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1 Equipment Breakdown in Construction

3 ‘Green’ coverages come to builders’ risk insurance But the new endorsements are just a start

6 Builders’ Risk, 2008 Latest AAIS revision clarifies ‘soft costs’ and implements full equipment breakdown coverage

10 Insuring Rehabs Picking the right form is critical when insuring work on existing buildings

14 Soft costs, hard concept AAIS seeks to clarify an area of confusion

17 Specialists on generalists Inland marine specialists say commercial generalists can miss the mark when writing the line

20 A question of class What constitutes an inland marine “class,” and why isn’t the number of classes growing?

1

C O N T E N T S

These articles originally appeared in past issues of Viewpoint magazine, a publication of AAIS. Some of the facts and conditions reported may be out-of-date in light of subsequent developments.

All articles are available online at www.AAISonline.com.All information is copyrighted property of the American Association of Insurance Services, Inc., Wheaton, Ill.

WINTER 2010 VIEWPOINT 1

This article originally appeared in the Winter 2010edition of Viewpoint magazine, a publication of AAIS.Some of the facts and conditions reported may be out-of-date in light of subsequent developments.

Equipment Breakdown in Construction

If you imagine a sparkling new building or renovation as acrown, the crown jewels would be the equipment installed toheat it, cool it, or perform other functions for the structure itselfor the enterprise that occupies it.

It is, then, easy to imagine the chagrin--to put it mildly--thatwould follow a loss to a project after machinery or equipmentexplodes or bursts.

At worst, such an event could produce a catastrophic loss tolife and property. At best, a project will be delayed as the strickenequipment is removed and replaced and other damage repaired.

And, the property losses might not be insured if equipmentbreakdown coverage is not in place.

In the absence of equipment breakdown coverage, anequipment loss would have to be absorbed by the contractoror project owner, or subjected to costly, contentious, andtime-consuming property and/or liability claims amongdifferent parties.

StandardizedStandardized equipment breakdown coverage is now avail-

able for construction projects through endorsements providedin the Builders Risk section of the AAIS Inland Marine Guide.Equivalent endorsements are slated to be released in theGuide’s Installation Floaters section.

The Inland Marine Guide is an industry leading resource of forms, rating procedures, underwriting guidelines, and other information for the traditionally nonfiled classes of inland marine insurance. (Guide forms and rating proceduresare filed, however, in certain states that do not exempt inlandmarine insurance from filing requirements.)

Builders risk is the form of insurance that covers buildingsunder construction or renovation. Coverage applies to thestructure or part of a structure being worked on, and materialsto be incorporated into the work, and typically ends when theproperty owner occupies the unit.

Installation floaters cover property that is being installed ina structure, such as an HVAC unit or other types of fixtures.Coverage applies to the property being installed, and typicallyends when the installation is complete and the owner takescontrol of the property.

CollaborationAAIS’s inland marine equipment breakdown endorsements

were developed in consultation with The Hartford Steam BoilerInspection & Insurance Co. (HSB), a leading provider of equipment breakdown reinsurance.

AAIS and HSB have collaborated in the past on the development of equipment breakdown coverage under AAIS personal, commercial, farm, and output programs.

AAIS equipment breakdown coverages can be used with any equipment breakdown reinsurer, however.

“Equipment breakdown losses during construction projectsare not all that different from those in finished structures,” saysLisa Phillips, HSB manager of product design. “But thehazards and exposures are different.”

Copyright, American Association of Insurance Services, Inc., 20102 WINTER 2010 VIEWPOINT

According to Phillips, equipment breakdown losses inconstruction are very often related to the new and untestednature of equipment in a new setting.

Besides power surges, she says, the principal causes ofaccidents within covered equipment on jobsites are improperwiring, installation, and calibration of equipment, incompati-bility of the equipment with other components of the structure, and lack of knowledgeabout the equipment’s operation andmaintenance.

“Most equipment breakdown expo-sures [in construction] are weightedtoward the end of a project,” she adds,“since this is when most systems are first startedand tested.”

Given that, equipment breakdown losses in constructionoften result in a delay in completion of a project; there is lesstime to make up for a delay. As a result, additional constructionand “soft” costs typically result.

EndorsementThe equipment breakdown coverage endorsement

introduced in the AAIS Builders’ Risk forms in 2008 providesstandard equipment breakdown coverage for losses arisingfrom “accidents” within covered equipment, defined asequipment that generates, transmits, or utilizes energy, orwhich operates under vacuum or pressure. To be covered under the endorsement, such equipment must be described as covered property in the base builders’ risk form.

The endorsement covers direct physical damage by anaccident to a covered project or structure, including materials to be incorporated in the structure, up to a limit stated on anaccompanying equipment breakdown schedule, or up to thebase policy limit, if selected by the insurer.

If delay in completion coverage is endorsed onto the basebuilders’ risk policy, it can be extended to equipment break-down losses, up to the delay in completion limit or a separatedelay limit on the equipment breakdown schedule.

TestingThe AAIS Builders’ Risk equipment form also includes

coverage for losses due to “testing,” described in the form asthe “start-up, performance, stress, pressure, or overload testing

of covered property,” including, but not limited to, coveredequipment subject to the equipment breakdown coverage.

Testing coverage has long been built into builders risk and installation floater forms, but the new AAIS forms take a different approach.

“Testing coverage can now be provided as part of the morecomprehensive equipment breakdown coverage, or it can be

provided in the traditional sense by anothernew endorsement drafted for that purpose,”says Robert Guevara, AAIS vice president forinland marine and the principal developer ofthe Inland Marine Guide forms.

Under the equipment breakdown form,testing coverage is provided up to the equip-ment breakdown limit selected; under thestand-alone testing endorsement, coverage is

provided up to a limit identified on the endorsement.

LimitationsThe AAIS equipment breakdown endorsements include

three provisions designed to help insurers control theirexposure to equipment breakdown.

A “suspension” condition allows the insurer to suspendequipment breakdown coverage if it discovers coveredequipment to be in or exposed to a dangerous condition.

In addition, there are two exclusions, one for any lossesarising from defects, errors, or other conditions involving data or software, and another for losses arising from the“misalignment or miscalibration” of covered equipment.

However, both of those exclusions include exceptionspreserving coverage for loss, damage, or expense arising from an accident within covered equipment.

“Buildings are ‘smarter’ today, and computers are moreprevalent in the systems that become a permanent part of thebuildings,” says Phillips at HSB. “It is not the intent of equip-ment breakdown coverage to pay for data and software losses,except when an accident results.”

As for the misalignment or miscalibration exclusion,Phillips explains that “many pieces of equipment can stop functioning for the reasons outlined in the exclusion withoutsuffering physical damage.

“We have found insureds submitting these types of claims,and this clarification will help in the claims process.”

“Most equipment breakdownexposures in construction are weighted toward the end of a project.”

— Lisa PhillipsHSB manager of product design

SUMMER 2009 VIEWPOINT 3

This article originally appeared in the Summer 2009edition of Viewpoint magazine, a publication of AAIS.Some of the facts and conditions reported may be out-of-date in light of subsequent developments.

‘Green’ coverages come to builders’ risk insuranceBut the new endorsements are just a start

Zurich, ACE, and other carriers followed suit with their own“green” builders’ risk endorsements, and AAIS introduced stan-dardized ones in the Builders’ Risk section of its Inland MarineGuide in July 2009 (see sidebar on page 16).

Most recently, Lexington Insurance Co., a Chartis (formerlyAIG) carrier, introduced an “Upgrade to Green” builders’ riskendorsement.

Among other things, the Lexington endorsement coversthe added costs of attaining a certain level of “green”

certification if the certification standards changebetween the time a project is initiated and theoccurrence of an insured loss.

(For more on the development and implications of“green upgrade” coverage, see “The greening of propertyinsurance” in the Summer 2008 edition of Viewpoint, availableonline at http://www.aaisonline.com/viewpoint/2008/08sum3.html.)

QuestionSome builders’ risk practitioners have asked, however,

and not unreasonably, whether green endorsements arereally needed for the class.

They ask, in essence: Shouldn’t all the features of aconstruction project be insured under a standard builders’risk property form? Why should green features be insureddifferently from any other features?

“The value of green construction under a builders’ riskpolicy is in fact in the price of the project, but there are otheraspects beyond the project specifications,” says Sue Stein, a vicepresident of claims for General Reinsurance who monitorstrends in insuring green construction.

“For the most part, our green coverages are included in thebasic policy limit,” says Steve Bushnell, director of emergingindustries at Fireman’s Fund and one of the principal developersof its green coverages.

“However, recognizing that buildings built to green stan-dards are more involved than traditional buildings,” he says,“our Green Builders’ Risk form provides additional limits to

By now, most construction insurance specialists are awarethat major writers of builders’ risk insurance are offering“green” coverage endorsements that cover exposures arisingfrom efforts to build structures that are energy-efficient andenvironmentally “friendly.”

Fireman’s Fund led the way in 2007 with an endorsementthat covered, among other things, loss of earnings, loss of rentalincome, and “soft costs” incurred because of delays after aninsured loss due to the processes and procedures needed tomaintain a project’s certification as a “green” project by majorenvironmental building organizations.

4 SUMMER 2009 VIEWPOINT

AAIS has developed new builders’ risk forms thatprovide coverage for loss exposures related to the “green”certification of an insured project. The forms appear in theBuilders’ Risk section of the AAIS Inland Marine Guide.

This AAIS initiative consists of two new endorsementsand related schedules and underwriting information.

One new form, entitled “Green Building Coverage,” is acoverage part that can be endorsed onto a standardbuilders’ risk form. The green coverage part provides fouradditional coverages increasingly sought by insuredsseeking to build structures that are environmentally sound and energy efficient:• “Indoor Air Quality” pays costs to restore the air quality

in a damaged structure to the standard set in an “air quality management plan” (to the extent thatstandard was achieved prior to the loss);

• “Recycling Debris” pays costs to divert debris of a damaged property from a landfill to a recycling facility;

• “Recertification” pays costs for recertification of a structure as meeting “green” standards of one of the leading environmental building organizations (upto the level of certification achieved prior to the loss); and

• “Electricity and Water Replacement” pays costs to purchase replacement electricity or water from a public utility due to insured loss to renewable energygenerating equipment or water conservation systems.

Each of these coverages is triggered only by an insuredloss covered under the base builders’ risk form, and eachcarries its own limit indicated on an accompanying “GreenBuilding Schedule.” The green coverage limits apply sepa-rately from any limits in the underlying builders’ risk form.

The second of the two new forms is a “Delay inCompletion Coverage Part - Green Building Form” whichcan be used in place of a standard delay in completionform.

The new green delay in completion form incorporatesthe innovations introduced by AAIS in 2008 to clarify ques-tions regarding what were loosely called “soft costs.” TheAAIS 2008 Builders’ Risk forms established a distinctionbetween additional “construction expenses,” such as fees,that are incurred in a lump sum, and additional “softcosts,” such as interest and taxes, that grow with time.

The green delay in construction form retains thatdistinction, and adds “Green Coverage Extensions” to payfor additional construction expenses, additional soft costs,loss of rental income, and loss of net income. Those exten-sions pay the added costs when a construction delay isextended because of additional procedures and processesrequired to meet the level of green certification that wasincorporated into the project design before an insured loss.

In addition, the green delay in construction formprovides a coverage extension for “Energy GeneratingIncome.” That coverage pays for loss of income due to lostsales of surplus power during the delay period if an insuredloss renders an insured’s renewable energy generatingequipment inoperable.

Robert Guevara, AAIS vice president of inland marine,has developed a narrated PowerPoint® presentation on theAAIS green delay in completion form. The presentation isavailable on AAISdirect to companies that access the InlandMarine Guide through that service.

Insurers that do not currently use the Guide can inquireabout accessing the presentation by contacting Rick Maka,AAIS director of marketing, at [email protected], orby calling 800-564-AAIS, ext. 222.

AAIS develops standardized ‘green’

endorsements for Builders’ Risk insurance

meet some of the green requirements that are over and abovethose for traditional buildings.”

Among the unique exposure of green construction cited byBushnell are the additional costs to recycle debris and flushfresh air through a rebuilt structure, and additional fees requiredto re-commission and recertify a structure.

Along that line, green builders’ risk endorsements to datehave identified specific green exposures that are distinct fromtraditional builders’ risk exposures and, for the most part,

provided separate limits for them.Straightforward as it seems, even that approach provides

plenty of opportunities for contention between insureds andclaims adjustors.

For example, how exactly does one segregate clean-up costsbetween the separate limits for “debris removal” and “recyclingdebris?” How is income coverage for the loss of self-generatedelectricity, a feature of some green forms, segregated from otherincome losses?

OpenApart from questions about those specific, defined types of

coverage, construction to green standards is adding a whole newdimension to construction costs and the insurance for them.

Insureds expect a standard builders’ risk policy to cover allaspects of a project that are specified “within the four corners”of a building project, including the green features, says ThomasTaylor, general manager of Vertegy, a St. Louis firm thatconsults on green construction.

Where the costs can really add up, says Taylor, is in theadditional steps needed to prepare materials properly for arestoration that meets green standards.

“The scary thing is that most of these processes and require-ments are implied but not delineated in the contract document,”he says.

Green construction standards, both for the materials to beused and the manner in which they are prepared and installed,constitute a factor that is both outside of a construction contractyet integral to it.

To fully insure a green project, builders’ risk underwriterswill have to take into consideration that a third party mightchange the terms of what needs to be constructed following aninsured loss, and how that construction needs to be carried out.

“The value of a green project is already higher than aconventional project going in, and each loss is going to bebigger,” says Pat Teterus, a vice president and senior consultingunderwriter for Gen Re.

“If the qualifications for a certain standard get higher, theninsureds will ask for something that is better than what theinsurer initially insured.”

Clearly the green building trend is going to force far morefundamental changes in builders’ risk underwriting and formsthan those introduced with the industry’s initial builders’ riskgreen endorsements.

For now, at least, “one has to be very careful before adding agreen endorsement onto a standard builders’ risk policy andthinking that all your bases are covered,” says Ronald Thornton,president of the Inland Marine Underwriters Association(IMUA). “There are all kinds of nuances.”

SUMMER 2009 VIEWPOINT 5Copyright, American Association of Insurance Services, Inc., 2010

Green coverage endorsement filedunder Commercial Output Program

AAIS has filed a new optional Green CoverageEndorsement and accompanying schedules under theCommercial Output Program (COP).

The endorsement extends insurance under theCOP's property and income coverage parts to threecategories of coverage:• Green Building Coverages, which cover certain

costs incurred to comply with "green" constructioncertification standards developed by organizationspromoting environmentally friendly construction.

These include costs incurred to restore indoor airquality, recycle debris, restore vegetative roofs,recertify a structure as green, and replace water orelectricity that is lost when onsite renewable energyor water conservation equipment is damaged.

• Non-Green Building Coverages, which cover thecosts to upgrade conventional but damagedpersonal property, finishes, plumbing systems,lighting systems, HVAC equipment, and roofs with property that meets green standards.

These coverages apply only for buildings andstructures that do not have a green certification.

• Green Income Coverages, which cover the incomecost for the extension of a restoration period due to materials or procedures required to achieve acertification.

This section also covers loss of income incurredwhen there is damage to renewable energy equipmentthat supplies power to a public utility.

6 FALL 2008 VIEWPOINT

This article originally appeared in the Fall 2008edition of Viewpoint magazine, a publication of AAIS.Some of the facts and conditions reported may be out-of-date in light of subsequent developments.

AAIS is acting to address new exposures and enduringissues in the latest revision of its builders’ risk policy forms.

At the end of October 2008, AAIS released a comprehensiverevision of the forms and endorsements provided in theBuilders’ Risk section of the AAIS Inland Marine Guide, aresource of forms, rating procedures, underwriting guidelines,and other information for the nonfiled classes of inland marineinsurance.

The new forms are immediately available for use in moststates, but are also being filed in certain states where filing isrequired, even for traditionally uncontrolled classes. Theproposed effective date for the filing is April 1, 2009.

Builders’ Risk, 2008Latest AAIS revision clarifies ‘soft costs’ and implements full equipment breakdown coverage

Of particular interest to inland marine construction under-writers will be the new standardized delineation of and distinc-tion between “soft costs” and additional costs for “delay inconstruction.”

That topic has been discussed for years in various inlandmarine and construction insurance forums, and the latest revi-sions implement some of the proposals raised in those forums.

As important, however, the new AAIS Builders’ Risk revi-sion expands equipment breakdown coverage and tightenslanguage to address the implications of a 2007 federal courtdecision that could, in effect, increase the exposure of builders’risk insurers.

DistinctionA major feature of the latest Builders Risk forms revision is

the introduction of a new “Delay in Completion Coverage Part”to replace a previous endorsement for covering “soft costs andrental income.”

The new coverage part introduces a distinction between“additional construction expenses” and “additional soft costs”that clarifies the difference between two types of costs incurredwhen a construction project suffers a delay resulting from acovered physical loss.

For both of those categories of losses, recovery is limited toadditional expenses, over and above those that would have beenincurred had there been no delay.

The additional “construction expenses” are limited to thefollowing:• Additional advertising, public relations,

and promotional expenses;

• Additional fees for architects, designers,engineers, and other advisers;

• Additional non-interest costs for financing,such as commissions and loan fees;

• Additional costs for renegotiating leases;

FALL 2008 VIEWPOINT 7

• Additional fees for accountant and attorney services thatwere being provided before the loss occurred; and

• Additional fees for renewing or replacing construction per-mits and licenses.

“What these costs have in common is that they are usuallyincurred in lump sums during the delay in construction,” saysRobert Guevara, AAIS vice president of inland marine. “Thelength of the delay has little if any impact on these costs.”

For that reason, says Guevara, the additional constructionexpenses have a single per occurrence limit, and are subject tothe basic builders’ risk dollar deductible.

Soft costsSoft costs, long a loosely used term in the industry, are now

a carefully defined and delimited set of expenses.Under the new coverage part, additional soft costs are

limited to:• Additional interest for money borrowed to

finance the construction work;

• Additional real estate taxes incurred during the period of delay;

• Additional costs to extend leases for construction equipment and temporary office space; and

• Additional costs of insurance premiums to renew or extend coverage.

“These costs grow with time,” says Guevara. “Therefore, inaddition to its own per occurrence limit, the additional soft costscoverage is subject to a limit per 30-day period.”

As a true time element coverage, the coverage for additionalsoft costs can be subject to a waiting period deductible, if soindicated on the schedule that accompanies the policy.

This still leaves “general administrative expenses,” whichwere included among the soft costs in earlier versions of AAISand proprietary builders’ risk forms.

Under the new AAIS revision, general administrativeexpenses are split off from additional construction expenses andsoft costs and insured separately as a supplemental coveragewith its own sublimit.

That coverage pays for necessary and reasonable administra-tive and clerical expenses that arise out of a construction delaydue to an insured loss, and which are over and above those thatwould have been incurred without the delay.

DebrisWhile the new treatment of additional costs following a loss

is the fruit of years of industry discussion of that topic, otherprovisions of the AAIS Builders’ Risk forms have been revisedto address a federal court ruling that abruptly expanded thepotential exposure for builders risk carriers.

In 2007, a U.S. district court in New Jersey issued rulings onseveral questions concerning a proprietary builders’ risk policy;the rulings are relevant to most industry builders’ risk forms.(The case in question was Zurich American Ins. Co. v. KeatingBuilding Corp., known as “Keating,” for short.)

Among other things, the court ruled that debris removalcosts were limited only to the costs incurred to haul debris away,and did not include the cost of demolishing damaged propertyso it could be hauled away.

The implications of that ruling, were it to become a prece-dent, would be that the cost of demolishing damaged propertywould fall under the basic limit under most builders’ risk forms,not under the separate, and generally lower, debris removallimit. This would effectively increase the exposure for carriers.

“Demolition itself can be quite costly,” says Guevara. “It canentail substantial additional engineering expenses and othercosts associated with electricity, permits, scaffolding, and theutilization of demolition contractors.”

To address the potential for additional exposure, the revisedAAIS Builders’ Risk forms specify that the coverage extensionfor debris removal applies to the cost for “demolition, clearing,and removal” of debris. The basic policy limit applies only tothe value of the damaged property, or to the cost to rebuild,repair, or replace it.

CompletionThe Keating court also determined that the policy in question

provided coverage for all additional costs incurred during theproject’s delay following a covered loss, not merely thoserelated to the repair or replacement of damaged property.

In making this ruling, the court found that the policy in question was regarded as an “all risk” policy under New Jerseylaw and, therefore, applied coverage to all losses for which acovered peril was the proximate cause, unless expresslyexcluded.


Endorsement title

Costs covered

(other than extra

expense and

rental income)

Limit and

deductible

Previous endorsement

Soft Costs, Extra Expense,

and Rental Income Endorsement

“Soft costs,” specified as additional costs for:

• Advertising;• Design fees;• Professional fees

(accountants and attorneys);• Financing (interest and fees);• Lease administration;• Realty taxes; • General administration;• Lease expenses;• Permit fees; and • Insurance Premiums.

Soft Cost, Extra Expense, and RentalIncome each subject to separate limit.

Also subject to a waiting period deductible if one is indicated on the soft cost schedule and a limit per 30-day period.

Latest counterpart

Delay in Completion Coverage Part

(includes rental income and income coverage)

“Additional Construction Expenses,”

specified as additional costs for:• Advertising;• Design fees;• Financing (fees only);• Lease administration;• Professional fees (account-ants and attorneys); and• Permit fees.

“Soft Cost Expenses,” specified as additional costs for:

• Interest payments;• Realty taxes;• Lease expenses; and • Insurance premiums.

Additional general administration expenses

insured separately as a supplemental coverage.

“Additional Construction Expenses” covered up to their own per occurrence limit indicated on an accompanying schedule, subject to the per occurrencedeductible of the basic builders’ risk policy.

“Soft Cost Expenses” are covered up to their own peroccurrence limit indicated on an accompanying schedule,subject to a limit per 30-day period, and to a waitingperiod deductible, if so indicated on the schedule.

General administration expenses covered up to theirown sublimit.

Changing treatment of "soft costs"The latest revision of the AAIS Builders' Risk formsclarifies the distinction among different types of costsincurred when a project is delayed by a covered loss


Regarding the form itself, the court noted that a differentform available to the carrier included language explicitlylimiting coverage to the repair or replacement of damaged prop-erty, and that the carrier could have used similar language in thepolicy at issue, which had similar but not iden-tical language.

To avoid potentially open-ended expo-sure for any and all costs resulting from aloss by an insured peril, the revised AAISBuilders’ Risk forms state that coverage isfor “direct physical loss or damage,” andinclude a new, comprehensive exclusion for“Delay in Completion and IncreasedConstruction Costs.”

To get delay coverage under the revisedAAIS Builders’ Risk forms, insureds mustpurchase the endorsement described above.

EquipmentThe latest AAIS revision of the Builders’

Risk forms includes a new endorsement intro-ducing comprehensive coverage for major andminor equipment breakdown exposures,including losses that result from the testing ofequipment. This endorsement replaces aprevious supplemental coverage which provided only limited coverage for relatively minor equipmentexposures.

As with many AAIS equipment breakdown coverage parts,the new Builders’ Risk endorsement was developed in consulta-tion with The Hartford Steam Boiler Inspection & Insurance

Co., and adapted from the equipment breakdown coveragedeveloped for the AAIS Commercial Output Program.

Previously, the supplemental coverage for equipmentbreakdown provided coverage up to a schedule limit for direct

physical loss to covered buildings and structuresdue to explosion, rupture, or bursting; mechanicalbreakdown; and electrical currents. (The coveragefor explosion, rupture, or bursting was limited tothe pipes, boilers, turbines, or steam engines wherethe loss occurred.)

The new endorsement provides expandedcoverage for “accidents” to covered equipment astraditionally established under “boiler andmachinery” coverage.

“Covered equipment” is defined as any equip-ment that generates, transmits, or utilizes energy,or which operates under vacuum or pressureduring normal use, provided the equipment otherwise qualifies as covered property under the base Builders’ Risk form.

“Accidents” are defined as a range of occur-rences within covered equipment, and the coveragefor loss caused by an accident extends to allcovered property.

On the equipment and testing schedule thataccompanies the endorsement, carriers have an option whetherto indicate a separate limit applying to each loss from a coveredaccident, or whether to cover losses under the base policy limitfor buildings and structures.

The equipment breakdown coverage can also be extended to the delay in completion coverage.

“True soft costsgrow with time.Therefore, inaddition to itsown peroccurrence limit,the additional softcosts coverage issubject to a limit per 30-dayperiod.”

— Robert GuevaraAAIS vice president

of inland marine

Copyright, American Association of Insurance Services, Inc., 2010



Definitive figures are hard to come by, but indications arestrong that “rehab” work will constitute a growing percentageof construction projects in the future.

The total spent on improvements and repairs to residentialstructures alone exceeded $255 billion in 2006, according tothe U.S. Census. Commercial renovations add untold billionsmore.

Among other things, the soaring cost of gasoline may pro-foundly change the economic calculus that, for decades, madeit more attractive to undertake new construction in expandingsuburbs rather than invest in existing communities.

With the price of gasoline now approaching $4 a gallon,

Insuring RehabsPicking the right form is critical when insuring workon existing buildings

older, more condensed communities with mass transit systemsare regaining their allure.

Another major factor driving growth in rehab work is lesswell-known but reportedly had an immediate impact: The intro-duction of new building code standards for renovation projectsthat are distinct from the standards governing new construction.

New Jersey took the lead in 1998 by enacting a “rehabsubcode” that, in essence, relaxed building code criteria forprojects involving existing structures. The state reported thatrehab activity nearly doubled in volume in the two yearsfollowing enactment of the subcode. Seeing those results,Maryland, Rhode Island, and North Carolina took similaraction shortly thereafter.

Then, in 2003, the International Code Council issued a new model building code with flexible standards for existingstructures. To date, it has been adopted as a statewide code in at least 14 states, and by municipalities in 13 others.

“A quiet revolution has been taking place in the way thatstate and local governments across the country regulatecommercial and residential construction,” wrote researcherPhilip Mattera, in a January 2006 report. “A new flexibility in the application of building codes is making possible therehabilitation of structures that would otherwise have remainedneglected or abandoned.”

For inland marine underwriters that write builders’ riskinsurance, the implication of the rehab boom is that a growingshare of premium in many markets will come from projectsthat include pre-existing structures.

Builders’ risk specialists know there is a world of differencebetween insuring “ground-up” construction--where the materials and supplies are new--and projects involving older,unfamiliar buildings that may have hidden hazards.

The most important consideration in insuring a rehab projectis the decision whether to assume the overall commercialproperty exposure for the existing structure being worked on.That’s an exposure builders’ risk carriers typically seek toavoid, but one that may be unavoidable for competitive or practical reasons as the market for rehabs grows.


Not equalThe terms “renovation” and “rehabilitation” are often used

interchangeably to refer to the restoration, updating, or conver-sion of an existing building.

For purposes of insurance, however, it would be best toregard them as distinct types of projects, says ValerieLindstrom, director of commercial lines marine business in theItasca, Ill. office of The Hanover Insurance Group.

In a 2004 white paper on the topic, she wrote that aproject is a “rehabilitation” if it involves structural changesthat could include the removal, replacement, and/or additionof load-bearing walls, supports , columns, floors, slabs, oropenings in the floor.

“Generally, when the value of the construction workexceeds the value of the building shell, the risk can be classi-fied as a heavy rehabilitationrisk,” she wrote.

In contrast, “[I]f thevalue of the work is less than40% of the value of thebuilding shell, the risk canbe classified as a renovationrisk,” provided there are nostructural changes involved.”

Examples of renovationprojects include the replace-ment of window frames, the updating of electrical wiring, andthe replacement of drywall. During renovation projects, build-ings typically remain occupied with commercial property cov-erage in place.

According to Lindstrom, rehabilitation risks are exposed torisks of catastrophic loss to a far greater degree than renovationrisks, as the former have often accumulated debris and com-bustible materials. Work on them often requires use of openflames to cut up old boilers and for other purposes.

InstallationDetermining whether a project is a renovation or rehabilita-

tion along the lines suggested by Lindstrom is a major factor indetermining whether it would be best insured under a builders’risk or installation floater policy.

Robert Guevara, AAIS vice president of inland marine,advises inland marine construction underwriters to look care-fully for the possibility of insuring projects on existing struc-tures with an installation floater.

An installation floater is clearly understood to apply only toproperty being installed, with certain specified exceptions.Presuming that one’s floaters have been kept up to date, aninstallation floater can be the most definitive way of avoidingexposure for loss to existing construction.

The standard Installation Floater available in the AAISInland Marine Guide provides no coverage for existing proper-ty on the site where an insured installation is taking place. Incontrast, the Guide’s Builders’ Risk jobsite form provides cov-erage for collapse and increased cost due to enforcement of abuilding ordinance or law.

“When I’ve trained underwriters, I’ve told them to considera project to be an installation floater risk when only one or afew features, such as roofing or drywall, are being repaired orreplaced,” Guevara says.

“The more features that arebeing renovated, the more difficultit is to distinguish existing con-struction from property beinginstalled, the more it becomes abuilders’ risk type of exposure.”

Special formsAAIS does have one form in the

Inland Marine Guide that providesboth builders’ risk and installationfloater coverage, but that form is

intended for relatively large projects and explicitly excludesrehabilitation and renovation projects.

For smaller rehab projects that truly fall into the category of“rehabilitation,” AAIS provides the Guide’s Builders RiskRehabilitation and Renovation form, first developed in 2004and recently revised.

This form stands out among builders’ risk forms in that itgives carriers the option to insure the entire existing structurefor commercial property perils for the period of rehabilitationor renovation. Here’s how it works:• On the schedule that accompanies the form, the underwriter

enters a “building materials limit” for the property beingcreated or installed, the exposure typically insured underbuilders’ risk policies.

• Separately, the carrier indicates whether it is providingcoverage for the existing building and, if so, whether thestructure is to be valued for a stated amount or for actualcash value.

“When the value of the constructionwork exceeds the value of the buildingshell, the risk can be classified as a heavyrehabilitation risk.”

— Valerie Lindstrom, director of commercial lines marine business,

The Hanover Insurance Group, Itasca, Ill.


• Then the underwriter enters an “existing building limit” forcoverage of the structure identified in the schedule. A provi-sion in the form specifies that the policy does not cover anystanding building or structure, or any part of a standingstructure, other than the existing building described in theschedule.

• The underwriter enters amounts for coverage extensions(e.g., debris removal), supplemental coverages (e.g., transit),and the deductible.

Difference“[Insuring a rehabilitation project] is a challenge because

you insure the existing structure differently from the work thatgoes into it,” says Guevara.

“That’s why the builders’ risk form and schedule forRehabilitation and Renovation have two separate valuation pro-visions, one to deal specifically with the existing structure, andanother one to deal with the work that goes into the project.”

Another benefit to this approach, says Guevara, is that itallows underwriters to insure what would be, in his opinion, an

installation project with a form that is nonetheless labeled as“builders’ risk.”

According to Guevara, project owners and financiers ofteninsist that work be insured by a builders’ risk policy, even when they continue to maintain other commercial property insuranceon the structure.

In such cases, carriers using the AAIS Rehabilitation andRenovation form can simply indicate on the accompanyingschedule that they are not insuring the existing structure.

LimitedFor several reasons mentioned above, genuine rehab proj-

ects are considered to pose more risk than “ground-up” newconstruction, and the AAIS Rehabilitation and Renovation formreflects that by restricting certain coverages in comparison tothose provided in other AAIS builders’ risk forms.

For example, most AAIS builders’ risk forms do not includeexclusions or limitations on collapse coverage.

On the rare occasion when a new structure might collapse,builders risk carriers may end up paying for a loss, although in

Coverage for Existing StructuresComparison of provisions under selected forms provided in the AAIS Inland Marine Guide

Exposure

Damage to pre-existing structure.

Damage to building property in the course of construction.

Collapse

Increased cost - ordinance or law

Damage to materials, supplies, machinery, equipment, and fixturesbeing installed as perma-nent part of structure.

Builders RiskScheduled Jobsite

Form - Broad

Not covered

Insured for property perils during period of construction.

No coverage for pre-existing structures.Collapse of structureunder construction generally covered.Builders’ risk carriermay subrogate.

Provided as supplemental coverage

Insured for open perils during period of construction.

Builders RiskRehabilitation andRenovation Form

Option to insure for open perils during period of construction.

Insured for property perils duringperiod of renovation or rehabilitationif selected on schedule.

Insured for specified “collapse perils” (named perils, hidden decay, insects/vermin, defectivematerials, etc.) during period of renovation or rehabilitation if coverage for existing building is selected.

Not covered

Insured for open perils during period of renovation or rehabilitation.

Installation Floater

Not covered

“

“

“

Insured for open perils during peri-od of installation.

Builders’ Risk andInstallation Floater(one combined form)

Not covered. Explicitly excludesrenovation and rehabilitation risks.

Insured for property perils duringperiod of construction.

No coverage for pre-existing structures.Collapse of structure under construction generally covered.Builders’ risk carrier may subrogate.

Provided as supplemental coverage

Insured for open perils during period of construction and/orinstallation.


many cases the claim will be subrogated and may ultimatelyend up as a liability claim against a subcontractor or a retainedbusiness risk.

Existing structures represent collapse hazards, however,especially when work is being done on load-bearing walls inunfamiliar structures.

To reflect that added exposure, the AAIS Rehabilitation andRenovation form incorporates what has become the standard

commercial prop-erty treatment ofcollapse: A gener-al exclusion forcollapse is builtinto the form,then limited cov-erage for collapsearising from spec-ified “collapseperils,” whichinclude standardnamed perils plus

hidden decay, insects/vermin, defective materials, and others.In addition, the AAIS Rehabilitation and Renovation form

provides no built-in coverage at all for increased cost of construc-tion due to a requirement to meet a building law or ordinance.

This can be a very significant exposure when dealing witholder buildings.

VacancyUnderwriters need to be mindful of the fact that there is

a chance that a builders’ risk carrier will end up providingbuilding property coverage on a vacant structure for a longperiod of time.“There are instances where a contractor or building owner will get a policy for rehab and renovation, then just sit on the

project,” Guevara says. “Then, aloss occurs and the claims investi-gation determines there was nowork done and no work permitsgranted.”

The Rehabilitation andRenovation form and schedulehave been revised to preclude thepossibility that a carrier will inad-

vertently assume prolonged exposure for a vacant building.The form itself states that coverage for a vacant building is

subject to a limitation expressed in the schedule. That limitationstates that, unless building permits are obtained or work begun,coverage under the policy will be in effect for only the numberof consecutive days indicated on the schedule.

Similarly, the schedule allows the carrier to indicate thenumber of days after completion of a project before coverageunder the policy ceases. This is in addition to the standardbuilders’ risk conditions for the termination of coverage, includ-ing policy cancellation or expiration, acceptance of property bythe owner/purchaser, abandonment of the project, or a cessationof insurable interest.

“A vacant building exposure is not a real rehab exposure,”Guevara says. “It is a completely different type of coverage thatshould be priced completely differently than you would for arehab form.

“Since that issue has come up a few times, we’ve built in acapability to put a cap on the coverage [so] there won’t be cov-erage unless the insured has gone out and obtained the con-struction contracts or building permits.”

“A vacant building exposure isnot a real rehab exposure.”

— Robert Guevara, AAIS vice president, inland marine




Some unfortunate phrases have become part of the insur-ance lexicon and are apparently impossible to dislodge.

“All risk” is one of them. Property/casualty professionalslearn quickly that virtually no policy covers all risks, in a literalsense.

“Open perils” is a more precise (or less imprecise) alterna-tive for describing policies that cover first -party property lossesarising from all perils except those explicitly excluded.

Still, “all risks” continues to pop up in articles, regulations,legal documents, and industry texts.

“Soft costs” may be another established term that obscuresmore than it clarifies, says Robert Guevara, AAIS vice presi-dent for inland marine.

Soft costs, hard conceptAAIS seeks to clarify an area of confusion

The term “soft costs” generally refers to certain expensesrequired to complete a construction project that has beendelayed due to unexpected physical damage.

In contrast to “hard costs” for labor and materials, soft costsare generally not considered to be directly related to physicalconstruction. Rather, they are commonly perceived to entailnon-construction costs such as taxes, marketing expenses, inter-est payments, and finance charges.

The soft costs endorsement provided in the Builders’ Risksection of the AAIS Inland Marine Guide lists 10 types of softcosts: advertising, design fees, professional fees, financing,lease administration, realty taxes, general administration, leaseexpenses, permit fees, and insurance premiums.

Builders’ risk is one of the traditionally nonfiled classes ofinland marine insurance, so it is not surprising to find consider-able variance among what different carriers list as “soft costs.”

Whereas the AAIS endorsement lists 10 categories of softcosts, forms from national carriers exhibited on one website listseven or eight categories of soft costs, and a checklist providedonline by a brokerage firm lists 14 different types.

DistinctionUnfortunately, says Guevara, the common understanding of

“hard costs” as construction-related and “soft costs” as ancil-lary obscures a more important distinction.

That distinction, he says is between original project costs--”hard” or “soft”--that are part of a covered loss, and additionalcosts incurred because of changed circumstances after a loss.

According to Guevara, the former are typically coveredunder an unendorsed builders’ risk policy, without the need of a“soft costs” endorsement.

To illustrate, suppose a project is partially destroyed due toan insured peril and needs to be re-designed. Depending on thecircumstances and the valuation of the builders’ risk exposure,there may be coverage under an unendorsed builders’ risk poli-cy for engineering and architectural fees needed to replace thelost value of the original specs.


Given that, Guevara notes that, “there is often coverage in astandard builders’ risk policy for certain construction costs thatare loosely called ‘soft costs’.”

Claims disputes can arise, however, when brokers or riskmanagers use the term “soft costs” to characterize certain losses,and are told by a claims rep there is no coverage because theinsured has not purchased a soft costs endorsement.

Without the endorsement, a project owner or contractor thatsuffers a loss will typically find itself without coverage for fees,taxes, interest, and other expenses that are in excess of the orig-inal project costs calculated for the builders’ risk valuation.

“We’ve been hearing about more and more claims disputesrelated to this,” says Guevara. “I wish we could get rid of theterm ‘soft costs,’ but it’s an established part of the business.”

Step oneAAIS has taken an initial step to clarify the identification

and treatment of construction costs in its new Contractors’Combination policy recently added tothe AAIS Inland Marine Guide (seesidebar on page 8).

To clarify the application of cover-age, the Contractors’ Combination poli-cy introduces two provisions:• A statement is included in the valua-

tion provision saying that coverage isprovided under the base form for“related construction costs that arere-incurred,” provided they wereincluded in the original valuation ofbuilders’ risk exposure.

• A new soft costs coverage endorsement is labeled andworded to specify that it applies to “additional” soft costsbeyond those that are part of the builders’ risk valuation.

“The extra valuation provision was added to clarify that thevalue of a building project may include construction costs thatare sometimes referred to as ‘soft costs,’ such as engineer’sfees,” says Guevara.

“To be covered under the base form, those constructioncosts must be included as part of the limit for the builders’ riskproject,” says Guevara.

“The term ‘additional’ was added to our soft costs endorse-ment to emphasize that coverage under the endorsement is forcertain costs that are in addition to the value of the builders’risk project.”

Moving onAAIS is contemplating even more substantial changes to its

treatment of soft costs in an upcoming revision to the Builders’Risk section of the Inland Marine Guide, says Guevara.

The revision will draw, in part, on ideas discussed at a ses-sion on soft costs at the 2006 annual meeting of the InlandMarine Underwriters Association (IMUA).

In a presentation at the IMUA event, Vincent Zegers, prod-uct line manager for property engineering for SwissReinsurance America, reviewed the treatment of hard costs andsoft costs in U.S. builders’ risk forms today, and urged U.S.insurers to adopt an approach commonly used in Europe.

Among hard costs, he listed the cost of labor, constructionmaterial, overhead, scaffolding, and fees. For soft costs, he list-ed marketing fees, developers’ fees, refinancing costs, loss ofincome or profit, and loss of interest.

What truly distinguishes hard costs from soft costs, accord-ing to Zegers, is that coverage forthe former is provided within a pol-icy period, subject to a dollardeductible, while coverage for thelatter is provided up to the end of aperiod of indemnity and is subjectto a time deductible.

Given that, endorsed soft costscoverage often is not triggered untila certain period after a loss, typical-ly 48 hours. (AAIS soft costsendorsements state that the waitingperiod is specified on the scheduleaccompanying the endorsement.)

Time elementZegers holds, however, that certain “soft costs” are incurred

at the time of a loss regardless of when they are contracted orpaid for, and would be more properly insured if covered in thesame manner as hard costs.

Among those costs are professional fees and refinancingcharges that have to be paid in full no matter how long a proj-ect is delayed.

When such costs are insured under a time deductible, as iscustomary, the insured has an incentive to delay incurring anexpense until after the designated waiting period.

That may not be advisable from a loss control perspective.A general principle of risk management holds that, the longer

“We’ve been hearing about moreand more claims disputes relatedto this. I wish we could get rid ofthe term ‘soft costs,’ but it’s anestablished part of thebusiness.”

— Robert Guevara, vice president, inland marine, AAIS


one waits to take action to address a loss, the greater the losswill be.

If an insured waits even a day or two to contract for neededservices, the contractors or professionals may take other jobsand, in effect, add weeks or months to the completion of theinsured project.

Other traditional “soft” costs, including loss of income, lossof rent, and interest expense, are directly related to the length ofthe delay in the completion of a project.

Zegers refers to these as “delay” exposures, “delay” being aterm commonly used in Europe and increasingly used by U.S.construction risk professionals. Given that losses under suchexposures are directly related to the time needed to complete aproject, Zegers says they are appropriately subject to a timedeductible.

AAIS actionGuevara agrees with Zegers, at least in part, and plans to

shift coverage for some of the current soft costs into the builders risk valuation.

For example, Guevara notes that certain finance charges have to be paid in their entirety, no matter what the interest rateor other terms of a loan.

In the upcoming Builders’ Risk revisions, he proposes to splitthe coverage for finance-related soft costs between finance charges,which would be subject to the basic builders’ risk deductible.

Interest expense, a time element exposure, would be subjectto a time deductible.

Guevara also plans to build some time element delay cover-age, with a separate sublimit, into the Builders’ Risk base forms.

One thing won’t change, however. Users of the InlandMarine Guide will continue to see the term “soft costs,” muchas Guevara might wish it would go away.

Property/casualty companies thatinsure construction contractors now haveaccess to a new program that providesseveral inland marine construction cover-ages in a single policy form.

A new Contractors’ Combinationpolicy form and endorsements wererecently added to the Inland MarineGuide, a leading source of policy forms,rating procedures, and underwritingguidelines for the traditionally nonfiledclasses of inland marine insurance.

The Contractors’ Combination baseform covers four types of inland marineconstruction exposures that are typicallyinsured by separate forms:• Contractors’ equipment and tools;• Builders’ risk;• Installation floater; and• Electronic business equipment.

Coverage for builders’ risk andcontractors’ equipment is provided on ascheduled basis, and schedules areprovided. However, the base form alsoincludes a supplemental coverage withseparate sublimits for unscheduledequipment and tools.

Installation floater coverage isprovided on a blanket basis, so coveredinstallation projects do not have to bescheduled. Also, electronic equipment(including computers, copiers, phonesystems, etc.) is covered while at loca-tions occupied by the insured; the loca-tions do not have to be scheduled.

Companies writing Contractors’Combination policies are advised to usethe rating which currently exists for eachapplicable Guide class (Builders Risk,Contractors’ Equipment, etc.) to rateContractors’ Combination coverage.

The Contractors’ Combination policyintroduces new provisions designed toeliminate confusion in the constructionmarket over the definition of “soft costs”(see main story on page 6).

Nearly 30 endorsements and sampleschedules are provided with theContractors’ Combination policy,including the following:• Electronics Coverage - Equipment

And Tools: Covers off-board electronicequipment used to communicatewith or keep track of contractors’equipment while at a jobsite.

• Additional Coverages Endorsement -

Equipment And Tools: Extendscoverage to construction trailers andtheir contents.

• Additional Coverages Endorsement -Builders’ Risk And Installation Floater:Extends coverage under theCombination Form to covered prop-erty while waterborne. It also coverstesting, personal property, andcoverage for contract penalties.

• Additional Coverages Endorsement -Electronic Business Equipment: Canbe used to provide coverage forincompatible hardware and media.The endorsement also providesforeign transit/location coverage andvirus and hacking coverage forcomputers.

• Income Coverage - Equipment AndTools: provides coverage for loss ofearnings caused by direct physicalloss of or damage to covered contractors’ equipment.

• Percentage Deductible Endorsement- Equipment And Tools: provides adeductible that is a selectedpercentage of the value of coveredproperty, subject to a minimum andmaximum deductible amount.

New Contractors’ Combination policypackages construction coverages




Ron Thornton likes to tell the story of a commercial under-writer who agreed to add a cargo coverage form faxed by anagent onto a commercial package policy, only to have the actresult in an unexpected $250,000 loss, wiping out years of mar-gin on the account.

It was a well-intentioned property underwriter doing afavor for an existing client, says Thornton, president of theInland Marine Underwriters Association (IMUA), the tradeassociation representing inland marine carriers and professionals.

As with many such gestures, he says, the cargo form wasadded with little or no knowledge of what it said, little or nounderstanding of the potential exposure, and little or no com-pensating premium charge.

Specialists on generalistsInland marine specialists say commercial generalistscan miss the mark when writing the line

In another case, Thornton says, an agent faxed a multi-pageinland marine form to a property underwriter, but left out theeven-numbered pages (they were on the reverse of the pagesthat were faxed).

Not familiar with the form, the underwriter endorsed it ontoa policy without the even-numbered pages. When a claimoccurred, the company had a knotty question of how to applyprovisions on pages that had never been attached to the policyin the first place.

ConsolidationThese anecdotes by Thornton provide examples of how

commercial lines generalists can miss the mark when theywrite inland marine coverage, according to inland marine spe-cialists.

In their eyes, a generation-long consolidation of inlandmarine underwriting from specialized departments into com-mercial property departments has eroded some of the receivedwisdom in the line.

“With the change from specialist to generalist in many com-panies, there’s not the level of training and market knowledgethere used to be,” says Thornton.

“When I started in the late 1980s there were still a lot ofcompanies with inland marine departments,” says ArthurFlitner, vice president of the American Institute for CPCU andthe principal developer of the curriculum for the Associate inMarine Insurance Management (AMIM) designation offered bythe Insurance Institute of America.

“Today, you’re hard-pressed to find an insurer with aninland marine department,” Flitner says. “For the most part,inland marine [underwriting] has been folded into commercialproperty or commercial package underwriting.

“Even veteran inland marine underwriters have had to face the reality that there were no longer inland marinedepartments and that they had to work in the larger context of commercial lines.

“We probably lost some of the really good inland marineunderwriters,” he continues. “It’s become more of a challenge


to keep intact the body of knowledge they had.”The consolidation of inland marine departments may be

slowing as a renewed emphasis on underwriting profitabilityleads to a renewed appreciation for the unique nature of inlandmarine expertise.

Sophia Phillips, vice president for commercial lines in theItasca, Ill. office of The Hanover Insurance Group, says therehas been a resurgence in admitted marine specialty markets,and an increased demand for inland marine specialists.

“Agents want to deal with marine specialists,” shesays. “If you want the better business, the more prof-itable business, you have to have special-ists.

“If you’re not hiring more specialists,you’re not perceived as serious about inlandmarine.”

Still, there is no doubt that a substantialamount of inland marine business is under-written by property or package underwritersfor whom inland marine is but a small partof the business they write.

According to inland marine specialists,those commercial generalists demonstrateseveral general tendencies when underwriting inland marinecoverages.

Giving it away“There is a tendency among commercial generalists to use

the marine to get to the price they want,” says Phillips.In other words, over the prolonged soft market, there was a

tendency to throw in inland marine coverages with a propertypolicy or commercial package, often with little more than anominal premium charge--or none at all.

This has been done because inland marine often accountsfor only a small fraction of the premium for a property account,let alone a full package.

There was less appreciation, until recently, for the fact thatinland marine was a highly profitable line that could provide alarger share of the margin on an account relative to its share ofpremium.

A growing appreciation for the profitability of the line hassuppressed the impulse to give away inland marine coverage,says Thornton, but the people writing accounts don’t always havethe necessary expertise to price exposures effectively, he says.

Writing the limitAnother tendency of commercial generalists cited by inland

marine specialists is their tendency, in Phillips’ words, “to basepremium on the limit rather than the exposure.”

That shortcoming is especially evident when tran-sit or cargo coverage is included in a commer-cial package. Commercial generalists com-

monly price the coverage according tothe limit without examining what is

being shipped.“Package policies will often

have specific limits for transit expo-sures,” says Pat Stoik, vice president

of commercial inland marine for theChubb Group of InsuranceCompanies, Warren, N.J.

“Those were instituted to captureincidental exposures, but have grown,”he says. “What were once incidentallimits have become meaningful limits.

“Now we’re talking about transitlimits of $500,000 or $1 million,” he

continues. “The loss of one valuable shipment can blow yourprofit on an account for the next five years.”

“Regarding transit coverage, the marine underwriter knowsthe key isn’t the limit, it’s the value of the shipments,” saysRobert Guevara, vice president of inland marine at AAIS.

Much the same holds for coverage for electronic data pro-cessing and warehouse legal liability where, the higher thevalue of the insured property, the greater the chance of a lossup to the coverage limit.

“You are much more likely to hit a $1 million warehouselegal liability limit when you have $10-$20 million in storage,”says Phillips.

Small tools is another class where non-specialists common-ly fail to price an exposure adequately, according to Phillips.

It’s common for commercial generalists to establish a $250 deductible for small tools coverage, not understanding the fullvalue of tools and the extent of loss to them.

With tools, says Phillips, “you’re insuring an entire schedule.“If a guy has a half million dollars worth of tools in a

$10,000 storage container, that’s much deeper than a work box,”she says.

Installation coverage, which covers property being installed ata purchaser’s location, is another type of coverage where

“There is a tendency amongcommercial generalists to usethe marine to get to the pricethey want.”

— Sophia Phillips, vice president for commerciallines, The Hanover Insurance Group, Itasca, Ill


commercial generalists commonly can easily take on moreexposure than they bargained for, says Flitner at the AmericanInstitute.

According to Flitner, commercial generalists have beenknown to provide incidental installation coverage to large man-ufacturers that install their own products, exposing themselvesto huge losses.

Different disciplineAs a line of insurance, inland marine is, some ways, a series

of smaller lines, called classes.Learning the nuances of the individual classes is admittedly

challenging and sometimes hard to justify when inland marinepremium is small relative to other types of coverage.

However, the contrast between how commercial generalistsand inland marine specialists underwrite the line derives frommore than the latter’s knowledge of inland marine particulars.

It is an entirely different approach to risks, say inlandmarine specialists.

“It’s a whole different discipline ofthinking,” says Phillips. “A marine under-writer is taught to take a risk and underwriteit. A package underwriter is taught to fit arisk within certain guidelines.”

“There’s a tradition in inland marine ofbeing very flexible because you don’t seethe same risk twice,” says Stoik at Chubb. “Also, inland marinerating plans have a significant amount of judgment.”

So why do inland marine specialists care if commercialgeneralists don’t write the line effectively?

For one thing, they don’t like being put at a competitivedisadvantage

“There is concern regarding coverages that [property orpackage underwriters] don’t really understand,” says Guevara atAAIS. “It sometimes puts marine specialists at a competitivedisadvantage.”

Beyond that, Thornton worries that a tendency of commercialgeneralists to lump inland marine with other property exposuresand coverages is eroding the quality of data collected for the line.

“The percentage of [premium for inland marine] businessreported as ‘miscellaneous’ or ‘unclassified’ has grown inrecent years,” he says. “Major companies are worried that thedata is being compromised.”

Since most of the nonfiled classes are judgment rated, howcan you make accurate judgments?

Guevara agrees that better segregation of inland marine coverage, and better reporting of inland marine data, wouldimprove the accuracy of pricing in the line.

“Among the companies that prefer to package coverage, theinland marine data is often lost in the numbers reported com-mercial multi-peril,” he says. “Within the data reported forinland marine, the third or fourth largest class is the one labeled‘Not Otherwise Classifed.’

“That’s become a big melting pot of a class that complicatesanalysis of the profitability of business.”

What to do?What would inland marine specialists recommend to

companies that have commercial generalists writing inlandmarine coverage?

“You can’t give up on education,” says Thornton at theIMUA. “You should designate some employees to at least gettextbook knowledge of inland marine.”

Flitner credits the IMUA, along with theAmerican Institute of Marine Underwriters, anocean marine trade organization, for champi-oning the creation of the AMIM curriculumthat Flitner maintains.

“It’s truly an extension of the two tradeorganizations,” Flitner says. “If not for theIMUA, it’s hard to say how much inland

marine knowledge would be intact and accessible today.”Apart from having underwriters take the AMIM program,

Flitner offers three pieces of advice to underwriters seeking tobuilding their knowledge of inland marine:

• Find an older mentor familiar with traditional practices in the line;

• Use the educational and reference resources provided by theIMUA to its members; and

• Use the AAIS Inland Marine Guide to policy forms and ratingprocedures for the nonfiled classes

The AMIM curriculum addresses classes and coveragesfound in the Guide.

Stoik, whose duties include oversight of the training ofinland marine underwriters at Chubb, offers some blunt adviceof his own.

“Don’t be afraid to pick up the phone and ask someone withthe expertise,” he says. “You’re an underwriter and it’s your jobto ask questions.

“The only stupid question is the one you failed to ask.”

“Major companies areworried that the data isbeing compromised.”

— Ron Thornton, president of the Inland Marine Underwriters Association




AAIS recently filed a comprehensive revision of itsCommercial Inland Marine (CIM) Program, an undertakingthat updates the policy forms and rating information for thecommercial classes traditionally subject to filing requirements(see sidebar on page 21).

While the update is significant for many insurers’ opera-tions, an observer could easily wonder why the number of stan-dard classes in inland marine insurance--both filed and non-filed--has remained essentially unchanged for decades.

This is the case even though the amount and variety ofproperty that could be insured under an inland marine policyhas grown substantially over the years.

For example, the revised AAIS CIM Program includes anupdate for the traditional “Photographic Equipment” class, butno separate class for video equipment or digital cameras hasarisen.

To understand why this is so, it is necessary to review thehistory of inland marine and the current conditions that affectthe development of the line.

A questionof classWhat constitutes an inland marine “class,” and why isn’t the number of classes growing?

Portable propertyAccording to Robert Guevara, AAIS vice president of

inland marine, the notion of classifying certain types of proper-ty into an inland marine “class” dates from the years when“fire” and “marine” insurers were strictly separated by regula-tion and practice.

Fire policy underwriting was (and remains) heavily dependenton the characteristics of an insured location, and did not adequate-ly address exposures to high-value portable property exposed toperils--particularly theft--away from insured locations.

Cameras, furs, jewelry, musical instruments, and doctorsand dentists equipment were examples of such property. Inlandmarine classes, whether filed or nonfiled, were defined for thepurposes of insuring them.

In addition, inland marine classes were defined for othertypes of property (accounts receivable, valuable papers andrecords, signs, mobile equipment, and more) that were uniquein nature, mobile, or subject to constant change, and thus ill-suited for standard “fire” coverage.

Before the age of consumer electronics, most other personalproperty worth insuring was large, not easy to steal, and typi-cally covered under location-focused property policies.

Times changeThings had changed in the insurance business by the time

electronic technology made valuable portable property com-monplace.

The distinction between fire and marine companies waspractically eliminated, and much the same has happened to thedistinction between property and marine departments withincompanies.

Along with that trend, portable personal property is nowcommonly insured with other types of personal property underthe personal property limit of a commercial property policy,subject to limitations for losses away from the insured premises.

“Without a strict separation of marine and property insur-ance, there is less of a call to define certain types of property asbelonging to a class,” says Guevara.


Another reason there has not been growth in the number ofinland marine classes is that some classes have adapted toinclude new types of property that have developed over theyears.

This is the case for electronic data processing, a nonfiledclass that emerged in the early years of the computer age andnow addresses exposures to Web sites and other forms of elec-tronic property not known when computers were introduced.

If there are no new standardized classes for video equip-ment or digital cameras, says Guevara, the reason is that what-ever items are not covered under property policies can beinsured under the Photographic Equipment class.

Proto-classes?It’s one thing to identify a category of property as having

unique exposures.But, an inland marine “class” is not established until three

things are developed:• A distinct policy form for insuring the property;

• A distinct procedure for rating the policy; and

• Fields for data capture related to the property instatistical plans.

There is a cost to each of these, and the benefits of defininga class have diminished as property policies have broadenedtheir coverage for personal property.

That is not to say that the process of developing inlandmarine classes has stopped entirely, however.

As an example of classes potentially in development,Guevara cites mobile medical equipment and electronic equip-ment for agriculture.

At the request of AAIS inland marine affiliates, Guevara’steam recently developed standard policy forms for insuringsuch equipment.

For the time being, and perhaps indefinitely, those formswill be included in the “Miscellaneous Floaters” section of theAAIS Inland Marine Guide, the leading industry resource offorms, rating procedures, underwriting guidelines, and otherinformation for the traditionally nonfiled classes.

If sufficient demand emerges for standardized rating infor-mation for mobile medical and electronic equipment, they maybecome classes of their own with rating procedures and datareporting fields, says Guevara.

AAIS has initiated a countrywidefiling of revised forms, endorsements,schedules, and manual for itsCommercial Inland Marine (CIM)Program.

This program encompassescommercial inland marine classes tradi-tionally subject to filing requirements,including Accounts Receivable, Cameraand Musical Instrument Dealers, FloorPlan Merchandise, Jewelry Dealers,Mobile Equipment Dealers, MusicalInstruments, Negative Film,Photographic Equipment, Physicians andDentists Equipment, Signs, TheatricalProperty, and Valuable Papers andRecords.

Among other things, the revisionmodifies forms and endorsements to use more titles and paragraph breaks to designate conditions, limitations, and exclusions that apply to covered property.

The new format is consistent withthat implemented in the 2004 revisionsof the Inland Marine Guide for nonfiledclasses. Because of this, companies willfind that, in most cases, they can use asingle amendatory endorsement in astate for both filed and nonfiled inlandmarine forms bundled into a packagepolicy.

The format also complies with guide-lines arising from a recent Californiasupreme courts decision regardingclarity in policy provisions, as well asthose established by the Oregon insur-ance department. The new countrywideformat eliminates the need to maintainseparate forms for Oregon.

Other enhancements to the programinclude:• Incorporation of an updated definition

of “collapse” where applicable;• Addition of a standard pollution

exclusion to each coverage part;• Addition of resulting loss language

(which broadens coverage) to variousexclusions (animal nesting/ infestation/discharge, contamination/deteriora-tion, mechanical breakdown, temperature/humidity, wear and tear, and weather);

• Introduction of an optional calendardate or time failure exclusionendorsement (in place of built-inexclusions originally developed toaddress the “Y2K” problem);

• Filing of updated schedules of cover-ages on behalf of companies, (previ-ously placed on file for informationalpurposes only); and

• Modifications to various individualforms within classes.

For information on affiliating withAAIS for use of the Commercial InlandMarine Program or Inland Marine Guide,contact Rick Maka, director ofmarketing, at [email protected] orby calling 800-564-AAIS.

AAIS revises Commercial Inland Marine Program


AAIS is big in inland marineWhat makes AAIS so valuable?

Many things, really, but two in particular:

The Inland Marine Guide, long the industry's premier resourcefor forms, rating procedures, underwriting guidelines, and otherinformation for the nonfiled classes.

The Guide provides a range of coverage forms not seenelsewhere. For most classes, the Guide provides several baseforms and numerous endorsements that give you structuredoptions for each risk, saving you time and avoiding costlyerrors.

As an added value, forms and rating procedures in the Guide arefiled in those states that do not exempt them from filingrequirements, saving you time and money.

The Commercial Output Program (COP), and its offshoots,the COP-XL for jumbo risks, and the Developers OutputProgram for construction operations.

For decades, AAIS has led the industry in developing and refiningoutput coverage, the practice of providing broad coverage in a singleform for both commercial property and inland marine exposures, andusing a flexible rating procedure to rate each risk as a single entity.

Today, more than 300 insurers of all sizes are affiliated with AAISfor the Inland Marine Guide, and nearly 100 use the CommercialOutput Program.

Products and people you can rely on.

www.AAISonline.com

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