CHAPTER THREE - COMMERCIAL INLAND MARINE CONDITIONS

 

As indicated earlier, the preceding “Common Policy Conditions” applies to Commercial policies of the various types.  But for Inland Marine policies, the Conditions are different, as the insuring form would be different according to the type of insurance.  The conditions as described below, are in addition to the Common Policy Conditions, and they are also in addition to Conditions used in the particular Commercial Inland Marine Forms.

 

There are two “Conditions”, the Loss Conditions that apply only in respect to losses; and the General Conditions, that apply to conditions other than those related to losses.

 

LOSS CONDITIONS

 

A.  ABANDONMENT

 

The Condition states that there can be no abandonment of any property to the insurance company.  The “Abandonment Clause” is of significant importance in Inland Marine and Marine insurance, and should be discussed in more detail at this point.

 

ABANDONMENT CLAUSE

 

The Abandonment Clause in Marine insurance is a clause giving an insured the right to abandon lost or damaged property and still claim full settlement from an insurer (subject to certain restrictions).  Two types of losses are typically provided for under abandonment clauses:

 

1.  ACTUAL TOTAL LOSS

This pertains to property so badly damaged that it is not repairable or unrecoverable; causes include, fire, sinking, windstorm damage and mysterious disappearance.  For example, until the 1980s, the Titanic, which sank off Newfoundland in 1912, was deemed to be unrecoverable and the Commercial Union Insurance Company had paid its owners for their loss due to sinking.  Owners of ships that had mysteriously disappeared in the Bermuda Triangle have been able to collect insurance. 

 

Disappearance of pleasure craft due to drug pirates has resulted in indemnification of owners through insurance proceeds. 

 

2.  CONSTRUCTIVE TOTAL LOSS

This pertains to property so badly damaged that the cost of its rehabilitation would be more than its restored value.  For example, a ship and/or its cargo is damaged to such a degree that the cost of repair would exceed its restored value.  The insured can abandon the property if (a) repair costs are greater than 50% of the value of the property after it has been repaired, and (b) the insurance company agrees to the insured’s intent to abandon. 

 

It is apparent that Abandonment applies generally to Marine insurance, however since the Inland Marine Conditions specifically excludes it from loss, this definition helps to understand the Condition.

 

B.  APPRAISAL

 

In order to determine the actual amount of the loss, it is necessary to “Appraise” the loss.  Since there are at least two parties involved – the insurer and the insured – there will often be disagreement as to the value of the property or the amount of the loss.  Rather than having to submit it to a court to settle the differences, which can be expensive and time-consuming, the following system is part of the insurance agreement:

 

Either the insured or the insurer, must make a written demand for an appraisal.  An appraisal is not automatic – the insurer can always send a check for the damages and the insured accept it, for instance.  At that point, each party will select a “competent and impartial” appraiser.  These appraisers will then appoint an “umpire.”  If the parties cannot agree on the settlement, or what if they can’t even agree on the umpire?  If this happens, then the umpire is appointed by the judge of a court having jurisdiction.

 

Each appraiser, independently and separately, will determine the value of the property and the value of the loss.  If they can agree on the value of the property or loss, then that is the amount that the insurance company is obligated to accept.  If they cannot agree, which frequently happens, then it is submitted to the umpire.  If the umpire agrees with one or the other of the appraisers, then that decision is binding. 

 

Each party (the insured and insurer) will pay the appraiser they appointed for their services, and they will bear the other expenses of the appraisal and umpire equally.  Note that this is a little different than many mediation provisions in other insurance contracts, as frequently they will state that the “losing” party will have to pay for the expenses of the umpire, and sometimes, even for all of the expenses of both appraisers and the umpire.

 

NOTE:  The insurance company still retains its right to deny the claim.

 

 

 

C.  DUTIES IN THE EVENT OF A LOSS

 

In case of a loss, there are certain duties that the insured must perform, as in all insurance policies.  Some of these duties are very obvious, but since a loss may involve millions of dollars and may hinge upon accurate reporting of the loss, and also since some of these duties involve a specific and time-consuming effort on the part of the insured, these stipulations are necessary.

 

The police must be notified if any laws have been broken.  Many times an insurer will take no action whatsoever unless a police report has been filed in those circumstances where laws are broken &/or the police should be involved.

 

The form stipulates that a “prompt” notice of the loss including a description of the property involved, must be filed with the insurer.  Obviously the insurer has to set up claims reserves and take proper action provided the property affected by the loss was covered under the policy by the insurance company.

 

The insurer also needs to know how, when and where the loss occurred, and needs to know it as “soon as possible.”  The time for notification of a loss varies by types of insurance, and varies from 20 days for health insurance policies, 10 days for windstorm damage, and hail insurance damage within 48 hours.  Since the Inland Marine policy covers such a wide variety of situations, the general Conditions only specifies “as soon as possible.” 

 

The property covered under the policy, the subject of the “loss”, must be protected from further damage.  This often is not fully understood by the insured, who will leave the loss unprotected “until the claims people show up.”  By not taking protective action, further damage can be suffered.  Also, if it is possible, the damaged property should be set aside and arranged so that a claims examiner can easily make their examination of loss.  The insured is obligated to keep a record of any expenses incurred to protect the property, as it will be taken into consideration in the settlement of the claim.  Note that it says, “taken into consideration” and does not specifically say that they will pay for the expenses. 

 

 

 

The insured must not make any statement that will assume any obligation or admit to any liability, to which the insurance company may be liable, unless they have the consent of the insurance company. 

 

 

The insurance company must be allowed to inspect the property and any records proving a loss.  This may seem like a “of course” statement, but it can be imagined that some businesses might not want the insurance company to be “sticking their nose into their business.”  Some businesses simply do not want anybody, regardless of whom it might be, looking into their books for any reason, as they are nervous that the IRS might come calling.

 

The insurance company goes one step further and rightfully so.  They have the right to question the insured under oath, and further, this can be done at any time that is reasonable, as long as the questions pertain to the insurance or the claim.  This includes any books and records of the company, and any answers given by the insured must be signed by the insured.  While this may seem severe, it must be remembered that thousand and even millions, of dollars can be involved and the insured is the only one that really understands the entire situation.  When a claim is filed, the insurance company in effect, takes the place of the insured.  However, they cannot know as much as the insured unless the insured cooperates fully, and is willing to make statements that can be relied upon for any legal matter.

 

In the same vein, the insured must submit to the insurance company, a signed and sworn statement containing the information that the insurance company will request regarding the claim or loss, and it must be done within 60 days after the insurance company requests it.  Sixty days is fully reasonable for the greatest majority of losses, and if for some legitimate reason, it cannot be accomplished within 60 days, an insurer would be hard pressed to deny a reasonable extension.  The insurer will furnish any claims forms or papers to be completed.

 

And, the insured is required to cooperate with the insurance company in the investigation or settlement of the claim.  Makes sense, as a claim is actually a request by an insured for indemnification by an insurance company for a loss incurred from an insured peril.  Therefore, it just makes sense for an insured to cooperate.  Besides, if he doesn’t, he may not be indemnified…

 

D.  INSURANCE UNDER TWO OR MORE COVERAGES

 

When an insurance policy is actually “constructed” of more than one “form”, with each form having its own requirements, coverages and conditions, on occasion there is bound to be duplication of coverage within the policy.  Therefore, if a situation is a loss under one part of the policy, and is also a loss under another part, the insurance company will only be responsible for one “loss.”  Another one of those “makes sense” provisions.

 

E.  LOSS PAYMENT

 

The insurance company agrees that they will pay any claim or loss which is covered under this Coverage Part, within 30 days after one of the following events:

1. The insurance company and the insured have come to a mutual understanding,
2. There has been an entry of a final judgement, or
3. There has been the filing of an appraisal award.

 

The insurance company will not be liable for any part of a loss that has been paid for or replaced or “made good” by others.  This is also addressed in the Condition below.

 

F.  OTHER INSURANCE

 

Warning – Warning!  The duplication of coverage provision under an Inland Marine policy is as strict and more so, as with any other type of coverage.  In effect, it says that if an insured has another policy covering the same loss as under the Inland Marine policy, the insurer will pay only the excess over what the insured should have received from the other company.  Not too bad, so far.  However,

 

Note:  This “excess” basis applies to all Inland Marine forms except for the Mail Form.  Also note:  Some texts state that all of the commercial Inland Marine forms (except Mail Form) respond on an excess basis if other insurance is in force on the damaged property.  “Excess” insurance is defined as coverage over and above any valid and collectible insurance, which seems contradictory to the statement made in the standard policy form, as indicated above.  This problem has been overcome by an agreement by the insurance industry with the result that generally they agree to share the loss according to some published guidelines.

G.  PAIR, SETS OR PARTS

 

Some losses are to only a portion of the total object, such as one earring, 2 or 3 dishes from a full set of valuable china, or even a “part”, such as part of the scenery in a theatrical production.  Therefore, they are treated as two situations:

1. The insurer may repair or replace any part to restore the pair or set to what its value was before the loss occurred, or
2. pay the difference between the value of the pair or set before and after the loss.

 

In case of “parts”, the insurance company will only pay for the value of the lost or damaged part.

 

H.  PRIVILEGE TO ADJUST WITH OWNER

 

In those situations where a loss involves property of others in the care of the insured, the insurance company reserves the right to settle directly with the owners of the property.  If the insurance company does settle with the owner, the receipt of the settlement will satisfy any claims the insured has against the insurance company. 

 

In a preceding Consumer Application, the viola that was smashed was the property of another person other than the insured.  The insurance company could settle directly with the owner of the viola.  (In the preceding situation, where the insured made certain damaging statements accepting part of the blame, the insurance could, if they so desired, settle directly with the owner, leaving nothing for the insured since he had accepted some responsibility.)

 

An important provision (condition) is that if the insured is sued by the owner of property entrusted to the care of the insured, the insurance company may provide a defense for any legal proceedings brought against the insured.  This defense will be paid for by the insurance company, and the cost of the defense will not impact the applicable Limit of Insurance on that policy. 

I.  RECOVERIES

 

Sometimes, some of the property included in the loss, can be salvaged, or in case of a theft, for instance, can be recovered.  If the insurance company has paid the claim, but some of the “lost” property has been recovered, in effect it belongs to the insurance company.  Recoveries from a salvage company when property is damaged, for instance, is resold.  This is different than in other forms of insurance – for instance under auto insurance, frequently the policy will allow any recovery to offset the insured’s deductible.  Under the Inland Marine policies, the insured receives no benefits at all until the insurer has been reimbursed in full.

J.  REINSTATEMENT OF LIMIT AFTER LOSS

 

When an insured item insured for a certain amount ($10,000 for example) sustains damages of 50% ($5,000), the question frequently arises, “Does the item now have coverage of $5,000 remaining, or $10,000?  Policies differ as how this is handled, but using the ISO “Condition”, the limit is not reduced by payment of any claim, except if there is a TOTAL loss of a scheduled item, then that item would no longer be insured and any premiums pertaining to that particular item, will be reimbursed to the insured.  (They should not be paying premiums for a coverage that is not available).  However, if the item is restored or repaired, and is again worth the original amount ($10,000 in this case), then the Limit of Insurance goes back to $10,000.

 

 

 

K.  TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO THE INSURER

 

If an insured has made a claim, paid by the insurer, and then the insured is able to recover part or all of the damages from another person, the rights to recover that amount is transferred to the insurance company.  This transfer of recovery rights is known as “Subrogation” and is common in many insurance policies.  For future reference, a definition of Subrogation is in order here.

 

 

There is a little more to it than that, however.  The insured MUST take all actions in such cases to make sure that recovery is accomplished.  It is not far-fetched to think that some insureds just don’t want the “hassle” of having to try to get some of the money back from another party after having received damages from their insurance company.  Also, if the insured should be so foolhardy (or other words) to sign a statement releasing the other person from liability, then the insurance company has the right to refuse to pay the claim, or to recover the amount if the claim has already been paid.

 

 

 

 

 

 

 

 

 

 

 

GENERAL CONDITIONS

 

A.  CONCEALMENT, MISREPRESENTATION AND FRAUD

 

The coverage part is void if the insured is involved in fraud, in any situation regarding the property or the coverage of it, or if the insured intentionally conceals or misrepresents a material fact regarding the covered part, covered property, or the insured’s interest in the covered property.

 

Interestingly, Marine and Inland Marine insurance treat concealment, misrepresentation or fraud differently.  Since Marine insurance can, and frequently does, cover a ship or cargo that is out at sea, any concealment, misrepresentation or fraud voids the policy ab initio (from the beginning).  However, with Inland Marine insurance, the insurer has an opportunity to inspect the proposed insured’s carriers, cargoes and/or operations and any other area of interest.

 

The Condition says  “if the insured intentionally conceals or misrepresents a material fact.”  A “material” fact is one that is so important that if the insurance company had known about it, it would never have issued the insurance, paid a claim, or even determined the premium. 

 

Practically, it is difficult to void coverage under an Inland Marine policy, unless the fraud perpetuated is material to the loss.  It is unusual for coverage to be voided because of concealment or misrepresentation that was immaterial to the loss also. 

 

 

B. LEGAL ACTION AGAINST THE INSURANCE COMPANY

 

 

 

 

The insured may not take any legal action against the insurance company unless there has been full compliance with all of the terms in this coverage part.  Also, any such action must be taken within two years after the insured has knowledge of the “loss.” 

 

C.  NO BENEFIT TO BAILEE

 

A “Bailee” is someone who has possession of another’s property, and in case of a loss or damage, is responsible for the property.  The purpose of the clause, that states that no person or organization who has custody of the property (except for the insured, of course) will benefit from the insurance policy, is to preserve the right to subrogation. 

 

Bailees’ contracts and Bills of Lading, which are used by carriers, may have a provision that states that the Bailee or carrier shall have the full rights of any insurance, in effect relieving the Bailee of liability for damage to the property.  This would appear to be in conflict with this clause in the Conditions.  Actually, the provision in the Bills of Lading or contracts of Bailees, means that if the insured collects a loss payment from an insurance company, then the Bailee does not have to pay the claim.  But the Inland Marine policy provides that if the Bailee is relieved from its obligation of paying for a loss because of the insurance, then the insurance company does not pay anything.

 

This provision helps to preserve the right of the insurance company to pay a loss to the insured, and then collect it from the carrier.  But, to make things more complicated; this is not necessarily true in all cases.  Therefore, if this situation arises and there are some doubts as to how it should be handled, the insurance will frequently pay the insured by using a loan receipt.  In effect, the insurance company lends the loss amount to its insured, but with the condition that the loan will be repaid only if the loss is recovered from the carrier or the Bailee.  Then the insurance company sues the carrier or Bailee in the name of the insured.  If the suit is successful and the insured is able to collect from the Bailee or carrier, then the loan is used to repay the insurance company.  Conversely, if the insured is not successful in the suit, then the insured has no obligation to repay the insurance company.  This really proves that “there is more than one way to skin a cat.”

 

 

D.  POLICY PERIOD

 

While the policy forms states briefly that losses are covering during the policy period as shown in the Declarations, it is a little more complicated than that. 

 

The policy inforce date and expiration date is contained on the Declaration page.  Some Inland Marine policies only cover a specific event at a particular time, and usually of limited duration.  Examples would be the shipment of a particular cargo, or the installation of certain equipment.  Then there is some Inland Marine policies that provide coverage until the policies are cancelled and have no specified expiration date.  Most policies, however, are good for one year. 

 

Note that this rather simplistic condition covers losses that commence during the policy period.  It is not necessary that the entire loss occur before the end of the policy period.  Conversely, if a loss occurs prior to the inception (inforce) date, it is not covered under the insurance.

 

 

E.  VALUATION

 

The ISO form states that the value of property will be the least of

1. The actual cash value,
2. The cost of the reasonably restoring the property to its condition immediately before the loss, or ,
3. The cost of replacing that property with substantially identical property.

 

Generally, insurance companies will determine the actual cash value of an item as the replacement cost of the item or of a similar (like) kind of item and quality, less depreciation on the damaged (or lost) item. 

 

 

When the property insured is new, actual cash value is considered the same as replacement cost, as there usually is not depreciation on unsold merchandise.  Expensive items, such as the combine above, are an exception to this.  But because of this, Inland Marine is seldom written on a “formal” replacement cost basis.

 

As other forms are studied, note that some of them will change or amend the “Actual Cash Value” provision, depending upon what is covered.  As an example, the Jewelers Block Form states that the coverage will be the lowest amount that appears on the inventory/stock books/ other stock papers/ or lists that existed at the time of loss – provided, of course, if that figure is less than the Actual Cash Value or repair/replacement value of the property.  The reason that this type of language is used in Jewelers Block Forms is that jewelry can go up (or down) in value more dramatically and more often than other kinds of merchandise, as it depends entirely upon market conditions.  The same, to differing degrees, can be found in mail, film and accounts receivable forms as they have there own evaluation peculiarities.

 

In some cases in Inland Marine policies, certain classes of property must be valued at time of contract, particularly those that are difficult (or in many cases, impossible) to replace.  Examples could be paintings or manuscripts.  By declaring a value up front, it eliminates valuation problems if claims occur later.  If the items increase in value substantially during the policy period, then the insurer must be notified and arrangements made to come to an agreement as to the new valuation.

 

One other thing in this vein – according to the Inland Marine division of the ISO Manual, which is different than that found in the policies, there might be a valuation based on another basis agreeable to the insurance company and the insured.  One excellent example of this is where property being transported is valued at the invoice cost, as that would be a lot easier to determine than trying to establish an Actual Cash Value valuation amount. 

 

The last statement in this Condition states that in case of a loss, the value of the property will be determined as of the time of loss.  Of course, this does not apply to those situations where the value of the property is determined when the policy is issued.

 

 

OTHER CONDITIONS

 

DEDUCTIBLE

Most of the ISO commercial Inland Marine policies carry a mandatory minimum deductible.  The deductible is applied before any claims are paid.  In essence the deductible is subtracted from the amount of the loss before the limit of insurance is applied.  In some cases, the full amount of the insurance will be paid if the amount of the loss exceeds the applicable limit of insurance.

 

 

COINSURANCE

 

Coinsurance and Deductible often become confused by insureds.  Coinsurance is a method that insurance companies use to encourage insureds to purchase the full value of the property insured, or to at least a stipulated percentage.

 

The provision is found in many ISO coverage forms.  A typical provision would state that “All covered property, (except property in transit) must be insured for at least 80% of its total value at the time of loss,” otherwise the insurer will pay “only the proportion of the loss that the Limit of Insurance (shown in the Declarations for all covered property at all covered locations) bears to 80% of the total value of all property (at all locations) at the time of the loss.” 

 

Some insurers may require that the total amount of the covered property be insured, in effect at “100%” coinsurance.  Some policies will include the value of all owned and rented property; therefore it must be taken into consideration in determining the limits of insurance.

 

 

Because of the many, many items and situations that can be (and are) covered by Inland Marine policies, there must be certain contradictions.  However, at the conclusion of this text, it should be apparent that the present forms, as complicated as they seem to be, are obviously the result of much hard work and detail. 

 

STUDY QUESTIONS

 

1.  Common Policy Conditions for Inland Marine insurance include “General” Conditions.

        A.  General Conditions are those conditions other than “Loss Conditions.”

        B.  General Conditions contain provisions for Abandonment, and Appraisal.

        C.  General Conditions refer to methods and amounts of premium payments.

        D.  General Conditions are those conditions that affect how losses are paid.

 

2.  The following actions that must be taken by an insured in case of loss under and Inland Marine policy, do NOT include:

        A.  The policy must be notified if any laws are broken.

        B.  A prompt notice of the loss must be made to the insurer.

        C.  The insurance company may question the insured in detail, but may not question the insured under oath or require access to books and records.

        D.  The insurer may inspect the property and records that prove the loss.

 

3.  In case of a loss, which is covered by two insurers, one insurer refuses the pay for the loss, the other insurer agrees to pay for the loss.

        A.  Both insurers will pay 50% of the loss.

        B.  The insurer that agrees to pay for the loss will pay 100% of the loss.

        C.  The insurer that agrees to pay for the loss will pay the excess over what the other insurer should pay, even though the other insurer does not pay.

        D.  Neither insurance will provide payment for a loss.

 

4.  Ballywag Inc. files an Inland Marine claim for $15,000 for loss to a scheduled item that has a limit of insurance of $25,000.  If it is determined that the loss is a total loss and cannot be replaced or repaired

         A.  The insurer will pay Ballywag $15,000.

         B.  The insurer will deny liability completely.

         C.  The $15,000 will be paid and any unearned premium on the scheduled item will be returned to Ballywag.  When the item is replaced, new insurance will be issued for the new scheduled amount or limit of insurance.

         D.  Ballywag will receive $25,000, and the policy will be kept open until the item is replaced, at which time its limit of insurance will not exceed $25,000.

 

5.  When an insurance company takes the place of the insured and sues a third party which caused the liability, this is called

         A.  Replacement.

         B.  Subrogation.

         C.  Excess Insurance.

         D.  Waiver of Liability.

 

6.  The insured deliberately misrepresented the contents of a cargo.  What would be the difference if the cargo was shipped by common carrier or by a ship at sea?

         A.  The Marine insurance cannot be cancelled until the ship has reached a port.

         B.  The Inland Marine company has an opportunity to inspect the cargo and other affiliated                                    area as it is not easy to cancel or void Inland Marine insurance.  The Maine insurer would cancel ab initio, e.g. void the policy from the beginning.

         C.  There is no difference, they both would cancel when the cargo reached its designation.

         D.  Both insurers would void the policies regardless of what any investigation may find.

 

7.  Under Inland Marine insurance, one important provision is that no person or organization who has custody of the insured property will benefit from the insurance policy.  Why is this?

            A.  It keeps the insured from selling an insured item and replacing it with a cheaper item,
                  in the meantime keeping the valuation of the more expensive item.

            B.  It is to keep unlicensed agents from selling Inland Marine insurance.

            C.  It preserves the right to subrogation.

            D.  It makes it necessary for the Bailor to obtain insurance, therefore increasing the sales
                  of insurance by the insurance company and agent.

 

8.  Which is the best method of determining value for insurance purposes for paintings or other works of art?

            A.  Cash value valuation.

            B.  Agreed valuation at time of contract.

            C.  Replacement Value.

            D.  Cost of restoration.

 

9.  A shipment of jewelry is being transported by a common carrier and insured.  What will the value of the jewelry be in case of a loss?

            A.  The sales value of the jewelry when it was shipped from the jewelry manufacturer to
                  the retail store.

            B.  The lowest amount that appears on the jewelry store’s inventory at the time of the
                  loss, or the actual cash value at time of loss, whichever is less.

            C.  The actual cash value of the jewelry when it was shipped.

            D.  What the estimated value would be if the jewelry were auctioned.

 

 

 

 

 

 

 

 

 

 

 

10.  Brenly’s Construction Co. has an insured piece of expensive road-building equipment destroyed by a covered peril.  Brenly’s has loss of income coverage.  The loss occurred two days prior to the expiration date of their Inland Marine policy with National Insurance.  This policy was replaced by a similar policy with the same provision, but written by Industrial Insurance.  Who would cover the loss of income?

            A.  National Insurance would cover the loss of income until the equipment has been
                  replaced or restored and the income stream resumes, under the provisions of that
                  policy.

            B.  National Insurance would pay up to the time of expiration, and then Industrial would
                 continue the loss of income payments.  They would also participate in the replacement
                 of the machinery on a pro-rata basis.

            C.  If National Insurance is not renewed, there will be no payments for loss of income
                  from either company as this coverage is settled when the income stream continues,
                  and National did not have the coverage at that time for loss of income, and Industrial
                  has a pre-existing condition clause, so they are not liable.

            D.  National Insurance would pay the loss of income benefits, but Industrial would pay
                  50% of each payment unit (day, week, month) until the income stream is resumed.

 

ANSWERS TO STUDY QUESTIONS

 

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