the amount it must spend to repair the building and bring it up to code. After reviewing its options, it decides that building a new building is less costly than repairing the old one. In addition, doing so will enhance the overall appearance of the entire campus. The good news is that the company still pays up to the $10,000 limit to help it meet the standards.

(8) A conflict could arise between this coverage and the Ordinance or Law Exclusion in any of the Causes of Loss forms. However, there is no conflict because this paragraph states that this Additional Coverage is not subject to that exclusion.

(9) The Valuation Condition and Replacement Cost Optional Coverage exclude the increased costs of construction due to enforced ordinances or laws. Only this Additional Coverage provides such coverage. As an attempt to clarify issues, this paragraph states that those increased costs of construction limitations stated in the Valuation Condition and Replacement Cost Optional Coverage do not apply to this Additional Coverage. The intent of this paragraph is to eliminate any confusion over the coverages and limitations that exist under these three separate policy provisions.

Note: CP 04 05–Ordinance or Law Coverage should be used if higher limits or broader coverage is needed.

Related Article: CP 04 05–Ordinance or Law Coverage

f. Electronic Data

Electronic data is considered property not covered except for the small $2,500 limit this additional coverage provides. If a covered cause of loss damages or destroys electronic data, this additional coverage provides the cost to replace or restore it but, only on a very limited basis. This item does not apply to prepackaged stock or to electronic data that is an integral part of the building heating, ventilating, air conditioning, elevator, lighting or security systems because they are exceptions to the property not covered electronic data item and therefore already covered under the coverage form.
(10 12 change)

This additional coverage has two unusual features. The first is that the covered cause of loss that applies varies by the cause of loss form that applies to business personal property at the location where the loss occurs. If CP 10 30–Causes of Loss–Special Form applies, the covered causes of loss for electronic data are only the specified causes of loss plus collapse. If CP 10 20–Causes of Loss–Broad Form applies, collapse and the other causes of loss that are part of the broad form apply. There is no mention of CP 10 10-Causes of Loss – Basic because all of its covered causes of loss are applicable.

Loss or damage caused by virus, harmful code, and similar attacks on the computer system is covered, regardless of the causes of loss form that applies. However, normal computer entry or data manipulation problems are excluded.

The second unusual feature is that the $2,500 limit is an aggregate amount and is the most paid over all locations for an entire year. If a loss begins in one year and continues into a second year, the only limit available is the aggregate limit from the first year. This limit can be increased but remains an aggregate limit.

This is extremely limited coverage. As a result, an insured that has electronic data exposures should consider an Electronic Data Processing coverage form or policy.

Related Articles:

AAIS Electronic Data Processing Equipment and Business Computer Coverage Forms

ISO Computer Systems Coverage Form

5. Coverage Extensions

There are several coverage extensions that apply to covered property if 80% or higher coinsurance applies, or if coverage is written on a reporting basis. They are limited to protecting property located in or on buildings listed on the declarations. They also protect property in the open or in or on vehicles but only when the property is within 100 feet of the described premises.

Note: The 10 12 edition changes to the building, business personal property and personal property of others were not added to this opening paragraph so the definition of property in the open or in a vehicle is slightly different.

Any exceptions to the opening paragraph requirements are stated in the specific coverage extension.

Each extension provides additional limits of insurance. None of them is subject to the coinsurance condition.

a. Newly Acquired or Constructed Property

Because contacting an insurance agent to report a new acquisition is not automatic behavior, this extension gives the named insured some peace of mind coverage for new purchases. However, this coverage is not free. The property acquired must be reported and an additional premium paid starting from the date it was acquired.

• Buildings

If building coverage is provided, this extension applies to new buildings the insured is constructing at a premises described on the declarations. Buildings the insured purchases at other premises are also covered but only if they are intended for use similar to other scheduled buildings or as a warehouse. The maximum limit for any newly built or purchased building is $250,000.

Note: As stated above, the newly purchased building at a premises not described on the declarations use must be similar to that of existing buildings or be used as a warehouse. The insurance company accepts risks based on occupancy and should not be expected to automatically add a new location with a dramatically different occupancy than what it already covers.

Example: L&M Property Management is a successful commercial real estate developer. L&M owns 15 office buildings and 10 apartment buildings. It has an opportunity to purchase a building that a furniture manufacturer occupies and quickly does so. A fire occurs two days after the acquisition but before it notifies the insurance company. The coverage L&M expects under this coverage extension does not apply because the occupancy is not similar to that of other scheduled buildings.

Note: The occupancy limitation does not apply to buildings being constructed at a premises already listed on the declarations.

• Your Business Personal Property

If coverage on the named insured’s business personal property is provided, this extension applies to any and all the following:

• Business personal property (newly acquired or existing) at newly acquired locations. Property at fairs, trade shows, or exhibitions is not covered.
• Business personal property (newly acquired or existing) in newly constructed or acquired buildings at locations already listed on the declarations

Note: Unlike the requirement under newly acquired building, there is no requirement that newly acquired business personal property be the same as or similar to existing business personal property. However, it must qualify as eligible business personal property.

Note: The 10 12 edition no longer automatically provides coverage on newly acquired business personal property at a described location. This could be a significant reduction of coverage for businesses that have rapid and constant turnover of stock. (10 12 coverage removal)

The maximum limit per building is $100,000.

This coverage extension does not apply to certain types of personal property of others that are in the named insured's custody on a temporary basis. If the reason the personal property is with the named insured is because the insured is installing or performing work on it, there is no coverage under this extension. In addition, if the personal property is part of the named insured’s wholesaling or manufacturing activities there is no coverage under this extension.

• Period of Coverage

Coverage is provided on a very limited time frame. It ends on whichever of the following is earliest:

• The policy expires
• 30 days after the property is acquired (or construction on it begins)
• The date the property or value is reported to the insurance company

Note: This provision is occasionally applied with unfortunate and undesirable results.

Example: If the insured acquires a building on 12/31/19 and the policy renews on 01/01/20, coverage ends the day after the property was acquired.

This is especially important for the insured that requests that the 30-day time period be increased to 180 days. Even then, coverage still ends on the earliest of the above dates.

The construction date is the date the insured begins constructing a new building. Because covered property does not usually cover foundations, the 30-day limitation does not begin until construction above grade level begins.

The date that building and/or personal property was acquired is reported to the insurance company so that premium can be charged for the entire period it was covered. This extension is provided for the insured's convenience, but coverage requires a premium charge. It is better to owe premium than to have an uninsured loss.

Related Court Case: Newly Acquired Property Held Not Covered After the Automatic 90 Day Period Expired

b. Personal Effects and Property of Others

Coverage for business personal property can be extended to include personal effects that belong to the named insured, its partners, officers, members, employees, or managers. An important restriction of this part of the extension is that coverage does not include theft regardless of the cause of loss form attached.

Coverage also extends to property of others while it is in the named insured’s care, custody, or control. This part of the extension does not have a theft limitation which means that whatever cause of loss applies to the business personal property would also apply to this extension.

The most paid at a described location is $2,500. This is the most available, regardless of the number of persons involved and the value of the property lost. Loss adjustments that involve such claims are handled directly with the property's owner.

Example: A break-in occurred at January Plus. In addition to the loss of stock and other business personal property the following items were stolen:

• The president’s model airplane collection.
• An employee’s prized stuffed animals
• A client’s briefcase and coat

Only the client’s briefcase and coat were covered under this extension because personal effects are not covered for loss by theft.

c. Valuable Papers and Records (Other Than Electronic Data)

The coverage form does not insure the cost to restore and replace information on valuable paper and records. This coverage extension provides a small limit of insurance to pick up this cost but only for valuable papers and records that are not electronic data.

The covered cause of loss that applies varies by the cause of loss form that applies to business personal property at the location where the loss occurs. If CP 10 30–Causes of Loss–Special Form applies, the covered causes of loss are only the specified causes of loss plus collapse. If CP 10 20–Causes of Loss–Broad Form applies, collapse and the other causes of loss that are part of the broad form apply. There is no mention of CP 10 10-Causes of Loss – Basic because all of its covered causes of loss are applicable.

The limit is $2,500 at each location. Higher limits are available. The cost of research and duplication is considered additional coverage. However, the blank material used for the process is covered under business personal property coverage and is not additional coverage.

Note: There are two options if the insured requires higher limits. One is to increase the limits for this coverage extension. The second is to use a separate Inland Marine Valuable Papers and Records coverage form. While increasing this coverage form's limits for this exposure may be simpler and less expensive, doing so may mean losing valuable coverage enhancements and the portable nature of a floater form in a stand-alone policy. Both coverage forms should be compared carefully before making any coverage recommendation.

Related Articles:

ISO Valuable Papers and Records Coverage Form

AAIS Valuable Papers and Records Coverage

d. Property Off-Premises

Most business personal property tends to move around. This extension recognizes this fact and provides up to $10,000 when property is off premises. However, this coverage applies only to property that is usually situated at a described location and is away from the premises for only a short period. The personal property can be temporarily:

• At a location the named insured does not own, lease, or operate
• At a storage location the named insured leases but only if the lease was made after the policy period began
• At a fair, trade show, or exhibition

If storage space leased during the policy period is still leased when the policy renews, it must be added to the policy as a separate covered location. Otherwise, coverage at that leased storage space ends.

This extension has two important limitations. It does not apply to property in or on a vehicle. It also does not apply to property in the possession of the named insured’s salespersons, unless the property and the salespersons are at a fair, trade show, or exhibition.

Inland marine coverage forms are available to cover off premises property, property in transit, or property at the premises of others for storage, service, or repair.

Related Article: Who Needs Inland Marine Coverage?

e. Outdoor Property (10 12 change)

Under Property Not Covered, q. (2) lists the following as not covered:

• Fences
• Radio and television antennas and satellite dishes
• Trees, shrubs, and plants. Stocks of trees, shrubs, or plants held for sale or that are part of a vegetated roof are exceptions to this exclusion. (10 12 change)

This coverage extension insures this property, but only for loss or damage caused by or that results from the aircraft, explosion, fire, lightning, riot, or civil commotion causes of loss. The limit of insurance is $1,000 in any one occurrence, subject to a maximum of $250 for any one tree, shrub, or plant. The limit must cover both restoring or replacing the damaged items and removing their debris.

Note: The 10 12 edition debris removal revision specially states that it does not apply to removing any item that this coverage extension covers.

Example: A group of high school kids looking for treats on a Halloween evening approaches Mitzi’s Daycare just as Mitzi is leaving to go home. They yell at her, "Trick or treat!" A smiling Mitzi tells them that she is sorry, but she doesn’t have anything for them. The next morning, a frowning Mitzi reads, “Here’s your treat!” scrawled on her wood fence now lying on the ground. If her insurance company agrees the damage was due to civil commotion as opposed to vandalism, this coverage extension may apply to some of the damage caused by the disappointed tricksters.

The expense to remove the debris of any tree, shrub, or plant owned by others is also covered unless the named insured is a tenant and the tree, shrub, or plant is owned by the landlord and is located on the premises the named insured occupies. (10 12 addition)

The Commercial Property Program has an endorsement available to include or schedule additional coverage for outdoor trees, shrubs, and plants. CP 14 30–Outdoor Trees, Shrubs, and Plants allows the insured to increase these coverage extension limits and schedule specific coverage for this property. CP 14 50–Radio or Television Antennas is available to use to increase limits on that property. In addition, inland marine coverage forms are available that provide both higher limits and broader coverage.

Related Articles:

ISO Commercial Property Program Available Endorsements and Their Uses

Who Needs Inland Marine Coverage?

f. Non-owned Detached Trailers (10 12 change)

Business Personal Property coverage can extend to include coverage for non-owned trailers that meet all of the following conditions:

• The trailer is used in the insured’s business.
• The trailer is at a premises listed on the declarations.
• The trailer is in the insured's care, custody, or control.
• The named insured is contractually responsible to pay for loss or damage to the trailer.

Note: Using the phrase "contractually responsible" is unusual and may be a preview of things to come in other areas of insurance that have been murky or unclear in the past.

However, there is no coverage for loss or damage that occurs:

• When the trailer is attached to a motor vehicle or motorized conveyance (whether moving or not)
• During any hitching or unhitching operations. This applies even if the trailer is accidentally unhitched from a motor vehicle or a motorized conveyance.

The most paid under this extension is $5,000. Higher limits are available. This coverage is excess over any other insurance that covers such property, whether that insurance can be collected or not.

Note: The limit could be per-trailer or per premises. However, because there is no such statement, the limit should be applied per occurrence. If a named insured uses a number of non-owned trailers, the limit should be increased to reflect those values.

g. Business Personal Property Temporarily in Portable Storage Units (10 12 addition)

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

• The unit is located either within 100 feet of the building or within 100 feet of the premises, whichever distance is greater
• The storage unit is portable. It may be a detached trailer.
• The unit is in use for no more than 90 days.
• The coverage limitation within the causes of loss form with respect to sand, dust, sleet, snow, ice, or rain within a structure applies to any property within the storage unit.

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

This coverage is subject to a sublimit of $10,000. It does not increase the amount of business personal property coverage. This sub-limit can be increased.

This is not duplicative or excess coverage so if a damaged item is covered elsewhere under this coverage form or by endorsement, there is no coverage under this extension for that item.

Example: Olivia gets a great deal on Christmas merchandise but does not have room for it in her warehouse. A month after the merchandise was received, it was destroyed by fire.

Scenario 1: Olivia had put the merchandise in her personal off-site storage unit. There is no coverage.

Scenario 2: Olivia had stored the merchandise at a friend’s warehouse. There is no coverage under this coverage form but her friend’s policy may provide coverage.

Scenario 3: Olivia arranged to store her merchandise in a warehouse and notified her agent to add the location to her policy. There is coverage but endorsement was required to add the location, another to delete it, and an additional premium charge.

Scenario 4: Olivia leased a detached trailer, parked it next to her building, and placed all of the merchandise in it. She had access to the merchandise and gradually brought it into her building throughout the season. When the fire occurred, the merchandise was covered.

B. EXCLUSIONS AND LIMITATIONS

Exclusions and limitations are in the Causes of Loss Forms that apply. More than one causes of loss form may be attached based on entries on the declarations.

Related Article: Basic, Broad, and Special Causes of Loss Forms Analysis

C. LIMITS OF INSURANCE

This section states the maximum limits the insurance company pays in any one loss. In most cases, the limit on the declarations is the total amount that can be recovered for a single loss. If an outdoor sign (whether attached to the building or not) is damaged or destroyed, coverage applies for up to $2,500 per sign in each occurrence.

Example: A fire breaks out at Wally's Winery on July 8. The intense heat pouring out of the winery’s doors shatters the front and rear signs. The sign at the rear is valued at $810. The larger sign in front is valued at $2,710. The insurance company pays only $3,310 for the damage to both signs, $810 for the sign at the rear and $2,500 for the sign at the front of the building.

On August 23 (after both signs are replaced), a severe windstorm breaks a limb off a nearby oak tree. The limb smashes the sign at the rear and completely destroys it. The brand-new sign just recently installed is valued at $1,973. The full value of each sign is paid for the second occurrence.

The limits provided for the following coverages are in addition to the limits of insurance for other coverages listed on the declarations:

• Fire Department Service Charge
• Pollutant Clean-up and Removal
• Increased Cost of Construction
• Electronic Data

Insurance company payments made under 4. Additional Coverages b. Preservation of Property does not increase the limit of insurance that applies.

Example: Let’s go back to Wally’s Winery. During the fire, Wally moves $40,000 in stock to a truck in order to save it. A fire engine responding to the fire strikes the truck and destroys that stock. Wally’s Business Personal Property limit is $300,000. The $300,000 is the most available to pay for the combination of the Preservation Of Property loss and the fire loss to the business personal property that had not been removed.

Note: The limits for the Coverage Extensions are also in addition to the Limits of Insurance on the declarations, even though this section does not specifically make that statement. The explanation of the limits appears in the Coverage Extensions closing paragraph.

D. DEDUCTIBLE

The deductible is the amount of a loss that the named insured must pay. However, the amount of loss must be reduced by any coinsurance or agreed amount condition penalty before the deductible is applied. This becomes the adjusted loss amount.

The amount of adjusted loss is compared to the deductible amount. If it is less than the deductible, the named insured is responsible for the entire loss amount.

Example: Mary’s Meat Market has a $50,000 limit of insurance on Business Personal Property and a $1,000 deductible. The police cut short an attempted break-in but not before the criminals damage the entry doors and a safe. The total loss is $988. Mary pays for the repairs from her own funds because the amount of loss is less than the deductible.

If the amount of adjusted loss exceeds the deductible, the insurance company pays the lesser of the amount of loss above the deductible or the limit of insurance.

Example: The criminals return to Mary’s two nights later. They are much more successful this time and manage to remove a large amount of inventory. Because of their concern about getting caught, they decide to set a fire to cover their tracks. The total loss is $63,000. The amount of loss after the $1,000 deductible is applied is $62,000. Because the limit of insurance is only $50,000, the insurance company pays $50,000.

If the occurrence that causes the loss involves two or more items of covered property and each has its own limit of insurance, the occurrence deductible is applied only once.

Example: The fire from Mary’s Meat Market damages the building that LRO Property Management owns. LRO insures the main building for $250,000, subject to a $1,000 deductible. LRO also has a garage at the rear of the main building insured for $15,000. The loss amounts are $125,000 on the main building and $5,000 on the garage. The loss payment on the main building is $124,000, based on the $125,000 loss reduced by the $1,000 deductible. The deductible is applied to the loss on the main building. The garage is not subject to a deductible and its $5,000 loss is paid.

An optional deductible endorsement is available. CP 03 20–Multiple Deductible Form is used to apply different deductibles to different coverages or types of property.

Related Article: Deductible Plan

E. LOSS CONDITIONS

These Loss Conditions apply in addition to IL 00 17–Common Policy Conditions and CP 00 90–Commercial Property Conditions.

Related Articles:

CP 00 90–Commercial Property Conditions Form Analysis

IL 00 17–Common Policy Conditions Analysis

1. Abandonment

The named insured still owns the property after a loss and is responsible for all expenses associated with it, unless or until the insurance company agrees to accept ownership of the property.

Example: A sinkhole causes the Montgomery Fashion Palace to tilt and slide off its foundation into the middle of Main Street. This creates a major traffic obstruction. Montgomery informs its insurance company that it will accept a cash settlement and then close the business. However, the insurance company is not interested and refuses to accept the property. As a result, Montgomery must either move the building back to its original position or arrange to have it demolished. Montgomery is also responsible for all fines and penalties from the city for obstructing traffic.

2. Appraisal

The insurance company and the insured may occasionally disagree on the value of property or on the actual amount of loss. The appraisal condition is designed to resolve these disagreements without a court intervention. In the first step, one party decides it has reached an impasse with the other party and makes a written request for an appraisal. Each party then hires an independent appraiser. Each appraiser must be both competent and impartial.

Example: Jane is the insured and her insurance company is Bargun-Downe Property Company. They disagree on the value of the roof damaged by a lightning strike. They both agree to submit the dispute to appraisal. Jane selects an experienced appraiser who just happens to be her brother. Bargun-Downe selects a totally impartial party who does not have any appraisal credentials. Both appraisers are rejected. Jane’s selection is biased, and the company’s selection is not qualified.

The appraisers then choose an umpire. If they cannot agree on one, they can request that a judge of a court that has jurisdiction select one. Once all parties are selected and are in place, each appraiser states the value of the property and the amount of loss. If both parties agree, the amount of loss is settled. Only disputed amounts are submitted to the umpire. Any decision made by any two of the three is binding on both the insurance company and the insured.

The expenses associated with this process fall outside the category of expenses the coverage form pays. The insured pays the following costs or expenses. The insurance company does not reimburse it for them:

• Its appraiser
• Its equal share of the cost of the umpire
• Its equal share of any other appraisal expenses

The insurance company pays the following costs and expenses. None of these expenses reduce the limit of insurance:

• Its appraiser
• Its equal share of the cost of the umpire
• Its equal share of any other appraisal expense

Example: A tornado seriously damages Baron’s Furniture Store. Furniture is strewn over many city blocks. Sheila is the owner and believes the value of the loss is $560,000, based on her inventory records. The Cheapskate Mutual claims representative visits the store, views both damaged and undamaged merchandise, and determines the loss to be $350,000. Each side presents its case to the other, but the impasse cannot be resolved. Sheila needs to restore the inventory in order to get back in business. She sends a letter to Cheapskate and requests an appraisal. Each party selects a qualified and impartial appraiser but cannot agree on an impartial umpire. They ask a local judge to select one and he does so. Sheila’s appraiser determines the loss to be valued at $625,000 but Cheapskate’s appraiser determines a value of the loss of $450,000. The umpire reviews their figures and agrees with the insured on some items and with Cheapskate on others. The final settlement is $510,000. Each party bears its own expenses for the appraisers and umpire, but the agreed value of the loss is $510,000.

Related Court Case: Insurer Must Accept Decision of Its Approved Umpire

3. Duties in the Event of Loss or Damage

The insured is expected to act reasonably whenever a loss occurs. If not, the company’s obligation to pay the loss may end. The named insured must:

• Notify the police or other law enforcement authorities if a law may have been broken. Even though this requirement may sound obvious, the circumstances surrounding a loss may make this issue more complicated than it appears.

Examples:

Scenario 1: A theft occurs at Paul’s Camera Shop. Paul reports the loss to the insurance company. It begins to adjust the loss and discovers that Paul did not make a police report. He explains that he suspects that a relative may be involved and doesn’t want to get her in trouble.

Scenario 2: A fire destroys Jerry’s warehouse. The insurance company adjuster discovers that a local gang may have started the fire. Jerry does not fill out a police report because he fears reprisal.

In cases like these, the insurance company has the right to refuse to pay the loss. It needs this requirement to protect its interests, which include being certain that the claim is legitimate as well as making sure there is a chance that the responsible parties are found and punished. When theft of property is involved, police involvement increases the chances that the property will be recovered.

• Give prompt notice to the insurance company of loss or damage and describe the property involved. This notice is not a complete and thorough report. It provides only enough information for the insurance company to begin to process the claim and decide how to respond. Some court cases have challenged the meaning of "prompt." As a result, the best advice is for the insured to send as much loss information to the insurance company as soon as it knows that a loss has occurred.

Related Court Case: Two-Year Limitations Period to File Claim Began To Run On Date of Fire

• Give a description of how, when, and where a loss occurred as soon as possible after it occurs. This requirement is slightly different than the prompt notification obligation. That obligation is to inform the insurance company on a timely basis that a loss has occurred. This obligation assists the company to determine if the loss is actually covered.
• HOW is what actually caused the loss. The answer determines if the loss is covered.
• WHEN is the exact time the loss occurred. Because coverage applies only if the loss occurs during the policy period, this information is very important. There is coverage if the loss occurs at 12:02 a.m. on the inception date. There is no coverage if it started at 11:59 p.m. the day before the inception date. In addition, accurate information on when the loss or damage occurred may help resolve whether the loss occurred suddenly or over a period of time. This is important. There is a distinction because sudden losses tend to be fortuitous and covered while losses that take place over a period time may be maintenance issues that are not covered.
• WHERE is important because most coverages require that the property be at a location or premises listed on the declarations. If the loss occurs elsewhere, the coverage form must be examined carefully to determine if any coverage applies at such locations.

• Take appropriate steps to protect the covered property from any further damage. The time to take that annual Florida vacation is never immediately after a loss occurs. The requirement to protect property involves taking reasonable measures, not extraordinary or unreasonable ones. Covering property with tarps to protect against moisture damage, boarding up windows, and hiring security guards are examples of reasonable measures to take after a loss. Any expenses the named insured incurs are taken into consideration in the loss adjustment and settlement but paying these expenses does not increase the limit of insurance. Finally, the named insured should separate the damaged property from undamaged property and set the damaged property aside for examination whenever possible.

Example: The front window of Haptown Appliances blows in during a violent thunderstorm. Flying glass, debris, and water badly damage the televisions on display. The police notify the owner and the owner informs his insurance agent and the insurance company. When the storm ends, the owner goes to the store and evaluates the situation. His immediate concern is that the security system no longer works. He purchases lumber, boards up the window, and contacts the alarm company. The alarm company recommends a security company that can provide extra security until the window is repaired and the alarm system is put back into operation. After these arrangements are in place, the owner examines the appliances and moves the damaged ones to the rear of the store and begins to clean-up. The insurance company includes the expenses for temporary security and boarding-up the window in the loss adjustment and settlement.

• Provide inventories of damaged and undamaged property when the insurance company requests them. This includes quantities, costs, values, and the amount of loss claimed. This detailed information is important to properly adjust the loss and offer a fair settlement. The named insured controls the inventory and is responsible for supplying the information needed.
• The insurance company has the right to verify that the information the named insured provides is accurate and correct. For this reason, it may inspect the property in order to prove the loss or damage. It may also examine the insured's books and records that relate to the loss or damage. The insurance company can also take samples of the damaged and undamaged property and make copies of the insured's books and records.

This condition states that the insurance company must be reasonable in its requests. Because reasonable is not a defined term, the two parties might disagree about the intent of this condition. For example, the company may state that repeat visits are necessary in order to be thorough. The insured may view the same actions as being a delaying tactic that slows down the settlement. While the essence of this condition is to prevent the insurance company from harassing the insured, it also benefits the company. Because of the way it is written, an uncooperative insured cannot claim that a single visit is sufficient for the carrier to adjust and settle a loss.

Related Court Case: Uncooperative Insured Can't Seek Arbitration (Classic)

• Show good faith in the truth and accuracy of a claim for loss by providing the insurance company with a signed and sworn proof of loss. This must be done no later than 60 days after the company requests it, along with any other information needed. The insurance company provides the necessary forms and instructions on exactly the information it needs.

Note: If the company's requests are not clear and the insured is confused, any delay in providing the information cannot be used as an excuse to deny coverage.

• Cooperate with the insurance company as it investigates and settles the claim.

In addition to the points outlined above, the insurance company has the right to examine any insured under oath. The examination can take place without another insured being present. The examinations can be done as often as necessary with respect to anything related to either the insurance coverage or the claim itself. They can include examinations of the insured's books and records. In all examinations, the written document used to record the insured's answers must be signed.

Related Court Case: Insured Fails to Produce Required Documents Following Fire Loss

Note: Loss investigation is a serious part of the insurance claims process. The insurance company must have complete access to information as necessary to investigate and settle the claim. This may include information the insured would rather not disclose. Claims adjusters want to believe their insurance customers are honest but the sheer number of incidents of fraud makes them cautious. While the insurance company cannot use intimidation or harassment, it must still be diligent in order to protect its assets and to prevent or limit fraud.

4. Loss Payment

a. and b. The insurance company must use one of the four options below to settle a claim:

• Pay the value of the lost or damaged property.
• Pay the cost to repair or replace any lost or damaged property. This cost does not include any expense for increased cost due to enforcing or complying with any ordinance or law that regulates use, repair, or construction of any property. (10 12 change)
• Take all or any part of the property at an agreed or appraised value.
• Pay to repair, rebuild, or replace the damaged property with property of similar type and quality. This payment does not include any expense for increased cost due to enforcing or complying with any ordinance or law that regulates use, repair, or construction of any property. (10 12 change)

The value of damaged or destroyed property, or the cost to repair or replace, is based on the terms of the coverage form’s valuation condition or any other provision that amends or replaces the valuation condition.

c. The insurance company must tell the insured the option it will use within 30 days after it receives a properly prepared and signed sworn proof of loss.

d. Insurance is meant to indemnify, not reward. As a result, the insurance company does not pay more than the insured's financial interest in the covered property at the time of loss.

Example: Mary and Jane form a partnership called Mary Jane’s Clothing. Five years later, Mary purchases Jane’s interest. A covered loss occurs two months after the purchase. Because Jane’s name is still on the policy, she files a claim against the policy. She is politely informed that she has no right to make a claim and that the coverage form will not respond to her claim because she no longer has a financial interest in the covered property.

e. The insurance company has the right to adjust claims for loss or damage to property the named insured does not own directly with the property's owner. However, the insurance company has the right to settle those claims with the named insured and allow the named insured to work with the property’s owner. Any settlement reached must satisfy all claims for the property because the insurance company pays only once. The most the insurance company will pay for such a loss is the property owner’s financial interest in the property.

f. The insurance company that provides the property coverage may decide to defend the named insured against suits due to claims brought by the property's owner. In such cases, the insurance company does so at its own expense.

g. The insurance company must pay the loss within 30 days after it receives the insured's signed and sworn proof of loss. This obligation depends on the insured meeting all policy conditions as well as one of the following determining the value of the loss:

• The parties having agreed on the amount of loss
• An appraisal award having been made

h. Buildings that abut one another often share a party wall. This wall separates the two buildings but is also part of each building. Loss settlements are not affected if the same insured owns all buildings. However, loss settlements may be more difficult if different insureds own the shared party wall.

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

Example: Marsh’s Restaurant is the middle building in a row of five buildings. Each shares a common wall with its neighbor. A fire starts at Marsh’s and spreads to both its neighbors. The loss is substantial. Marsh’s is determined to rebuild but the business on the south side is not. Marsh’s insurance company works with the business on the north side and both pay their share of the party wall. However, Marsh is paid the full amount for the wall on the south side and then its insurance company subrogates against the business on the south side for its share of that wall.

5. Recovered Property

Either the named insured or the insurance company may recover property after the company pays a loss. The recovering party must promptly notify the other to inform it of the recovery. The named insured has the right to decide whether to return the claim payment and keep the recovered property or allow the insurance company to keep the recovered property. The insurance company is responsible for recovery expenses and any repair to the recovered property, subject to the limit of insurance.

Example: Burglars break into Floyd’s Music Shop and steal $25,000 in CDs. The insurance company pays the claimed amount of $25,000. Two years later, the police notify Floyd that they located the CDs in a warehouse. Floyd notifies the insurance company of this development. The insurance company representative and Floyd visit the warehouse and Floyd realizes that the current value of the CDs is negligible due to their age. He decides to keep the claim payment and let the insurance company keep the CDs.

6. Vacancy

Insurance companies are interested in insuring successful and ongoing businesses. Risk pricing contemplates an active occupancy. As a result, rates on vacant properties are heavily surcharged. Because vacancy is often discovered only after a loss occurs, the loss conditions dramatically limit coverage if the insurance company was not informed of the vacancy in advance.

This condition has harsh penalties. As a result, it is very important to understand the definition of vacancy. If the named insured is a tenant, the only part of the building considered when analyzing vacancy is the portion it occupies. That portion is considered vacant if the business personal property on premises is not sufficient for the tenant to conduct its customary operations.

Example: Millie’s Florist Shop occupies a quarter of the Landow building. The tenant that previously occupied the rest of the building, The Cat and Mouse Café, moved out. The building owner is looking for a new tenant and the search is now in its ninth month. A fire breaks out in the vacant portion of the building and Millie's space experiences heavy smoke damage. This condition does not affect Millie’s loss because the portion of the building she occupies is not considered vacant.

If the named insured is the building owner or a general lessee, the entire building is considered in determining vacancy. The building is vacant unless at least 31% of the total square foot area is either of the following:

• Rented to a lessee or sub-lessee that uses it to conduct its customary operations
• Used by the building owner to conduct customary operations.

Note: The key word is customary.

Example: If the lessee, sub-lessee, or building owner is a retail business, the retail business is its customary operation. The insurance company may deny a claim when a loss occurs and it discovers that 90% of the building is used for storage, because the building is vacant according to the coverage form's language.

Buildings under construction or being renovated are not considered vacant. Questions could arise as to how long a project can be considered under construction and under renovation. If a building is being renovated but the renovation involves only the owner working on the building in his spare time (because he knows there are no tenants interested in it), how long will it be before that building is considered vacant?

Example: The Eastward Shopping Center has four separate buildings and always struggles with vacancy issues. Building A is totally occupied by one tenant. Building B has one shop that occupies 20% of the space. The rest of the building has been vacant more than six months. Building C has multiple tenants but is 15% vacant. Building D has just been leased subject to completion of major remodeling. A contract has been signed and remodeling has begun. A major summer storm’s heavy winds damage all four buildings. Based on the definition of vacancy, Buildings A and C are not vacant and their coverage is not affected. Building B is vacant and is subject to a vacancy penalty. Building D is not vacant at the time of the loss (and the vacancy penalty is not applied) because it is being remodeled.

Having defined vacancy, the vacancy condition can be stated. If the building damaged by a covered cause of loss has been vacant as defined above more than 60 consecutive days before the date of loss the following apply:

• The insurance company does not pay anything if the loss is caused by vandalism, breakage of building glass, water damage, theft, or attempted theft. It also does not pay for sprinkler leakage damage if the sprinkler system is not protected against freezing.
• The insurance company reduces the amount of any loss it pays by 15% if the claim is caused by or results from any covered cause of loss not listed above.

Example: Building B in the Eastward Shopping Center example above was penalized 15% because the loss was caused by storm damage. The loss would have been denied if it had been caused by vandalism.

Related Court Case: Vacancy Exclusion Held Applicable When Building Was Devoid of Substantial Warehouse Contents

Related Article: Vacancy

7. Valuation (10 12 change)

The value of covered property at the time of a covered loss or damage is determined as follows:

a. Actual cash value at the time of loss except as described below. The coverage form does not define actual cash value, but court decisions refer to it as replacement cost new minus accumulated depreciation.

Note: Optional Coverage Replacement Cost, described later in this analysis, replaces actual cash value valuation with replacement cost valuation when RCV is shown on the declarations for the type of property.

Example: Listings, Inc. has a small fire that produces considerable smoke. It provides a complete inventory along with purchase prices for all items damaged. The claims adjuster then develops the current replacement cost new for those items and applies a depreciation factor to that replacement cost new in order to develop each item's actual cash value.

Item Description	Item Age	Purchase Price	Replacement cost new	Depreciation factor	Actual Cash Value
Office furniture	2 years	$6,000	$7,500	.80	$6,000
Computers	5 years	$15,000	$9,000	.50	$4,500
Carpet	5 years	$20,000	$25,000	.70	$17,500
Window Coverings	2 years	$10,000	$12,000	.90	$10,800
Total Value			$53,500		$38,800

The maximum loss paid using actual cash value valuation is $38,800. If the replacement cost option had been selected, a maximum payment of $53,500 is available.

b. The insurance company pays the building loss at full replacement cost value if the building limit of insurance meets the requirements of F. Additional Conditions 1. Coinsurance and the cost to repair or replace it is $2,500 or less. This is a bonus to the insured for carrying a limit of insurance that satisfies the coinsurance requirement.

This cost does not include any increased costs due to enforcing or complying with any ordinance or law that affects construction or use. (10 12 change)

This item has exceptions. The following property remains valued at its actual cash value, whether or not it is attached to the building.

• Awnings
• Floor coverings
• Refrigerating, ventilating, cooking, dishwashing, or laundering appliances
• Outdoor equipment
• Outdoor furniture

c. Stock sold but not delivered is valued at its net selling price less discounts and expenses the insured would have had otherwise.

Example: Ben’s Wholesale stocks only merchandise it has sold. A covered loss destroys all the stock. The merchandise was sold at an agreed price of $600,000. Ben provides a 10% 30-day payment discount and it costs $50,000 to transport the merchandise to the customer. The value of Ben’s loss is $600,000 minus the 10% discount of $60,000 and minus transportation costs of $50,000, for a total of $490,000.

d. Damaged glass that is required by law to be replaced with safety glass is replaced with safety glass, even when the damaged glass was not safety glass

Example: Mary purchases a small, older building and is charmed by the full-length bay window where she can display her wares. One day a customer mistakenly drives through the window. The insurance company discovers that the glass is original single pane. Current building codes require that any window that is lower than 18 inches above the floor and more than nine square feet must be replaced with tempered or safety glass. The cost of the new tempered bay window is covered because of the legal requirement for it and this valuation condition.

e. Tenants’ improvements and betterments valuation is unique because the tenant purchases, owns, and uses them but cannot legally exercise its ownership right to remove them when the lease ends and it moves out. One of the following three valuation methods is used that are based on actions of the insured or the landlord:

• Actual cash value is used to determine the amount of loss if the insured repairs or replaces the improvements or betterments.
• A cash settlement based on the proportional value of the items is determined if the insured does not promptly repair or replace the improvements and betterments. The proportion is established as follows:

Step 1. Determine the number of days from the date of loss to the lease's expiration date. The expiration date is considered the end of the renewal option period, if there is one.

Step 2. Determine the number of days from the date the improvements and betterments were installed to the lease's expiration date. The expiration date is considered the end of the renewal option period, if there is one.

Step 3. Multiply the original cost of the improvements and betterments by Step 1.

Step 4. Divide Step 3. by Step 2.

Example: Sally’s Card Shop added $5,000 in improvements when it moved in two years ago. The five-year lease includes a five-year renewal option. Lightning damages the improvements and they must all be replaced. Sally is not sure that the improvements are really needed at this time, so the proportion must be calculated in order to pay the loss.

Step 1. Date of loss is 01/01/19. Date of lease is 01/01/17-12/31/22 with option to 12/31/27. The number of days from 01/01/19 to 12/31/27 is 2,920.

Step 2. The lease inception is 01/01/17 and lease expiration with renewal option is 12/31/27. The total number of days is 3,650.

Step 3. $5,000 X 2,920 = $14,600,000

Step 4. 14,600,000/3,650 = $4,000

Sally would receive $4,000 based on this proportional method.

• The insured does not receive anything if another party, such as the landlord, repairs the improvements or betterments.

Related Articles:

Improvements and Betterments

CP 04 38–Functional Building Valuation

F. ADDITIONAL CONDITIONS

These two additional conditions are extremely important. Mistakes in either can be extremely costly.

1. Coinsurance

This condition applies only if there is a coinsurance percentage on the declarations. The insurance company does not pay the full amount of any loss if the value of the covered property at the time of loss multiplied by the coinsurance percentage on the declarations exceeds the property's limit of insurance.

It is important to understand that coinsurance is not required or mandatory. However, it is recommended because pricing is surcharged significantly when coinsurance is not selected. The lower premium is provided on the condition that the insured maintain a limit of insurance equal to the selected 80%, 90%, or 100% of the value of the covered property. If it does not, a coinsurance penalty is applied to any loss sustained.

The coinsurance penalty is calculated as follows:

Note: The insured can select the Agreed Value option and not be subject to coinsurance or the coinsurance penalty. This option is analyzed in G. Optional Coverages.

Step 1. Determine the value of the covered property at the time of loss. The value of the property as of the policy inception date is irrelevant.

Example: Keith’s Saddle Barn has coverage on its stock and other business personal property. The total value is $150,000 on the inception date. Keith decides to use 80% coinsurance and purchase coverage with a $120,000 limit. A fire occurs three months into the policy period. At the time of loss, the total value of stock and other business personal property is $200,000 because Keith purchased a large amount of stock in advance of the Christmas season. The loss is valued at $50,000. The value used to determine the coinsurance penalty is $200,000, the value at the time of loss, and not the $150,000 value on the inception date.

Step 2. Multiply Step 1. by the coinsurance percentage on the declarations. There is no penalty if the result is greater than the limit of insurance. However, if the result is less than the limit of insurance, go to step 3.

Options available are 80%, 90%, 100%, or none. The premium is surcharged if the no coinsurance option is selected. Property rates are developed assuming 80% coinsurance and are not surcharged or credited. Limits that reflect 90% coinsurance are credited 5% and those that reflect 100% coinsurance are credited 10%.

The limit of insurance is not required to be the value multiplied by the coinsurance. It should be based on the maximum value expected during the policy period. If fluctuating values are expected, the insured should consider writing coverage on a reporting form or using the peak season endorsement.

Related Articles:

Value Reporting Form

Peak Season Coverage

In some cases, the insured may choose to insure at 100% value of the property but keep the coinsurance at 80% or 90% so the limit is adequate in case of unanticipated value increases and to avoid a coinsurance penalty.

Example: Because the value of the property at the time of loss is $200,000, Keith’s Saddle Barn's limit should have been $160,000. Keith chose 80% but applied it to the value of $150,000 as of the inception date and now faces a coinsurance penalty because the limit is only $120,000.

Step 3. Divide the limit on the declarations by Step 2 to develop the coinsurance penalty factor.

Step 4. Before applying the deductible, multiply the loss amount by Step 3.

Step 5. Subtract the deductible from step 4.

The insurance company pays the lesser of the amount determined in Step 5. or the limit of insurance. The named insured pays any difference.

Example: Keith’s Shoe Barn's loss amount with a coinsurance penalty is determined as follows:

Step 1. The value is $200,000

Step 2. $200,000 X .80% = $160,000.

Step 3. $120,000 / $160,000 = .75

Step 4. $50,000 X .75 = $ 37,500.

Step 5. $37,500 – the $1,000 deductible = $36,500

The insurance company pays $36,500. The remaining $12,500 is not covered.

The coverage form includes three useful examples that explain how the coinsurance condition applies. The coinsurance condition may be suspended by selecting G. Optional Coverages 1. Agreed Value which is analyzed later in this article.

Related Article: Coinsurance Clause

2. Mortgageholders

Mortgageholder is not defined in this coverage form except to state that trustees are included as mortgageholders. The insurance company pays for covered loss or damage to buildings or structures to each listed mortgageholder in the order of precedence and as its respective interest appears. The mortgageholder must prove its interest at the time of loss.

The mortgageholder retains the right to receive loss payments even when foreclosure proceedings or similar actions are being taken against the insured. However, it loses those rights after the foreclosure is complete because at that point the named insured no longer has any interest in the property. Instead, the bank is the owner and its policy should respond.

If the insured’s claim is denied because of actions taken by the insured, or because it failed to comply with any of the coverage form's terms and conditions, the mortgageholder retains its right to receive loss payments but only if it has done all of the following, as applicable:

• Paid any premium due when the insurance company notified it that the insured had not done so
• Submitted a signed, sworn proof of loss within 60 days after the insurance company notified it that the insured had not done so
• Notified the insurance company of any change it knows of in ownership, occupancy, or substantial change in risk

Example: Gravyboat LLC buys and sells homes. It owned 35 homes when a market adjustment occurred. Gravyboat is overextended and cannot sell a number of houses. The mortgageholder, Bank Three, begins foreclosure proceedings on five properties. Gravyboat does not pay the premium and CloseEnuf insurance company sends a notice of cancellation. Bank Three receives the notice and pays the premium but does not tell CloseEnuf that Millicent, LLC had actually purchased two of the properties. When one of the Millicent properties is damaged by fire, CloseEnuf denies the loss because Bank Three had not informed it that the ownership had changed.

Once the mortgageholder takes such intervening action, the coverage form’s terms apply to the mortgageholder because it assumed the named insured's position.

If the insurance company pays the mortgageholder for a covered loss or damage but refuses to pay the insured because of its actions or because it did not comply with the terms and conditions of the coverage form both of the following apply:

• The mortgageholder’s rights under the mortgage transfer to the insurance company to the extent of the amount paid.
• The mortgageholder’s right to recover the full amount of its claim is not impaired.

The insurance company has the option to pay off the entire mortgage including accrued interest. If it does, it owns the mortgage and the insured must pay the remaining mortgage debt to the insurance company.

If the insurance company cancels the policy for non-payment of premium, it must give at least 10 days prior written notice to the mortgageholder before the cancellation takes effect. It must give at least 30 days written notice to the mortgageholder for any other reason.

If the insurance company decides to not renew the policy, it must give at least 10 days written notice to the mortgageholder prior to the expiration date.

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

G. OPTIONAL COVERAGES

This coverage form has four optional coverages. They are optional because they apply only if there are entries for them on the declarations that indicate they have been selected. The optional coverage may apply to one type of coverage but not another. As a result, the entries on the declarations must be very precise.

1. Agreed Value

The coinsurance condition includes serious penalties if the value of covered property at the time of loss is less than the value the coinsurance clause requires. While the agreed value option gives the insured an alternative valuation technique, it is also subject to certain conditions and requirements.

The coinsurance condition does not apply when the insured selects this optional coverage. Instead, the insurance company does not pay more for covered loss or damage to covered property than the proportion that the limit of insurance bears to the agreed value entered on the declarations.

An expiration date for the agreed value option must be entered on the declarations. If its expiration date is prior to the policy expiration date and it is not extended by endorsement, the coinsurance condition is reinstated, and the option no longer applies. This optional coverage applies to only loss or damage that occurs on or after the effective date of this optional coverage and before the expiration date of the agreed value option date on the declarations or the policy expiration date, whichever is earlier.

Note: This option is called agreed value because the insurance company and the named insured agree that the value is adequate based on documentation submitted to substantiate the values. Before extending the option, updated documentation must be submitted so that a new agreed value can be determined.

Example: Kitty’s Tavern submits an application and requests agreed value optional coverage. The worksheet also submitted shows a business personal property value of $150,000. However, Kitty wants to insure it to only 90% of this value. AlcoHall Insurance company and Kitty agree on a 90% agreed value of $135,000. The policy is issued with this limit for the period 01/01/19 to 01/01/20. The agreed value clause expiration date is also 01/01/20.

A $5,000 covered loss occurs. The loss is paid in full because the limit and the agreed value are the same.

The policy is extended to 04/01/20 without a request to extend the agreed value optional coverage. When a loss occurs on 03/01/20, the coinsurance clause is reinstated, and the loss is adjusted based on coinsurance because the Agreed Value Optional Coverage date was not extended.

2. Inflation Guard

This option gives the named insured a certain degree of flexibility. It is used primarily on real property, not personal property. The named insured selects an annual inflation rate. The insurance limit automatically increases by the inflation rate selected during the course of the year. As a result, if a loss occurs, the new limit as of the date of loss is determined before any loss calculation is done. The new limit is calculated as follows:

Step 1. Determine the limit of insurance that applies to the loss.

Step 2. Multiply the limit in Step 1. by the decimal version of the annual increase percentage selected on the declarations.

Step 3. Determine the number of days since the limit was last changed.

Step 4. Divide Step 3. by 365.

Step 5. Multiply Step 2. by Step 4. to determine the amount of increase.

Step 6. Add Step 1. to Step 5. to determine the limit of insurance that applies to the loss.

Example: Caldwell Manufacturing is issued on January 1 a $1,250,000 limit and an 8% inflation guard factor. A loss occurs on July 1. The limit available to pay the loss is calculated as follows:

Step 1. $1,250,000 is the limit of insurance

Step 2. $1,250,000 X .08 = $100,000.

Step 3. There are 30 days between June 1 and July 1.

Step 4. 30/365 = .082

Step 5. $100,000 X .082 = $8,200

Step 6. $1,250,000 + $8,200 = $1,258,200. This is the amount available to apply to pay for the claim.

Note: When Optional Coverages–Inflation Guard is included, the renewal limit should be reviewed carefully. If the inflation guard factor is 8%, the limit at renewal should be at least 8% higher than the current limit or the insured's renewal limits are actually a reduction in coverage.

Example:

· Policy term: 01/01/19 to 01/01/20

· Limit of insurance: $1,000,000

· Inflation guard factor: 8%

· Limit of insurance as of 12/31/19: $1,000,000 X .08 = $1,080,000

The insured that wants the policy renewed "as is" should be reminded that this means a renewal limit of $1,080,000. This reflects the original limit increased by the annual inflation guard factor. Renewing for the $1,000,000 limit is actually a reduction in limits.

3. Replacement Cost

a. The Valuation Loss Condition is amended by replacing Actual Cash Value with Replacement Cost. This means that there is no deduction for depreciation of property when determining payment for property that a covered cause of loss damages or destroys.

b. Replacement cost valuation does not apply to:

• Personal property of others
• Contents of a residence
• Works of art, antiques, or rare articles such as etchings, pictures, statuary, marbles, bronzes, porcelains, and bric-a-brac.
• Stock, unless an entry on the declarations includes stock as covered property subject to replacement cost

c. The insurance company does not force the insured to accept replacement cost valuation at the time of loss. The insured can accept a settlement based on actual cash value. The insured can later make a claim based on replacement cost as long as it notifies the insurance company within 180 days after the date of loss that it wants to exercise the replacement cost. The reason to accept an actual cash value settlement and then revert to replacement cost is to obtain initial funds to begin the process to repair or replace.

Example: Connie’s Feed and Grain has a $225,000 limit, including replacement cost optional coverage. A fire destroys her store. Connie decides to take the actual cash value settlement of $150,000 instead of rebuilding. When members of the community beg her to reconsider her decision, she changes her mind and on the 179^th day, notifies the insurance company of her intent to rebuild. She uses the $150,000 settlement to start rebuilding. She receives the remaining $75,000 after construction is complete.

d. The insurance company does not pay on a replacement cost basis until the property damaged or destroyed is actually repaired or replaced. If the arrangements for repairs or replacement are not made as soon as possible after the date of loss, a replacement cost settlement can be denied.

Note: The longer the insured takes to begin to make repairs, the more expensive the loss becomes because of deterioration and general exposure to the elements. Water damage is always a concern, especially in warm climates.

Tenants’ improvements or betterments are subject to replacement cost when personal property is subject to replacement cost. However, if the named insured does not meet the conditions in d. above, the valuation reverts to the method explained under the Valuation Condition. In addition (and to prevent double dipping), the insurance company pays the named insured only when the named insured actually pays for the repairs. When the landlord or another party pays for the repairs to the tenant’s improvements and betterments, the named insured will not receive any payment.

e. The insurance company is obligated to pay only the least of the following amounts:

• The limit of insurance that applies to the damaged or destroyed property
• The cost to replace the damaged or destroyed property with comparable property used for the same purpose

Note: There is no requirement that the property be replaced with comparable property that is used for the same purpose only that the cost for whatever replacements are made will not exceed the cost of comparable property used for the same purpose.

• The actual cost to repair or replace the damaged or destroyed property

The named insured has the option to rebuild at a different location. When that option is selected, the amount paid is limited to how much it would have cost to rebuild at the original site with comparable value property that is used for the same purpose.

Example: Barney’s Gun Shop is destroyed. Barney has been subject to harassment at the current location so decides to relocate to a more amenable area. He also decides to change operations entirely. He has always dreamed of running a British Tea Shop and this seems like the perfect time. The cost to rebuild Barney’s Gun Shop at its current site is $325,000. The cost to build Barney’s Tea Shop is $400,000. The most Barney will receive is $325,000 and he will receive it only after the Tea Shop is built.

f. The cost of repair or replacement does not include any increase caused by enforcing or complying with any ordinance or law that applies to the construction, use, or repair of the property. (10 12 change)

4. Extension of Replacement Cost to Personal Property of Others

This extension can be used only when the Replacement Cost Optional Coverage is selected because it simply modifies it. This coverage removes the exclusion for personal property of others from the above Replacement Cost Optional Coverage.

There is one limitation. If personal property of others is subject to a written contract that establishes the named insured's liability for loss or damage to it, valuation of that property is based on the least of:

• The amount stated in the contract
• The property's replacement cost
• The property's limit of insurance

Example: Mary has a contract for leased equipment in her office. The contract states that she is not responsible for more than $40,000 if a loss occurs. A loss occurs and the replacement cost value for the equipment is determined to be $60,000. The most the insurance company pays is $40,000 due to the contract's language.

H. DEFINITIONS

This coverage form has three defined terms.

1. Fungus

This term includes any and all forms of fungus. Mold, mildew, spores, scents, mycotoxins (or by-products that the fungus releases or produces) are examples of items considered fungus, but the term is not limited to only them.

An example of mildew

Note: 4. Additional Coverages e. Increased Cost of Construction uses this term to restrict coverage.

2. Pollutants

This term refers to any solid, liquid, gaseous, or thermal irritant or contaminant. It includes smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned, or reclaimed.

Pollutants take many forms.

Note: ISO uses this definition in all its coverage forms.

3. Stock

This is merchandise held for sale or in storage. Raw materials, goods in process, and finished goods are all considered stock. In addition, supplies that will be used in the packing or shipping of stock are stock.