CHAPTER FIVE - COMMERCIAL PACKAGE POLICY & CPP PROVISIONS

HISTORY

 

During the period of time when civilization moved from an agrarian society to an industrial society, goods and methods of production of the population became more concentrated.  With this concentration, the possibilities of losses increased due to situations beyond the control of the owners; primarily by fire, wind and water.  While farmers have always suffered such losses, they compensated for part of the cost by helping each other in time of need.  The “barn - raising” of rural America was well documented as part of history, particularly in situations where property was destroyed because of fire.

As the industrial society expanded, protection against losses was very conservative, originally covering only losses by fire.  Policies were written by hand covering each situation differently.  As more and more businesses required this protection, more standardized wording became available, and with financial institutions investing in commercial ventures, insurance had to be provided to protect the investors interests.  This further pushed the burgeoning insurance industry to standardize coverages and policy provisions.

Marine Insurance is considered as one of the oldest (if not the oldest) types of insurance, as ships and their cargoes were protected against losses at sea by consortiums of wealthy persons who “underwrote” the protection by signing “under” the contract and noting their share of the risk.  Throughout the years certain words used in the contracts became standardized and recognized by law as having specific meanings.  To this day, many marine policies contain language that may seem archaic, such as referring to risks as “perils”, but is used because of the legal interpretations that has evolved. 

Other forms of insurance have changed so that it is easier to understand by the consumer, and most of the antiquated language is no longer present.

As soon as protection from fire perils was available, protection against windstorm, hail, water damage, and other such risks was created.  These coverages became known as “property insurance.”

Soon legal recourse against someone wronged by another was considered an insurable situation, and the idea of protection against liability grew into what is now called “casualty” or “liability” insurance.  Many insurers became “Property and Casualty Insurers.”  Others preferred to continue to cover only one type of peril, such as fire insurance, and these companies became known as “monoline” companies, and policies that cover only one type of peril, became known as monoline policies.

MONOLINE INSURANCE POLICIES

 

With the complexities of modern life and modern commerce, many commercial enterprises were faced with an increasing number of situations that were determined to be insurable.  Also, the number of types of commercial businesses also increased each type with its own peculiarities and situations that are unique to their business.  With the increase in insurance situations, the number of insurance policies needed to cover each contingency increased dramatically, to the point where many customers had many policies.  The problems with this approach soon became apparent.

The sheer number of such policies became overwhelming, with a variety of coverage’s provided by a variety of insurers, frequently represented by a variety of insurance brokers.

With so many policies, it was inevitable that there would be duplication of some coverage’s, and with no coverage provided for other risks.

Legally, it became reminiscent of the biblical scholars who debated for years as to how many angels can dance on the head of a pin, i.e. since there was little standardization of wording, legal interpretations were abundant.  Many consumers paid for years to protect themselves and their businesses against certain risks of doing business, only to find that the wording of the policy did not provide the coverage they thought they had purchased.

     

MULTILINE POLICIES

 

It soon became apparent that the only solution was to “package” policies.  Therefore, the “multiline” policy was born, which is several of the risks previously insured under separate policies, now packaged into one policy.  This has several advantages:

To the Insured:

• There are fewer policies to purchase and maintain.
• The chance of delay in loss settlement due to disputes of different insurers is substantially reduced.
• The insured benefits from reduced administrative expense.

 

To the insurance company:

• The administrative expense is lessened because it costs less to underwrite and issue one policy instead of several.
• Package policies help insurers avoid adverse selection by spreading the risk among various insureds and among the various risks covered under the package policy.

Packaging is also advantageous for the insurance agent as it facilitates selling a policy to cover the insured’s entire account, and many packages are more easily sold and rated, so the agent can quickly and efficiently provide quotes.

 

 

 

 

THE ROLE OF THE INSURANCE SERVICES OFFICE

 

Insurance is a statistic-driven business.  The premiums to be charged for any insurance coverage must be based upon statistics derived from actual experience, either of the insurance company itself, or from an industry average.  And statistics can only be meaningful if there is enough experience to provide a broad base upon which to forecast future losses and expenses.

If each insurer attempted to collect sufficient statistics to provide adequate premiums, the expenses would be excessively high, and the reliability of the statistics could be questioned, as it would probably not be based upon an adequate base.  However, if companies banded together and shared their experience, the expenses would be drastically reduced for each company. 

Therefore, most companies use the services of the Insurance Services Office (ISO) which is a statistic - gathering organization located in New York.  While it initially was involved in providing advisory rates to its subscriber members, it has since withdrawn from providing rates, and now provides policy forms and endorsements and manual rules for its members.  It should be noted that subscriber members are free to use whatever policy forms and rates they choose, but the information provided by the ISO is considered as “Standard” wording for the purposes of this text. 

The American Association of Insurance Services, a competing firm, provides similar services to approximately 400 regional insurers.

The ISO developed special “Special Multi - Peril Policies (SMP)” which always included Property Coverage and Liability.  They were designed to be used only by a “Preferred” class of policyholder.  When the SMP policies were introduced, this added a new class of policy available to the monoline policies in use, adding to the number of forms available to the consumer.

In addition, because of the different needs and desires of the smaller and medium sized businesses, such as grocery stores, garages, bakeries, etc., a new classification of policies was developed, appropriately called the “Businessowners Policies.”  These policies also covered both property and liability risks, but because of the wide variety of risks peculiar to each type of business, many insurers offered a variety of coverages.  This class of policy will be discussed later in this text.

As the SMP policy evolved throughout the years, the ISO offered many revisions, and eventually replaced the SMP policy with the “Commercial Package Policy” (CPP) that had several new features:

• The ISO rewrote all of the standardized commercial forms into more easily understood language
• The differences between the monoline and the multiline policy forms were eliminated, with the welcome result that one set of forms can be used for one coverage or many.
• Much more flexibility was obtained as the customer no longer had to accept the standard coverages, but could construct a policy using the forms that they specifically needed.

While the Commercial Package Policy has replaced the older SMP policies in most areas, there still are some SMP policies used in a few areas that have not adopted the ISO Commercial Package Policy.

COMMERCIAL PROPERTY INSURANCE

 

The ISO introduced a series of forms to protect commercial property and to insure buildings, personal property, 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 (Principal subject of this text)
• 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.   Also, the policy does not have to incorporate liability coverage.  Two classes of property are ineligible for this coverage: Homeowners Policies and Farming Policies.

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

C. P. P. UNIFORM PROVISIONS

 

There are several parts to the Commercial Package Policy (CPP) that are common to all such policies and parts of policies, but for purposes of this discussion, the Common Policy Conditions and related sections as above constitute most of the parts that will pertain to the CPP and to the Liability Coverages discussed in this text.

 

Common Policy Declarations are very important as they list who is covered and the outlines of the limit amounts, premiums, how the insurance applies, time of insurance, where the property is located, etc.  The agent must check the Declaration Page very carefully before delivering it to the customer as items on the Declaration page are items that have been discussed and agreed-upon with the customer.  They may be changed if there are any errors by so notifying the insurer, however other provisions of the policy have been filed and approved by the Insurance Department and changes cannot be made, or can be extremely difficult to change.  (An example of a Declaration Page follows this section). 

 

TYPICAL COMMON POLICY CONDITIONS

 

CANCELLATION

 

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 the 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.

 

 

Changes

 

The policy contains all the agreements between the insured and the insurer concerning the insurance afforded.  The first Insured named in the policy Declarations is authorized to make changes in the terms of the policy, however, the insurer must agree to any changes.  The policy terms can be amended or waived only by Endorsement issued by the company and therefore be made a part of the policy.  Endorsements are discussed in a separate chapter of this text.

 

 

Examination of Books & Records

 

The insurance company may examine and audit the insured’s books and records as they relate to the policy at any time during the policy period and up to three years afterward.  The reason for the three year period is because some property &/or liability claims can have a long “tail” and the insurer may be liable for claims that occurred during the policy period but not reported until up to three years later.

 

 

Inspectons 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 (they actually state they do not 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.

The insurer reserves the right to recommend changes to areas of insurability and the premium to be charged.

This provision applies not only to the insurer, but also to any rating, advisory, rate service or similar organization, which makes insurance inspections, surveys, reports or recommendations.

 

Premiums

 

The named Insured (first-named insured) shown in the Declarations page is responsible for the payment of all premiums and will be the payee for any premiums returned to the insured by the insurance company. 

 

Transfer of Rights & Duties

 

The rights and duties of the insured may not be transferred without the written consent of the insurance company, except in case of death of an individually named insured.  If the insured dies, the rights and duties will be transferred to their legal representative, but only while acting within the scope of duties as legal representative.  Until such time that the legal representative is named, anyone having temporary custody of the property will have the rights of the insured and duties, but only in respect to that property.

 

Endorsements are the mechanism whereby a standardized form can be tailored to fit the needs of a variety of situations.  Endorsements “modify” the policy in some fashion.  In these contracts they are used to add additional lines of coverage, to change coverage or the terms of the policy, or restrict the terms.  Some Endorsements are required by regulatory bodies, others are required by insurers.  If two or more lines of insurance are to be “endorsed”, this is called “Interline Endorsements.”  If changes are to be made within a single line of insurance, this is called the “Line of Insurance” Endorsements.” (See later chapter on “Endorsements”).

 

Please note that the same forms may be used to write either a monoline policy or a Commercial Package Policy.  If the package policy format is used, as explained earlier, many common items only need to be included only once.

 

 

 

 

STUDY QUESTIONS

 

1.  The chance of claim settlement delays is reduced when the policy is

      A.  a Multiline policy.

      B.  a Monoline policy.

      C.  an Inland Marine policy,

      D.  an Automobile Liability policy.

 

2.  Which of the following is NOT an advantage of a Multiline policy?

      A.  There is fewer policies to purchase and maintain.

      B.  The chance of delay in loss settlement due to disputes of different insurers is reduced.

      C.  The insured benefits from reduced administrative expenses.

      D.  The commissions are higher.

 

3.  The oldest form of insurance is

      A.  Life insurance.

      B.  Health insurance.

      C.  Liability insurance.

      D.  Marine insurance.

 

4.  The Insurance Services Office (ISO) is

      A.  a credit-reporting agency.

      B.  a statistic gathering organization

      C.  an agency of the Federal government.

      D.  an insurance company rating bureau,

 

5.  Commercial Liability policies may be cancelled

      A.  by either party, subject to conditions.

      B.  only by the insurance company.

      C.  only by the insured.

      D.  by the insurance agent only.

 

6.  The DeBrey Mercantile company has a Commercial Package Policy.  After suffering two losses, the insurance company notified DeBrey that they will be inspecting their operation within 30 days, using an outside firm to do the actual inspecting.

      A.  The insurance company cannot inspect once the policy is issued.

      B.  If the insurer is going to inspect, they must use only their own employees.

      C.  This is reasonable within the policy conditions and provisions.

      D.  DeBrey can take the insurer to court and make them leave the company alone.

 

7.  The partnership of Brown and White have a professional liability policy.  Who is responsible for payment of premiums?

      A.  Both Brown and White equally.

      B.  The one that is named first on the policy.

      C.  The one that is named secondly on the policy.

      D.  The insurance agent.

 

8.  The approved method of adapting a standardized liability to fit a particular situation is by

      A.  Endorsement.

      B.  Rewriting.

      C.  Amendment.

      D.  Subrogation.

 

9.  Cecil Standard, President of Standard Drilling Co., dies suddenly at the office.  According to the by-laws, the temporary acting President is their legal counsel Jim who takes office days later.  An emergency board meeting is called and Henry is elected president one week later.  During the interim when Jim was acting as President, he obligated the company to a contract with Seamless Properties as Cecil had instructed him to start the paperwork just before he died.  When Henry becomes President, he revokes the agreement, stating that Jim did not have the authority to enter into any such agreement.

      A.  During the interim, Jim could do anything including selling the company.

      B.  Since Jim was acting within the authority of the legal representative, the agreement
 stands.

      C.  Nobody had any authority to do anything until the new President was elected.

      D.  Jim and Henry must agree on the commitment with Seamless, or either could be sued.

 

10.  In the situation above, Sam considered purchasing a drilling rig from standard drilling, and was trying it out on his property when Cecil died.  Sam sent in a check for the rig, but Henry considered the agreement null and void.

      A.  Sam had no right to sell the rig, and must return it to the company.

      B.  Sam had temporary custody and so was within his right to buy the rig.

      C.  Jim had to approve the sale or the rig had to be returned.

      D.  Henry had the last word; Sam is out of luck.

 

ANSWERS TO STUDY QUESTIONS

 

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