CHAPTER TEN - COVERING BOTH REAL AND PERSONAL PROPERTY

 

It is rather obvious that the types of properties mentioned in the Nation-Wide Definition are personal property and refers to property that can be moved and is not part of a structure that is attached to the ground.  Buildings and land (and other structures attached thereto) are considered as real property.  There are three types of Inland Marine policies that cover both personal property and real property.

 

1. Builders Risk policies:  These policies cover structures and buildings during the construction stages and the policy covers the structures and buildings and to any personal property that will become part of the building or structure.  The Builders Risk policy discussed here will pertain to the construction of buildings and similar structures.  Other types of Builders Risk policies have been discussed in the section on Instrumentalities of Transportation.

 

1. Installation Floaters:  While the principal coverage under this type of Inland Marine coverage is moveable property such as electrical or heating or plumbing, etc., equipment, during the time that it is being installed, coverage can continue once it is installed and until the construction has been completed and accepted by the owner (or the insured’s interest may expire, if before the building has been completed).  Once this equipment is installed, it becomes real property.

 

1. Difference in Conditions policy (DIC):  Coverage for a physical structure, machinery, inventory, and merchandise within the structure in the event of earthquakes, flood collapses and subsidence strikes.  Even though coverage is on an All-Risks basis, important perils are excluded, such as fire, vandalism, sprinkler leakage, employee dishonesty, boiler and machinery losses, and mysterious disappearance, since it is assumed that the insured business already has coverage for these perils under a business property insurance policy.   

 

The Installation Floaters and the Builders Risk policies will be discussed together here, as they are very similar and separate discussions would be repetitious.  

 

BUILDERS RISK POLICIES & INSTALLATION FLOATERS

 

As indicated above, these policies cover real property during construction, or while being renovated or repaired, in addition the personal property that will become a permanent part of the structure is also covered.  Under an Installation Floater, coverage will stop when the “interest of the insured” stops or when the project has been completed and accepted by the owner, whichever is first.  According to the Marine Definition, Builders Risk policies and Installation Floaters must insure against perils other than fire and extended coverage. 

 

The Definition allows coverage on property in transit on its way to the construction site, and “during temporary storage or deposit.” 

 

Generally, and in most states, Builders Risks can be insured either under a commercial property policy or an Inland Marine policy.  The rates of the commercial property policy are generally filed, whereas the rates and conditions of the Inland Marine Builders Risk policy are not filed.  Therefore, and as usual, this allows the Inland Marine Builders Risk policies to be broader in terms.

 

 

While Builders Risk policies are usually nonfiled, there are a few states that require Builders Risk filings.  Also, many companies use a standardized form for the general contractors, and are used for schools, shopping centers, apartment houses, office buildings, condominiums, private residences and other such construction.  Construction of electrical utility plants and oil refineries, and similar types of operation, especially those that require very expensive machinery and equipment to be installed, would not be candidates for a “standard” form.

 

Under an Installation Floater, the insured may be the owner of the property, the contractor doing the construction and installation, or may be the one that is selling the property.  Under a Builders Risk policy, the insured may be the owner of the property under construction, the contractor, or can also be both the owner and the contractor, or can also be a subcontractor. 

 

PROPERTY COVERED

 

Both, the Builders Risk policy and the Installation Floater cover property owned by the insured, and also covers property of other parties if the insured is so liable. 

 

The Builders Risk policy covers the property that is being constructed, or being re-constructed, altered or repaired, and also consists of certain machinery, equipment, supplies and fixtures that will eventually become part of the structure.  Often, scaffolding and temporary structures are included.

 

Installation floaters are usually used to cover plumbing, heating, cooling and electrical systems and such, and can be written to include such items as carpeting, tile, glass, elevators, machinery, etc.

 

Property that is excluded from the Builders Risk and or Installation Floaters can vary by policy and by company, but typical exclusions would include

1. trees, shrubs, grass, plants or land values;
2. plans, drawings, designs, blueprints or specifications;
3. property in storage unless it has been specifically assigned to a job site;
4. machinery and tools and equipment, etc., that will not become part of the permanent building or structure;
5. (Builders Risk only) existing property to which alterations, repairs or additions are being made.

 

Since the majority of the Builders Risk and Installation Floater policies are All-Risks policies, in addition to the usual exclusions, the following exclusions are frequently added:

1. error, omission, or deficiency in design, faulty workmanship or faulty materials;
2. subsidence, settling, cracking, shrinking, bulging, or expansion of foundations, pavements, sidewalks, driveways, walls, patios, floors, roofs or ceilings (unless covered by specified perils);
3. loss or damage caused by snow, rain or sleet to property in the open that is not a permanent part of the structure or installation, except for property in the custody of a carrier for hire;
4. loss covered under any guarantee, warranty, or other similar assumed obligations;
5. order of any governmental authority, or enforcement of any state ordinance or law that requires the demolition of any part of insured property damaged by a covered peril;
6. testing of machinery or equipment;
7. delay penalties;
8. flood and water damage;
9. earthquake; and
10. employee dishonesty.

 

Installation floaters generally exclude wear and tear, gradual deterioration and inherent vice, and may exclude mechanical breakdown, electrical injury from artificial causes, errors in design, faulty workmanship or materials, and explosion or rupture of steam boilers.

 

COVERAGE PERIOD

 

The time frame is usually stated in the policy to begin when transit commences, or when the insured acquires a financial interest in the property (even if the property has not begun to be transported).  Builders Risk and Installation Floaters may be stated to end at the earliest of (1)  when the financial interest of the insured ceases; (2)  when the purchaser accepts the property as complete; (3)  when the policy expires or is canceled.  For Builders Risk only, (4)  when the property is put to its intended use, leased or rented to others, or occupied;
(5)  30 days (or 60 or 90 days) after construction has stopped; or (6)  when the insured abandons the construction with no intention to complete the work.

 

LIMITS OF INSURANCE

 

There will be a separate limit of insurance for property in transit and to property at the job site, and the Builders Risk policies will include a limit for property at a location other than at the job site.

 

EXTENSIONS OF COVERAGE

 

Builders risk policies can be extended to include loss of rents, loss of earnings, and “soft costs.” 

 

When a property under construction is damaged by an insured peril with the result that there is a delay in completion of the structure, there can be loss of earnings, particularly if the building was to be rented to others.  He could lose income from rents.  If the owner was going to use the building for his own purposes, then he would lose income because of the time element.  Coverage is usually on an actual loss sustained basis.

 

The building owner might suffer from other costs (“soft costs”) such as additional interest expense that can be incurred if the construction loan has to be renegotiated; advertising expense can be higher as future tenants will have to be notified of the delay and if some tenants do not rent or lease space because of timing, then additional tenants may be needed.  Also, additional real estate taxes may be due because of the extension of the construction time, and more commissions may have to be paid to real estate agents if they have to renegotiate the leases they have obtained.

 

VALUATION BASIS

 

For Builders Risk policies, the basis of settlement is usually the cost of the materials and labor involved in repairing or replacing the property with materials “of like kind.” 

 

For Installation Floaters, they may provide for actual cash value for property of the insured, and if the insured is liable for the property of others, the amount for which the insured is liable is the valuation. 

 

UNDERWRITING

 

The underwriters for Builders Risk and Installation Floaters must contend with a multitude of exposures.  The principal ones are the old standbys – fire, theft, windstorm, vandalism, collapse, transportation, and depending upon the geography – flood, earthquake, strikes and civil unrest.

 

Fire is the most important cause of loss as it is usually the most expensive.  Fire protection, both public and private, must be carefully studied and documented.  How tall the building is and the construction material used in the building have a major impact on fire and ensuing damages.  Frame or wooden buildings are the most susceptible to fire.  High-rise reinforced concrete buildings require extensive use of forms for pouring concrete, with the fire hazards thereof.  Many fires are caused by temporary heating equipment and cutting and welding.  On the high-rise building under construction, it is important that the standpipes that provide the water supply increase in height as the building increases in height, thereby making sure that there is always an adequate water supply.

 

Loss by theft and vandalism and arson can be minimized by taking the proper precautions, such as fencing, lighting, alarm systems on trailers and storage sheds, and security guards.  For those buildings being erected in areas where windstorms are frequent, such as hurricane seasons, construction that will take more than a year must be carefully underwritten and many times will include a higher deductible and a lower limit of insurance for losses caused by windstorms, as buildings in those areas are particularly susceptible to flooding and earthquake.

 

A rather unusual type of coverage for these policies is operational testing.  For instance, if the building is a chemical plant, certain chemicals can be introduced into the system under pressure, and therefore must be tested at high pressure &/or high temperatures.  At electric generating plants, they are exposed to hazardous steam conditions, and turbines are necessarily tested at high rates of speed.  If there are design flaws or errors in construction, testing such as this can cause substantial damage.  Because of the technical aspect of testing equipment, and the potential for substantial losses, some policies will have a sub-limit of insurance for losses which occur during the testing phases.  They may also require the presence of an expert in that particular field.

 

Because of the uniqueness of this type of forms, they are often written on a manuscript form, which can mean that a producer writes the form.  In these cases there has to be very close checking of all of the vernacular and the using of legal terminology so that the intent of both the insurer and the insured can be reached.

 

 

 

 

DIFFERENCE IN CONDITIONS COVERAGE

 

Originally, the “Difference in Conditions (DIC)  coverage was used only for Marine policies, and started as an Inland Marine coverage when fire insurance policies were Named Perils forms and this policy was created to bridge the gap between the fire insurance policy and the All-Risks policy.  Today, of course, the All-Risks policy is available, but the DIC policy is nonfiled and is an Inland Marine class of business, therefore it offers considerable flexibility.  For instance, while flood and earthquake losses are excluded in regular All-Risks policies, they can be included in a DIC policy. 

 

A more precise definition of DIC coverage is as follows:

 

 

“Even though the coverage is on an All-Risks basis, important perils are excluded, such as fire, vandalism, sprinkler leakage, employee dishonesty, boiler and machinery losses, and mysterious disappearance, since it is assumed that the insured business already has coverage for these perils under a business property insurance policy.”  (Dictionary of Insurance Terms, Third Edition)

 

As a general rule, DIC insurance is intended to apply to catastrophic losses, and therefore it has high deductibles.  There are many forms on the market today as nearly all DIC policies are individually created to suit the particular situation.

 

PROPERTY AND PERILS COVERED

 

The property to be covered can be personal or real property, or both.  Every building and/or the contents of every building may be listed, or it can use a blanket statement, e.g., “all real and personal property owned by the insured or for which the insured may be liable.”  If this approach is used, a single limit of insurance is usually stated.

 

Properties that the insurer may not feel they want to insure or properties that can best be insured under a more usual and customary form, can be excluded.  These exclusions can be (and certainly not restricted to) currency, jewelry & precious stones, securities and negotiable instruments; animals, crops, lumber and other plants; data processing equipment; property in transit or being constructed; boats, airplanes, vehicles designed for highway use, railroad stock and pipelines; tunnels, mines, and property therein; piers, wharves, bulkheads, pilings, docks, dams, reservoirs; and property of the insured sold by conditional sales, trust agreements, or other deferred payment plans.  From this abbreviated list, it is apparent that the DIC policy is a policy that insures property that doesn’t fit into regular Inland Marine forms.

 

As an All-Risks policy, the DIC policies insure against risks of direct physical loss or damage from any external cause, except as excluded.  Therefore, the perils that are excluded should tie in with the basic policy.  Occasionally, there can be some duplication of coverage, in which case the “other insurance” clause will be invoked.  Typically, excluded perils would be fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, aircraft, vehicles, smoke, sprinkler leakage, vandalism and malicious mischief, and any other perils that may be insured (including by endorsement) on the base policy.

 

One can legitimately ask, since there are so many exclusions and they tie so closely to what is covered in the basic policy, doesn’t the DIC policy simply say that they will not cover what is covered in the basic policy?  Actually, the form is frequently written in this manner, by referring to the basic policy by insurer, policy number, date or issue, etc., that positively identifies the basic policy.  They have also been issued in the same manner, but exclude those perils insured under a standard property form, if that state has a standardized policy form. 

 

A list of perils that could be excluded would be quite lengthy, but would include such items as contamination, deterioration; errors in design or processing, rain; snow, sleet; employee dishonesty; steam boiler perils; shrinkage, evaporation, etc.; earthquakes or floods; mysterious disappearance; war and nuclear hazards, etc., etc. 

 

The policy can be extended to cover loss of income or business interruption.  Flood coverage is often excluded, and when it is excluded, it may be so broad that in certain cases the entire exclusion would be removed and a more moderate exclusion would be provided.  The same situation arises with earthquake exclusions in some cases as it can also be exceptionally broad and exclude any earth movement of any kind.

 

LIMITS

 

 

In some cases, a limit of insurance can be assigned to each piece of property each at different locations.  Generally there is only one limit of insurance, and since there usually is no coinsurance, the limit can be a percentage of the property insured.  If business interruption is included, then there is usually a limit for that coverage, and when flood or earthquake coverage is added, there are additional limits for these.

 

DEDUCTIBLES

 

One deductible can apply to physical loss only, or it can be used for both business interruption and physical loss, or on the other hand, a separate one can be used for business interruption.  If flood and/or earthquake coverage is afforded, then there will be separate deductibles for those.  Flood deductibles are usually expressed as a dollar amount, while earthquake deductibles are usually either a dollar amount, a percentage of either the property damaged, or the total value of property in a particular zone.

 

VALUATION OF PROPERTY

 

Usually the valuation follows the basic policy, such as cash value, replacement cost or some other valuation.  Different valuation methods can apply to the property covered, particularly since this policy can cover such a wide variety and large number of perils.

 

OTHER INSURANCE

 

DIC policies are almost always stipulated to be excess over other insurance covering the same property against the same peril.  DIC policies may also allow for other insurance which would be another excess over the limits in the DIC policy, as the DIC policy is frequently written in “layers."

 

UNDERWRITING

 

Because the DIC policy can be written on so many types of property, each with their own particular perils, the underwriting of each policy can be quite a challenge for the underwriter.  Obviously underwriting of DIC policies requires a lot of technical expertise tempered with an abundance of common sense.

 

The three most common DIC losses are water damage, collapse, and burglary.

 

Water damage is the most common DIC loss, caused by ruptured pipes, leaking roofs and surface water.  The age and condition of the plumbing is of prime importance.  In some cases, if there is a danger of surface water causing damage during runoff, the underwriter must be aware of low areas where water can stand, and in some cases there can be drainage ditches dug or berms erected where necessary.

 

Roof collapse is the most common loss due to collapse, generally because of too much weight on the roof, such as snow drifts or heavy rains.  Where there are several flat roofs next to this increases the possibility of excess weight on any particular roof.

 

As in all lines of insurance, the exposure of burglary is in direct relationship to the value of the property insured and the difficulty of access.  Alarm systems, security guards, building locks and construction, etc., all must be known in order to underwrite the DIC policy properly.

 

Earthquakes are not common, but they can be the most severe in property losses.  Property underwriters are usually aware of the various seismic zones and the possibility of earthquakes in certain areas.  Within the contiguous 48 states, there has been seismic activity reported in all states, with the upper Midwestern states, and an area along the gulf coast.  Actually, only North Dakota, Minnesota, Wisconsin and Florida have no seismic activity reported anywhere in the state.  Alaska has a lot of activity, as does Puerto Rico and all of the Hawaiian Islands, except Kauai.  When an underwriter excludes earthquake, they usually exclude shock damage, but not damage resulting from other covered perils that occur because of the quake.

 

In respect to exposure to flood loss, the United States Army Corps of Engineers provides a 100-year flood plain study that shows where floods are likely to occur. 

 

Underwriters will use inspections to help them evaluate the risk, and can call upon either their own engineers for specialized exposures, or contract with inspection companies for more routine risks.

 

STUDY QUESTIONS

 

1.  Which of the following Inland Marine policies covers both personal property and real property?

        A.  Garment Contractors Floater.

        B.  Furriers’ Customers insurance.

        C.  Builders Risk policies.

        D.  Contractor’s Equipment Floater.

 

2.  Since a Commercial Property Policy (CPP) is filed, and the Inland Marine Builders Risk policies are not filed,

        A.  the provisions of the CPP are broader and more attractive to many customers.

        B.  the provisions of the nonfiled form are broader.

        C.  the Builders Risk policy is not available in most states.

        D.  the Builders Risk policy still must file their rates in most states.

 

3.  Under an Installation Floater, the insured cannot be

        A.  the owner.

        B.  the contractor.

        C.  the seller of the property.

        D.  a subcontractor.

 

4.  The majority of the Builders Risk and the Installation Floaters are

A.  on the Named Perils form.

        B.  on the All-Risks form.

        C.  designed to cover settling, cracking, shrinking, etc., of foundations.

        D.  designed to cover damage from rain or snow.

 

5.  On the Builders Risk form, the coverage period begins

        A.  when the policy is written.

        B.  when the purchaser accepts the property as complete.

        C.  when the property is leased to others,

        D.  when transit commences or when the insured acquires a financial interest in the property.

 

6.  For Builders Risk policies, the basis of settlement in case of loss, is

        A.  the amount that an appraiser puts on the property.

        B.  the cost of the materials and labor involved in repair or replacing the property with materials of like kind.

        C.  the invoice amount.

        D.  actual cash value for property of the insured, for other’s property – liability of the insured would pertain.

 

7.  The most important cause of loss for Builders Risk is

        A.  flood.

        B.  windstorm.

        C.  fire.

        D.  riot.

 

8.  What type of insurance provides coverage for a physical structure, machinery, inventory and merchandise within the structure, in the event of earthquakes, flood collapses and subsidence strikes.

        A.  Builders Risk insurance.

        B.  Installation Floater.

        C.  Contractors Equipment insurance.

        D.  Difference in Conditions insurance.

 

9.  Under a Difference in Conditions policy, what type of property is covered.

        A.  Real property.

        B.  Personal property.

        C.  Real or Personal property, or both.

        D.  Commercial property only.

 

10.  Difference in Conditions (DIC) insurance frequently is written in addition to other insurance covering the same property.  In case of a loss, the DIC policy is almost always considered as

      A.  excess over the other insurance.

      B.  secondary to the other insurance.

      C.  shared on a pro-rate basis with the other insurance.

      D.  void if the same property is covered.

 

ANSWERS TO STUDY QUESTIONS

 

1C     12B     3C     4B     5D     6B     7C     8D     9C     10A