CHAPTER TWO - COMMERCIAL PROPERTY INSURANCE

 

The ISO introduced a series of forms to protect commercial property and to insure buildings, personal property, and business income and builders risks.  The coverage parts of this policy are:

• Commercial Property Policy

            1)         Basic Form

            2)         Broad Form

            3)         Special Form

• Commercial Crime
• Commercial Inland Marine
• Commercial General Liability
• Commercial Auto
• Commercial Boiler and Machinery

 

• The policy is available to almost any type of risk and it is not necessary to buy coverage on all the coverage parts   - any two parts may be used to comprise the policy.
• The policy does not have to incorporate liability coverage. 
• Two classes of property are ineligible for this coverage: Homeowners Policies and Farming Policies.

UNIFORM FORMAT

 

All three forms of the Commercial Property Policy and the other Commercial insurance forms mentioned above, have a uniform format as all policies include Common Policy Declarations and Conditions:

DECLARATIONS

• Name of Insured(s)
• Location(s) of the Risk insured
• Description of the Insured’s business (See Description of Property below)
• Policy period
• Other details to identify the risk and describe the coverages.

 

ILLUSTRATIONS:

 

 

 

 

CONDITIONS

Cancellation may be effected by either party, subject to conditions:

• Cancellation by Insured:  The first - named insured in the policy declarations may cancel at any time by written advance notice, and will receive refund of premium, generally on a pro - rata basis.
• Cancellation by Company:  Company must give notice as required by state law, after which time policy may be canceled after 30 days, unless the cancellation is a result of non - payment of premium, in which case only 10 days notice is allowed.
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TRANSFER OF RIGHTS OF RECOVERY

When the company pays a loss under its policy, it may require from the insured an assignment of all rights of recovery against third parties; in effect, the company is “subrogated” to the insured’s claims.

 

ILLUSTRATION: 

 

NO BENEFIT TO BAIL

A bail is a person or concern who has temporary custody of the property of others for the purpose of repair, storing, processing, delivery, etc., and the owner of the property expects the property to be returned to him.  The policy states that the Bailee will not benefit from the insurance.

 

 

ILLUSTRATION:

 

 

Other policy provisions include:

• Renewals,
• Policy Changes,
• Premium payments,
• Assignment of Rights and
• The right of the company to make inspections and examine books and records. 

In addition to the common provisions outlined above, the following conditions apply to the Commercial Property Policy in each of its three forms (Basic, Broad and Special):

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CONDITIONS

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• As would be expected by the terminology, “Conditions” provide the “conditions” under which the risk is accepted by the insurer.  In effect, the insurer is saying that based upon the information given and so stated in the “Declarations”, a contract providing the stated coverage is provided under the conditions listed in this provision.
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CONCEALMENT OR MISREPRESENTATION

        Policy is void if a material fact about coverage or insured’s insurable interest, has been concealed or misrepresented by the insured.

 

 

ILLUSTRATION:

FRAUD

Fraud will always cancel a policy.  Fraud is defined as: “A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.” (Blacks Law Dictionary). 

A discussion of the difference between fraud and misrepresentation or concealment is outside the scope of this text.  Generally speaking, if the insured knowingly deceives in anticipation of financial gain, then it is fraud.  If the insured misrepresents a risk but does so out of ignorance and without the intent to receive financial gain, it probably would be considered misrepresentation.  In either event, the “conditions” are not met and the policy is voided from inception.

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LEGAL ACTION AGAINST THE COMPANY

No action can be made against the company if a period of more than 2 years has transpired since the date of loss (with some state - mandated exceptions of time).

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CANCELLATION

The cancellation clause described earlier is modified by an endorsement on a Commercial Property Policy, stating that a policy covering a specific building can be canceled by the Company at least 5 days prior to effective date of the policy, by mail or delivery of cancellation notice, if:

• the building has been vacant or unoccupied for more than 60 consecutive days.  Does not apply to Seasonal unoccupancy; and more than 65% of units or floor area vacant or unoccupied is considered as vacant.
• 30 days has transpired since the payment of a covered loss and the repairs have not been started or other contractual arrangements made to have the repairs completed.
• the building has an outstanding order to facilitate or any outstanding demolition order, or has been declared unsafe, by a government agency.
• items that could be fixed and/or salvaged, and that aren’t necessary to any rehabilitation or repair, are removed from the building and not replaced.
• failure to furnish water, heat or electricity for 30 consecutive days (except if under season unoccupancy).
• failure to pay property taxes that out outstanding for more than a year except where the Insured is in a legitimate dispute with the tax authorities regarding the payment of the taxes.
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ILLUSTRATIONS 

 

INSURED’S DUTIES IN THE EVENT OF LOSS

 

Certain duties of the insured occur even if the Company makes no demands upon the insured to fulfill these duties.  Other duties must be met only if the Company makes a formal demand.

(1)  Duties That Must Be Met By The Insured Regardless If Company Makes a
      Formal Request:

• To protect the property from further loss.
• To furnish a complete inventory of all property involved, damaged or undamaged.
• To furnish a proof of loss within 60 days after request by the insurer, including complete statements regarding time and date of loss, the origin of the loss, the value of the items involved, and all other details.

 

ILLUSTRATION:

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(2) Duties That Insured Must Meet When Required By Company

• Furnish detailed and verified plans and specifications of any building, fixtures and/or machinery destroyed or damaged.
  
• To agree to examination of any property that remains after the insured loss.
  
• To submit to an examination under oath.
  
• To produce for examination all books of accounts, bills, invoices and other records, and to produce extracts when requested.

 

The loss becomes payable after investigations, detailed Proof of Loss, and other substantiating documentation.  The company then must determine if there was other insurance involved in order to determine their share of the loss.  They must also determine whether the specified loss is covered under 2 or more coverage’s, and determine which is payable and in what proportion.

 

The Company can voluntarily broaden the policy coverage, which it may do for customer relations, public policy, or to avoid threatened legal action even if they are technically and legally not responsible.

INSPECTIONS AND SURVEYS

 

The insurance company has the right to inspect the insured’s premises and operations at any reasonable time during the period of the policy.  The company may use its own personnel, or may employ others such as rating or service bureaus acting on behalf of the insurer.

 

While the insurer can inform the insured of the results of the inspections and can recommend changes, there is no duty or legal obligation for the insurer to do so.

The provisions states that the insurer:

• is not obligated to make safety inspections.
• does not guarantee that conditions are safe or healthful.
• does not guarantee that the insured is in compliance with safety or health regulations.

The purpose of these disclaimers is to protect the insurer against lawsuits.

ILLUSTRATION:

 

 

 

 

DESCRIPTION OF COVERED PROPERTY

 

• (The CPP covers both buildings and personal property)
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Description of The Buildings: All additions, fixtures, machinery and equipment, etc. are included in detail.  This should be the most carefully constructed provision of the policy, as discussed earlier.

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Landlord’s Furnishings and Property: Also covered is the personal property of the owner used to maintain and service the building and its premises.  Therefore, this property should not only be detailed, but as these items may change frequently, any substantial changes must be recorded in case of loss.

 

Newly Acquired or Constructed Buildings: It is not uncommon for businesses to expand operations or to move to a better or secondary location.  These buildings will be covered under this plan.

 

Other coverage’s provide for service charges from a Fire Department (up to $1,000), the removal of debris (up to 25% of the direct loss amount plus deductible), and pays for removal of pollution to land or water as result of loss.  If property must be removed from the insured premises, the policy will pay for the removal and storage.

 

 

EXCLUSIONS

 

 

     Accounts, Bills, Deeds, Evidence of Debt,
Money, Notes or Securities.

 

 

 

 

  Animals (unless owned by others and boarded by insured).

 

 

 

 

 

   Roads, paved surfaces, retaining walls

 

 

 

   Contraband or property in course of illegal trade or transportation.

 

 

 

 

 

Cost of research, replacement or restoring of valuable papers and records, including computer data.

 

 

 

 

Land crops on the land, or lawns.

 

 

 

 

 

Airborne or waterborne personal property.

 

 

 

Also excluded would be any property that is covered under another policy, and those specifically excluded (such as swimming pools, chimneys, windmills, etc.

 

Property Outside Buildings Exclusion excludes items such as:

 

 

Fences enclosures, exterior walls, etc.

 

 

 

 

Radio and television antennas

 

 

 

 

 

Unattached signs

 

 

 

 

 

 

Plants or shrubs

 

 

 

 

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PERSONAL PROPERTY COVERAGE

 

• The Commercial Property Policy also covers business - related personal property.  Personal property includes all property other than real property (real estate). 
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Business Personal Property of the Insured covers direct loss or damage to personal property owned by the insured and used in the insured's business, including furniture and fixtures, machinery and equipment, stock, and other similar personal property (except for items excluded).  The form defines stock as "merchandise held in storage or for sale, raw materials and in - process or finished goods, including supplies used in their packing or shipping."  Business personal property of the insured also includes labor, materials, or services furnished by the insured on personal property of others.

 

The insured's interest in improvements and betterments also is insured as business personal property, although improvements and betterments are actually a part of the building.  The form defines improvements and betterments as follows:

 

• Fixtures, alterations, installations or additions that are made a part of a building or structure occupied but not owned by the policyholder.
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• Property acquired by the policyholder or made at his/her expense, but which cannot be legally removed.
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• Property for which the named insured has a contractual responsibility to procure coverage.
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• Personal Property of others, which is designed to protect the insured against loss or damage to the personal property of others while such property is in the custody of the insured.  It is intended for businesses that usually have non-owned property in their care, such as lawnmower repair shops, furniture reupholster, etc.  This type of property is covered only while it is in the insured’s care, custody and control and while it is in the insured building.
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ILLUSTRATION:

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PROPERTY NOT COVERED

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• In addition to the Property Not Covered section above, on the Building Property, Automobiles held for sale and vehicles or self - propelled machines of a certain types are not covered.
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PERSON(S) INSURED

 

The person(s) insured is either the insured, or the Legal Representative when acting within scope of insured; otherwise anyone having property custody of the property will have the rights.

 

AMOUNT OF INSURANCE

(Purpose of the insurance is to make the insured whole and to restore him to the position he was in prior to the loss.)

 

Methods of “making whole” (Replacement Cost, Actual Cash Value, etc.), are described below.

Building  -  If the amount of insurance satisfies the coinsurance requirement, then losses of $2,500 or less will be settled on the full replacement value (without deduction for depreciation) or the cost to repair.

Tenant’s Improvements and Betterment’s  -  The policy provides that recovery for loss or damage to property that has been improved by a tenant, will be available, either actual cash value or for a lesser amount, depending upon the work performed and the time frame within which it was completed.

PRO RATA DISTRIBUTION CLAUSE

Blanket Policies  -  Fire insurance policies are sometimes written to cover blanket coverage at two or more locations.  A Pro Rata Distribution clause may be attached to such blanket policies.  The clause operates to distribute the amount of the policy by providing that insurance attaches in each building or location in the proportion that the values at the location bear to those in all locations covered.

 

ILLUSTRATION:

REPLACEMENT COST COVERAGE

 

In general, one may insure buildings, improvements and betterment’s, furniture, fixtures, machinery and equipment, and supplies in connection with such property on a replacement basis.

 

• Replacement Cost coverage does not take into consideration any depreciation in the value of the property.  Certain restrictions apply, such as the minimum coinsurance clause.
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• Replacement Cost coverage policies stipulate that the Insured must replace the property within a reasonable time, if he is to recover for his loss on a replacement cost basis.  Courts have held that one year is a reasonable period within which to replace.

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• Replacement must be made within two years of the date of loss and on the same site or another location within the state.
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• The Replacement Cost coverage in use by many companies also incorporate maximum of 400% of the actual cash value of the property.  As a result of this clause, it can be seen, the Replacement Cost coverage does not necessarily guarantee that the Insured will receive sufficient indemnification for the full cost of replacing the damaged or destroyed property.

 

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AGREED AMOUNT COVERAGE

Coverage is available modifying the basis on which losses are settled.

 

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ACTUAL CASH VALUE

The actual cash value, defined as the replacement cost less depreciation, is frequently paid for losses on such items as household furniture, personal effects, art works, and property of others.

 

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OTHER LOSS PAYMENT OPTIONS

 

Inflation Guard (Automatic Increase In Insurance)  -  Under this endorsement, the amount of insurance is increased automatically by an annual percentage rate specified in the Declarations.

 

Market Value Other Than Stock   -  Stock which has been sold but not yet delivered to the purchaser will be valued at its selling price.  Losses are paid on a market value basis if repair of replacement is not contracted for within 180 days of the loss; or on a replacement basis (with similar property that performs the same function if repair or replacement is contracted for within 180 days of the loss or damage.

 

Brand and Label Clause - By endorsement, the policy allows the insured to remove the brand or label from property for salvage purposes.

Manufacturer’s Selling Price - Optional, all the insured’s finished stock, whether sold or unsold, is valued at the insured’s selling price.

Market Value Clause - All stock is valued at its selling price and is used only when the stock is of a type which is bought and sold at an established market exchange where market prices are posted and quoted.

Alcoholic Beverage Tax Exclusion - The law permits the Treasury Department to refund taxes and duties paid on alcoholic beverages damaged by perils other than theft and excludes the value of such federal taxes on alcoholic beverage held for sale.

Building Ordinance Coverage  -  Coverage may be acquired to cover the losses suffered when a loss has destroyed a portion of a building but an ordinance or law requires the insured to raze the undamaged portion.

 

 

PROTECTION FOR THIRD PARTIES

(Mortgagees)

Generally, any losses paid by an insurer are paid to the insured named in the policy.  Because of a growing practice of mortgaging real estate property as security for a loan, this Mortgage Clause was created.

The Mortgagee clause sets up a separate contract between the insurance Company and the mortgagee.  The clause grants the mortgagee specific protection and imposes certain requirements on it.

BENEFITS RECEIVED BY MORTGAGEE

Any loss on the property is payable to the policyholder, as his/her interest is shown in the policy.  Since the mortgagor usually owns the original policy, the Insured cannot cancel without the mortgagors consent.  If the insured neglects to care for the property, the mortgagee would still be protected to the extent of its interest in the real property (real estate).  Furthermore, the insurer has the option of paying off the balance of the mortgage and receiving a full assignment of the mortgage.

 

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LOSS PAYABLE CLAUSE

 

• A Loss Payable Clause states that any loss would be payable to a third party (by name) thereby placing the mortgagee in the same position as the insured. 
• A second form of a Loss Payable clause is available to lenders for receipts, bills of lading, contracts, etc., which immunizes the lender to acts or breaches of policy conditions by the insured, if the lender is unaware of such acts. 
• A third form provides coverage for the future buyer.

 

 

 

STUDY QUESTIONS

1.  Jones opens a local package delivery service.  He purchases property coverage as required by the bank that holds the mortgage on the property.  He is strapped for cash but since his 2 delivery trucks are financed also, he must take out auto coverage.  He would like to purchase liability insurance, but cannot afford to do it right now.

      A.  Jones has purchased a monoline policy.

      B.  Jones must purchase liability insurance if he wants a Commercial
                Package Policy.

      C.  Jones has purchased a Commercial Package Policy.

      D.  Jones can purchase other coverage later, but if he does, he will no
                longer have a Commercial Package Policy.

 

2.  The Declaration page of a Commercial Property Policy does not contain

      A.  the name of the insured.

      B.  the policy period.

      C.  the premiums.

      D.  description of the risk.

 

3.  When an insurer can recover part of its loss from another insurer, this is called

      a.  continuation of coverage.

      b.  subrogation.

      c.  insurable interest.

      d.  duplication of coverage.

 

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4.  After a loss covered by a commercial policy, the insured is not required to  voluntarily

      A.  put up plywood over windows if needed and otherwise protect the

          property against further loss.

      B.  submit to an examination under oath.

      C.  furnish proof of loss.

      D.  provide blueprints of the building and specifications of equipment.

 

5.  The most carefully constructed provision of the CPP is

      A.  what personal property is located in the insured building.

      B.  the name and address of the insurance company.

      C.  the details of the additions, fixtures, machinery and equipment to be
                 covered.

      D.  personal information (age, marital status, residence address, phone,
                etc,)

 

6.  In respect to on-site inspections by the insurance company,

      a.  the insurer is not obligated to make safety inspections.

      b.  the insurer will guarantee that conditions are safe and healthful.

      c.  the insurer will guarantee that the insured is in compliance with
               required safety procedures.

 

7.  Margaret has an art gallery, which includes an original oil painting that had been in her family for years.  The exact value of the painting is difficult to ascertain, but she and the insurer agreed that in case of loss, she would be paid $15,000 for the painting.  The Loss Payment Option in this case is

      A.  Replacement Cost.

      B.  Actual Cash Value.

      C.  Agreed or Appraised Value.

      D.  Mediation Value.

 

8.  Bernice has $9500 invested in a display in her store, although she would have had to pay at least $12,000 for the equipment but she was able to purchase them from a wholesaler who was going out of business.  The display were destroyed in a covered loss, and the insurer paid Bernice $12,000.  The Loss Payment Option on this situation is

      A.  Agreed or Appraised Value

      B.  Actual Cash Value.

      C.  Mediation Value.

      D.  Replacement Cost.

 

9.  A “bail” will not benefit from the CPP.  What is a “bail?”

      A.  A bondsman.

      B.  An agent or General Agent.

      C.  An attorney.

      D.  A person who has temporary custody of property of others for the
      purpose of repair, storing, etc., and the owner expects the property to
      be returned.

 

10.  If there are more than one person listed on a CPP policy, who can cancel the policy?

      A.  Any of the ones listed on the policy.

      B.  The one whose last name appears first in alphabetical order.

      C.  Only the Agent.

      D.  The first named insured.

 

ANSWERS TO STUDY QUESTIONS

 

1C     2C     3B     4B     5C     6A     7C     8D     9D     10D