part one – personal lines chapter one - homeowners insurance concepts rev 121107.pdf ·...

American Education Systems, LC

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Table of Contents – Core Concepts • Part One – Personal Lines 1

Chapter One Homeowners Insurance……………………………………………….1 Chapter Two Automobile Insurance and the Personal Auto Policy……………..79 Chapter Three Personal Watercraft………………………………………………….152 Chapter Four Personal Umbrella…………………………………………………….175

• Part Two – Commercial Lines 193 Chapter Five Commercial Package Policy…………………………………………..193 Chapter Six Business Owners Policy…………………………………………………243

• Part Three – Social Insurance and PC Insurance Coverage 287

• Part Four – Specialty Insurance – Commercial Inland Marine 317

Part One – Personal Lines

Chapter One - Homeowners Insurance

Homeowners Insurance is sold to residential property owners to provide both property

coverage and liability coverage related to the home and its use. Homeowners Insurance

accounts for 10% of Property and Casualty premium volume.

The Insurance Services Office (ISO) has recently revamped its coverages based on the

many court cases that have affected coverage. The new forms are called ISO

Homeowners 2000. The Homeowners 2000 is the ISO’s first major revision to the

Homeowners Policy since the 1991 program. The revised program includes more than

fifty changes, which include editorial clarifications, increased limits of liability, new

policy conditions, and both broadening and narrowing of coverages.

• Review of the Policy Forms

There are six different types of policy forms to provide homeowners insurance.


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HO-2 Broad Form

Covers named perils for buildings and

personal property

HO-3 Special Form

Insures against open perils (perils not

specifically excluded) for buildings and

named perils for personal property

HO-4 Contents Broad Form

Primarily for renters

HO-5 Comprehensive Form

Open perils coverage for both building

and personal property

HO-6 Unit Owners Form

Primarily for condominium owners

HO-8 Modified Coverage Form

For older or special value homes

In addition to providing broader coverage, forms providing open perils coverage shift

the burden of proof for the loss from the insured to the insurance company. With

named-perils coverage, the insured has to prove that a covered peril caused the loss.

With open perils coverage, the insurance company has to prove that an exclusion

applied in order to deny coverage.

• Eligibility


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Homeowners policies are issued to cover a premises that is used principally for private

residential purposes, with some business use permitted. Specifically ineligible are farm

property, mobile homes and trailers (except for contents coverage) which can be

covered with other types of insurance.

An insurance company can issue homeowners forms HO-2, HO-3 or HO-5 to the

insured if the insured qualifies as any of the following:

• an owner-occupant of a dwelling, with up to four families in residence;

• the intended owner-occupant of a dwelling in the course of construction (not the

builder);

• one co-owner of a duplex, when each distinct portion of a two-family dwelling is

occupied by separate co-owners;

• the owner of a second or seasonal (vacation) residence. The policy must be a

separate policy than for the homeowner’s primary residence.

• a purchaser-occupant when the seller retains title under an installment contract

until payments are completed; and

• an occupant of a dwelling under a life estate arrangement, when dwelling

coverage is at least 80 percent of the current replacement cost.


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• If the insured is a co-owner, a purchaser-occupant or an occupant under a life

estate, the owner or remaining co-owner also will have what the insurance

companies call an insurable interest in the dwelling, other structures, premises

liability and medical payments coverage. This interest can be insured by

attaching an Additional Insured Endorsement to the insured’s policy. However,

that co-owner’s personal property will have to be insured separately, on another

policy.

• Coverages Offered

Both property and liability coverages are offered under a homeowners policy. The first

four sections of the policy relate to property coverages, and the last two to liability

exposures as follows. The policy forms differ by property coverage but the liability

coverage is identical for all six forms.

Section I – Property Coverages

Coverage A Dwelling

Coverage B Other Structures

Coverage C Personal Property

Coverage D Loss of Use

Section II – Liability Coverages

Coverage E Personal Liability

Coverage F Medical Payments to Others


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Section I Property Coverages

A homeowners policy includes a number of different coverages, which provide a sort of

loose checklist of the kinds of exposures the insured may face.

• Coverage A—Dwelling Coverage

This coverage applies to the house itself, attached structures (such as an attached

garage), and materials and supplies on or adjacent to the premises. This includes

materials used for repair or construction.

The limit of insurance is selected by the insured and differs depending on the value of

the house. The value must be of a certain minimum (these minimums differ by state)

which is usually about $25,000.

Coverage is provided for real property. Real property includes buildings and

structures, but not the land on which they are located. While land usually is part of the

purchase price of real property, it is not subject to loss or destruction in the same way

buildings are, so it is not covered by insurance in the same way.

One way to calculate the value of the structures on the insured’s property is to use local

tax assessment values. But the most common way people estimate how much insurance


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they need is by covering at least the amount of any mortgage or other loans on the

property.

One caveat here: The amount outstanding on the insured’s home loan—or even the

original full amount of that loan—may not be enough to rebuild the insured’s house if

it’s destroyed.

• Coverage B—Other Structures Coverage

It applies to buildings on the premises that are separated from the house by a clear

space, or connected only by a fence, utility line or similar connection (such as a

detached garage or work shed, or even a guest house). The standard amount of

insurance for other structures is 10% of the amount written for the dwelling coverage,

and it is provided as an additional amount of insurance. (In other words, if the insured

has a $200,000 policy for the dwelling, the insured will automatically get an additional

$20,000 of coverage for other structures.) If 10% isn’t enough, the insured can buy more

other structures coverage.

• Coverage C—Personal Property Coverage

Personal property means just about any household possession that’s financially

valuable—from an earring to a refrigerator.

Personal property includes all forms of property other than real property. On a

homeowners policy, personal property coverage protects household goods, indoor and


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outdoor furniture, most appliances (but not built-ins), linens, drapes, clothing and other

personal belongings, which may range from toys to home computers and small boats.

This coverage applies to personal property owned or used by the insured or anyone else

covered under the insured’s policy while it is anywhere in the world. It also includes

coverage for theft. At the insured’s request, other people’s personal property also may

be covered while it is on the insured’s premises. This coverage usually is an additional

amount of insurance—above the policy’s face—50 percent of the amount written for the

dwelling. If that’s not enough, the insured can increase the limit (even to purchase

replacement cost insurance for personal property)—and the insured also can choose to

decrease.

Common Client Question: While on vacation, thieves broke into my car and stole my

camera, and some camera equipment I borrowed from my neighbor? Will my

homeowners insurance cover this loss?

The short answer is yes – the loss is covered. Of course it is subject to the deductible and

the policy limit.

Personal Property coverage applies in many situations—including when things are

stolen from the insured’s car while the insured is traveling. This is the type of protection

that people sometimes overlook or forget about. Personal property coverage is one of

the primary reasons to buy a comprehensive homeowners policy.

Insurance companies don’t consider all types of personal property equal. Some items—

particularly those with a high value—will have separate limits under a homeowners

policy.


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The following is a list of the kinds of items that are treated differently, and their typical

limits.

Coin collections, gold, silver, medals and

currency, script, shared value card, smart

cards (such as gift cards and prepaid

phone cards)

$200

Securities, deeds, manuscripts, passports,

stamps and other valuable papers

$1,500

Watercraft

$1,500

Trailers not used for watercraft

$1,500

Jewelry, watches and furs

$1,500

Firearms

$2,500

Silverware, silver-plate, goldware, tea sets,

gold/silver-plated trophies, etc. (some

policies have substantially higher limits)

$2,500

Business property kept at home

$2,500 ($500 for business property away

from the residence)


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Electronic apparatus and accessories while

in a motor vehicle if intended to be used

by a power source in the motor vehicle

$1,500

Electronic apparatus (such as a laptop

computer) and accessories used primarily

for business, away from the residence

premises, but not in a motor vehicle

$1,500

Some policies also place a limit on things like garden tractors, riding lawnmowers, etc.

These limits apply to each category of item, not each item. If the insured has a

substantial amount of jewelry or computer equipment—or anything limited under the

policies the insured is considering—the insured will want to buy additional insurance.

The insured can raise the limits on any of these categories—or on specific valuables. But

the insured will have to pay an additional premium, of course.

The insured can add some items to the insured’s policy by scheduling them for special

coverage limits. Scheduling is usually the cheapest way to obtain additional coverage—

but this option doesn’t always cover valuable property sufficiently. Or the insured can

purchase a floater, which is a separate insurance policy that generally protects from

additional risks and provides higher limits than you would find with the typical

homeowners policy. The cost of floaters is usually minimal and it’s certainly better to


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secure adequate insurance than to risk leaving family heirlooms, expensive equipment

and prized possessions uninsured and unprotected.

Common Client Question: I have a storage facility rented nearby, and when I went to

get something out of it over the weekend, I found some of my items missing? Is this

covered by my homeowners policy?

The short answer is yes – the loss is covered. Of course it is subject to the deductible and

the policy limit.

• Coverage D—Loss of Use of Living Space

Coverage will kick in if a covered loss makes the insured’s home uninhabitable. Most

homeowners policies cover either additional living expenses related to maintaining the

insured’s normal standard of living or the fair rental value of the part of the residence

where the insured lives (it’s the insured’s choice). If a covered property loss makes the

part of the insured’s residence that is rented to others uninhabitable, policies also cover

the loss of fair rental value.

• The Real Value of the Homeowners Policy

As the above list implies, if the insured has a $200,000 homeowners policy, that’s not all

the insured will get if the insured’s home is destroyed. The $200,000 limit usually

applies only to the cost of replacing the physical structure. Typically, a policy will pay


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half of the face amount—in this case, up to $100,000—to replace the insured’s home’s

contents, including valuables.

A typical policy also will cover legal costs related to a liability lawsuit. In other words, if

the insured has a $200,000 face-value policy, the insured could get $200,000 to rebuild

the house, $100,000 for personal items, $10,000 to re-landscape, $10,000 to rebuild a

freestanding garage and $25,000 to cover temporary living expenses. That’s a total

coverage of nearly $350,000 on a $200,000 face-value policy. And the cost of the

insured’s defense in a liability lawsuit could add another $50,000 or $100,000.

Common Client Question: I am moving at the end of the month. Will my homeowners

policy cover any damage I may have to my property during the move?

Yes – make sure to keep the policy in force during the move.

• Who is an Insured

It’s important to know who will and will not be covered under the insured’s policy. The

declarations and the definitions page of a homeowners policy will provide this

information. The declarations page will list one or more individuals. This person or

these persons are the named insureds.

The definitions page elaborates:

• Insurance on the dwelling and any other structures is provided for the named

insured and the insured’s spouse, if the spouse lives in the same household.


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• Personal property coverage and personal liability insurance are provided for the

named insured and all residents of the same household who are relatives of the

insured, or who are under age 21 and are in the care of the insured’s family, or

who are under age 24, a relative, and enrolled in school full time.

• If the named insured or the spouse dies, coverage continues for legal

representatives. Until a legal representative is appointed, a temporary custodian

of the named insured’s property also would be covered. All household members

who are insured at the time of the named insured’s death will continue to be

covered while they live at the residence premises.

• Upon the request of the named insured, the personal property of others may be

covered while on the residence premises, and the personal property of guests or

a residence employee may be covered.

• A residence employee usually means a housekeeper, gardener or any other

employee who performs duties related to the maintenance and use of the

insured’s residence premises, or who performs household, domestic or similar

duties elsewhere that are not connected to a home-based business.

Knowing who is and isn’t covered is vital. Not only does it tell the insured whose

personal property is insured, but some coverages apply only if one of the insured

parties does not cause the damage.


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Common Client Question: My son is attending Yale University and had his stereo

equipment stolen from his dormitory room? Will my homeowners insurance cover that

loss?

Probably. Make sure and check each insurer’s policy wording. If the student is under

age 24 and a full-time student, coverage is probably available under the parents’

homeowners policy.

• Property Not Covered

Homeowners insurance covers a lot—but it can’t cover everything the insured owns or

everything the insured does. Most homeowners policies list specific property and

specific kinds of losses that are not covered. Insurance is designed to cover sudden and

accidental losses.

Therefore, gradual, preventable or expected losses must be excluded.

The following types of property and losses are not covered by any homeowners policy,

and they serve as a kind of reverse checklist:

• land, including that under an insured residence;

• structures used solely for business purposes;

• structures or property (other than a private garage) that are rented or held for

rental to someone who is not a tenant of the insured dwelling;


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• articles that are specifically covered by other insurance (since, the insured can

only collect once for a loss);

• animals (pets, livestock and any other critters);

• motor vehicles;

• aircraft and parts, other than model or hobby aircraft;

• hovercraft;

• property of roomers, boarders and other tenants who are not related to any

insured (they’ll need to get their own renters insurance);

• accounts, drawings, paper records, electronic data processing tapes, wires,

records, disks or other software media containing business data (blank records or

media are covered, and so are music CDs); and

• water or steam.

• Losses Not Covered

In addition to the property not covered, there are also types of losses not covered under

homeowners policies. These include:


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• losses caused by perils having catastrophic potential—these include flood,

hurricane, tornado, nuclear and war risk exclusions;

• losses caused by off-premises power failure;

• losses caused by the neglect of an insured person to use all reasonable means to

save and preserve property (for instance, if the insured’s home has a hole in the

roof and the insured doesn’t cover it and it rains, the insurance company will not

pay for water damage);

• any intentional loss arising out of an act committed by or at the direction of an

insured (for instance, if the insured drives through his own fence while trying to

run down the neighbor’s dog, the insured can’t get the insurance company to

pay to fix it); and

• losses caused by, resulting from, contributed to or aggravated by earth

movement (earthquake, land shock waves from a volcanic eruption, landslide,

mine subsidence, mudflow and earth sinking, rising or sliding).

• Perils Not Covered

Certain perils, or risks, are excluded from standard policies because they can be covered

better under different insurance (for example, a separate earthquake insurance policy),

because they are a natural change that occurs over time or because paying for them


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might tempt people to commit fraud. Among the exclusions that fall into this category

are damage caused by:

• wear and tear;

• deterioration;

• depreciation;

• rust;

• mold and mildew;

• wet or dry rot;

• contamination;

• smog or smoke from industrial or agricultural operations;

• mechanical breakdown;

• settling, cracking, shrinkage, bulging or expansion of pavement,

• patios, foundations, walls, roof, floors or ceilings; and

• birds, insects (including termites), vermin or domestic animals.


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Pay close attention to the insect exclusion. It’s the reason termite inspections are such a

critical part of selling a house...and the reason old houses sometimes need to be

fumigated. Also, most policies do not cover any damage from sewer back-up or seepage

below ground, around windows or through foundations. But this exclusion is one of the

most frequently litigated parts of homeowners insurance. Policyholders will usually try

to prove water damage resulted from something other than sewer back-up.

• Valuing Property

Many insurance policies have a valuation clause, which describes how the value of

different types of property will be determined in the event of a claim. The valuation

clause may use such terms as actual cash value and replacement cost.

• Replacement Cost

About 70% of homeowners policyholders have replacement cost coverage for their

dwellings. Replacement cost coverage means that an insurer will replace the damaged

or destroyed home regardless of the cost.

• Guaranteed Replacement

One popular coverage is guaranteed replacement cost. If the insured carries 100% of

replacement value at the policy inception and agrees to increase it if the home’s value


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increases by 5% or more. In exchange, the insurer will pay for building replacement,

regardless of cost, up to the policy limits.

If the insured owns an older home, the insured may not be able to get guaranteed

replacement cost coverage, because many of the building techniques used in decades

past are more expensive than techniques used today. So, the insured may have to settle

for a modified replacement cost policy. With this sort of coverage, instead of repairing

or replacing plaster walls with similar materials, for instance, the policy would pay for

repairs using wallboard. Complete replacement cost coverage may be difficult to obtain

if the insured has extensive ceiling moldings and other fine craftsmanship that would

be difficult to replace today.

• Coinsurance

Homeowners policies also will pay the insured the full replacement cost for the

insured’s house and other insured buildings only if the insured maintains a minimum

amount of insurance—usually 80%. In other words, if it will cost $200,000 to rebuild the

insured’s home and the insured only have $100,000 worth of insurance, no insurance

company is going to pay the insured the full replacement cost. For this reason, most

insurers require that the insured’s insurance be equal to at least 80% of the replacement

cost at the time of loss.

The formula is as follows: Insurance carried/Insurance Required X Amount of Loss =

Amount Reimbursed


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An example: If the insured’s home had a replacement value of $220,000 (construction

cost of $80 per square foot X 2750 square feet). To settle any loss at a replacement cost

the insured must carry at least 80% of the replacement value, or in this case $176,000

($220,000 X 80%).

But what if the insured only carried $150,000 of insurance? The formula to determine

the settlement value would be as follows: $150,000/$176,000 = 85.23%. So 85.23% times

the amount of the loss is what the insured would receive in case of a covered loss (after

the deductible).

• Fine Points of Coverage

One last point about the way insurance companies value the insured’s property: Say the

insured’s house is worth $100,000, and the it is insured for that amount. If the insured

has a fire that causes $50,000 worth of damage, the ACV of the building would be

reduced to $50,000. If the insured should have another claim before repairing the

damage from the fire (an ambulance responding to the fire and crashes and wipes out

the rest of the house), the insured can file a claim for only the $50,000 ACV.

On the other hand, if the insured completely repairs the fire damage, before the

ambulance comes along and wipes the insured out, the insured’s coverage is restored to

the full $100,000 (although the insured will probably want to move, at that point).

• Valuing Personal Property


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Actual cash value (ACV) is the basis for recovery under many property and liability

contracts, regardless of the policy amount. ACV generally means “the replacement cost

of damaged or destroyed property at the time of loss, less depreciation.”

For example, if the insured’s bedroom set was completely destroyed by a covered peril,

the insurance company will look first at the current replacement cost, then account for

the length of time the insured has had it. So, if a new set is $10,000, but the insurance

company figures that the one which was destroyed had depreciated 30% due to age and

use, a policy providing ACV recovery would pay $7,000.

Replacement cost coverage is usually available for personal property as well as the

building for an additional premium. It is important to note that the insured must be

able to prove the replacement value as well as actually replace the item for the coverage

to apply.

An important note: Insurance companies don’t want to encourage policyholders to file

claims and pocket the money. So, for both building and contents losses, most policies

state that full replacement costs will be paid only if the property is actually repaired or

replaced. If it is not, claims will be paid on an ACV basis.

An important issue in many property insurance policies is the pair and set clause. This

is written in because a set can be worth more than the sum of its pieces. For instance, an

antique pair of candelabras might be worth $1,000. But if one is lost or destroyed, the

remaining candelabra might be worth only $200. In this situation, the value of the loss

of one part of a pair is not equal to 50% of the value of the complete pair.


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For this reason, many property insurance policies give the insurer the option of

repairing or replacing any part of a pair or set to restore its value, or of paying the

difference between the ACV of the property before and after the loss. In the above

example, the insurance company might be able to replace the lost item—or obtain a

complete pair of equal value to exchange for the remaining item—at a lesser cost than

making a cash settlement. Or the insurer might pay the difference in ACV before and

after the loss ($800), if replacement was not possible at a lesser cost.

Good Advice for Clients:

Take Inventory and Keep it Current: Listing items and taking pictures to back it up.

Keep it in a safe-deposit box or at a family members house out of state.

Keep receipts of large purchases as proof of their value

Determine the replacement cost of the house and keep insurance up to date with the

value every few years

Basics of the Policy Forms

• HO-2 Broad Form

The six basic policy forms provided differ in the perils covered and the coverages

offered can either more narrow or more broad. The 16 perils covered under the HO-2

are:


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Fire or lightning

Windstorm or hail

Explosion

Riot or civil commotion

Aircraft such as if a plane crash lands on the

insured’s house

Vehicles but not vehicle damage caused by any

vehicle owned or operated by any resident

of the insured premises

Smoke damage from a fire—but not smoke from fireplaces

or from agricultural smudging or

industrial operations

Vandalism or malicious mischief (known

as VMM)

but not if the dwelling has been vacant for

60 consecutive days or more. Also covers a

college student’s property at the student’s

school residence as long as the student has

been there at any time during the 60 days

prior to the loss

Theft but not theft committed by an insured,

theft from a part of a residence rented to

someone who is not an insured, or theft in

or to a dwelling under construction; and


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theft coverage for property away from the

residence premises is subject to limitations

Damage caused by falling objects

but damage to a building’s interior or its

contents is covered only if the falling

object first damages the roof or an exterior

wall

Damage to a building or its contents

caused by weight of ice, snow or sleet

however, damage to an awning, fence,

patio, pavement, swimming pool,

foundation, retaining wall, pier, wharf or

dock is not covered

Accidental discharge or overflow of water

or steam from a plumbing, heating or air

conditioning system, or an automatic fire

protection sprinkler system, or from a

household appliance

this does not include loss caused by

freezing, or loss to the system or appliance

from which water or steam escaped—and

coverage is suspended whenever the

insured’s home has been vacant for more

than 60 consecutive days

Sudden and accidental tearing apart,

cracking, burning or bulging of a steam or

hot water heating system, an air

conditioning system, an automatic fire

protection sprinkler system or an

appliance for heating water


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Freezing of a plumbing, heating or air

conditioning system, or an automatic fire

protection sprinkler system, or of a

household appliance

This coverage also is suspended whenever

the home is vacant, unoccupied or being

constructed, unless reasonable care was

taken to maintain heat in the building, or

to shut off the water supply and drain

systems and appliances

Sudden and accidental damage from

artificially generated electrical current

but not damage to a tube, transistor or

similar electrical component)

Volcanic eruption excluding losses caused by earthquake,

land shock waves or tremors

The basic coverage offered under an HO-2 policy is:

Coverage A Dwelling $8,000 minimum

Coverage B Other structures 10% of the amount of

Coverage A

Coverage C Personal property 50% of the amount of

Coverage A


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Coverage D Loss of use 30% of the amount of

Coverage A

Coverage E Personal liability $100,000 minimum per

occurrence

Coverage F Medical payments $1,000 minimum per

person, per occurrence

• HO-3 Special Form

HO-3 is known as the special form—and it is the most popular homeowners policy

form.

Instead of naming the perils that are covered, the HO-3 form covers open perils – all

perils that aren’t specifically named as not covered. Of course, this is still a long list,

because insurance companies like to be very specific about what they will and will not

pay for. This protects them in the event the insured sue for coverage.

While structures are insured for open perils, personal property is insured on a named-

perils basis. This policy insures personal property against loss by all of the perils

included on the broad form, HO-2—and expands the coverage a bit. HO-3 also covers

vehicle damage to a fence, driveway or walk—even when it is caused by a resident.


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And HO-3 also does not suspend coverage for personal property from certain perils, as

HO-2 does, whenever the insured’s home has been vacant for 60 or more consecutive

days—which is important if the insured travels for extended periods of time.

• Coverage Offered


Coverage A Dwelling

$8,000 minimum

Coverage B Other structures

10% of the amount of

Coverage A


Coverage A


Coverage A

Coverage E Personal liability

$100,000 minimum

Coverage F Medical payments

$1,000 minimum


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• Additional Coverages

HO-3 provides the most complete coverage for the insured’s home and other structures

and has these 12 additional types and limits of coverage.

Removal of debris from covered property

if the debris was caused by a covered peril

(for instance, if the insured’s house burns

down and the debris needs to be removed

before the insured can rebuild)

Up to 5% over the policy limit as

additional insurance

Reasonable repairs to protect the insured’s

home from further damage (this would

include covering a hole in the roof, so rain

or snow can’t come in and cause further

damage)

Subject to the policy limit (not an

additional amount of insurance)

Trees, shrubs and other plants

Up to 5 percent of the amount of Coverage

A, though no more than $500 can be spent

on any single tree, shrub or bush as an

additional amount of insurance

Charges the fire department bills the

insured for being called to the insured’s

home

$500 maximum as an additional amount of

insurance

Damage that occurs while the insured try

to remove the insured’s personal items




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when the insured’s home has been

damaged by an insured peril

If the insured’s credit card, fund transfer

card, etc., is stolen and used and the card’s

issuer wants the insured to pay the

outstanding debt

Up to $500 as an additional amount of

insurance

for the insured’s share of loss assessments

charged to the insured by a homeowners’

association or corporation

Up to $1,000 (for any one loss) as an

additional amount of insurance

property lost due to the collapse of either

all or part of the building, as long as the

collapse is caused by perils insured against

under HO-2 or due to hidden decay;

hidden insect or vermin damage; weight

of contents, equipment, animals or people;

weight of rain that collects on the roof; or

use of defective material or methods in

construction, remodeling or renovation (as

long as the collapse occurs during the

construction, remodeling or renovation)



Glass or Safety Glazing Material Subject to the policy limit (not an


Landlord’s Furnishings if the owner of the

house is also an occupant, but rents a

portion of the house to others

$2500 per loss in each unit (not an


Allows for the increased cost to repair or Up to 10% of Coverage A as an additional


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rebuild to comply with building

Ordinances or Laws that are new since the

original structure was build

amount of insurance

Grave Markers Up to $5,000 (not an additional amount of

insurance)

Common Client Questions:

#1 A tree on my property blew over in last nights’ windstorm and damaged my fence

as well as my neighbor’s car? Will the damage be covered under my homeowners

policy?

The policy will not automatically cover the damage to the neighbor’s car. However, if

the neighbor sues, the liability portion of the homeowners policy will provide defense

coverage and will pay if you are found legally liable for the damages.

#2 My neighbor’s tree blew over and damaged my roof. Is this covered under my

homeowners policy?

Yes, there will be coverage. However, your insurance company will retain the right to

subrogate coverage against your neighbor and his/her insurance company.

The policy will pay for the damage to your fence, and not to replace the tree. Had

damage to the tree been due to a specifically covered peril (such as lightning) then up to

$500 would be available per tree.


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• Perils Not Covered

As comprehensive as it is, HO-3 does not cover everything. The exclusions include:

• property, losses and perils not covered due to limitations of the insuring

agreement and the general exclusions;

• loss involving collapse, other than those described above;

• freezing of a plumbing, heating or air conditioning system, or an automatic fire

protective sprinkler system, or a household appliance—or discharge, leakage or

overflow due to freezing while the dwelling is vacant, unoccupied or being

constructed, unless reasonable care was taken to maintain heat in the building, or

to shut off the water supply and drain the systems and appliances (such damage

by freezing of an occupied premises is covered);

• damage caused by freezing, thawing, pressure or weight of water or ice to a

fence, pavement, patio, swimming pool, foundation, retaining wall, bulkhead,

pier, wharf or dock;

• theft in or to a dwelling or structure under construction, or theft of any property

that is not actually part of a covered building or structure (theft of part of a

finished building is covered);


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• vandalism and malicious mischief if the home has been vacant for more than 30

consecutive days at the time of loss;

• wear and tear, deterioration, latent defect, rust, mold, wet or dry rot,

contamination, smog, smoke from agricultural smudging or industrial

operations, birds, vermin, insects, domestic animals or the settling, cracking,

shrinking, bulging or expansion of pavements, foundations, walls, floors, roofs

or ceilings;

• losses caused by weather conditions to the extent that weather contributes to

causes found in the general exclusions (i.e., power failure, flood, etc.);

• losses caused by faulty, inadequate or defective planning, zoning, surveying,

siting, design, specifications, workmanship, repair, construction, renovation,

remodeling, grading, repair or construction materials, or maintenance; and

• losses caused by acts, decisions or the failure to act or decide by any person,

group, organization or government body

For the home and other structures, if any excluded loss is followed by a loss that is not

excluded, the additional loss is covered by HO-3.

• HO-4 Contents Broad Form


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The HO-4 policy is for individuals who rent their living space and don’t need building

coverage. They are usually available for tenants of apartments, condominiums, or

mobile homes.

Although the HO-4 doesn’t cover the building itself, it does provide a limited amount of

coverage for building additions and alterations. If the insured spent money to improve

the apartment, and there is a covered loss, such as a fire, this insurance will pay to have

the improvements replaced.

The basic coverage offered under an HO-4 policy (renters) is:

Coverage A Dwelling Minimal coverage for

tenant improvements

Coverage B Other structures No coverage

Coverage C Personal property $4,000 (can increase

significantly)


Coverage C

Coverage E Personal liability $100,000 minimum

Coverage F Medical payments $1,000 minimum

• HO-5 Comprehensive Form

The HO-5 policy is for homeowners who want open perils coverage for both their

dwelling as well as personal property. One of the interesting coverages offered in the


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HO-5 is coverage for loss or misplacement of certain types of personal property,

including jewelry, furs, firearms, and silverware. Other homeowners policies would

cover these items for theft, but not if they were lost or misplaced.




Coverage A


Coverage A


Coverage A



• HO-6 Unit Owners Form

Condominium owners own their dwellings, so coverage under the HO-6 is provided for

both the building and personal property. Eligibility is for owner of condominiums or

cooperative units that are owner occupied for residential use.

It is assumed that there will be a condomimum association policy that will cover most

of the building itself, but there is minimal coverage for improvements that the unit-

owner may have made to the unit.


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If the owner rents the condo, but leaves some of his or her personal property in the unit,

a separate coverage endorsement is available to cover this personal property. The basic

coverage offered under an HO-6 policy (condo) is:


Coverage B Other structures No coverage

Coverage C Personal property $4,000


Coverage C



• HO-8 Modified Coverage Form

The HO-8 policy was developed in response to market need for a policy for historical

homes with features that could cause the replacement value of the home to exceed the

market value. Coverage is provided on an actual cash value or repair cost basis. The

HO-8 also has a standard $100 deductible which may be increased.



Coverage A


Coverage A (or $1,000

whichever is greater, if

covered property is off-


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premises); theft losses

limited to $1,000 per

occurrence


Coverage A



Section II Liability Coverage

Liability coverage is the same under all homeowners policy, and encompasses two

major sections:

• Coverage E—Personal Liability

• Coverage F—Medical Payments to Others

• Personal Liability Coverage

A homeowners policy provides liability coverage automatically, in addition to property

coverage. By combining property and liability coverages, the insurance company is able

to reduce processing costs, determine losses more accurately and pass these savings on

to insureds in the form of lower premiums.


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The liability portion of the homeowners policy is designed to protect a homeowner’s

assets if that person is sued by someone who is injured—physically, mentally or

otherwise—while on the insured property.

Most homeowners policies offer liability protection for bodily injury and property

damage. It covers not only the cost of the claim, but also the cost of defense if the

insured is sued, and a limited amount of coverage for bail bonds and other bonds

related to a claim.

The standard policy’s liability protection covers injuries or damage caused by the

insured, a member of the insured’s family or a pet. It applies to injuries that occur on

the insured’s property—or anywhere in the world from civil—not criminal—law. If the

insured or a family member are indicted in a criminal lawsuit, homeowners insurance

won’t cover any resulting financial losses.

• Who Is An Insured

Once again, who is insured under the insured’s homeowners policy becomes an

important issue. When the policy says an insured, it means the named insured, a spouse

and any relatives resident in the household, as defined on the definitions page of the

insured’s policy.

But when it comes to liability, the coverage is broader than for property. In this case, an

insured also includes any person or organization legally responsible for animals or

watercraft owned by a household member. For example: The insured boards his dog at


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a kennel while he is away; when one of the employees takes Fido for a walk, he or she is

insured if Fido bites another dog.

If the insured or the insured’s spouse dies, all household members who are insured at

the time of the insured’s death will continue to be covered while they continue to live at

the insured’s home. But only property coverage continues for legal representatives—

liability coverage is not extended to lawyers or a temporary custodians.

• What Is Covered

What is covered is just as important as who is covered.

When it comes to liability, bodily injury means harm, sickness or disease, and includes

the cost of required care, loss of services or death resulting from the injury. This is one

of the main kinds of loss that constitutes a civil liability.

Property damage means injury to or destruction of tangible property—and includes

loss of use of the property. Loss of use is another of the key kinds of loss that constitutes

a civil liability.

Occurrence means an accident, including continuous or repeated exposure to

conditions, that results in bodily injury or property damage, neither expected nor

intended by an insured person. A situation must be deemed an occurrence before

insurance will apply.


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Example: Mack takes his dog out for a walk without a leash. For no apparent reason,

Mack’s dog attacks Jim, who is jogging nearby. Jim’s injuries cost him $10,000 in lost

income during recovery. Mack is personally liable to Jim for this $10,000.

• Medical Payments to Others

The second liability coverage is medical payments to others. This covers necessary

medical expenses incurred within three years of an accident that causes bodily injury.

(An accident is covered only if it occurs during the policy period.) Medical expenses

include reasonable charges for medical, surgical and dental care, X-rays, ambulance

service, hospital bills, professional nursing, prosthetic devices and funeral services.

In the example above, after Mack’s dog bites Jim, Mack also will be liable for the

stitches, shots and other medical treatment Jim might need.

Medical payments coverage applies only to people who are on the premises with the

permission of an insured person. Someone who comes onto the insured’s property to

rob the insured’s house and is attacked by the insured’s dog cannot collect damages

under the insured’s homeowners policy. This coverage does not apply to medical

expenses related to the insured’s injuries or those of anyone who lives with the insured,

except residence employees.

Away from the insured’s home, coverage applies only to people who suffer bodily

injury caused by:

• the insured;


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• an animal owned by the insured or an animal in the insured’s care (if the insured

happen to be pet-sitting);

• a residence employee in the course of employment by the insured; or

• a condition in the insured location or the ways immediately adjoining.

In some cases, these costs are simply determined; in other cases, the facts may be

unclear—and the insured person may or may not be legally liable. In these cases, the

insurance company often will pay medical costs as a goodwill gesture to avoid legal

action.

For instance, a visitor to Mack’s home slips and falls on the front steps. These injuries

result in medical expenses to the visitor in the amount of $275. Later, the visitor sues

Mack for $10,000, claiming damages for negligence. An insurance company will often

pay the $275 quickly, in hopes of preventing the larger lawsuit.

The insurance company has plenty of incentive to avoid lawsuits. Under the standard

homeowners policy, it is obligated to provide a legal defense against claims—even if the

claims are groundless, false or fraudulent. The company also may make any

investigation or settlement deemed appropriate.

All obligations of the insurance company end when it pays damages equal to the policy

limit for any one occurrence. Both personal liability and medical payments coverage

have limits—medical payments is usually much lower than personal liability. Unless

the insured requests something else, the insured will get the basic limits of these


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coverages, which are the minimum amounts written. But higher limits of liability can

usually be purchased for a higher premium.

Personal liability insurance applies separately to each insured person, but total liability

coverage resulting from any one occurrence may not exceed the limit stated in the

policy. How does this come into play? If Mack and his sister are both walking the dog

when it bites Jim, they both might be named in a lawsuit. However, their homeowners

insurance will cover them only up to the single limit.

Of course, if Mack was involved in one dog bite incident and his sister was involved in

another, the insurance would cover each incident separately up to the limit.

• Limits of Liability

Personal liability coverage provides three kinds of insurance, in addition to the stated

limits of liability:

• claim expenses;

• first aid to others; and

• damage to the property of others.


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Claim expense coverage includes the costs of defending a claim, court costs charged

against an insured person and premiums on bonds that are required in a lawsuit

defended by the insurance company.

Expenses incurred by the company—such as investigation fees, attorneys’ fees, witness

fees and any trial costs assessed against the insured—also will be covered by the policy.

If bonds are required in the course of the lawsuit, such as release of attachment or

appeal bonds, the company will pay the premium—but it is under no obligation to

furnish the bonds. That is the insured’s responsibility.

Claim expense insurance also covers post-judgment interest: If a court judgment is

rendered against the insured, there usually is a time lapse between the rendering of the

judgment and the payment of the damages awarded. The company will pay any

interest charges accruing on the damage award during this time period.

Expenses for first aid to others are covered when the charges are incurred by the

insured and when the charges result from bodily injury that is covered by the policy.

Expenses for first aid to an insured person are not covered.

If damage to the property of others is caused by an insured person, the policy will

provide replacement cost coverage on a per occurrence limit. This means each liability

situation will be treated separately—and the maximum policy coverage will apply

separately each time.

This additional coverage won’t pay for:


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• damage caused intentionally by an insured person who is at least 13 years of age;

• property owned by the insured (because this coverage is designed to cover

property owned by others); and

• property owned and rented to a tenant or a person who is resident in the

insured’s household.

So, if the insured borrows a camera from the insured’s neighbor and accidentally drops

it in the insured’s swimming pool while taking pictures, this coverage will provide up

to $500 to replace the camera. But it wouldn’t provide coverage if the insured were to

drop the insured’s own camera in the insured’s pool. (Personal property might.)

• Policy Conditions

The liability coverage in a homeowners policy includes a number of other conditions,

which can limit its applicability. These conditions include the following parameters:

• If the insured declares bankruptcy, this does not relieve the insurance company

of its obligations under the policy.

• Personal liability coverage will be treated as excess over any other valid

insurance—unless the other insurance is written specifically to be treated as

excess over the personal liability coverage. This means that the other insurance—

auto insurance, for example—has to pay out to its limit before the personal

liability under the homeowners policy kicks in.


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• The insured’s duties in the event of an occurrence include providing written

notice to the insurance company that identifies the insured person involved, the

insurance policy number, the names and addresses of claimants and witnesses,

and information about the time, place and circumstances of the occurrence.

• The insured is required to promptly forward every notice, demand or summons

related to the claim and, when requested, to assist in the process of collecting

evidence, obtaining the attendance of witnesses and reaching settlement.

• The insured is not covered if the insured assumes any obligations or makes any

payments—other than first aid to others following a bodily injury—except at the

insured’s own expense.

• Payment of medical costs to others is not an admission of liability by the insured.

So, if the insured’s auto insurance pays for medical care for someone injured

while riding in the insured’s car when the insured’s son is driving, the insured’s

homeowners insurance might not pay a liability claim. The injured party may

have to submit to a physical examination, if requested by the insurance

company, and authorize the company to obtain medical reports and records.

The policy also will pay up to $1,000 for the insured’s share of a neighborhood

homeowners association or condominium loss assessment made because of bodily

injury or property damage suffered by a person on jointly owned property. (Higher

limits are available.) However, if a local government makes a charge against the

insured’s association, the insured’s share of the loss is not covered.


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Coverage also will apply if the insured, as a volunteer officer of the association, is sued

individually.

• Coverage Does Not Apply

There are three major circumstances under which homeowners liability coverage does

not apply. If any of these circumstances applies to the insured, the insured will

probably need separate liability or other types of insurance.

The first circumstance is business activity. Personal liability coverage is not a business

policy—it will only cover personal activities and exposures. The standard policy form

itself states:

Any liability arising purely out of the insured’s occupation or business and/or the

continual or permanent rental of any premises to tenants by the insured is excluded.

The second major circumstance under which liability coverage does not apply is injury

to members of the insured household. Before this exclusion was added to the standard

policy, some courts permitted family members to sue other family members and collect

damages. As a result, people would use homeowners liability coverage as a

replacement for other kinds of insurance—often instead of health coverage.

The homeowners policy is not meant to be a substitute for accident and health

insurance—and this exclusion makes it clear that there is no coverage for an injury

suffered by the named insured or other family members who reside in the same

household.


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The third circumstance under which liability coverage does not apply is the intentional

act of an insured person, or acts that can be expected to produce bodily injury or

property damage. In other words, if the insured meant to hurt someone (except in

defense of person or property), the insured’s homeowners insurance won’t cover

damages.

• Liabilities Not Covered

In addition to these three exclusions, there are a number of other circumstances in

which homeowners insurance does not cover liabilities. These include the following:

• war or warlike action (most policies have a war risk exclusion—losses due to war

are catastrophic and simply too much for insurance companies to protect

against);

• rendering or failure to render professional services (again, business activities are

not covered);

• transmission of a communicable disease by an insured;

• sexual molestation, corporal punishment or physical abuse;

• the use, sale, manufacture, delivery, transfer or possession of controlled

substances (illegal drugs), other than the legitimate use of prescription drugs

ordered by a physician; and


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• entrustment by an insured person of an excluded vehicle, watercraft or aircraft to

any person, or vicarious parental liability (whether or not statutorily imposed)

for the actions of a minor using any of these items.

• Underwriting and Pricing Homeowners

Insurance

Homeowners policy underwriters are looking for specific hazards in their decision of

whether or not to issue a policy. Homeowners basic policy premiums are based on three

things:

• The type of construction

• The territory

• The protection class

• Construction Type

The construction type of a home is generally determined by the materials used in the

exterior walls and is generally either:

• Frame (such as wood), or


47

• Masonry (brick or stone).

A frame home is more likely to be destroyed in a fire, and therefore more expensive to

insure.

• Territory

Each insurer assigns territory codes to different parts of a city, based on its own loss

experience in that area. A home that is in a territory that has experienced greater losses

will be more expensive to insure than one in a territory with fewer losses.

• Protection Class

Protection class is an insurance company’s term for the quality of the fire-fighting

available in that area. If a homeowner is a long distance from the nearest fire

department, it will be more expensive to insure than a home that is within a mile of a

fire department.

• Other Property Coverage Considerations

The underwriter will also consider potential hazards and unsafe conditions. These

include the potential for a flood or earthquake in the area. They will also include how

the upkeep of the house has been, and whether the homeowner has potentially unsafe

items such wood burning stoves. Newer homes are generally easier to underwrite than


48

older homes which may not have built-in smoke detectors, or have old electrical,

heating, and plumbing systems.

• Liability Considerations

Since a homeowners policy covers not just the property, but also the liability of the

homeowner, a number of factors are considered by the underwriter. These include

items which might increase the potential for claims such as dogs, swimming pools or

trampolines, as well as evidence that the insured may be likely to file claims, such as the

credit history, and a history of prior losses.

Covering Special Homeowner Needs

• Endorsements Available for the Homeowners

Policy

To get coverage tailored to the needs of the insured, one or more endorsements can be

added to a basic policy. Endorsements are additional levels and types of insurance

added to a standard policy. There are actually 93 endorsements to the ISO HO 2000.

Some of the most important endorsements are explained as follows and are grouped by

what they do to extend the policy.


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• Valuing Losses

Personal Property Replacement Cost Loss Settlement. This allows for personal property

losses to be settled at replacement cost value, as is the building. There is no deduction

for depreciation when this endorsement is attached to the homeowners policy. Only

certain types of property are eligible for this coverage , such as carpeting and household

appliances, and including scheduled property. Certain types of property are specifically

not eligible for this coverage, including fine arts, antiques, and memorabilia.

Inflation Guard. Inflation protection increases the insured’s dwelling coverage

automatically each year. The increase is amount agreed to by the insurer and insured,

and applies over the 12 month policy period on a pro rata basis, increasing the limits

day by day.

Actual Cash Value Loss Settlement. This endorsement actually reduces the amount of

coverage by allowing the insured to choose an actual cash value settlement for the

building instead of replacement cost. It can be used to reduce the homeowners policy

premium.

Scheduled Personal Property. This endorsement is important when the limits of

coverage for specific personal items aren’t adequate to provide complete protection.

Items for which the insured wants more coverage are scheduled or listed. Items which

are typically scheduled include jewelry, furs, cameras, musical instruments, silverware,

golfing equipment, fine arts, and stamps and coins. Scheduling personal items provides

coverage at their actual appraised value. (The insured will have to provide the

appraisal, and keep updating it as the items appreciate or depreciate, and as new items


50

are purchased.) A scheduled item also is protected for things that typically are not

covered under a homeowners policy, such as lost or misplaced items and gemstones

lost from a piece of jewelry because of a loose or damaged setting. Also, depreciation is

not subtracted from a claim if the item is scheduled.

• Adding Business Coverage

Business Pursuits. This endorsement applies to the Section II Liability portion of the

homeowners policy only. It provides liability coverage for business pursuits both at the

residence as well as off premises. However, it specifically excludes liability for

professional liability. If the business of the insured is teaching, it also specifically

excludes injury arising from teaching using a animal (such as a horse), an aircraft,

watercraft, or motor vehicle, and excludes injury arising from corporal punishment.

Home Business Insurance Coverage. This endorsement provides the most

comprehensive coverage available for a home business under a homeowners policy. It

is intended for small businesses (less than $250,000 in gross receipts) such as sales,

service and craft making types of businesses and extends these types of coverages:

Property (increases limit for business property limit to the full policy limit, and away

from the residence premises to $10,000, and increases the limits for money and smart

cards, etc.);

• Business liability, such product liability, advertising injury, and personal injury;

• Business income, accounts receivable, and valuable papers and records;


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Home Day Care Coverage. This endorsement provides certain coverages if the insured

cares for children in the insured’s home. It primarily provides additional coverage for

the liability exposure for injuries to the children. Specifically excluded from coverage is

negligent supervision with regard to motor vehicles and animals such as horses.

• Adding Perils

Earthquake. This endorsement will cover any loss to the insured’s home and its

contents caused by an earthquake, tremors or aftershocks. Earthquake coverage carries

its own deductible, which is usually a percentage of the Coverage A limit, such as 5%.

An earthquake endorsement does not cover damages directly or indirectly caused by a

flood due to an earthquake.

• Adding People

Additional Insured Residence Premises. This endorsement provides coverage when

there is more than one homeowner when either both owners live in the home or only

one owner lives in the home. This endorsement would be important to provide

coverage for an unmarried couple who live together in a home they jointly own. It

would also serve to provide coverage for siblings who inherit their parents’ home, but

where only one sibling actually occupies the home. The endorsement is intended to

cover individuals who are not insureds under the homeowners policy but who have a

financial or legal interest in the home.


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Other Members of Your Household. This endorsement provides coverage for

nonrelatives living in the same home, such as an unmarried couple living together.

Coverage is provided as if each had his or her own policy.

Assisted Living Care Coverage. This endorsement provides coverage for an insured’s

relative who lives in an assisted living facility. It primarily provides special limits of

liability for the insured’s personal property such as hearing aids, eyeglasses,

wheelchairs, etc. In addition, it provides an additional living expense in the event that

the residence facility is uninhabitable (coverage is provided for a maximum period of 12

months).

• Insuring a Home-Based Business

More than 50 million Americans operate full- or part-time businesses at home—and this

number increases each year.

However, a basic homeowners insurance policy provides very limited protection for

business property—coverage for such items as computers, fax machines, filing cabinets,

tools and inventory usually is limited to $2,500 in the insured’s home and $500 away

from home. And it provides no protection for business liability. So, if the insured

operates a business out of the insured’s home, and the insured doesn’t have a business

insurance policy, the insured may be substantially underinsured. It also does not

provide coverage for loss of income if the insured cannot operate the business for a

period of time due to the loss of the home.


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Business is defined by the policy as a trade, profession or occupation which is full, part-

time, or even occasional. It also includes other activities for which the insured receives

more than $2,000 in a year. Insureds may be conducting “business” according to the

definition of the policy and not realize it.

One option is to secure additional coverage for a home-based business by adding an

endorsement to the insured’s homeowners policy. If the insured’s business doesn’t

qualify for the endorsements, the insured can purchase coverage for the insured’s

home-based business under a business owners package policy, referred to as a BOP,

which provides property and liability coverage. Some insurance companies even offer a

policy that is specifically tailored to meet the needs of an in-home business.

• Living Together

It is not unusual to have unrelated insureds living in the same household or individuals

with a financial interest in a house in which they do not reside. Let’s review who is

insured under the homeowners policy: the named insured or insureds; the spouse of the

named insured, if that spouse lives in the home; other residents of the home who are

relatives; other residents of the home who are under age 21 and are in the care of the

insured’s family, whether or not they are relatives; relatives under age 24 who are full-

time students.

Coverage is also provided for personal property of others and legal representatives of

the insured in some cases.


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Let’s consider a typical example. Bob and his wife, Ann, have three children. Peggy is

25 and married and living out of state. Stan is age 22 and going to the local university

full-time while living at home. Sue is 17 and living at home while going to high school.

Paul is a foreign exchange student and also living with the family for this school year.

Ann’s 75 year old mother is also living with them.

Considering the policy definitions, coverage would already exist without endorsement

for all of these individuals, except Peggy.

Let’s look at a more complex situation. Martha and Gwen are domestic partners. Molly

owned a home that Gwen moved into. When Molly bought the home, her father helped

her with the down payment, and acquired a half-interest in the home. To be adequately

covered under the homeowners policy, the policy would be issued in Molly’s name, her

father would be named as an additional insured using the Additional Insured

Residence Premises endorsement. Gwen would be covered by addition with the Other

Members of Your Household endorsement. If Gwen had children under the age of 21

living in the same household, they would be covered as well by this endorsement.

• Second Homes

A secondary home is defined as one not occupied by the insured for at least three

consecutive months per year. This kind of home can be covered by a dwelling policy – a

type of policy which covers the property only, and not the liability exposures. Liability

will already by covered under the insured’s primary homeowners policy. If the insured

rents out the second home for a portion of the year, there will not automatically be


55

coverage for the renters’ property, but an endorsement can be added to cover this

exposure.

• Homes Owned by a Trust

It used to be that a home owned by a trust could not be insured under a homeowners

policy. But now that it has become more common for individuals and couples to have

living trusts and have their homes as part of the property of the trust, coverage may

now be provided. When this happens, the trust is the owner of the home, so there is

some confusion about who should be the named insured – the trust or the individuals?

The best solution is to issue the policy in the individuals’ names and add the trust on as

an additional insured. This provides the liability coverage needed by the individuals,

and covers the property exposures for the trust – the only exposures the trust itself

really has.

Special Forms of Coverage

• Dwelling Policies

The insured may need dwelling insurance if the insured can’t get a homeowners policy

for the home. As we have seen before, some dwellings are ineligible for homeowners

coverage because of the structure’s age, location or value, but they may still qualify for

dwelling insurance.


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Dwelling policies are issued primarily to cover non-owner-occupied buildings. The

insured may not need liability or personal property insurance—especially if the insured

is insuring a second home or certain kinds of investment real estate. In these situations,

the insured may prefer to buy the more limited—and less expensive—dwelling

insurance.

A dwelling policy also will not cover outdoor property, such as awnings and antennas.

And, coverage for vehicle damage to the premises is broader under a homeowners

policy. Dwelling insurance does not cover vehicle damage to fences, driveways, walks

and outside lawns, shrubs, trees and plants.

There are many similarities between the homeowners and dwelling policies. That’s

because dwelling insurance is a portion of a standard homeowners policy: the part that

covers the dwelling structure and attached structures on the insured’s property.

Like homeowners insurance, dwelling insurance comes in three forms—basic, named

perils (also called broad) and special. Again, special is the most generous coverage. It

also shifts the burden of proof of the cause of a loss from the insured to the insurance

company.

• Eligibility

To qualify as a dwelling, a building must be a principally residential structure that

contains no more than four apartments or is occupied by no more than five roomers or

boarders. Single-family homes, duplexes and triplexes are eligible for coverage on


57

dwelling forms. Townhouses or row houses also are eligible, if each building does not

contain more than four units.

Dwellings in the course of construction also are eligible for dwelling coverage.

Permanently located mobile homes are eligible, but they can only be insured under the

basic coverage form. Farm dwellings are not eligible. (Coverage for farm houses must

be written on separate farm forms.)

Under these policies, dwellings need only be principally residential; eligible dwelling

property need not be exclusively residential. Certain incidental business and

professional uses are allowed. These operations must be conducted by the insured or a

member of the insured’s household, they must provide service rather than sales, and

they must involve no more than two people working on the premises at any one time.

The kinds of home businesses permitted include beauty parlors, photographic studios

and professional offices.

Just as in a homeowners policy, an important part of the dwelling policy is

distinguishing who is—and is not—covered under the policy. Generally, because the

dwelling package doesn’t include liability insurance, its coverage extends to fewer

people.

Insurance on the dwelling and any other structures is provided for the named insured

(the insured) and for the named insured’s spouse, if that spouse is a resident of the

same household.


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If personal property is insured, the named insured and all members of his or her family

residing at the described location are covered for property that they own or use. The

personal property of guests and domestic employees may be covered by an

endorsement.

If the insured dies, coverage continues for the insured’s legal representatives. Until a

legal representative is appointed, a temporary custodian of the estate also would be

covered.

• Dwelling Forms

As we’ve mentioned, three dwelling policy forms are available. Like the different kinds

of homeowners insurance, these different forms provide different degrees of coverage.

Insurance companies usually require that the insured purchase minimum amounts of

insurance for the broad and special forms. This is because people sometimes choose

very small amounts of coverage for dwelling insurance. (Since the policies typically

only cover the value of buildings—which usually aren’t primary residences—

minimizing dwelling coverage can make sense.)

The three forms of dwelling insurance are:

• the basic form—which insures against fire, lightning, removal and internal

explosion (a package of optional coverages-called extended coverage—can be

added for an additional premium, and insurance companies don’t require that

the insured purchase a certain minimum amount of coverage);


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• the broad form—which insures against all of the standard and optional perils

available on the basic form and expands several of them (the minimum amount

of insurance offered is $12,000 for the dwelling or $4,000 if the policy is written

for personal property only); and

• the special form—which insures against any risks that are not excluded

(minimum insurance is $15,000 for the dwelling).

Many insurance companies offer the same three-level variation in their homeowners

policies. The basic form—which may not be the first policy the insurance company

offers—usually will cost 20 percent to 30 percent less than the others. The standard

deductible on dwelling forms ranges between $250 and $500.

FAIR Plans

FAIR Plans are designed to provide “fair access to insurance requirements” for

property owners who experience difficulty in buying insurance on property located in

blighted or deteriorating urban areas. An example of a FAIR plan in Michigan is the

Michigan Essential Insurance Act, the purpose of which is to guarantee access to

specific insurance coverages to eligible persons. Through this Act, insurers are not

permitted to refuse to insure, continue to insure, or limit coverage unless the insurer has

specific underwriting rules allowing the insurer to reject an eligible applicant.

• Duties of the Insurer and Producer


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Under the Michigan Essential Insurance Act, the insurer is not permitted to penalize a

particular individual agent by compensating him less because of the geographical

location of the business written.

Under the Act, an agent is required to do the following:

• Provide each eligible person seeking automobile or home insurance the lowest

available premium quotation for the types of insurance coverages that are offered by

the insurers represented by the agent

• Inform the eligible person of the number of insurers that he or she represents

• Not influence an eligible person to not select an insurer or coverage for the purpose

of avoiding the agent’s obligation to submit an application or an insurer’s obligation

to accept an eligible person

• Submit an application for auto or home insurance to the insurer selected by the

eligible person

In the case of auto insurance, the agent is legally required to supply the following

information with renewal policies should it not have been supplied by the insurer:

• An explanation of the insurance eligibility point system


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• A statement that if the insured is considered an eligible person, he or she may

qualify for insurance form more than one insurer, and possibly at a lower rate

• A statement that upon request, the agent will give the insured quotations from

all insurance companies represented by the agent from whom the insured may

obtain insurance

• Risk Classification – Home Insurance

Home insurance risks must be grouped by territory and a territorial base rate

established. These rates are required to be filed with the DOI, but typically are not

subject to prior approval by the commissioner before they are used. It is required that

the rates not be excessive, inadequate, or unfairly discriminatory.

Risk classification for homeowners insurance must be based on the following:

• Amount of insurance type of coverage

• Security and safety devices present, including smoke detectors, locks, and related

items

• Repairable structural defects related to the risk

• Fire protection class

• Construction of the dwelling, based on size, building materials, and number of

units

• Loss experience of the insured, based on paid claims that resulted from factors

under the insured's control


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• Availability of law enforcement or crime prevention services

• Proximity of a fire hydrant

• Use or absence of use of smoking materials inside the dwelling

• Insurance Declined and Termination of

Insurance

If an applicant’s request for insurance coverage is declined, the insurer must inform him

of the specific reason for the refusal of coverage.1

Termination of insurance is not effective unless the insurer provides at least 30 days

written notice of termination to the named insured. The notice must include the

effective date of termination and the specific reason for termination. In addition, at least

20 days written notice of termination is required for policies that have been in effect for

55 days or less. Notice requirements for termination due to nonpayment of premium

must be included in the policy language.

• Exemptions

Insurers admitted to do business in Michigan after January 1, 1981 are not eligible for

exemptions from the provisions of the Act.

1 Refusing to provide an application form is referred to as “declination.”


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• Grievance Procedures

If an applicant believes an insurer has improperly denied him insurance, or has charged

an incorrect premium for that insurance, he is entitled by law to a private informal

conference with the insurer to resolve the dispute. Should the insurer fail to provide the

conference within 30 days of request, or if the applicant disagrees with the proposed

resolution, he may have the matter acted upon by the commissioner. If either party

subsequently disagrees with the commissioner’s decision, the commissioner can be

requested to hear the matter as a contested case.

• Eligibility - Home Insurance

An “eligible person” for home insurance is a person who lives in and rents or owns a

house, condominium, cooperative unit, room, or apartment. The eligible person must

occupy the dwelling. The dwelling unit cannot contain more than four units.

“Home insurance” refers to fire insurance on a dwelling and coverage to insure non-

business property, obligations and liabilities that are contained in a fire insurance

policy. It does not include insurance for commercial, industrial, professional, or

business property, obligations, or liabilities.

Persons who are not eligible for home insurance are those who:

• Have in the last five years been convicted of arson or conspiracy to commit arson,

malicious destruction of property or violations regarding the use of explosives;


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• Have in the last five years been successfully denied payment of a claim for evidence

of arson, misrepresentation or fraud (when the claim was in excess of $2000 or

greater than 15% of the amount of insurance in force for a repair cost policy or 10

percent of the amount of insurance in force for a replacement cost policy);

• Have property that is used for illegal and/or particularly hazardous purposes;

• Have refused to purchase insurance for at least 80% of the replacement cost of the

dwelling when applying for a replacement cost policy;

• Have refused to purchase insurance for at least 100 % of the actual cash value of

contents insured under a tenant or renter’s policy;

• Have policies that were canceled for nonpayment in the last 2 years;

• Want to insure a dwelling valued at less than $7,500 for a repair cost policy or

$15,000 for a replacement cost policy;

• Have failed to procure or maintain membership in a club, group or organization that

meets certain insurance law requirements when membership is a uniform

requirement of the insurer

• Want to insure a dwelling that does not meet the commissioner’s minimum

insurability standards; or


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• Have not paid real property taxes due on the property for the last two years.

• Underwriting Rules – Home Insurance

It is not permissible for an insurer to refuse to insure, refuse to continue to insure, or

limit coverage available to an eligible person for home insurance. The underwriting

rules employed by an insurer for home insurance can only be based upon the following:

• Criteria applicable to and employed for the determination of home insurance

eligibility

• The insured property’s physical condition

• For renewals, the liability claim history of the insured during the preceding 3

year period when that history is based on claims arising from an insured’s

negligence or failure to correct a physical condition after receiving written notice

from the insurer that is related tot he liability claim, or that presents a clear risk

of a significant loss under the liability policy

• For new policies, physical conditions that present an increased chance of loss

under liability coverage

• Relationship between the market value and the replacement cost of the dwelling

if it is insured under a replacement cost policy and the insurer offers a repair cost

policy


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• For nonrenewals, the claim history under the policy, excluding liability claims,

when the following exists: 3 paid claims in the last 3 years totaling $1,500 or

more, not including weather-related claims; 3 paid claims in the last 3 years

totaling $2,000 or more including weather claims

• Number of residences within the dwelling are not consistent with those

represented in the policy forms

• Existence of an adjacent physical hazard that presents a significant risk of loss

• Dwelling has been unoccupied for more than 60 days if there is evidence of an

intent to vacate or keep the dwelling vacant

• Failure of the insured to purchase in excess of 80% of the replacement cost under

a replacement cost policy when this is a condition for the sale of the property

• Inspection of Dwellings – Home Insurance

An insurer may use an inspection of a dwelling to determine if an applicant is eligible

for home insurance. When this is the case, the criteria for selecting dwelling for

inspection may not be based on:

• The dwelling’s location


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• The age of the dwelling or its heating, electrical or structural components

• The dwelling’s market value

• The amount of insurance, or

• The race, occupation, color, creed, marital status, sex, national origin, residence, age

or handicap of the applicant

Flood Insurance

While the standard homeowners policy will cover water damage caused by heavy rains,

most home—and business—owners could not get actual flood insurance until 1968,

when Congress voted to create the National Flood Insurance Program (NFIP). Prior to

that time, the federal government had focused its efforts on flood control techniques,

such as building dams, levees and seawalls—and on disaster relief for flood victims.

The National Flood Insurance Act of 1968 took a new tack. It created a federal program

to provide flood insurance to communities in flood zones—as long as the communities

reduced future flood risks to new construction.

Participation in the program is required on a community basis—rather than an

individual basis—because local zoning laws and building codes seriously affect the

amount of damage an area will suffer due to flooding. The federal government realized

that the whole community would have to get behind efforts to reduce damage—and

federal relief costs—in order to make the NFIP work.


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To be eligible for flood insurance, a community must require permits for all

construction in high-risk areas, and ensure that the materials and techniques used in the

new construction will minimize flood damage.

But obtaining flood insurance isn’t the only reason communities participate in the NFIP.

If an area did not participate and the president were to declare that area a disaster due

to flooding, the community would not be eligible to collect federal aid for the repair or

reconstruction of insurable buildings in Special Flood Hazard Areas. People in those

communities still could receive other forms of disaster assistance, such as food and

emergency shelter, but they wouldn’t get the government’s help in rebuilding their

homes and businesses.

Needless to say, this is a profound incentive for community participation—and almost

all of the communities with serious flood potential have joined the NFIP, which is

administered by the Federal Insurance Administration, or FIA, a component of the

Federal Emergency Management Agency (FEMA). If you buy a home in a flood zone,

the mortgage lender probably will require that you purchase flood coverage.

• Eligibility

Today, you can insure almost any enclosed building and its contents against flood

loss—if your community is participating in the program. If you live in an area that is

prone to flooding, you probably know that yours is one of the more than 18,000

communities that participate.

NFIP insurance can be written on any building that:


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• has two or more exterior rigid walls;

• has a roof;

• is fully anchored to prevent flotation, collapse or lateral movement; and

• is principally above ground.

Mobile homes that are anchored to permanent foundations, condos, condominium

associations and homes that are under construction also can be covered by the NFIP.

Buildings that are located over water or that are principally below ground cannot be

insured under this program—and neither can travel trailers and converted buses or

vans.

• Exclusions

Many flood insurance policy provisions are similar to those found in a fire insurance

policy. Flood policies do not cover:

• accounts, bills, currency, deeds, evidences of debt, money, securities, bullion and

manuscripts;

• lawns, trees, shrubs, plants, growing crops, pets and livestock;

• aircraft, self-propelled vehicles and motor vehicles;


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• fences, retaining walls, outdoor swimming pools, bulkheads, wharves, piers,

bridges, docks, and other open structures on or over water;

• underground structures and equipment, such as wells and septic tanks;

• roads, machinery or equipment in the open;

• newly constructed buildings that are in, on or over water; and

• structures that are primarily containers, such as gas or liquid storage tanks (but

silos and grain storage buildings, including contents, may be covered).

NFIP coverage includes protection for foundation elements (including posts, pilings,

piers or other support systems for elevated buildings), utility connections and

mechanical equipment necessary for the habitability of the building (such as furnaces,

hot water heaters, clothes washers and dryers, food freezers, air conditioners, heat

pumps, electrical junctions and circuit breaker boxes).

• Limits of Insurance

The amount of flood insurance you can purchase depends on the value of your home.

However, the maximum limit for flood insurance is $185,000 for a house, and another

$60,000 for its contents. For many people, this may not begin to cover their losses.


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The types of items that usually receive limited coverage in a standard homeowners

policy (art, jewelry, furs, gold, silver, etc.) receive even less coverage under a flood

policy. The maximum coverage for all of these items is just $250. Coverage for business

equipment in a home also is limited—to $2,500. But you can purchase additional

insurance to protect all of these things.

Building Coverage Regular Program Regular Program Emergency

Program

Basic Limits Additional Limits

Single Family

Dwelling

$50,000 $200,000 $35,000

2-4 Family Dwelling $50,000 $200,000 $35,000

Other Residential $150,000 $200,000 $100,000

Non-residential or

small business

$150,000 $350,000 $100,000

Contents Coverage

(per unit)

Single Family $20,000 $20,000 $10,000

Other Residential $20,000 $20,000 $10,000

Non-residential or

small business

$130,000 $130,000 $100,000

In addition to coverage for the house and its contents, the dwelling form of the standard

flood insurance policy also includes coverage—up to 10 percent of the policy amount—


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for garages and carports. You also can schedule coverage for up to 10 additional

buildings on your property (if you have a workshop or a guest house, for instance).

• Buying Flood Insurance

While the NFIP is a federal program, flood insurance is sold locally—through insurance

companies. More than 200 insurance companies currently sell and service flood

insurance under their own names.

Rates will depend on a home’s age, where it is located and how it was built. How much

a community has done to reduce the risk of flooding also will impact rates. If a house is

on high ground and was built according to current standards, rates may be as low as a

few hundred dollars a year. On the other hand in a high-risk area, premiums could be

10 times that amount or more.

Deductibles for flood insurance typically are quite reasonable (especially when

compared with the deductibles for earthquake insurance)—in the $500 to $750 range.

To determine the relative risk of flooding for a particular site—which obviously

profoundly affects insurance rates—check a Flood Insurance Rate Map (FIRM). Each

community’s FIRM is issued by FEMA, usually after a Flood Insurance Study has been

performed to analyze risk zones and elevations.

Whether a home was built before or after FEMA came in and created the local flood

map also impacts rates. That’s because pre-existing structures in flood zones receive

subsidized rates—and structures that are shown by a flood map to be outside of serious


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flood zones benefit from even lower rates. Newer homes outside of serious flood zones

get the best rates of all.

Floods and flash floods occur in all 50 states. Historically, about one-third of all claims

paid by the NFIP are for flood damage in areas identified as having only “moderate” or

“minimal” risk of flooding. Flooding in these areas typically is a result of inadequate

drainage.

If a community doesn’t participate in the NFIP, residents may still be able to buy some

level of flood coverage. Check with the NFIP for further details at www.fema.org/nfip.

Earthquake Insurance

Earthquake insurance is quite different from flood insurance. For one thing, it was—

and still is, in some cases—underwritten by insurance companies, rather than a federal

agency. This means the rates and policies differ from company to company.

Issues in Homeowners Insurance

Today


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• Cancellation/Nonrenewal of Homeowners

Policies

Insurance companies have been losing significant amounts of money on the sale of

homeowners policies over the past years, and so they are more particular than ever

about new policies or renewals. They use the Comprehensive Loss Underwriting

Exchange (CLUE) which is a database of a home’s history of claims as well as reports of

damage.

Because of the recent problems with mold claims, insurers are sensitive to reports of

damage to homes regarding water. Insureds who make reports of damages or claims

regarding water or mold may find it difficult to find future coverage. Damage and

claim reports are kept for five years in the database.

• Increases in Premiums

Experts predict increases in homeowners premiums of 15% or more this year. Expect

questions from your clients about why their premium is increasing, even though

coverage is not.

Clients have become much more proactive than in decades before with regard to their

treatment by professionals. This is not just true with regard to their financial well-being,

but it is also true of medical treatment and other aspects of life. Clients are more likely

to ask today if there is anything they can do to help hold down the cost of insurance.


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The smart agent will help them in that quest and suggest some of the following.

• Consider higher deductibles. Generally, the higher the deductible, the lower the

premium. The standard deductible is $250, but can be increased to $500, or

$1,000, or even higher.

• Consider homeowners insurance as coverage for catastrophic type losses, and

make claims for only serious problems, not for smaller items. The average

homeowner files a claim against their policy only once per decade. Many

insureds do not want to hear this – they would like to be able to reap some

benefit for their premium payments, and are interested in using the full extent of

the coverage. In truth, the more claims that are filed, the higher the future cost of

insurance, and the higher likelihood the coverage will be cancelled or

nonrenewed.

• Get a copy of the CLUE report, the insurance score and credit history. The CLUE

personal property report that shows past claims and report history can be

obtained at www.choicetrust.com

• Consider eligibility for discounts such as loyalty discounts, senior discounts,

multiple policy discounts. There are also reductions in premium for homes with

fire and burglar alarms.


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• Adequate Limits for Replacement Cost

Ten years ago, most companies offered guaranteed replacement cost coverage for most

policies if the homeowner wanted to make sure that they would have replacement cost

coverage no matter what. Now, fewer of these policies are offered. The insured must be

sure to keep up the amount of the insurance so that if he or she wants replacement cost

coverage, the insurance must be at least 80% of the replacement cost value. Insurance

companies have encouraged policyholders to keep up their limits (which also increases

premiums).

Remember, market value is not the same as replacement value. Replacement value is for

the dwelling and market value would include the dwelling plus the value of the land.

Since construction costs increase over time, it is important to encourage clients to

review the replacement cost of homes annually. To do this, you must ask about any

major remodeling to the house. It is important for the insurance professional to stay

connected with local contractors and appraisers to know approximate costs of

construction in your area. Construction costs of homes generally range from $45 to $150

per square foot, with custom homes in the $100 to $150 range and up. It is also possible

to estimate construction costs with construction cost software. There is also an easy to

use estimator at www.building-cost.net.

• Toxic Mold

The Homeowners 2000 policy excludes coverage for mold, but the previous ISO

homeowners policy provided the coverage.


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According to an article in the Los Angeles Times (11/24/02), in 1997, State Farm paid

$92 million for 35,000 water damage claims under its homeowners policies (an average

of $2,630 per claim). By 2001 it paid $190 million for 39,000 water damage claims (an

average of $4,870 per claim). This is due to the new concern for mold that can occur

from water damage.

Insurance companies believe that the increase in claims is not due to an increase in

mold, but in greater public awareness and overblown health concerns about mold

toxicity. As an industry, insurers paid $1.3 billion in mold claims in 2001. Mold claims

can occur anywhere, but 70% of the claims so far have been in the state of Texas.

While some insurers requested amendments to their current policies in most

jurisdictions to exclude mold coverage, some states have allowed the amendments,

others have not. Some insurers plan to continue mold coverage, but for an additional

premium. State Farm, for instance, has eliminated coverage for mold in most states.

Other companies that do offer mold coverage generally limit to a cap, such as $5,000 or

$10,000 per incident. For more information about taking care of home mold, see:

http://www.epa.gov/iaq/molds/index.html. For more on the insurance implications,

and to keep up with the latest cases, see: http://www.moldupdate.com/.

• Dog Liability

Insurers have been particularly concerned recently about cases of animal liability,

particularly dog bites. Some insurance companies will now not provide homeowners


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insurance to owners of dogs considered dangerous. According to the Humane Society,

about 40% of households own dogs.

More than 4.7 million people are bitten by a dog each year according to The Centers for

Disease Control. and 10 to 20 of these people die of their injuries. Another study done

by The Centers for Disease Control that show the most serious bites are generally the

result of attacks by these types of dogs: pit bulls, rottweilers, German shepherds,

huskies, malamutes, and Doberman pinschers.

A number of insurers refuse coverage to owners of these dogs and others such as wolf-

hybrids, and Presa Canarios.

Dog bites account for almost 30% of homeowners claims, and cost the industry about

$310 million per year. Some insurers will only look at the breed of dog, others will take

into account the past history of the dog.

One option for dog owners who need to obtain homeowners coverage may be to

exclude coverage for dog liability from the policy. For more detailed information about

coverage available see www.dogbitelaw.com.


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Chapter Two - Automobile Insurance and the Personal Auto Policy

Every state in the U.S. has a law requiring people who drive to have a minimum level of

auto insurance. But, even if the law didn’t require it, every driver would still want to

have some auto coverage. Driving a car or truck is risky business. (And that doesn’t

even touch on the danger of driving a motorcycle.) Each year, more than 6 million

motor vehicle accidents occur on our nation’s roadways, accounting for almost 43,000

deaths, according to the Federal Highway Administration.

Even the safest car or truck driver runs some risk of getting in an accident. This means

the insured will need some form of insurance to cover the cost of repairs to the

insured’s car—as well as the other person’s car and injuries, if the insured is at fault.

Then there are medical bills. There’s also the chance that the insured will be sued for

causing pain and suffering if someone is injured in an accident and the insured is at

fault.

Another issue to consider: According to the Insurance Information Institute, nearly 1.2

million vehicles were reported stolen in the United States in 2001, according to the

Federal Bureau of Investigation.

In other words, the insured’s vehicle is at risk, even when it’s parked. When it’s

moving, all of the insured’s possessions are also at risk. The key to protecting the

insured from these risks is to “transfer” them to someone else—and the way to do that

is to buy insurance.


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• Personal Auto Policy Coverages

The personal auto policy is designed to provide insurance coverage to individually-

owed automobiles used for non-commercial purposes. The policy itself provides four

different types of coverages, and there are six sections to the policy as follows:

• Part A - Liability Coverage

• Part B – Medical Payments Coverage

• Part C – Uninsured Motorists coverage

• Part D – Coverage for Damage to Your Auto

• Part E – Duties After an Accident or Loss

• Part F – General Provisions

Each of these coverage sections has subsections, such as an insuring agreement,

exclusions, and limits.

As a part of the policy, and before the main coverages are described there are the

declarations page, an insuring agreement, and definitions that apply to all the terms

used in the policy.


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• Declarations

The Declarations Page contains a lot of the specific information relating to a particular

policy—and policyholder. It includes the names of the people covered by the policy, the

dates it’s in effect and the vehicles covered.

• Definitions

After the Declarations Page, the next place to look for basic information is the

definitions section of the standard policy. Two of the most important definitions follow.

• You, as used in this policy, means the named insured who is specifically named

in the Declarations, and a spouse if a resident of the same household.

• Newly Acquired auto is a private passenger auto, pickup or van that you become

the owner of during the policy period. This might apply if the insured bought a

new car, before he or she bought insurance specifically for that new car.

• Eligibility for Coverage

Not every vehicle is eligible for coverage under a Personal Auto Policy. There are usage

rules and rules that have to do with the size and shape of the vehicle.


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Only private passenger vehicles are eligible for coverage under the Personal Auto

Policy. To be considered a private passenger auto, the vehicle must, have four wheels.

Coupes, convertibles, sedans and station wagons qualify as private passenger autos for

coverage under a Personal Auto Policy. Pickup trucks, panel trucks and vans also may

be considered private passenger autos and may be eligible for coverage if they satisfy

the following requirements:

• they must be owned by insured persons;

• they must have a Gross Vehicle Weight of less than 10,000 pounds; and

• they must not be used in a freight or delivery business.

So, vans, pickups and panel trucks are eligible when they’re used only for personal

transportation, or used in farming and ranching, or used in any business except a

freight or delivery business.

However, the same restriction does not apply to other private passenger autos. Coupes,

convertibles, sedans and station wagons are eligible for coverage as long as they are not:

• used as a public or livery conveyance for passengers for a fee (such as a taxi or

limousine service); or

• rented to others.


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The insured can extend liability, medical payments, uninsured motorists, collision and

other-than-collision coverage to motorhomes, motorcycles, golf carts, etc. To do so, the

insured must add on a Miscellaneous Type Vehicle Endorsement, which will be

discussed later in the course.

• Part A - Liability Coverage

Liability is probably the most important kind of automobile insurance. It covers money

owed when the insured causes bodily injury to another person or damage to another

person’s property.

Technically, liability coverage applies only when the insured is legally liable for injury

or damage. The fact that injury or damage has occurred does not necessarily mean that

you’re legally liable. (However, proving who is either completely or partially liable can

be one of the most time-consuming—and legal fee-generating—parts of the insurance

claims process.)

If one driver is liable for a two-car accident, the other party may be entitled to

compensation for injuries or damage or both. Compensation may be in the form of

money paid to the injured party for tangible damages (such as a medical bill or the cost

to repair a damaged vehicle) and/or money paid for intangible damages (such as pain

and suffering).

The intangibles are the ones that get you, financially speaking. When the insured

damages another car, the insured’s liability is usually limited to the value of that

vehicle. But, if the insured injures a person in that car, causing a permanent disability or


84

pain and suffering that prevents that person from earning a living, courts can award

millions of dollars. That’s why the insured needs liability insurance.

• Defense Costs

Because defending a lawsuit in court can be very expensive, payment of legal defense

costs is an important part of liability insurance coverage. In some cases, the cost of

defense can be as much as—or more than—the amount ultimately awarded as damages.

It’s important to remember that the insurance company pays unlimited defense costs in

an automotive liability suit—and these defense costs are paid in addition to the limit of

liability.

If defense costs were included within the limit of liability, most of us would have to

purchase much higher limits of insurance to be adequately protected. For example, if

the insured had a $50,000 limit of liability and the insurer defended a claim for which

the insured’s liability was questionable, but lost the case anyway and incurred $38,000

of expenses for defense costs, there would be only $12,000 of coverage left to pay for

damages. If the damage award was $40,000, the insured would then have to pay $28,000

out of the insured’s own pocket.

Fortunately, car insurance doesn’t work that way. This is vital because the cost of

replacing a car, however expensive, is finite; the potential liability risk is not.

Bear in mind that the insurance company is only obligated to defend claims that are—or

may be—covered by the policy. It has no duty to defend or settle a claim for injury or

damage that is not covered by the policy.


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For example, if the insured is being charged with drunk driving, the insurance

company will not pay for the insured’s criminal defense.

• Supplementary Payments

In addition to the basic liability insurance, this section of the policy agrees to provide

supplementary payments.

If the insurance company defends against a liability suit and the court reaches a verdict

against you, and if the insurance company delays making the payment, the court might

require that interest be paid on the amount of the judgment from the time it is entered

until it is paid or an offer of payment is made. This interest is post-judgment interest—

and it does count toward the policy’s overall limit of liability.

The policy will also pay up to $200 a day for loss of earnings (but not other income) the

insured incurs because of attendance at hearings and trials at the insurance company’s

request.

In addition the policy will pay up to $250 for the cost of bail bonds, and other

reasonable expenses incurred that the insurer’s request.

• Exclusions

There are 13 exclusions in the liability section of the policy. These can be categorized to

help you remember them:


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Autos Used for an Improper Purpose

Excluded are:

• Autos used in business other than farming or ranching

• Autos used in prearranged racing or speed contents

• Autos used as a public or livery conveyance (transporting people for money)

• Autos used without permission

• Autos used by someone employed in the auto business

Damage or Injury to the Insured (remember, this section is for liability to others)

Excluded are:

• Damage to property owned or transported by the insured

• Damage to property rented to or used by or in the car of the insured

• Injury to the insured’s employees


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Ineligible Types of Vehicles

Excluded are:

• Motorized vehicles with fewer than four wheels or designed for off-road use

Autos that Need to Specifically be Covered by the Policy or are not covered

Excluded are:

• Autos other than covered autos that are:

• Owned by the named insured or furnished for his or her regular use

• Owned by family members or furnished for their regular use

Other

Excluded are:

• Intentional injury using the auto

• Damage that would be covered under the insured’s Nuclear Energy Liability

Policy


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State insurance laws generally specify minimum required limits, but most insureds buy

more coverage than the minimum requires. For example, a state might require that

automobile owners maintain liability insurance in the following amounts:

• $15,000 per person and $30,000 per accident for claims stemming from bodily

injury; and

• $10,000 per accident for claims stemming from property damage.

Examine the chart that follows to determine the minimum liability limits required in the

insured’s state.

The figures listed are in thousands of dollars. (Insurance companies generally

abbreviate the coverage amounts in this way.)

• The first number is the bodily injury liability maximum for one person injured in

an accident.

• The second number is the bodily injury liability maximum for all injuries in one

accident.

• And the third number is the property damage liability maximum for one

accident.


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State Liability Limits

Alabama 20/40/10

Alaska 50/100/25

Arizona 15/30/10

Arkansas 25/50/15

California 15/30/5

Colorado 25/50/15

Connecticut 20/40/10

Delaware 15/30/10

D.C. 25/50/10

Florida 10/20/10

Georgia 25/50/25

Hawaii 20/40/10

Idaho 25/50/15

Illinois 20/40/15

Indiana 25/50/10

Iowa 20/40/15

Kansas 25/50/10

Kentucky 25/50/10

Louisiana 10/20/10

Maine 50/100/25

Maryland 20/40/10

Massachusetts 20/40/8


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Michigan 20/40/10

Minnesota 30/60/10

Mississippi 10/20/5

Missouri 25/50/10

Montana 25/50/10

Nebraska 25/50/25

Nevada 15/30/10

New Hampshire 25/50/25

New Jersey 15/30/5

New Mexico 25/50/10

New York 25/50/10

North Carolina 30/60/25

North Dakota 25/50/25

Ohio 12.5/25/7.5

Oklahoma 10/20/10

Oregon 25/50/10

Pennsylvania 15/30/5

Rhode Island 25/50/25

South Carolina 15/30/10

South Dakota 25/50/25

Tennessee 20/50/10

Texas 20/40/15

Utah 25/50/15

Vermont 20/40/10

Virginia 25/50/20


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Washington 25/50/10

West Virginia 20/40/10

Wisconsin 25/50/10

Wyoming 25/50/20

Most experts recommend buying bodily injury coverage of at least $100,000 per person

and $300,000 per accident, and property damage coverage of at least $25,000. These

higher limits are important: If a court awards someone more money than the insured’s

auto insurance limits, the insured is personally responsible for the difference.

If the insured wants to protect the insured’s assets—a house, investments, etc.—in the

event that the insured causes an accident, the insured will probably want coverage of at

least $100,000/$300,000.

As part of the insured’s property damage liability coverage, if the insured damages

another vehicle, the insurance company also will pay for a rental car for the other

driver—which is considered a loss of use expense. (Of course, the insured’s insurance

company is not so generous with you. Loss of use is not part of the insured’s physical

damage coverage; however, the insured can add on rental car coverage—if the insured

doesn’t have a spare car—for a small fee.)

The other big liability concept is vicarious liability. In the case of the insured’s car

insurance, it means liability that applies to a person or organization that did not

actually cause damage or injury but is responsible for the actions of the person who did

cause the damage or injury. A classic example: a member of the insured’s family causes


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a multi-car accident that results in claims against the insured’s insurance policy from

the other drivers.

Liability coverage also might apply to injuries to a passenger in the insured’s car—but

only if the insured is legally responsible for the passenger’s injuries and the passenger is

not a member of the insured’s household.

• Out of State Coverage

Because liability laws vary from state to state, settling a claim can be complicated if an

accident occurs when the insured is outside the insured’s home state.

That’s why out-of-state coverage provisions exist in the personal auto policy. The policy

will automatically provide the minimum amounts and types of coverage needed in the

other state. For example, suppose the insured’s home state does not have a no-fault auto

insurance law, but the insured vacations in another state that requires no-fault

coverage. If the insured has an accident in the no-fault state, the insured’s Personal

Auto Policy will provide the required no-fault benefits.

However, most personal auto policies do place some restrictions on where the insured

drives. Generally, the policy territory is limited to the United States, its territories and

possessions, Puerto Rico and Canada. If the insured drives into Mexico, the insured

must have valid liability insurance from a Mexican insurer. (If the insured doesn’t have

the necessary insurance and is involved in an accident, the insured could wind up

doing jail time, having the car impounded and suffering other penalties.)


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• Part B - Medical Payments Coverage

Medical payments coverage is an optional part of auto insurance. The coverage pays

reasonable medical expenses incurred by you, members of the insured’s family and

passengers for bodily injuries sustained while riding in the insured’s car.

This coverage also applies to the insured and the insured’s family members when

you’re riding in another automobile, or if you’re injured as pedestrians by an

automobile.

Medical payments coverage allows immediate payment to the insured or other covered

persons, regardless of who was at fault in the accident. Both the insured and the

insurance company benefit from this aspect of the coverage. A quick settlement of a

claim for medical expenses resulting from an injury is a big help if you’re paying the

bills out of pocket, since the insured doesn’t have to wait around until all the finger-

pointing (and lawyer-calling) is done. The insurance company likes this quick-pay plan,

too, because it hopes paying the insured right away will prevent the insured from filing

a liability claim later for additional damages.

There is one major problem with settling medical claims immediately: The insured may

not know right away what medical expenses the insured will incur as a result of an

accident. Sometimes, one treatment is rendered immediately (such as the setting of a

broken bone) and another treatment comes later (such as surgery to put a pin in the

broken bone or physical therapy to follow). There may be a long delay between the first

treatment and the final treatment for an injury.


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The Insuring Agreement in this section includes a three-year time limitation on

expenses covered by the medical payments insurance. Limits are typically between

$1,000 and $10,000 per person.

• Part C - Uninsured Motorist Coverage

Uninsured motorist (UM) coverage is designed to protect the insured for bodily injuries

when those injuries are caused by another driver who either has no liability insurance

or has coverage that is less than the minimum requirements of state law. UM coverage

also protects the insured for bodily injury when caused by a hit-and-run driver who

cannot be identified.

The Insurance Research Council found in 2001 that approximately 14% of all drivers are

uninsured, and that statistic is twice that high in states like California, Colorado,

Mississippi, Alabama, and New Mexico.

Even in states that strictly enforce auto insurance rules, uninsured motorists go to great

lengths to stay on the road. Some purchase temporary insurance to obtain license and

inspection seals, then discontinue their payments. Others use counterfeit insurance

cards.

UM coverage was conceived as a partial solution to the problem created by drivers who

would not or could not obtain liability insurance. It benefits those who are covered by a

Personal Auto Policy and who purchased UM coverage. It does not benefit the

uninsured motorist who is responsible for an accident.


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In most states, UM coverage applies only to bodily injury. Only a handful of states

allow this coverage to apply to property damage. (In many states, property damage

caused by an uninsured motorist or a hit-and-run driver comes under the domain of the

insured’s collision coverage—an important point to consider before the insured turns

down collision coverage.)

• Part D - Coverage for Damage to Your Auto

The insured has to carry insurance to cover damage to somebody else’s car. But the

insured doesn’t have to carry insurance to cover damage to his own car. However, most

people with newer vehicles choose to get it—and all people who “co-own” their cars

with a bank or leasing company are usually contractually required to have it. Coverage

for damage to the insured’s car is divided into two major categories: collision and other

than collision.

Also covered are expenses related to the insured not having an auto while it is out of

service. For instance, coverage is provided to rent a car for up to $20 a day.

• Collision

Collision coverage refers to direct or accidental physical damage to the insured’s car as

the result of upset (flipping over) or impact with another vehicle or object (other than an

animal).


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Collision pays for traffic accident damages, and comprehensive pays for other types of

damage, such as from hail or a tree falling on the insured’s car. Collision coverage

typically accounts for about 30 percent of the annual cost of an auto insurance policy,

and comprehensive accounts for about 15 percent.

Auto policies are almost always written with higher deductibles for collision than for

comprehensive losses. So, by treating an accident with an animal as a non-collision loss,

the insurance company has done the insured a favor: It allows the lower deductible to

apply. Why? Because insurance companies know that the insured will have greater

opportunities to avoid contact with other cars or objects than with free-moving

creatures that react unpredictably to lights, motion and sound.

• Other Than Collision

The second loss category for damage to the insured’s car is called, aptly enough, other

than collision or OTC. Historically, this has also been known as comprehensive

coverage. It is a broad category that includes many types of loss. In fact, most types of

auto insurance claims fall under OTC coverage.

If the insured’s car is stolen and it isn’t recovered—and the insured has other-than-

collision coverage—the insurance company will pay the insured the actual cash value of

the car, less the insured’s deductible.

This actual cash value is an important term that we will see throughout this book. In

short, it means the amount paid for a thing minus the depreciation that has occurred

during the term of ownership. In the case of cars, it is often used interchangeably with


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the term Blue Book value. Whatever the term, this is a conservative way to value an

asset—and one that doesn’t guarantee the asset can be replaced.

If the insured’s car is recovered and it wasn’t totaled, the insurance company will pay to

fix the damages caused by the theft.

However, OTC coverage will not pay for things that were in—but not of—the insured’s

car. This includes cellular phones, tapes and CDs, suitcases, cameras, purses and

hundreds of other items. The good news is that these items probably will be covered by

the insured’s homeowners (or renters) insurance policy.


The insured doesn’t get to choose the limit of liability for physical damage coverage

directly, because it is based on the actual cash value of the covered car, minus any

deductible.

An important point: Most cars depreciate in value rapidly. If the insured paid $20,000

for a new car five years ago and it is totally destroyed today, it would not be worth its

original cost—nor would it be worth the current cost for a new car. Instead, the

insured’s insurance company would pay the actual cash value, and the insured might

receive $10,000 as a settlement.

Generally, the actual cash value of a five-year-old car should be enough for the insured

to purchase another five-year-old car of the same (or similar) make and model.


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If the insured’s car was not a total loss, the company would pay what it cost to repair

the car with materials of like kind and quality (which may mean used or substitute

parts). However, the insurance company does have the option of keeping all or part of

any damaged or stolen property—and giving the insured a check for an agreed or

appraised amount.

This is what people mean when they say a car has been “totaled.” The insurance

company pays out the total Actual Cash Value (ACV) of the car and takes possession of

the title. It will then sell the wrecked car to an auto salvage company.

Also bear in mind that if the shop doing the repair work does additional damage to the

insured’s car (say, if it falls off the lift or someone backs into it), the insurance company

will not pay. The insured will have to get the money for those repairs from the shop.

A personal auto policy will usually include specific liability limits for certain kinds of

coverage. One example: If the insured owns a trailer, on most policies, the maximum

coverage is limited to $500.

• Policy Endorsements

A variety of endorsements may be used in connection with an auto policy.

Endorsements may do something as simple as correcting the misspelling of the

insured’s name—or something more complex, such as changing the insured vehicles or

adding a coverage that is not mentioned in the original policy. Here are a few of the

more popular endorsements that can be added to the personal auto policy.


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Underinsured Motorists Coverage Endorsement is similar to the uninsured motorists

coverage provided in the policy. It applies when another driver who causes an accident

has liability insurance, but the insurance is inadequate to cover resulting injuries. In

some states this coverage is mandatory.

For example: The insured carries $50,000 of underinsured motorists coverage. Another

driver swerves onto the wrong side of the street and hits the insured’s car head-on. The

insured needs $45,000 to cover the insured’s injuries. The other driver only has $30,000

of bodily injury liability coverage and cannot personally pay the additional damages.

The other driver’s insurance company would pay the insured $30,000, and the

underinsured motorists component of the insured’s coverage would pay the additional

$15,000.

Towing and Labor Costs Coverage Endorsement applies toward towing and labor costs

when a covered auto is disabled. However, the labor costs are covered only when the

labor is performed at the place of disablement (such as on the side of the road where the

car stopped running—not later at a garage). This coverage usually is written for a

prearranged, limited amount.

Joint Ownership Coverage Endorsement provides coverage to persons who live

together or relatives other than spouses who live in the same household and use the

same autos. The personal auto policy only provides coverage to a named insured and

spouse.

Named Non-Owner Coverage Endorsement provides coverage for use of an auto for

individuals who don’t personally own an auto, such as someone who drives a company


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car. Coverage for the company-owned car would be provided by the company, but the

driver might need coverage if he or she were to use another car for any reason.

• Rental Car Coverage

Coverage for rental cars is not usually provided under a personal auto policy. The only

exception is when the rental car is used as a “temporary substitute” for an auto covered

under the policy but which is out of service because it is being repaired in some way.

When the insured rents a car, the rental car company will usually offer the insured

several kinds of coverage. The most common is a collision damage waiver, or CDW.

Some rental companies use the term loss damage waiver, or LDW, instead of CDW—

but the protection is the same.

This kind of waiver releases the insured from responsibility for damage to the rental

car, provided the insured complies with the rental contract terms. If the insured

declines the coverage and have an accident, the insured may be held responsible for the

entire value of the car. (A technical point: CDW isn’t, strictly speaking, insurance. It’s an

indemnification agreement between the insured and the car rental company.)

One common problem is that CDW agreements often contain limitations and loopholes

that renters can unwittingly violate, voiding the coverage. For example, CDW can be

voided if the insured drives on an unpaved road, or if the insured engages in

“negligent” driving—and the rental company defines negligent.

CDW usually is overpriced. It added about $11 a day to the cost of renting a car in 1995.

However, in states where rental companies have to bundle collision coverage into the

advertised rental rate, average rates are only about $2.50 a day higher than in the rest of


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the country. (Illinois used to be one of the states that bundled coverage in rental car

rates. However, in 1997, it changed its laws to allow car rental companies to sell the

coverage again. This change was made because of the move among auto insurers to

limit coverage for damage to rental cars.)

CDW isn’t the only additional insurance car rental companies may try to sell you. Other

kinds include:

• Supplemental liability insurance. Unlike the CDW/LDW, this option protects the

renter against property damage or personal-injury claims over and above the

basic liability limits provided in the rental agreement—usually the minimum

required by state law.

• Personal-effects coverage. This provides limited reimbursement for loss of

baggage and other personal property during the rental period. (These items

probably are covered by the insured’s homeowners policy.)

• Personal accident insurance. This provides limited accidental death benefits for

the renter and—often—passengers.

Of these, supplemental liability is the coverage most people should consider. Whether

or not the insured should buy it has a lot to do with where the car is rented. In some

states, major car rental companies are beginning to shift primary liability responsibility

to renters who have personal insurance. That means, without supplementary coverage,

the insured could be faced with financial disaster if the insured is sued.


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A useful rule of thumb: If the clerk at the rental desk asks for the name of the insured’s

insurance company and the insured hasn’t secured broad non-owned auto coverage,

the insured should consider taking the supplemental liability coverage.

Coverage also may depend on whether the insured uses the car for business or

pleasure, or whether the insured’s vehicle at home is being used in the insured’s

absence. Some personal policies limit the number of rental days covered each year.

Others apply deductibles and lower liability limits to collision coverage—and,

therefore, rental car coverage.

Even when the insured’s personal auto insurance does cover the insured in the event of

a physical damage loss to a rental car, it will usually be treated as excess over the

insurance or other coverage purchased from the car rental company. This means that if

the insured bought the CDW, the insured’s insurance company won’t pay until the

rental car company’s obligation is tapped out.

And if the insured thinks the credit card the insured uses to rent the car provides all the

coverage the insured needs, he may be wrong. Insurance offered by credit card

companies is treated as excess over all other forms of coverage—even the insured’s

personal policy.

• Underwriting and Pricing

Insurers use many factors when evaluating a potential insured as an auto insurance

customer, including driving record, your personal claims history, and where the

insured resides.


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Automobile rating determines base rates and applicable rating factors, and then

calculates individual coverage premiums and the total premium for the policy.

A premium is the product of the base rate multiplied by the applicable rating factor.

Separate premiums are determined for each of the four major personal auto

coverages—liability, medical payments, collision and other than collision. These

separate premiums are then added together to obtain the total policy premium.

Traditional auto insurance rates are based on broad averages of loss and expense data

and include components for expected losses and expenses. Individual companies have

generally been permitted to deviate from published rates based on individual company

differences in experience and expense factors.

In recent years, the insurance industry has begun a transition toward some new rating

approaches. The Insurance Services Offices has begun to develop prospective loss costs

for a number of lines of insurance, including automobile insurance. Prospective loss

costs are based on loss data and loss adjustment expenses, but not the other components

of a final rate (such as an insurance company’s expenses and profit).

Insurers that use prospective loss costs must apply modifications in the form of a loss

cost multiplier to account for individual company expenses, underwriting profit and

contingencies, in order to arrive at final rates. Generally, individual companies believe

loss cost rating gives them more flexibility in developing their rates.

• Rating Factors To take into consideration the differences between different automobile risks, the

insurance industry uses a system of primary and secondary rating factors, which are


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added together to produce a total rating factor.

The primary rating factor is based upon many things, including use of the vehicle and

the age and sex of the drivers. For youthful operators, the primary factor is also affected

by marital status, driver training, and scholastic achievement. We considered these

factors in the previous chapter.

The total rating factor is then multiplied by the base rate for all major coverages—

except uninsured motorists coverage. Rating factors do not apply to UM coverage, or to

towing or other minor coverages that may be added by endorsement.

In most states, territorial rating of automobile risks is permitted and insurance

companies do consider the neighborhood in which you live. This means the primary

rating factor also depends on the territory where the vehicle is garaged (this means

where it is parked at night, even if it is parked on the street). Usually, this location is the

same as the address of a policy’s named insured.

Different areas pay different rates because of a number of factors: state insurance

requirements, local population, weather conditions, collision damage repair costs, auto

theft rates and hospital costs. Also, insurance companies charge customers in a

particular area for the cost of nearby accidents involving uninsured drivers.

Other than the state you live and drive in, a consistent set of factors determine the

premiums you pay for auto insurance. These include:

• who you are;


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• your driving record;

• where you live—within the state;

• how you use your car;

• the model, mileage and year of your car; and

• the type of coverage you select.

• Driver’s Age

Perhaps the most hotly disputed rating factor is age. As with most insurance coverage,

it is illegal to discriminate against a person because of age in the issuance, nonrenewal,

or cancellation of an automobile insurance policy. What insurance companies can do is

structure premiums to accomplish their goals.

For most men and women, auto premiums actually drop a bit while they’re in their 50s.

The rate of accidents per miles driven is lower for people in the 40s and 50s than any

other group. Insurance companies know this and respond accordingly.

Since older people tend to drive less and to avoid the most dangerous conditions (at

night, during rush hour and in bad weather) fewer older people than teenagers die on


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the roads. That means older people tend to pay lower insurance rates than even middle-

aged drivers.

Accident rates—and premiums—begin creeping up again when drivers reach 60; over

age 75, the rate of fatal crashes per miles driven is even higher than it is for teenagers.

The accident numbers for the oldest drivers skew perceptions among auto insurance

risk analysts. They tend to characterize the entire population of over-65 drivers as high

risk. This means that drivers between 65 and 75, whose accident rates remain relatively

close to drivers in the middle-age categories, subsidize the drivers over 75.

The American Association of Retired Persons and other groups offer driver safety

training courses for people over 50. The AARP stresses that the entire group—its target

market—has more accidents per mile driven than any other age group. But some

insurance industry professionals argue this is merely an attempt to spread risk.

• Rating the Car

Collision coverage pays you for loss or damage to your own automobile as the result of

upset, overturn or collision with another object. In order to provide this kind of

insurance, a company has to calculate how much your car is worth and then calculate

how much it will charge in premiums. To avoid inconsistencies, the insurance industry

uses standard formulas for calculating premiums.

Four factors influence auto insurance premiums:

• the age of the vehicle,


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• the value of the vehicle,

• the deductible amount you’ve chosen, and

• the territory in which the vehicle is located.

If all other factors are equal, the older the vehicle the less the cost for collision coverage.

Most vehicles wear out with use and the replacement value declines over time.

The higher the age group number, the lower the rate. This suggests that older vehicles

are assigned to a higher age group, which is true. Some insurance companies use rate

tables that show vehicle model years instead of age groups. The rating concept is the

same whether you are using actual model years or age groups.

A convenient way to figure the age group of an automobile: First determine the current

model year. If it is prior to October 1, the current calendar year is the current model

year. If the date is October 1 or later in the year, the next calendar year is considered the

current model year. Thus, if the current date is November 1, 2003, you call it 2004.

Once you have determined the current model year, you simply count backwards. If

2003 is the current model year, the next earlier year would be 2002, preceded by 2001,

etc. Since age group 6 is the maximum age, all automobiles which are 1997 or earlier

models would—in 2003—fall into age group 6.


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The second factor that affects collision rates is the value of the vehicle, which is reflected

by the symbol group. The symbol group is a rating code developed by adjusting an

automobile’s price new upward or downward to reflect the physical damage loss

experience for that particular model.

Two automobiles of different makes and models might have the same market value, but

be assigned to different symbol groups if one tends to suffer greater damage in an equal

crash, or if it is more expensive to repair equal damage in one model because of the cost

of individual parts.

You can think of the symbol group as something that reflects the value of a vehicle and

the insurance company’s relative exposure to loss. The higher the symbol group code,

the higher the rate. The key to identifying an automobile is the vehicle identification

number or VIN. Although an actual VIN may consist of 17 characters, only the first

eight are critical to the rating process. The rating symbol group code is based on the first

eight characters of an automobile’s VIN.

This information is also useful to insurance companies in various ways. For example, if

an application states that an auto is a two-door model with a small engine and the VIN

indicates that it is a four-door with a big engine, the company will likely double-check

to determine which description is correct.

The additional characters in a VIN are useful for confirming the identity of a specific

automobile. While they do not affect rating, they indicate the specific manufacturing or

assembly plant and even the production unit number of each completed vehicle that

comes off the production line. Each automobile VIN is unique in this respect. Thus,


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when a stolen vehicle is recovered, the police may use the VIN to confirm that an

automobile belongs to a specific registered owner.

• Rating for Comprehensive Coverage

Other than collision or comprehensive insurance is a physical damage coverage that

applies to your own vehicle for losses other than those caused by collision.

All of the procedures you just used to determine collision rates also apply to

determining the comprehensive rate. Comprehensive coverage is usually rated by

territory, age group, symbol group, and deductible amount.

Alternative comprehensive deductibles, ranging from $100 to $1,000, are usually

available. In some states, full coverage may be written with no deductible.

Most rating tables include different secondary factors for standard, intermediate and

high performance vehicles, and for sports vehicles. Among the four most common

performance codes:

• “i” means intermediate,

• “h” means high performance,

• “s” means sports model, and


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• “p” means sports premium model.

If a car model doesn’t have a specific performance code, it is presumed to be a standard

performance model. Most cars are standard performance vehicles.

• Rating the Driver

The most important classification that affects the secondary rating factor is the sub-

class, which is based on the driving record of the policyholder or other drivers living in

the same household. The applicable sub-class for an automobile is based on a series of

points (from 0 to 4) that may be assigned because of motor vehicle violations or

accidents. These points are different than points that your state’s department of motor

vehicles or public safety may charge against your driver’s license to track violations.

Many companies assign points based on the Safe Driver Insurance Plan that is part of

the standard rating manual published by the Insurance Services Office. This Plan lists

types of violations or accidents and assigns a point value based on the severity of the

problem.

Example: While initially rating your auto policy, your insurance company discovers

that a point should be charged for an accident. This point increases your secondary

rating factor from 0.00 to 0.40 and the total factor from 1.30 to 1.70. The base premium

affected was $400. Therefore, instead of paying $520, you will pay $680.


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Every accident does not result in points being charged. But points (or, usually, one

point) are assigned for certain inexperienced drivers, even if they’ve had no accidents or

convictions.

The chart below shows how points are assigned and adjusted in the case of households

that include youthful operator and seek a good student discount.

The rates would be even higher if the young driver didn’t qualify for a good student

discount.

Three conditions are necessary in order for points to apply on the basis of an

inexperienced operator: The person must be licensed less than three years, be the

principal operator of the auto, and have no points charged due to an accident.

Auto insurance reform measures have focused on driving records and experience as the

most secondary factors. For example, California’s Proposition 103 gave rating priority to

a driver’s record, the number of miles driven per year and the number of years of

driving experience over all other factors in setting rates.

Other—more recent—reforms have attempted to reverse that trend. They allow insurers

to attach no more weight to drivers’ records than other factors, such as their residential

ZIP codes, marital status and gender.

While some reform laws lay out the order of factors to be considered, many do not

provide priority weights for each. This is a major technical criticism of populist reforms.

The absence of priority weights allows insurance companies to use sequential analysis.


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This leaves rating priorities to the company’s discretion and—argue most analysts—

raises the prospect of rates based on where you live rather than how you drive.

• Rating Family Policies

The manner in which rating factors are applied to multi-car policies sounds

complicated—but is actually pretty simple. There are two key elements to remember:

• When rating more than one car, driving record points are applied to a maximum

of two cars. When rating three or more cars, the driving record points are

assigned to the two cars with the highest base premium. All additional cars don’t

have to have points.

• When there are no youthful operators, the primary factor for the principal

operator of a car is applied to that car. If you add youthful operators to your

policy, the primary factors for youthful operators will apply to all vehicles those

drivers use.

In all cases, if any youthful operator is the principal operator of a car, the primary factor

for that young driver applies to that car.

Although youthful operators who are not principal operators are assigned to cars in the

order of the cars having the highest base premiums, it is possible for two or more cars to

have the same base premium. There is a rating rule to resolve this potential conflict

when it arises.


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If the total base premium is the same for two or more cars, a youthful operator who is

not a principal operator will be assigned to the car with the lowest rated use

classification (the “pleasure” versus “business” distinction).

• Insurance Scoring

A new trend in the insurance industry has been to use “insurance scoring” to determine

the rating category. More than 90% of insurers use insurance scoring for personal auto

policies. Insurance scores are based on information contained in the insured’s credit

report, but they put weight on particular factors. The insurance score may be

downgraded when a credit score is downgraded. An insurer might consider an insured

a bad risk (this is only allowed in some states) and refuse to sell the insured a policy, or

charge a higher premium for the policy.

ChoicePoint, part of the Equifax credit-reporting company, maintains a database called

CLUE (Comprehensive Loss Underwriting Exchange). CLUE provides insurers with

claims history reporting, and driving-record reporting. ISO also maintains a database

called the All Claims database, which is used for detecting fraud.

• The insured can get a copy of his or her credit history from Equifax, Experian, or

TransUnion.

• A copy of the ChoicePoint CLUE report can be obtained at

http://www.choicetrust.com.


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• The report will cost between $8 and $10, depending on how the consumer wants

the information.

• The Insured can acquire a copy of the ISO All Claims report if the information it

contains is disputed.. Consumers can call (800) 709-8842 to obtain copy of their

report. A "request for disclosure" form must be completed.

No Fault Insurance

Another choice the insured may have in the insured’s state is whether or not to

purchase no-fault insurance.

In most states, blame is assigned in an accident. The person who is deemed at fault—or

that person’s insurance company—is responsible for paying the costs incurred by the

other party.

Many states use some form of no-fault insurance system. These systems all have similar

goals, but they tend to differ widely in practice.

In all insurance policies, the medical payments and property damage sections of the

collision coverage contain no-fault elements—they will pay, no matter who was

responsible for an accident.


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If the insured opts for no-fault insurance, the insured agrees to give up certain rights to

sue if the insured is in an accident. In return, the insured receives a state-mandated

premium discount (usually at least 15 percent).

Before the insured chooses no-fault coverage, the insured should understand what that

decision could mean. Under the option, the insured agrees to relinquish the insured’s

right to sue for pain and suffering in the case of a minor injury. But there are some

exceptions:

• The insured keeps the right to sue, if the insured is injured seriously.

• The insured is allowed to sue for damages, regardless of the type of injury, if the

insured is hit by a drunk driver or an uninsured or out-of-state motorist.

• The insured retains the insured’s right to sue for unpaid medical bills, lost wages

and out-of-pocket expenses.

Supporters of these programs say that no-fault promises quicker payment of insurance

claims, because there’s no wait for insurance companies—or courts—to decide who is at

fault. A growing number of insurance companies agree, saying that no-fault systems

reduce their costs—and the resulting higher auto insurance premiums—by limiting the

number of lawsuits. That’s a big plus for an insurance sector, in which legal fees

account for as much as 12 percent of premium costs.


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• Basic Factors

The basic factors that shape no-fault programs include:

• Thresholds. Designers of a no-fault system must decide when injuries are so

severe that a person should be allowed to sue the driver who was responsible.

Make the threshold too low and most people will go to court; make them too

high and some may not be fairly compensated. Most no-fault proponents favor a

verbal threshold that spells out which specific injuries permit an insured to sue.

The alternative is a monetary threshold, which allows lawsuits for damages

above a specified amount.

• Benefit (or liability) limits. A no-fault designer also must decide what maximum

benefits an injured motorist can receive under a no-fault policy. While some

suggest a limit as high as $250,000, the industry proposal puts the cap on benefits

at $50,000, which insurance officials say covers 97 percent of all auto claims.

• Lost coverage allowances. No-fault can mean that drivers pay more to maintain

their current level of coverage. For instance, since no-fault only covers insured

motorists and their passengers, a driver might have to buy a separate liability

policy to cover such things as hitting a parked car.

• Cost containment. Low-cost policies also could require medical treatment from a

managed-care provider. (Medical expenses typically account for 15 percent of

insurance premium costs.)


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• Pure No Fault

One reason proponents of no-fault defend it so staunchly is that when they say “no-

fault,” they generally mean pure no-fault.

Under a pure no-fault system, virtually all lawsuits related to auto accidents are

eliminated. The right to sue and a shot at a damage award are replaced by the right to

guaranteed benefits. Lawsuits are retained only to punish convicted drunk drivers and

others guilty of criminal conduct. Policyholders pay premiums to protect themselves. If

they (or their passengers) are injured, they are compensated by their own insurers—no

matter who is to blame for any part of an accident.

The system described above is unlike a liability system, which requires the responsible

party’s insurer to pay for medical bills and car repairs. As yet, there is no pure no-fault

system in the United States.

In 1995, the Hawaiian state legislature adopted what would have been the first pure no-

fault program. Consumer advocate Ralph Nader visited Hawaii to lend his support to

the program. He said that a limited reform plan being considered, which would allow

lawsuits after damages exceeded $20,000 and offer consumers a choice of policies, was

too complex. “And complexity always works to the benefit of the auto insurance

company against the consumer,” Nader said.

He and other supporters argued that, under pure no-fault, consumers would no longer

have to hope that the person who hit them was rich or well-insured. They also wouldn’t

have to split the settlements with lawyers. Most importantly, they wouldn’t have to


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subsidize uninsured motorists with UM coverage. (Getting rid of the need for UM

coverage is one benefit of pure no-fault.)

The California-based RAND Institute estimated that the Hawaiian pure no-fault

initiative would have provided drivers with $1 million in medical and wage loss

coverage for an average of half what they paid for less injury coverage under the

liability system. But governor Ben Cayetano said it would cost victims their chance to

sue for pain and suffering. He unveiled his own plan, which would provide every car

owner with $25,000 worth of liability insurance and let health insurance pay for traffic-

related injuries.

• Partial No Fault

The 1995 Hawaii proposal came pretty close to pure no-fault. But most of the no-fault

programs currently in place can best be called partial no-fault. They allow the insuredto

make a claim up to a certain dollar limit without having to determine who caused an

accident.

About the same time Hawaii’s no-fault proposal was getting bogged down in politics,

California’s insurance commissioner and a number of consumer advocacy groups

proposed a partial no-fault plan. The program that Commissioner Chuck Quackenbush

supported would require all drivers to purchase a basic policy with $15,000 in medical

and lost-wage benefits—for an annual premium of $220 for most drivers. People injured

in an automobile accident would be entitled to compensation for medical bills and lost

wages up to the $15,000 limit, regardless of who caused an accident. If damages went

beyond that threshold, they could sue.


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The minimum policy would be mandatory for all Californians, with proof of insurance

required for vehicle registration. Modeled after New York’s no-fault law, it also used a

verbal threshold—“serious or permanent injury”—to determine in which cases

litigation could be pursued.

In New York, all auto insurance policies must contain $50,000 in no-fault coverage for

medical expenses and lost wages. Policies still have liability coverage, but that only

begins after the $50,000 no-fault limit has been used up.

Michigan and New York often are cited as having good experiences with no-fault.

Georgia and Connecticut, which repealed no-fault in the 1990s, often are cited as having

had bad experiences with the system.

Some consumer advocates who support no-fault reforms argue that trial lawyer groups

spend a lot of money to oppose any form of no-fault. And, even in states that have stuck

with no-fault plans, regulators have tended to lower liability limits—which lawyers

like.

Under New Jersey’s no-fault auto insurance law, all drivers must buy personal injury

protection (PIP) coverage. If an accident occurs, it pays for all medical bills and lost

wages for the insured up to $250,000. Drivers have to buy PIP as part of every

automobile insurance policy. This coverage is a substitute for the indemnification

typically handled through civil lawsuits.


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• Michigan’s No Fault

In 1973, Michigan launched its no-fault insurance law, Public Act 294. From that point

on, in Michigan, compensation for auto accidents was no longer based on the tort

liability system. Instead, everyone now had to have a minimum, mandatory no-fault

insurance policy, or be subject to a misdemeanor that could lead to the revocation of

one's operating license, a fine ranging from $200 to $500, and prison time lasting up to

one year. This no-fault insurance coverage created an environment where auto accident

victims received compensation for injuries or damages from their own insurance

company, regardless of who was at fault in the accident.

The structure of the mandatory no-fault insurance package has a threefold nature. The

most important of the three basic coverages is residual liability coverage. This coverage

protects the insured against legal liability for severe injury, death, or physical

disfigurement to others. The coverage can also provide protection when the insured

caused an accident in which the actual losses are greater than the benefit level of the

policy's personal injury protection coverage. The mandatory minimums for residual

liability in Michigan are $20,000 for one person's injury, $40,000 for everyone injured in

the same accident, and $10,000 per accident for property damage. Naturally, higher

limits can be purchased, and are indeed recommended. The residual liability coverage

also protects the insured on a conventional Bodily Injury-Property Damage Liability

basis if he or she should be involved in an accident outside of Michigan. This is a

mandatory coverage.

The personal injury protection (PIP) coverage pays benefits that are very wide-ranging.

For example, reasonable medical and rehabilitation expenses are covered. 85% of the

lost wages or salary of the injured party, up to a specified amount* per month for three


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years, is paid. And up to $20 per day is paid for services such as yard care that the

accident victim can no longer perform are provided for as long as three years. On top of

this, in case of an accident resulting in fatality, survivor loss benefits (up to a stated

amount**), replacement services, and a $1,750 funeral and burial expense are also

provided under this coverage. This is also mandatory coverage.

The final mandatory no-fault coverage is property protection insurance. This coverage

pays up to $1 million per accident when an insured's auto causes damage to the

property of others. This does not cover the vehicles of others, but rather the trees,

buildings, road signs, mailboxes, etc., that can be damaged by an insured's moving

auto. Other automobiles and vehicles are covered only when they are not moving and

are legally parked.

In addition to the three basic mandatory coverages, additional coverages can be added to

the mandatory no-fault insurance policy. These have been described earlier in this

section—they are reviewed again here briefly to demonstrate how they integrate with

the mandatory no-fault coverages.

The most popular optional coverage for auto insurance is collision coverage. This

coverage comes in three "flavors.” The most popular for those with a new auto, or an

auto with high resale or trade-in value, is standard collision. This form of collision

coverage pays for damages to the insured's auto, less the deductible, regardless of who

was at fault in the accident. It is generally seen as the "best buy" in collision coverage.

The second flavor, broad form coverage, pays for damages regardless of who is at fault,

but only charges the deductible when the insured is more than 50 percent at fault.

* The specified amount is updated annually by the Michigan Insurance Bureau.


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Naturally, this is more expensive than standard collision. Limited is the most restrictive

form of collision coverage. It will only pay for damages, less the deductible, when the

insured is not more than 50 percent at fault.

Other forms of optional coverages available for the mandatory no-fault auto insurance

policy are other-than-collision, or comprehensive coverage, and uninsured and

underinsured motorists coverage. These coverages are the same as those detailed in our

previous sections on auto insurance.

Two other optional forms of coverage not outlined previously, however, are death and

dismemberment coverage and road service coverage. Death and dismemberment

coverage pays benefits to the insured or other family members residing in the insured’s

household for death or certain injuries sustained in an auto accident—regardless of the

party at fault. Various optional death benefits exist, depending on the insurance

company’s policy designs.

Road service coverage is analogous to many auto club benefits. Towing and roadside

assistance is available to the insured that elects this coverage. This benefit reimburses

the insured for reasonable and necessary expenses associated towing and labor of a

disabled vehicle.

It is important to understand that no state has a pure no-fault system. The Michigan

system is "modified" in that it does allow lawsuits under certain conditions. First, there

is the possibility of mini-torts, or suing another driver for up to $500 if the victim is not

at fault in the accident. More dramatically, however, is the possibility to sue when a

certain threshold is reached.


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In Michigan, the possibility of a lawsuit for an auto accident can occur if a verbal

threshold is met. This threshold is on injury or injuries that result in death, serious and

permanent disfigurement, or the loss or impairment of a serious bodily function.

According to the 1986 State Supreme Court ruling, DiFranco v. Pickard, the jury in the

lawsuit is empowered to determine whether the threshold has been met. In other

words, the jury can decide whether the injury sustained in the accident constitutes a

loss or impairment of a bodily function necessary to maintain a normal life. Also, under

this ruling, pain that results from an injury caused by an auto accident is enough to

meet the threshold, as it can be seen to impair a necessary bodily function.

• Special Topics for Michigan Auto Insurance

A PAP may be issued to cover automobiles owned by individuals, by a husband and

wife living in the same residence, or by a Joint Ownership Coverage Endorsement. This

endorsement covers vehicles owned by persons living together who are not married, or

to cover vehicles owned by relatives other than husband and wife. Unless a specific

exception is made, PAPs do not cover vehicles owned by businesses or by groups of

people.

In certain instances, an eligible individual may be denied coverage. Because auto

insurance is so vital and can be an emotional issue, it is important for the insurance

professional to understand the reasons that an individual may be denied a PAP, and be

able to explain these reasons in a concise and reasonable manner.


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In Michigan, a person may be denied auto insurance for the following reasons:

• The individual’s driver’s license has been revoked;

• Within the past 5 years, the individual has been convicted of trying to defraud an

insurance company

• Within the past 5 years, the individual has been denied payment of a claim over

$1,000 based on evidence of fraud

• Within the past 3 years, the individual was found guilty of a felony with a motor

vehicle, driving under the influence of alcohol or drugs, failing to stop at the scene

of an accident, or reckless driving;

• The car that the individual wishes to insure does not meet Michigan safety

requirements;

• Within the past 2 years, the individual’s auto insurance has been cancelled because

of non-payment of premium;2

• The individual’s driving record has more than the allowable number of “eligibility

points” (see chart below)

• The individual does not meet the insuring company’s underwriting rules.

2 This restriction can be waived with advance payment of the entire premium.


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The final reason for denial is the most variable. Each insurance company will have its

own underwriting guidelines. In many cases, an insurance company will not provide

coverage for custom or antique cars. This is because repairs for such automobiles are

inordinately expensive. As long as the company applies its underwriting guidelines in a

uniform manner within the boundaries of state law and regulation, it may refuse to

issue insurance for a fairly wide range of reasons.

Insurance Eligibility Points and Individual Driving Records – Similar, but not Identical

COMPANY-ASSIGNED INSURANCE ELIGIBILITY POINTS

• 4 POINTS

Driving more than 15 mph over the speed limit (careless driving)

• 3 POINTS

Driving 11-15 mph over the speed limit

• 2 POINTS

Driving 15 mph or less over the speed limit on freeways, which previously had a

maximum speed limit of 70 mph

• 2 POINTS


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All other moving violations

• 3 POINTS

The first accident that the individual is more than 50 percent at fault

• 4 POINTS

The second and all subsequent accidents that the individual is more than 50 percent at

fault

Assigned Risks and the Michigan Automobile Placement Facility

• The Michigan Automobile Placement Facility

The Michigan Automobile Placement Facility (MAIPF) is an organization for providing

auto insurance to any qualified person who is unable to get insurance in the regular

market. The “regular” market is referred to as the voluntary market. Persons finding

insurance coverage through the MAIPF are said to be in an assigned-risk pool. Insureds

in the assigned-risk pool are in the residual market.

The assigned-risk pool has declined in size over the past several years. Many more

insurers are covering drivers who are higher risks because they see these drivers as an

opportunity for growth.


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Another reason that the numbers of the assigned-risk pools are declining has to do with

rates. Rates for the assigned-risk pool are set by the Automobile Insurance Plans Service

Office (AIPSO). The rates in the residual market are no longer competitive with those in

the voluntary market.

If a person has a car registered in Michigan, or holds a valid—not suspended or

revoked—driver’s license, he or she is qualified for insurance through the MAIPF. The

only reasons one can be refused insurance through the facility is due to the following:

1. The person is not required by law to be covered by law to be covered by no-fault

insurance because he or she is a non-resident who does not intend to live or drive

in Michigan for at least 30 days.

2. The person’s driver’s license is suspended or revoked.

3. The person has had an auto policy cancelled within the past two years because of

non-payment of premium.

• The Michigan Catastrophic Claims Association

The Michigan Catastrophic Claims Association (MCCA) is a special fund set up by the

state’s no-fault law. Because Michigan’s no-fault provides unlimited medical benefits

for people who are hurt in auto accidents, this form of fund is necessary.


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The MCCA reimburses insurance companies for their on-fault medical losses after they

have reached a certain amount. Following this, the companies pay an assessment to

cover MCCA’s liabilities. Ultimately, this cost is passed on to all policy owners, and this

cost the policy owner’s share of the expense. In recent years, however, the MCCA has

been over-funded, resulting in refund checks to policy owners.

Hard to Insure Motorists

• Cancellation One of the most common complaints about car insurance companies is how quick they

are to cancel the insured’s policy if the insured has an accident or get too many tickets.

Fortunately, state regulators have taken a great interest in how, when and why

insurance companies cancel policies.

In 1995, Washington state Insurance Commissioner Deborah Senn announced a package

of changes in procedure and consumer education programs intended to help people

make sense of their auto insurance. The centerpiece of the Washington package was a

proposed law that would prevent insurance companies from canceling or denying auto

coverage based on a single accident per insured driver—or because of accidents that

weren’t the fault of the policyholder.

Insurance regulators hear many consumer complaints that insurance companies

arbitrarily assign partial blame to policyholders when accidents aren’t their fault. After


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assigning blame without consulting the policyholder, some companies then cancel the

coverage.

Another Washington proposal would prohibit insurance companies from denying

people auto coverage because their coverage was previously cancelled or denied by

another company. Consumer groups call the practice “blacklisting.”

Of course, even the most progressive states must allow insurance companies to cancel

policies in some instances (after all, insurance is a business, and insurers should be

allowed to make a fair profit). But state insurance regulations do provide guidelines

concerning when and why policies may be cancelled, and how. They usually require the

insurer to use specific language—and provide explanations and information—to the

policyholder as part of the cancellation notice. If they don’t comply, insurance

companies often get far more than a slap on the hand.

State insurance departments also have heard a growing number of policyholders

complain that, if they make even a small claim, insurance companies will threaten to

cancel their coverage unless they buy other insurance policies—such as homeowners or

umbrella liability insurance.

Some states require that an insurance company offer alternative coverage—which

usually comes at a higher cost—whenever it cancels a policy. The insurance company

has to refund part of whatever premium you’ve already paid, too. The refund typically

is calculated on a pro rata basis, which means the refund is based on the time coverage

was in effect.


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However, there are situations in which a return premium computation is not based on

an even division of the premium, and the insurance company is allowed to retain

slightly more than a pro rata share in order to recover the expenses of issuing the

policy. When a policy is issued, the insurance company expects to recover its

administrative expenses—for generating the policy and keeping policy records over its

term.

When a policy is cancelled, the exposure to loss terminates but some of the insurance

company’s fixed expenses remain the same. It can recover these expenses by deducting

a slight penalty from the return premium. Return premium calculations that include

this penalty often are referred to as short-rate cancellations.

If the insured decides to cancel a policy, the insurance company usually will return only

90 percent of the pro rata portion of the unearned premium for the first policy year

(thus, the penalty is 10 percent). This applies to annual policies, and to policies having a

shorter term, such as three or six months.

If a two- or three-year policy is cancelled after the first year, the first-year premium is

fully earned, the initial expenses have been recovered, and the insurer should return the

full unearned premium for the unexpired term.

• Assigned Risk In most states, if no insurance company will sell the insured car insurance, the insured

can buy coverage from a state-run company or an assigned risk plan. Insurance policies


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written by these alternative markets tend to be expensive and offer more limited

coverage than standard policies.

A state-run insurance company is exactly what it sounds like.

An assigned risk plan is a cooperative enterprise that all insurance companies doing

business in the state must participate in. The plan constructs a policy (again, usually

expensive and limited) that it will sell to people whose driving records or location

disqualify them from standard coverage. It then forces participating insurance

companies to take a number of assigned risk policies—typically a number proportional

to their market share in the state. (Big companies have to take more, small companies

fewer.)

• Insurance for Specialty Vehicle Risks

There are all sorts of land-bound motorized vehicles that typically aren’t thought of as

cars—and that may not be best insured (or even possible to insure) under a personal

automobile policy. Insurance companies use the terms specialty vehicles and

recreational vehicles to refer to these machines, which include motorcycles, mini-bikes,

dirt bikes, mopeds, motorhomes, camper trailers, three- or four-wheeled all-terrain

vehicles (ATVs), electric or gas-powered golf carts, snowmobiles and dune buggies.

For the most part, these vehicles are not covered under a homeowners policy. In fact, a

homeowners policy pretty thoroughly excludes liability and medical payments

coverage for anything to do with any type of motorized vehicle. It may provide

coverage for a boat that is stored on the insured’s premises, and it may provide


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coverage for a golf cart or ATV used to service the insured’s property. But if the insured

is going to be using any of these vehicles off-site, the insured really needs to insure

them properly.

This can be as simple as adding an endorsement to the insured’s homeowners policy—

or to the insured’s automobile policy. But, more likely, the insured will want to get

special stand-alone coverage just for the type of vehicle the insured needs to insure. In

this course, we’ll look at each type of vehicle and the type of coverage offered, along

with appropriate coverage issues.

• Insuring a Motorhome or RV

The insured can insure a motorhome or recreational vehicle (RV) by adding an

endorsement to the insured’s homeowners or auto insurance policy. However, these

policies weren’t designed to cover motorhomes; and the endorsements do not give the

insured the complete coverage the insured can get by purchasing an RV policy.

For example, will the insured’s automobile or homeowners policy cover appliances,

plumbing, outside awnings and other accessories? Will it cover emergency expenses

that the insured may incur while traveling? Probably not.

What’s more, in the event of a claim, the insured may have to pay expenses out-of-

pocket while the insured’s insurance company decides if coverage is or isn’t provided

under the insured’s homeowners or auto policy. If the insured’s homeowners and auto

policies are with different insurance companies, this can really get ugly.

When it comes to insuring an RV, a Personal Auto Policy will not cover:


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• personal belongings in the insured’s RV;

• liability when the insured’s RV is parked and you’re using it as a residence;

• attached accessories, including awnings, antennas, rooftop air conditioners and

satellite dishes;

• expenses for lodging or to get the insured home if the insured can’t stay in the

insured’s RV because of a covered loss.

Meanwhile, a homeowners policy usually will allow the insured to use only 10 percent

of the insured’s personal belongings insurance limit to cover off-premises property (in

other words, while it’s in the insured’s RV). That may not be enough to cover items the

insured brings on a long trip.

In contrast, RV insurance policies were designed specifically for motorhomes, and they

probably will better suit the insured’s needs.

• Coverages

Typically, an RV insurance policy will offer:

• liability coverage in case the insured injures someone or damage someone else’s

property (the insurance company also will pay medical bills and wage loss


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incurred by an injured person, and other damages the insured is obligated to pay

as result of an accident);

• personal effects coverage for lost or stolen clothing, cameras, dishes, sporting

goods, jewelry, etc.—often available on a replacement-cost basis (rather than a

depreciated, actual cash value basis);

• tow dolly/hitch coverage (a tow dolly or hitch would be used to haul a car or

truck behind the motorhome, so the insured can run errands once he’s parked

the big rig);

• campsite/vacation liability coverage—for bodily injury or property damage if

the insured is liable for an accident arising out of the ownership, maintenance or

use of the RV as a temporary vacation quarters;

• comprehensive and collision coverage for damage caused by accidents, fires,

smoke, floods, landslides, hail, windstorms, mice or other stray animals,

vandalism, low branches or overhangs—this includes coverage for awnings,

antennas, satellite dishes, air conditioning units and other roof components;

• towing and roadside labor coverage;

• emergency expense coverage, which typically will pay up to $750 for reasonable

temporary living facilities, transportation and the cost of getting the RV home if

it becomes inoperable due to a comprehensive or collision claim more than 50

miles from its usual storage place; and


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• medical expense coverage, no matter who is at fault.

As the insured can see from the nature of these coverages, RV insurance is service-

oriented. It is designed to offer as much protection as possible, in the event the insured

has mechanical problems on the road.


Some companies also offer replacement cost coverage. In the event of a total loss, if the

insured purchases this coverage, the insured will receive a new motorhome of the same

model, class, body type, size and equipment as the insured’s insured vehicle. Another

option is purchase price coverage, which will reimburse the insured for the original

purchase price of the vehicle in the event of a total loss.

The insured can add uninsured motorist coverage to most RV policies, as well.

Most insurance companies will place conditions on the coverage of the insured’s

personal effects. Typically, a company will pay no more than $500 for any single camera

or video camera; for travel tickets, passports, manuscripts, stamps and collectibles; for

sporting equipment; and for any single article of jewelry, art, antiques or furs.

Certain items are not covered at all under an RV policy, including property pertaining

to the insured’s business or occupation; deeds, documents, records, bills, money, notes,

securities, etc.; animals; any self-propelled vehicle or watercraft; and property otherwise

covered by other insurance.


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If the insured lives in the insured’s RV all the time, companies that specialize in RV

insurance can provide what’s referred to as full-timers coverage. Since the insured does

not have a home, this coverage provides comprehensive personal liability protection

very similar to that offered in a homeowners package policy. It also covers additional

living expenses if the insured’s RV becomes unlivable due to a covered loss, and even

provides coverage for fire department service charges.

To qualify for full-timers coverage, some insurance companies will require the insured

to have another vehicle in the household to run errands, and they may stipulate that the

RV not be used as a commercial or retail work site (e.g., if the insured travels around

the country to swap meets and sell out of the insured’s vehicle, it would not qualify for

coverage).

• Premiums

Premium rates for motorhome insurance reflect an insurance company’s concerns.

What are those concerns?

From an operational standpoint, motorhomes have many of the same driving traits as

one would encounter in driving a truck (size, maneuverability, susceptibility to wind).

If the insured is inexperienced at driving a motorhome, the insured could have

considerable difficulty operating one. Hence, the insured’s experience is an issue in

setting rates.


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Another concern, of course, is the insured’s driving record for passenger cars. If the

insured has a lot of points on the insured’s license, the insurance company figures the

insured will be just as likely to commit offenses while driving a motorhome—but with

the potential to cause greater amounts of injury and damage.

From a property insurance standpoint, a motorhome can have a very high value—

which means it presents a significant risk to an insurance company. Because of the high

vehicle values involved, many insurers also require vehicle inspections and photos—

and some insurers charge extra when physical damage coverage is requested for older

motorhomes.

Another issue inherent to motorhomes concerns cooking on-board. This, of course,

increases the chance of fire loss beyond what’s present in private passenger cars, so fire

extinguishers commonly are required.

What if the insured loans the insured’s motorhome to someone (one of the insured’s

grown children, for example) or rents it out? Many auto policy endorsements that

provide motorhome coverage specifically restrict liability coverage in the event the

insured loans or rents the vehicle to someone else—and so do many stand-alone

motorhome insurance policies. Why? The insured can rent out the insured’s motorhome

to a potentially unlimited range of operators, ranging from good drivers to bad. Since

the insured’s insurance company only wants good drivers behind the wheel, it may

exclude all coverage in rental situations, or it may charge a higher rate for motorhomes

that are rented or leased out.


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Many companies that specialize in RV insurance will offer discounts for mature drivers

with good driving records (usually people over 45, but sometimes over 50). The insured

also may be able to get a discount if the insured belongs to an RV association.

Some companies even offer a program called disappearing deductibles, which pertains

to comprehensive and collision claims. Typically, if the insured doesn’t file a claim

during the year, the insured’s deductible will be reduced by one-fourth for the next

year. If the insured continues to live claim-free, the insurance company will continue to

reduce the insured’s deductible until it’s gone. Needless to say, this is a great way for

the insurance company to keep the insured as a long-term customer.

The insured also may need special coverage for a travel trailer or camper unit. Travel

trailers are towed by a car or truck—they do not drive under their own power. So, the

liability for a travel trailer is covered under the insurance on the tow vehicle. However,

physical damage protection must be purchased separately based on the value of the

trailer.

A camper unit can be mounted on the back of a pickup truck if it is specifically

constructed for living purposes. It is covered for liability through the insurance on the

vehicle to which it is mounted. However, physical damage protection must be

purchased separately based on the value of the camper unit.

• Insuring Motorcycles

Coverage for two-wheeled vehicles is a lot like personal automobile insurance. Some

insurance companies that specialize in motorcycle—and usually dirt bike, moped and

ATV—coverage.


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When the insured insures a car, the insured has the choice of purchasing liability

insurance only, and the insured has the same option when the insured shops for

motorcycle coverage. The insured also can add the usual options:

• comprehensive coverage;

• collision coverage;

• uninsured/underinsured motorist coverage;

• towing and roadside assistance; and

• medical expense coverage.

Some companies also offer coverage for custom parts and equipment—or special policy

options for custom or collector bikes.

Uninsured motorist coverage is available for motorcycles. Actually, this coverage is

even more important for motorcyclists than it is for drivers of cars and trucks.

Unfortunately, uninsured motorist coverage typically is quite expensive under a

motorcycle policy. This is because of the types of accidents to which motorcycles are

susceptible.


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Often, a motorcyclist can be brushed by a vehicle, while the car’s or truck’s driver is

entirely oblivious. The resulting injury to the motorcycle operator becomes an

uninsured motorist claim because, more often than not, the driver of the car will never

be identified. (Hit-and-run accidents are covered under uninsured motorist coverage,

unless the insured’s bike is parked at the time. Then the insured’s collision coverage

would come into play.)

If the insured rides with a passenger, it is important to make sure the passenger will be

covered under the insured’s policy. Many insurance companies refer to this as guest

liability. Some motorcycle policies are more restrictive than others in how they cover

guest liability.

Also, be sure to get year-round coverage if the insured may be riding in the winter.

Seasonal coverage costs less—and it may be all some insurance companies will offer.

Like most insurers of vehicles, motorcycle insurance companies prefer to write policies

for mature, experienced drivers with clean records who live far away from city centers

and keep their bikes in a garage.

Insurance companies also consider the kind of motorcycle the insured is trying to insure

when they set rates. When it comes to car insurance, companies typically charge lower

rates for safe family sedans than for two-seat sports cars. When it comes to motorcycle

insurance, companies are likely to charge more for modified or customized bikes, since

they can be more expensive to repair in the event of a physical damage claim. Insurance

companies also are concerned about the attitude of custom bikers. And, finally,

insurance companies consider the fact that large highway-oriented machines cost

thousands of dollars, and they may be driven on extended cross-country trips.


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Insurance companies will reward people who fit their idea of an ideal rider by offering

premium discounts. For instance, the insured may qualify for:

• a good rider/driver discount of about 20 percent;

• a motorcycle rider training course discount—for instance, for completing a

Motorcycle Safety Foundation course—often in the neighborhood of 15 percent;

• a touring cycle discount of about 25 percent (since touring cycles are considered

less risky than the faster and lighter-weight sport bikes;

• a discount for being a member of the American Motorcyclist Association or the

Harley-Davidson Owners Group;

• a multiple-bike discount of up to 30 percent; and

• a claim-free renewal discount of about 25 percent if the insured renews with the

same company and hasn’t filed any claims.

Another point worth mentioning: Most insurance companies exclude coverage for any

form of racing.

• Insuring Snowmobiles, Dirt Bikes & ATVs Stand-alone coverage for snowmobiles, dirt bikes, and three- and four-wheeled ATVs, it


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is much like the motorcycle coverage described above. In fact, many of the same

insurance companies that offer coverage for street bikes also offer coverage for these

off-road vehicles. (Note that the term off-road vehicle is being used to describe vehicles

primarily used off of paved roads for recreational purposes—not four-wheel-drive

trucks.)

Coverage issues for snowmobiles, dirt bikes and ATVs are similar to those for

motorcycles, but there are a couple of differences. For one thing, to ride a motorcycle on

the street, you need to have reached the legal driving age in the state—and the you need

a motorcycle license. To ride a snowmobile, dirt bike or ATV off-road, you don’t need

any particular license

First, let’s look at the age issue. Insurance companies can set rates for individuals who

have reached driving age by reviewing their driving records and their claims histories

on their auto policies. However, for younger operators, the insured’s insurance agent

may be forced to perform what is known as loss control—by interviewing the young

operators and advising them of the very real risk of injury to themselves and others

arising from careless or reckless operation of the ATV. Otherwise, an insurance

company may not be willing to take on the risk of insuring the insured’s ATV.

Another issue when it comes to minors riding ATVs is vicarious parental liability.

Parents can be held liable for the acts of their children, which is an important

consideration if those children are going to be riding ATVs, snowmobiles or other

motorized vehicles.


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While virtually all motorcycle riders insure street bikes like cars, many people try to

insure dirt bikes, snowmobiles and ATVs under their homeowners insurance policies.

And, to some degree, they can do so. It is also possible to insure these vehicles under a

personal auto policy.

• Specialty Coverage Under The Personal Auto Policy

The main endorsement under which an auto policy can be broadened to cover specialty

vehicles is the Miscellaneous Type Vehicle Endorsement. (However, not all companies

that write auto insurance offer this endorsement.) It can be used to extend all Personal

Auto Policy coverages to a wider range of vehicles by modifying the definition of

covered auto to also mean miscellaneous type vehicle, a term that may include:

• motorhomes;

• motorcycles and similar vehicles;

• all-terrain vehicles (ATVs);

• dune buggies; and

• golf carts.

Each individual vehicle to which the endorsement applies must be listed on the policy,

and the insured will have to pay extra for each coverage for each vehicle.


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This endorsement alters the auto policy in a variety of ways—which makes for some

unintended consequences. Under liability coverage, it eliminates coverage for other

persons or organizations for any liability arising out of the insured’s operation of any

vehicle which is not a covered auto (such as a non-owned ATV). This creates various

gray-area issues.

For example, Dale owns a four-wheeled ATV, for which coverage is provided by a

Miscellaneous Type Vehicle Endorsement attached to his auto policy. Instead of using

his own ATV, he borrows someone else’s four-wheeler to take to the church youth

group party. If, because of Dale’s actions, someone gets hurt and sues the church, the

church would not be an “insured” under Dale’s policy.

Next, a common condition restates the exclusion of vehicles having fewer than four

wheels to clarify that the exclusion does not apply to any vehicle having fewer than four

wheels for which liability coverage—and, likewise, medical payments coverage—has

specifically been purchased under the endorsement.

The final liability coverage revision—and this is a major change—is the addition of a

passenger hazard exclusion. Normally, under a Personal Auto Policy, the insured has

liability coverage for a passenger in the insured’s car who is injured in an accident.

Under the passenger hazard exclusion, it is possible to exclude such coverage for

anyone “occupying” the described “miscellaneous motor vehicle.”

Given the sometimes-more-hazardous nature of operating or riding a motorcycle or

ATV, this exclusion can make such a risk more palatable to a cautious insurance


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company. Asking for the passenger hazard exclusion is also a way to lower the

insured’s premium, if the insured needs to add the Miscellaneous Type Vehicle

Endorsement to the insured’s policy. But it adds considerable exposure back onto the

insured’s shoulders, so avoid this exclusion if the insured hasa choice in the matter.

The final section of the miscellaneous type vehicle endorsement concerns the greatest

amount the insurance company could have to pay in the event of a physical damage

loss.

While the physical damage coverage is written for a stated amount, the amount shown

is not necessarily the amount that will be paid if there is a loss.

Under this coverage, the insurance company will pay the smallest of the following

amounts:

• the amount shown in the schedule or on the Declarations Page for the vehicle;

• the actual cash value of the stolen or damaged property; or

• the amount necessary to repair or replace the property with other property of

like kind or quality.

An example: The insured has $10,000 of scheduled physical damage coverage for a

current-model ATV, which is stolen. It would take about $14,000 to replace it (since it is

still a current-year model), but the actual cash value of the vehicle is about $12,000


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(because you’ve used it). However, because the insured only purchased $10,000 worth

of coverage, the insurance will not pay more than $10,000 for this loss.

Another example: The insured has $10,000 of scheduled physical damage coverage for

an older ATV, which is stolen. The actual cash value of the vehicle is about $8,000 on the

current market, but a replacement (same make, model and quality) can be purchased

for about $6,500 at an auction. In this case, the insurance company will not pay more

than $6,500.

Obviously, the key here is to purchase the right amount of physical damage coverage so

the insured doesn’t suffer a loss at settlement time. But there’s no point in paying higher

premiums for more coverage than the insured’s ATV or snowmobile is worth, because

it isn’t going to get the insured a larger settlement.

Another thing to remember: The deductible the insured has chosen for the automobile

part of the policy also applies to the Miscellaneous Type Vehicle Endorsement. So,

payment for a loss under this endorsement will be reduced by the amount of the

applicable deductible. However, if more than one covered auto is damaged in the same

collision (e.g., if the insured backs into his own car with his own ATV), only one

deductible will apply—but it will be the highest applicable deductible.

• Covering a Snowmobile

The insured also can add coverage specifically for a snowmobile under a Personal Auto

Policy. In this case, the Snowmobile Endorsement would be used instead of the


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Miscellaneous Type Vehicle Endorsement, and it can be used to provide the insured

with most of the typical auto policy coverages.

The Snowmobile Endorsement defines snowmobile as a land motor vehicle, designed

for use off public roads on snow or ice, and propelled only by wheels, crawler treads or

belts. Trailers designed to be towed by snowmobiles (but not for transporting them)

also are included in this definition.

The definition of “snowmobile” then specifically excludes any vehicle powered by

propellers or fans. Some very-high-speed hybrid snow/ice vehicles are powered in such

a manner, and they cannot be covered by this endorsement.

(The insured will probably need a stand-alone snowmobile policy for higher-

performance models; and the insured may have to purchase separate snowmobile

coverage if the insured doesn’t have a great driving record. The insured also may be

able to obtain coverage under one of these policies for a snowmobile that the insured

races.)

Any snowmobiles the insured has must be specifically listed on the policy. It also will

cover a snowmobile that the insured buys while the policy is in effect, but only if

coverage is requested within 30 days. And it will cover any non-owned snowmobile

used as a temporary substitute if the insured’s snowmobile is out of service.

Both liability and medical payments coverage are excluded if the insured uses the

snowmobile for business, if the insured races it (whether it’s in a sanctioned race or

not), and if the insured rents or leases it to anyone. In addition, a passenger hazard


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exclusion may be added. And, if other insurance applies, snowmobile coverage will be

treated as excess over any other collectible insurance.

The same restrictions apply under uninsured motorist coverage, and under physical

damage coverage (except for the business use exclusion). Physical damage coverage

again has a limit of liability provision that operates in the same manner it does in the

Miscellaneous Type Vehicle Endorsement (the insurance company will not pay more

than the stated amount, actual cash value or actual cost to repair or replace the

property).

When it comes to setting rates, from an insurance company’s standpoint, a snowmobile

can be an especially high-risk vehicle in the wrong hands. So, the insurance company

will check the insured’s driving record to see if the insured is apt to be a safe

snowmobile operator. The company also will want to know the insured’s level of

experience.

Plus, the company will want to know about the insured’s family. In many states, no

licensing requirements exist, so any child in the house can climb aboard and buzz off

into the winterscape. Insurers worry about this—and charge accordingly if the insured

has any children in the insured’s household.

From a property insurance standpoint, the type of snowmobile being considered is

important. Is it a name-brand vehicle, or did the insured build his own? The type of

drive train also must be known, since propeller-driven craft present greater exposures

to loss due to their high-speed capability—and are excluded by the snowmobile

endorsement, as well as by some stand-alone policies.


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• Insuring Mopeds

What about mopeds? They’re often operated on the street, but aren’t subject to motor

vehicle registration everywhere. Their slow speed can hinder traffic, yet they can be

used to weave in and out of traffic. They present a small profile, which is difficult for

other motorists to see. Frequently, they are operated on the streets by children.

If a moped is not subject to registration, the insured would have liability coverage on

the insured’s own premises under a homeowners policy, but no coverage off-premises.

If it is subject to registration, homeowners liability coverage is not available at all.

The insured can obtain broader liability coverage under the Miscellaneous Type Vehicle

Endorsement to the insured’s auto policy—to provide coverage on and off the premises.

But many insurance companies will not provide this coverage for mopeds, especially if

there are under-age operators.

As a result, the insured will probably have to obtain a stand-alone policy. These are

hard to find, in most circumstances. Motorcycle insurance companies will usually have

stand-alone policies...but may not be excited about selling the insured one, because the

premiums are low.

In fact, most people who ride mopeds do not carry specific insurance—and absorb any

liabilities they incur.


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• Leased Autos – Gap Insurance

Because of the dramatic depreciation of an auto’s value, the actual cash value (ACV)

calculated by an insurer on a vehicle is typically much less than the value of a loan or

lease. Because the owner/lessee is responsible for paying the remainder of a lease or

loan even when an auto has been totaled, gap insurance is often a useful purchase.

Gap insurance pays the difference between the amount the insurer pays in ACV and the

amount still owed.3 Some lease contracts will include gap insurance in the agreement,

but others do not. Because leasing companies often include this coverage in the lease

contract, gap insurance is not heavily marketed. The insurance professional should

make clients aware that this coverage does exist, and make sure they review the

language of their auto lease agreement to determine whether they have such coverage.

For loan gap coverage, most companies require that the insured have collision and

comprehensive coverage in order to purchase the additional insurance. Loan gap

coverage usually will not pay for any late fee charges, extended-warranty charges, or

credit insurance charges.

• Insuring Foreign Drivers

Most insurers will not sell policies to drivers without a driver’s license from a state in

the United States. One major reason for this discrimination is that Motor Vehicle

Reports (MVRs) are not available for people from other countries. This makes it

3 Some insurers refer to this coverage as “Loan/Lease Payoff Coverage.”


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extremely difficult for insurers to assess their risk. Companies that will insure foreign

drivers will treat these individuals as new drivers without a driving history—regardless

of their driving record in their country of origin. The result is significantly higher

premiums.

For adults who plan to stay an extended period in the United States, it is always best for

them to apply for a United States license. Should an agent speak to a foreign driver who

is recently licensed, but was insured prior to licensure, he or she inform the individual

that they will not get a full refund if they cancel their existing policy. If the cancellation

is made within the first 60 days of the policy term, the company will usually keep a

specified sum (typically no more than $35.00). If the cancellation occurs after 60 days,

the refund will be made on a pro-rated basis.

In situations where a fully-insured American family is hosting a foreign exchange

student with an international drivers license, coverage under the existing PAP is

possible, depending on the company’s underwriting guidelines. In most cases, the

foreign exchange student is covered as a duly-licensed, full-time resident of the named

insured’s household. However, because of the unusual nature of the situation, the agent

is always advised to refer to the home office for guidance.


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Chapter Three – Personal Watercraft

As society has become more affluent and more mobile, unprecedented numbers of

American families have purchased boats and personal watercraft. Of course, the fact

that people are marrying later in life also has contributed to the upsurge in sales, too—

since single people tend to have more disposable income.

If the insured is one of those people who is headed for the great outdoors every chance

he or she gets—along with his or her boat or personal watercraft—here’s what you need

to know about personal watercraft insurance.

• Reasons for Separate Policy

First of all, don’t expect a standard homeowners insurance policy to meet the insured’s

coverage needs. Most people who rely on their homeowners insurance to cover a boat

or Jet Ski wind up with gaps in coverage that they don’t know about until it’s too late.

The kind of coverage that the insured needs is similar to personal auto insurance. At a

minimum, boats and jet skis need liability and comprehensive coverage. Liability

protects the insured if his or her vessel injures someone or damages his property, and

comprehensive insurance protects his or her property in case of vandalism, damage or

destruction caused by theft or fire. Depending on the age and value of the insured’s

craft, the insured also may want to purchase collision insurance, which provides

coverage for damage the insured causes to his or her own property.


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Boat insurance prices depend on the value of the boat and the insured’s boating

equipment, the engine’s horsepower whether it has an in-board or out-board motor and

the length of the boat, according to the Independent Insurance Agents of America

(IIAA). The insured also can add coverage for such things as:

• fuel and other spillage liability;

• a boat trailer;

• medical payments;

• personal effects; and

• liability to protect the insured from an uninsured boater.

As with auto insurance, it is possible to get some price breaks on boat policies.

Typically, discounts are offered for having safety equipment on board or for providing

protective storage for the insured’s boat when it’s not in use. In addition, the insured

may be eligible to receive lower rates if the insured holds a captain’s license—or if the

insured completes one of the safety courses offered by the U.S. Coast Guard Auxiliary

or Power Squadron.

• Pleasure Boats In some respects, owning a boat is a lot like owning a car. For one thing, the insured


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will face the same sorts of exposures to loss. These include:

• Bodily injury and property damage to others, such as injury to passengers,

skiers, swimmers, occupants of other craft and damage to other craft.

• Physical damage to the craft itself because of collision with other boats or objects,

fire and theft (as well as many of the other comprehensive-type losses to which

cars are exposed); and losses due to “perils of the seas,” including wave action,

stranding, sinking or capsizing).

• Injury to the boat operator and other guests onboard the craft because of the

actions of another boater who is uninsured.

• Liability imposed because of the responsibility for removing a wrecked craft

from the waterway.

The insured can insure most boats as part of his or her homeowners policy or with a

separate boatowners’ package policy or an ocean marine policy. Yachts have their own

type of coverage, since there are a few additional concerns.

Regardless of the type of coverage the insured buys, certain conditions and exclusions

are almost always part of a pleasure boat insurance contract. Policies stipulate that the

craft must be used “solely for private pleasure purposes,” and that coverage will not

apply if the boat is hired out, chartered or used to transport people or property for a fee.

Another common exclusion removes coverage while the watercraft is being used in an

official race or speed contest (unofficial events are not excluded).


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• Homeowners Policy Limitations

If the insured has a homeowners policy, it will provide very limited watercraft

coverage. For instance, coverage for physical damage to watercraft, trailers, furnishings,

accessories, equipment and motors is limited to just $1,000 per occurrence. Not only is

this a relatively low dollar amount, but this coverage applies only to the named perils in

the homeowners policy. So, even if the insured gets the broadest homeowners coverage

available, it still won’t protect his or her boat for “perils of the seas” (including wave

action, stranding, sinking or capsizing).

Even when coverage does apply to watercraft, it is often quite limited. For example,

under the windstorm and hail perils, a homeowners policy will cover watercraft and

related equipment only when they are inside a fully enclosed building. Since many boat

owners store their boats outside, they wouldn’t be covered under a typical homeowners

policy.

Theft coverage for watercraft also is restricted under a homeowners policy. It applies

only to theft that occurs at the insured’s home. If his or her boat and/or trailer were

stolen from a lakeside vacation spot, a parking lot in a national park or any place else

other than his or her home, there would be no coverage.

Liability coverage under a homeowners policy is limited, too. A homeowners policy

offers coverage only to a very few types of vessels. For the kinds of vessels that are

covered, it includes coverage for ownership, maintenance, use, entrustment of the

watercraft by an insured to anyone else and vicarious parental liability for the actions of

a child or minor using the watercraft. Excluded watercraft, obviously, are not covered.


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The following chart illustrates some of the restrictions that affect the coverage of certain

types of boats.

Power and Length Restrictions for Covered Watercraft

Owned by the

insured

Rented by the

insured

Borrowed by the

insured

Outboard Total 25 hp or less No limit No limit

Inboard and inboard

outdrives

Total 50 hp and

less

Total 50 hp or less No limit

Sailboats 26 feet or less 26 feet or less No limit

Even if the insured owns a small boat that falls within the permitted range for

homeowners liability coverage, the odds are the insured will want to look elsewhere for

coverage—thanks to the $1,000 limit on property coverage. In most cases, $1,000

wouldn’t even begin to cover his or her losses.

However, the insured may be able to take up some of the slack in terms of liability

coverage via an endorsement to his or her homeowners policy. The watercraft

endorsement provides the range of normally excluded liability coverage (related to

ownership, maintenance, use, entrustment and vicarious liability) for boats that exceed

the power and length limitations outlined above.


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A caveat: The insured still wouldn’t be covered if the insured were in an official race or

practicing for a race (unless his or her craft is a sailboat). In addition, sailboats and

inboard and inboard-outdrive-powered boats wouldn’t be covered for bodily injury to

any employee if that employee’s main duties pertain to the maintenance or use of the

watercraft—and there is no coverage while the watercraft is used to carry people for a

fee or while it is rented to others.

The watercraft endorsement may solve some of the insured’s problems with

homeowners insurance coverage. However, it doesn’t help alleviate the physical

damage exposures the insured faces.

Boatowners Policies

Instead of trying to adapt a homeowners policy to meet only some of the watercraft

needs, the insured will probably be better off getting a boatowners policy, which is

designed to provide all of the coverages necessary to meet a boatowner’s needs. Some

of these policies are designed to cover small to mid-sized boats, while others are

designed specifically to cover larger craft, including high-value houseboats and even

luxury yachts.

It’s important to point out that insurance companies use different terms from the rest of

us when they describe these policies. While most people use the phrase personal

watercraft as the generic name for Jet Ski or Wave Runner-type crafts, insurers call boat

policies personal watercraft policies. We’ll call them boatowners policies, to be clear. To

make things even more confusing, insurance companies also offer policies specifically


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for Jet Ski-style personal watercraft. Obviously, when the insured gets quotes for a

boatowners policy, the insured will need to be sure the insured and his or her agent are

on the same wavelength.

So, what does the insured get on a boatowners policy? Again, boatowners policies are a

lot like car insurance policies. A typical policy will include:

• physical damage coverage for the boat and its equipment (on either a

replacement cost or actual cash value basis);

• liability coverage for bodily injury or property damage to others;

• medical payments coverage for occupants of the boat; and

• uninsured boater coverage to cover injuries that may be caused by an uninsured

or hit-and-run boater.

Policies designed for larger vessels often also include coverage for personal property on

board the craft, and special coverage for injuries to crew members.

• Definitions

Boatowners policies use a variety of terms that may be familiar to the insured. These

include:


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• Insured property—meaning the boat or boats scheduled on the Declarations

Page, along with related equipment. Policies designed to cover higher-value

vessels will include furniture and dinghies, while policies designed for lower-

value craft usually limit coverage for related equipment to that which is

necessary to the operation or maintenance of the boat.

• Covered person—meaning the insured or any person or legal entity operating

the covered boat for private pleasure use with the insured’s direct and prior

permission. (Business use is not allowed, because this is a personal watercraft

policy.) Any of the insured’s family members or anyone else operating the boat

with permission would be a “covered person.” However, the definition of

“covered person” does not include paid crew, or any person or entity operating

or employed by a marina, boat repair yard, boat sales agency, boat service station

or yacht club. (This is similar to the “auto business” exclusions found in a

Personal Auto Policy, which state that if a shop damages the insured’s car, it is

liable for the repairs—the insured’s insurance company isn’t.)

• Horsepower—meaning the amount stated by the manufacturer as peak

horsepower (at the flywheel).

• Latent defect—meaning a flaw in material or machinery that existed at the time

the boat was built, but was not discovered by ordinary methods of testing.

A typical policy also provides coverage for newly acquired watercraft, as long as the

insured notifies the insurance company within the prescribed time period (usually 15


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days) and as long as the new boat doesn’t exceed a maximum value (what the insured

paid for it or $50,000, whichever is less).

If the insured sells the boat—or assigns or transfers ownership to someone else—

coverage will terminate at that time, unless prior written consent of the insurer has been

obtained.

• Limitations on Travel Distance

Most boatowners policies limit where the insured can use his or her vessel. The policy

may name a specific lake, or it might describe a bay, region or boundaries within which

the boat is permitted to operate.

Example: A yacht berthed in San Francisco might be permitted to navigate “the waters

of San Francisco Bay and its tributaries, the coastal waters outside San Francisco Bay

bounded on the north by Pt. Reyes and on the south by Santa Cruz.” If the insured

ventures out of this area without contacting his or her insurance company, the insured

won’t be covered.

Why does the insurance company care where the insured go boating? Insurers base

their rates on the risk of loss—and the farther the insured travels, the greater the risk,

particularly if the insured lives near treacherous waters. So, the company will charge

higher rates for a boat that will navigate the entire globe than for a similar vessel that

will navigate only in Chesapeake Bay.


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On the other hand, if the insured’s boating excursions normally are confined to the San

Francisco Bay area, but the insured wants to take his or her boat on a trip to Mexico, all

the insured has to do is get permission in advance—and pay an additional premium to

cover the additional exposure.

Where the insured’s boat will operate also will have a profound effect on rates. Because

of record-setting damage from hurricanes during the last several years, boat insurance

is tougher to come by in some parts of the country. However, many insurance

companies will sell policies in high-risk areas under certain conditions. The insured

may have to change where the boat is stored during hurricane season (July to

November) and agree to navigational limits (e.g., traveling only in inland waters or no

more than 300 miles from land). The insured may even be asked to come up with a

written hurricane emergency plan.

If the insured is in a high-risk area, the insured also can expect to pay 25 percent more

than the insured would have before Hurricane Andrew struck in 1992. Boat insurance

rates have increased about 15 percent since then. However, as with car insurance, the

insured can opt for a higher deductible to reduce rates.

• Coverage Provided

Many boatowners policies take an all risks of direct loss approach to coverage (though a

smaller number are written on a more restrictive, named-perils basis). The all-risk

policies cover all losses that are not explicitly excluded. This includes coverage for

perils of the seas—and for land transportation perils, such as collision or overturn. (In


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contrast, watercraft coverage under a homeowners policy, even with endorsements,

would not provide such coverage.)

However, as in any insurance policy, there are exclusions. Typical property damage

exclusions mean the policy will not provide coverage for loss or damage resulting from

any of the following:

• wear and tear, gradual deterioration, weathering, insects, mold, animal or

marine life;

• marring, scratching or denting (picture a boat moored at dockside, bumping up

against the dock all day long);

• osmosis, blistering or electrolysis (these are chemical and electrical actions that

take place in fresh or salt water, which gradually affect the insured’s boat; only

sudden and accidental damage is intended to be covered by the policy);

• manufacturer’s defects or defects in design (boat policies vary on this point, and

some do provide coverage for defects in hull or machinery—as always, ask

before the insured buys); and

• the cost of repairing or replacing any item having a “latent defect” however, if

such a flaw in material causes other damage—for example, if a defective steering

mechanism malfunctions and causes a collision—the policy will cover the

resulting damage.


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Vital points to address are whether the insured’s boat is covered for actual cash value

(ACV) or replacement value and whether the policy will cover personal possessions on

the boat, from fishing equipment to water skis. If the insured tows the boat to the water,

the insured will also need sufficient trailer coverage.

Some declared value policies will pay the full policy limit in the event of a total loss,

even if the actual value of the craft is less than the declared value. However, most

policies that are designed to cover smaller craft include loss-settlement provisions

limiting the insurer’s obligation to pay. Usually, the amount the insurer will pay for loss

or damage will not exceed the lowest of the following:

• the difference between the pre-loss ACV and the post-loss ACV;

• the actual repair cost;

• the pre-loss ACV;

• the actual replacement cost; or

• the declared value of watercraft.

Large watercraft that are damaged or destroyed often have a salvage value, so a

boatowners policy also will include a provision concerning salvage charges. Because a


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salvage company will charge for its services, the insurer agrees to pay those charges. In

return, if there is any salvage or recovery after the insurer has paid for a loss, the

company has a right to recover what is paid.

Most boatowners policies for small craft do not provide coverage for personal property

while it is on board the vessel or being loaded or unloaded. However, policies for large

craft often do offer coverage for such things as clothing, personal effects, fishing gear

and sports equipment (there is no coverage for money, jewelry, traveler’s checks or

valuable papers and documents). They also may include coverage for insured property

that has been removed from the craft temporarily for storage on shore. If a policy has

this kind of coverage, it won’t require that auxiliary equipment actually be on board at

the time of loss (which means that coverage is provided for equipment on shore).

The insurance company also will pay the full cost for necessary and reasonable repairs

to covered property, without deduction for depreciation—with the exception of

property described in the “replacement” provision.

The insured also may want to buy commercial towing and assistance coverage, which is

the boat version of the towing and labor coverage found in a Personal Auto Policy. In

an emergency, the policy will reimburse the insured up to $300 for the reasonable costs

for towing to the nearest place where repairs can be made; for the delivery of gas, oil or

parts; or for emergency labor, while the insured is away from a safe harbor. No

deductible applies to this coverage. For property covered by the replacement provision,

the policy provides coverage on an actual cash value basis (the actual repair cost or the

replacement cost minus depreciation, whichever is less). This provision only applies to


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plastic and canvas coverings, all-weather bridge and cockpit enclosures, sails, outboard

motors or out-drive units and components of any of these items.

• Defense Costs and Other Liability Components

A boat insurance policy includes coverage if the insured becomes legally liable to pay

because of bodily injury or property damage that arises out of the ownership,

maintenance or use of the boat.

Like an auto policy, a boat policy will have stated limits of liability. The insurance

company will pay up to that amount for all damages or losses arising out of any one

accident or occurrence, or a series of occurrences arising out of the same event. So, the

insured needs to choose limits carefully.

In the event of a liability claim, a boatowners policy also will pay defense costs in

addition to the policy limit.

Policies aimed at large craft also may include coverage for liability arising out of:

• Attempted or actual raising, removal or destruction of the wreck of insured’s

boat;

• Failure to raise, remove or destroy the wreck of insured’s boat; and


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• Insured’s liability to paid crew members under the Jones Act or other Maritime

Law.

Naturally, a policy also will include a list of liability exclusions. These policies typically

do not provide coverage for:

• Liability of other covered persons to the insured, insured’s spouse or other

residents of the insured’s household;

• The insued’s liability to his or her spouse or to any other person residing in the

insured’s household;

• Liability assumed by the insured under contract or agreement;

• Fines or other penalties that any government requires the insured to pay; and

• Punitive damages.

The first two exclusions are designed to preclude the insured and his or her family from

seeking damages from one another under the policy, which is supposed to protect the

insured by covering injuries or damages suffered by other people. So, if another family

member or a friend is operating the insured’s boat with his or her permission and

injures the insured, the insured will not be covered if the insured sues that other person

(who would otherwise be a “covered person” under the policy). If the insured is

operating the boat and injures a family member, that injured family member also will

not be covered.


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Some policies also will include an exclusion for liability that arises while the boat is

being towed, except when the boat is hauled out or being launched—but most do cover

towing as part of the “ownership, maintenance or use” exposure.

Because fines or penalties imposed by governmental agencies—and punitive

damages—are a form of punishment for the insured’s intentional actions, they are not

covered.

Finally, the insured also may want to consider purchasing an umbrella liability policy

(covered later in this book). Unless boats are specifically excluded from the umbrella

policy, it will cover any liability in excess of that provided by the homeowners policy or

boat policy. However, an underlying boat policy still is required in most cases.

• Medical Payments Coverage

A standard boatowners policy will pay necessary medical, ambulance, hospital, nursing

and funeral expenses resulting from accidental bodily injury. This coverage applies only

to persons injured while in, upon, boarding or leaving the insured boat (which is

virtually identical to how the coverage applies under a Personal Auto Policy).

Like an auto policy, there is also a time limit on medical payments coverage. The

insurance company only will pay costs incurred within one year of the accident date.

This coverage also comes with exclusions. Coverage usually is not provided for:


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• injuries to his or her employee(s) while in the course of employment, or while

using, maintaining or repairing the insured’s boat or its equipment, since this

should be covered by workers’ compensation insurance;

• any responsibility for payment assumed under contract or agreement, since this

policy does not cover business use.

The insured can select his or her limit for medical payments coverage. This is the most

the insurance company is obligated to pay per person for each accident or event (which

means that if the limit is $5,000 per person and three people are injured in the same

accident, the policy could pay up to $15,000).

• Uninsured Boaters Coverage

Just as uninsured drivers are a problem for car insurance, uninsured boaters are a

problem for watercraft insurance—and more so, because laws requiring watercraft

insurance are less rigid. So, the responding coverage is commonly found in most

boatowners policies. It is remarkably like the uninsured motorists coverage provided by

personal auto policies.

The insurance company agrees to pay damages that the insured is legally entitled to

recover from the uninsured owner or operator of another boat, because of bodily injury

received aboard the insured’s boat. The term “uninsured owner or operator” includes

someone who cannot be identified, such as a hit-and-run boater.


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Policies also include a number of uninsured boater exclusions, which are similar to the

uninsured motorist exclusions found on a Personal Auto Policy. Uninsured boater

coverage does not apply to:

• claims settled without the company’s written consent;

• any uninsured vessel owned by a governmental body;

• any vessel owned by or furnished for the regular use of any insured or family

member;

• any insured while using a vessel without permission;

• his or her boat while it is being chartered; and

• any loss where no evidence of physical contact exists between the insured’s

watercraft and either an uninsured or a hit-and-run craft.

The insured also can’t get paid twice for the same loss under the uninsured boater

coverage and the liability coverage of the policy.

Again, the insured chooses his or her limits for this coverage, and the insurance

company will not pay more than that amount for all injuries arising out of any one

accident or event, regardless of the number of persons injured, claims made or vessels

involved.


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• Operating a Boat the Insured Does not Own

When the insured has car insurance, the insured is covered while driving other people’s

cars. When the insured has boatowners insurance, that isn’t always the case. If the

insured plans to operate other people’s boats occasionally—such as when they want to

ski on a water-skiing vacation—they will need to be sure the policy offers this coverage.

Policies that do offer the insured coverage while the insured is operating someone else’s

boat—assuming the insured has the owner’s permission—include physical damage

coverage for the boat, but only up to the limit the insured carries on his or her own boat.

In addition, if there is any other insurance applicable—such as that boat’s insurance

policy—his or her coverage only will apply as “excess” over the other insurance. In

other words, the insured’s insurance company will make up the difference if the

damage exceeds the coverage on the other owner’s policy. (This is nearly identical to

the “other insurance” provisions that apply to the use of non-owned autos under a

Personal Auto Policy.)

Even if the insured has coverage while operating other peoples’ boats, there are some

exclusions—primarily designed to keep the insured from weaseling out of paying for

coverage in the first place. An insurance company will not provide coverage under the

insured’s boatowners policy for any other vessel that is wholly or partially owned by

the insured, rented or chartered by the insured, is being used for purposes other than

private pleasure or is furnished for the insured’s regular use.

• Yacht Policies


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The policies typically purchased by yacht owners differ in structure from the boat

policies we’ve discussed so far, but they provide many of the same types of coverage.

True yacht policies are structured more like the traditional ocean marine policies that

are available to cover commercial ships.

Yacht policies also use some different terminology. Here are some of the key coverage

concepts and terminology the insured can expect to find in a yacht policy:

• Hull coverage. This is physical damage coverage for the vessel itself, and the

equipment and machinery necessary to the operation of the vessel. A few unique

coverage clauses (sue and labor, lay-up returns and running down) differentiate

this coverage from that found in other boatowners policies.

• Sue and labor clause. The insured must take all reasonable steps to protect

damaged property from further damage. Payment will be made for expenses

incurred in doing so.

• Lay-up returns. As discussed earlier, watercraft policies provide a premium

credit for a lay-up period during which the craft is not in use (for example,

October 1 to April 30). For very expensive craft, a lay-up of even a few weeks

would make the insured eligible for an appreciable premium credit. This clause

provides that if his or her yacht is laid up and out of commission during an

unscheduled period (perhaps it is out of service because of breakdown and

repairs) for a certain minimum time period (usually a 15-day minimum), the

insured will get a premium credit.


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• Running down clause. This provides property damage liability coverage in the

event his or her vessel strikes another vessel. It covers damage to the other vessel

(both hull and cargo), but not bodily injury liability (which is available under

protection and indemnity coverage). It is attached to and only written with hull

coverage (it is like collision coverage written to protect others).

• Valued policy. Coverage for higher-value craft may be written on a valued-

policy basis. The hull coverage of most yacht policies is written in this manner,

making them more like ocean marine policies than personal watercraft policies,

which cover smaller vessels.

• Protection and indemnity (P&I). This coverage provides the bulk of the liability

coverage for accidents and other events that arise out of the ownership,

maintenance or use of the yacht. It includes coverage for:

• Bodily injury to others (including those on board the insured’s vessel, such as

passengers or crew members and people who are not on board the insured’s

boat);

• Damage to the property of others (this supplements the running down clause

and covers all other types of property damage liability, such as damage to fixed

objects and non-collision damage to other vessels); and

• Property damage liability arising out of raising and/or removing (or failure to do

so) the wreck of the yacht.


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Yacht policies also include coverage for obligations due to the federal Longshoremens

and Harbor Workers Act, which requires compensation benefits for injuries to various

maritime workers other than crew members.

These policies also include medical payments coverage, like that described for smaller

boats.

• Insuring Jet Skis

Until now, we’ve discussed insurance needs for boats. However, Jet Skis and other

similar personal watercraft require essentially the same type of insurance. The insured

still needs liability coverage (in case the insured injures someone or damages someone

else’s property). And, depending on the money the insured has invested in his or her Jet

Ski, the insured may want comprehensive and collision coverage. Plus, the insured may

want to add coverage for a trailer to his or her policy, as well as coverage to pay

medical bills if the insured is in an accident.

Several companies offer insurance policies specifically for Jet Skis and related

watercraft. These companies are often easiest to deal with when it comes time to get

insurance, simply because they are aware of the kinds of coverage the insured will need

and the types of craft on the market.

The cost of coverage will depend on the Jet Ski’s value and engine size. Costs typically

will be higher to insure a personal watercraft with a motor that is larger than 500cc.


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Comprehensive and collision rates also will be higher for newer and more valuable

models.

Since personal watercraft can be insured under a traditional boatowners policy, if the

insured has a boat and several personal watercraft, it probably makes sense to get one

policy to serve all his or her needs—and reduce the cost of coverage. In fact, the

Independent Insurance Agents of America points out that the insured may be able to

get one recreational vehicle policy for all of his or her “toys,” from boats and Jet Skis to

motorhomes and all-terrain vehicles.


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Chapter Four – Personal Umbrella Insurance

Having friends over for a few beers seems harmless enough—unless one of them drives

off and gets into a serious accident. Then the insured may wind up in court. These days,

the insured can be held liable for the damages the insured’s guests cause after the

insured “allow them” to consume alcohol at the insured’s home and then “allow them”

to drive. Some states have laws that mandate a host’s liability, much like a saloon

keeper’s or a bartender’s liability.

The insured could be responsible for the payment of medical bills, vehicle repair costs,

lost time from work—and, in the worst case, claims for wrongful death that may result

in huge monetary settlements.

Does the insured have coverage for such a situation? Certainly not under the insured’s

Personal Auto Policy, even though the claim might be auto-related. The insured may

have coverage under the insured’s homeowners policy. But this coverage will be

limited.

Personal Umbrella Liability

In most cases, the insured would need a personal umbrella liability policy to cover this

sort of problem. (Of course, the insured also shouldn’t let his friends drink and drive,

but that’s another story.)


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When else would the insured need a personal umbrella policy? If the insured is being

sued for libel or slander in a non-business situation, if the insured’s dog bites another

person or animal, or if someone gets injured at the insured’s home and sues the insured

for medical bills and pain and suffering.

While common personal liability policies (such as a homeowners or Personal Auto

Policy) do provide coverage for their respective liability situations, often the limits

aren’t high enough to pay all the damages that could be awarded in even a moderately

severe case. What if the insured has a $250,000 limit for automobile bodily injury and a

court enters a judgment of $500,000 against him?

If a court hands down a liability judgment that exhausts the limits of the insured’s

homeowners or car insurance policy, the insured is responsible for the balance. Perhaps

the insured’s house will have to be sold, the insured’s IRAs will need to be cashed out

or other assets will have to be liquidated in order to make payment on the judgment. If

the insured’s assets are exhausted and a judgment is not fully satisfied, future earnings

may be attached in further settlement of the outstanding judgment. A major liability

loss can wipe out assets that took a lifetime to accumulate.

Is anyone exempt from personal liability exposures? Except for minors, the legally

incompetent and the indigent (who have no assets at risk), most of us have exposures.

How can anyone who drives an automobile be absolutely positive he or she will never

be involved in an at-fault accident? How can any homeowner—or renter—be certain

that no visitor will ever be injured on the premises? How can anyone be sure that a

personal liability claim will never arise out of something they say or something they

do? The simple answer is: you can’t.


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Another reason to consider this coverage: Obtaining an umbrella policy is a good way

to lower the insured’s home or car or boat insurance costs, since getting an umbrella

policy typically is less expensive than getting additional liability coverage on a

homeowners, boatowners or auto policy. And an umbrella policy provides coverage for

all three areas, plus things those underlying policies will not cover.

• Broader Coverage and Higher Limits

Umbrella liability policies, which were first written in this country in the 1940s, serve

two major functions: They provide high limits of coverage to protect against

catastrophic losses and they usually provide broader coverage than underlying policies.

Umbrellas are written to provide insurance on an excess basis, above underlying

insurance or a self-insured retention (the equivalent of a large deductible).

Most of the various personal umbrella policies on the market can be organized into two

categories:

• Following Form Excess Policies. These provide high limits over the exact same

perils, coverages and exclusions found in all of the underlying policies over

which coverage is being provided (e.g., the insured’s homeowners and auto

policies).

• True Umbrella Policies. In addition to high limits of liability coverage, these

provide broader coverage than is provided by the underlying coverages.


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True umbrella coverage will protect the insured’s present and future income streams

most effectively. It provides three essential things:

• excess limits over underlying policies;

• broader coverage than the underlying policies; and

• defense costs in addition to the limit of insurance.

An umbrella policy will usually defend a claim even if it is groundless.

For losses that are covered by the insured’s primary insurance, the umbrella coverage

begins to apply only after the primary coverage has reached its limit. For losses that are

covered by the umbrella and not by the insured’s primary policies, the umbrella

coverage begins to apply after a loss exceeds the deductible.

There are no standard umbrella policies, so it isn’t easy to generalize about them. Early

umbrella policies were extremely broad and contained few exclusions. However,

carriers soon learned that they would need to narrow the coverage by creating more

specific insuring agreements and exclusions.

The intent is to provide affordable and comprehensive coverage for catastrophic losses,

incidental exposures and modest insurance gaps, but not to provide blanket all-risk

coverage in multiple areas where there is no primary insurance. For this reason,

insurance companies usually will require the insured to maintain an adequate range of

underlying coverages before they will sell the insured umbrella liability coverage.


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The exclusions and limitations of an umbrella often are much like those found in the

underlying policies. However, the umbrella usually will have fewer exclusions than

primary coverage and a broader insuring agreement.

• Liability Concepts

When the insured violates society’s law, the insured has committed a crime. When the

insured violates the rights of another person, the insured has committed a tort. The

person committing a tort is known as the tortfeasor.

It is important to note that liability insurance applies only to the financial consequences

of torts. The insured cannot buy liability insurance to protect against the consequences

of crimes.

If the insured is angry at his neighbor and intentionally burns down his house, the

insured has committed the crime of arson—and liability insurance will not cover the

damages. However, if the insured is having a backyard barbecue and accidentally starts

a fire that burns down the insured’s neighbor’s house, liability insurance may cover the

damages.

The majority of personal liability cases involve unintentional torts. The basis for

unintentional torts is usually negligence, so we had better have a working definition of

negligence. In order for negligence to exist, four elements must be present:


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• Duty to act. The duty to act in a reasonably prudent manner toward another

(such as driving the insured’s car safely down the street in a manner that avoids

hitting other cars or pedestrians).

• Breach of the duty to act. The tortfeasor does not act in the prudent manner

described above.

• Occurrence of injury or damage. Another party actually must suffer an injury or

damage.

• Negligence is the proximate cause of the injury or damage. The tortfeasor’s

breach of duty is actually what caused the injury or damage.

If any of these elements is absent from an event, negligence does not exist and the

insured will not be held liable due to negligence. But when the required elements are

present, the injured party usually has a valid claim for damages based on negligence.

Damages is an important term to understand in any discussion of liability. When

someone is held liable for injury or property damage to another, that person can be

required to pay compensation to the injured parties. For these types of claims, we need

to be concerned with two broad types of damages:

• Compensatory damages—which simply means compensation for the loss

incurred. These may include specific damages (the documentable, actual

expenses incurred by the injured party, such as medical bills, wages lost and

property replacement costs) and general damages (monetary awards for more


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subjective, less quantifiable aspects of the loss, such as pain and suffering or loss

of consortium).

• Punitive damages—these are damages that the court can compel the tortfeasor to

pay in addition to the compensatory damages awarded. Punitive damages

represent a fine, or punishment, for outrageous, severe or intentional conduct.

• Types of Liability

Vehicle-related liability is the greatest single source of personal liability. The insured’s

use of a vehicle generally causes the insured to be in the proximity of many other

people and vehicle operators, while operating a several thousand pound machine

moving in and around other such machine operators.

Vehicle liability can arise from property damage to other people’s cars, injury to people

occupying other cars, injury to pedestrians and damage to property other than cars

(such as a neighbor’s brand-new fence).

Injuries and damages related to vehicle use also may be caused or aggravated by many

factors, such as excessive speed, driver inexperience, disobedience of traffic laws (such

as running a stop sign), use of intoxicants (drugs or alcohol) or simple carelessness

brought on by inattention (such as watching the scenery instead of the road).


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Residence-related liability is the next big source of personal liability. Whether the

insured owns or rent the insured’s home, the insured may be personally liable for injury

or damage to others. Such situations could include:

• trip and fall incidents due to ice and snow, debris, etc.;

• accidents related to swimming pools or other attractive nuisances, such as jungle

gyms and trampolines;

• property damage scenarios (for example, a renter causing damage to the

premises by careless smoking);

• injuries sustained by, or injuries to others caused by, domestic workers, such as

maids, gardeners, etc.;

• injury caused by an overly protective dog (if Fido bites the insured’s neighbor’s

little Fifi, the insured could wind up paying the vet’s bills—and a lawyer’s—and

watch out if Fido bites the insured’s neighbor’s child, no matter how much

Junior was teasing).

Generally, a personal umbrella policy will not cover business liability. However, some

business exposures may be covered by personal liability policies. For example, an

umbrella policy may cover certain home office exposures.

So far, we’ve discussed unintentional torts. Intentional torts can involve infringement of

property and privacy rights (for example, trespassing). Property rights also can be


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violated by nuisance-type activities that interrupt a property owner’s ability to use the

property (for example, when the insured tests the volume limit on the his new 2500-

watt CD player while the insured’s neighbor is trying to relax on a Sunday afternoon).

Other intentional torts involve personal injury, which includes bodily injury and

damage to reputation through untrue statements, libel (in print) or slander (spoken).

These are by no means the only examples of personal liability exposures. The insured’s

children, the insured’s pets, the insured’s premises, the insured’s hobbies, the insured’s

car and many of the insured’s daily activities create exposure to personal liability.

• Personal Umbrella Policies

A personal umbrella policy (as opposed to a business umbrella policy) offers coverage

above and beyond the liability coverage the insured has on homeowners or car

insurance policies. And some personal umbrella policies also offer coverage for boats

and Jet Skis—either with or without an underlying boat or specialty vehicle policy.

For many people, a personal umbrella policy is well worth the extra $200 or $300 a

year—especially if the insured can save that much on homeowners and automobile

policies by reducing liability limits.

However, bear in mind that the insured still will have to have at least the minimum

liability limits on the insured’s auto policy that are required by law in the state. And

most personal umbrella policies also require that the insured has a minimum amount of

underlying insurance in place.


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Since the minimum liability coverage available under a personal umbrella typically is

$1 million, this means the insured has $1.3 million worth of auto liability coverage—and

$1.3 million worth of comprehensive personal liability coverage. (In effect, the liability

limits on the insured’s auto and homeowners insurance policies serve as a deductible

on the umbrella policy.)

Many liability coverages are written as a combined single limit, or CSL. This means that

the single dollar limit is made available for both bodily injury and property damage (or

any other type of injury or damage covered by the policy) for which the insured is

found liable as the result of a covered accident, occurrence or event. A good personal

umbrella policy provides coverage in this manner.

Another variation is known as split limits of coverage. Automobile policies commonly

provide split limits, under which separate limits are stated for bodily injury coverage

per person, the maximum amount of bodily injury coverage per accident and property

damage coverage per accident. When an umbrella provides coverage above split limits,

it will begin to provide excess coverage above each of the stated underlying sublimits.

A variation provided by some insurers is an umbrella with what is called a smoothed

limit. Under this approach, the umbrella limit is the total amount of coverage that will

be provided. Instead of providing coverage in addition to that provided by an

underlying policy, the smoothed limit policy only provides total coverage up to its

limit.


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Example: Oliver has a $1 million umbrella policy written with a smoothed limit and

$200,000 of underlying homeowners liability. The umbrella insurance company will

only provide $800,000 of excess coverage for losses covered by these policies.

• Broader Coverage

One of the most important functions of a true umbrella is that it provides broader

coverage than the underlying policies. The term drop-down coverages is often used to

name the coverages provided by the personal umbrella that are not provided by the

underlying liability policies.

Some of these include:

• Personal injury coverage. The typical underlying homeowners policy provides

liability coverage for accidental bodily injury (meaning physical injury or death),

but not for events involving libel, slander, false arrest and the like. The personal

umbrella does cover the insured for liability arising out of these events.

• Regularly furnished autos. The standard Personal Auto Policy contains language

that precludes liability coverage for the use of vehicles that the insured does not

own but that are made available for the insured’s regular use (such as a company

car). The personal umbrella does not exclude such coverage.

• Contractual liability. The standard homeowners policy severely limits coverage

for liability assumed by contract. So, if the insured signs an easement agreement


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to build a shared access road with the insured’s neighbor—and he sues the

insured because the road is never completed—the umbrella will cover the

insured.

• Damage to property of others. The standard homeowners policy excludes

coverage for damage to property of others left in the insured’s care, custody or

control. The personal umbrella does not exclude coverage for damage to such

property.

An important concept that comes into play when a personal umbrella covers a loss that

is not covered by an underlying policy is termed a self-insured retention or SIR. (It’s

called a retained limit in some policies.) When the umbrella alone provides coverage for

a loss, the insured pays what amounts to a deductible by “retaining” the first small

portion of the loss (typically $250).

Loss payment is administered somewhat differently than with traditional deductibles.

In this case, the insured writes a check to the insured’s insurance company for the

amount of the SIR, and it pays the injured party the entire amount for which it is liable.

• Defense Costs

Another major benefit of personal umbrella coverage—which we have discussed before, but not

in detail—is that the policy provides for payment of defense costs. When the insured is accused

of being liable for damages to someone else and are taken to court over it, legal costs will be

incurred, even if the suit is totally groundless and ends in the insured’s favor.


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Fortunately, most underlying liability policies also provide coverage for defense costs,

whether or not the suit is groundless. Also, these costs are paid in addition to the

available limits of liability (in other words, the entire liability policy limits are available

to pay damages). Actually, the insurance company does much more than simply pay

defense costs when a suit is brought against the insured.

In other words, the insurance company steps in and provides the defense and does so at

its own expense. However, the insurance company’s duty to defend ends when it has

paid or offered to pay its maximum limit of liability.

For example, the insured has a homeowners policy providing $100,000 of personal

liability coverage, and the insured also has $1 million of personal umbrella coverage.

One day the insured’s pit bull bites and severely injures a visiting child and the child’s

parents sue for $500,000.

If the underlying insurer believes a defense may be successful, it may defend the claim

to conclusion, regardless of the outcome. (There may be no liability, the liability

awarded may be less than the homeowners policy limit or the award may exceed that

limit.) The umbrella insurer observes but does not participate in the defense. It will,

however, pay its share of any award in excess of the $100,000 homeowners limit.

However, the underlying insurer might not have to provide a defense. If it believes a

successful defense is doubtful and that any settlement is going to exceed its policy limit,

it might immediately offer to pay its $100,000 limit and avoid defense costs (its

obligation ends when it exhausts its limit). In this case, the insured no longer has the

underlying insurer defending its claim.


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The personal umbrella becomes very valuable at this point for two reasons: First, the

umbrella company will step in and defend the remainder of the claim; second, the

umbrella’s liability limit can make up the remaining $400,000 if the child’s parents win

their entire demand.

An umbrella policy’s duty to defend clause is also very important when there is no

underlying coverage for a particular suit. For example: Lily has a homeowners policy,

but she does not have an endorsement to provide personal injury coverage. Lily is sued

by someone for slander. There is no coverage for the claim under Lily’s homeowners

policy—the insurance company is not obligated to provide a defense or pay defense

costs. In this case, the personal umbrella company will step in and provide a defense,

pay the defense costs and provide drop-down personal injury coverage for damages

that may be awarded in addition to the defense costs.

Even if the insured has umbrella coverage, the insured needs to be careful about

defense costs. Many policies do cover defense costs in addition to the limit of liability.

But be aware that under the terms of some personal umbrellas, defense costs are

included in the policy limit and are not additional coverage.


Typically, personal umbrella liability coverage comes in increments of $1 million,

starting at $1 million and going up to $5 million—for a premium of $200 to $600

annually. (It is possible to get even higher limits. There are companies writing $10

million policies.)


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To figure out how much umbrella liability insurance the insured needs, the insured will

need to determine his or her current net worth (assets minus liabilities). Does the

insured expect this amount to increase in the near future? Because of the relatively low

cost of this type of insurance, the insured might consider buying enough coverage to

protect the his or her net worth for several years. The insured’s premium will depend

on the limits the insured selects; the number of cars, homes, boats, etc., that the insured

owns; and the area in which the insured lives.

If the insured is thinking about buying a personal umbrella liability policy, it’s best to

place it with the same insurance company that writes the insured’s homeowners and

auto coverage. Not only is the insured likely to get a discount for having multiple

policies with the same company, but the insured is more likely to avoid gaps in

coverage if one company is handling all the insured’s overlapping insurance needs.

Besides, most companies tailor their excess liability coverage provisions around their

auto and homeowners policies.

Personal umbrella liability policies vary from company to company. To help the insured

compare different policies and to optimize the coverage that the insured receives, we’ve

developed a chart that appears at the end of the chapter.

• Comprehensive Personal Liability Policies

Unlike personal umbrella liability policies—which are secondary, or excess, coverage—a

comprehensive personal liability (CPL) policy is a form of primary coverage.


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It used to be that personal liability exposures arising out of the insured’s home and the

activities of the insured and the insured’s family members were covered exclusively

under a comprehensive personal liability policy. However, as homeowners policies

have evolved into more complete packages of coverage, they have come to include CPL

coverage.

Stand-alone CPL coverage is virtually identical to the liability coverage provided by a

homeowners policy—and to the coverage provided by a liability supplement attached

to a dwelling policy (in fact, that supplement was intended specifically to replace CPL

insurance forms). In short, CPL coverage could be considered homeowners coverage

without the property insurance.

Generally, the difference between the liability insurance provided under a homeowners

policy or a supplement to a dwelling policy and the liability insurance provided under

a CPL policy concerns the minimum limits available. Comprehensive personal liability

policies continue to carry the basic limits homeowners policies used to have. The

minimum limits written are:

• personal liability—$25,000 per occurrence (this has been raised to $100,000 on

homeowners policies and the dwelling liability supplement);

• medical payments—$500 per person (this has been raised to $1,000 on

homeowners policies and the dwelling liability supplement); and

• damage to the property of others—$250 per occurrence (this has been raised to

$500 on homeowners forms and the dwelling liability supplement).


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So, one benefit of a stand-alone policy is the chance to purchase lower limits, if the

insured has very little in the way of assets to protect. On the other hand, a separate CPL

policy also can be written with much higher limits, for those who have significant assets

to protect.

So, if this coverage is redundant to what the insured can get with a homeowners policy

or a dwelling liability endorsement, why are separate CPL policies still available?

The most common use for CPL policies is as a supplement to a FAIR plan homeowners

policy. FAIR plan policies typically are written for substandard risks—homes with a

very low value, homes in neighborhoods that insurance companies tend to shy away

from, etc. These FAIR plan policies typically offer very limited property coverage—and

they do not offer liability coverage.

And that’s where the CPL comes in.

Because CPL policies provide homeowners-style liability coverage, insurance

companies sometimes do set some restrictions in terms of the insured’s residence—

though many offer coverage to almost all conceivable dwellings. Anyone who lives in

an apartment, a dwelling having no more than four family units, a condominium or a

mobile home usually is eligible for a CPL policy.

• Car and Motorcycle Excess Liability Coverage

Another option, if the insured is looking for more liability coverage, is an Automobile

Excess Liability or Motorcycle Excess Liability policy. These work much like a personal


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umbrella liability policy, only they are tailored to take over exclusively where an auto

or motorcycle policy leaves off—and, of course, they only cover liability related to the

insured’s car or bike.

These policies typically are written with a $1 million limit. And some of them also allow

the insured to use his or her car or bike for business—as well as personal—purposes.

Although these policies are usually inexpensive, for the money, it is hard to beat a

personal umbrella liability policy. The breadth of coverage offered is worth what may

be only a $100 a year in additional premiums, compared with one of these narrower

excess liability coverages.


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Part Two – Commercial Lines

Chapter Five – Commercial Package Policy

The commercial package policy, or CPP, is an insurance policy that is commercial lines

in orientation and composed of at least two coverages.4 Contemporary CPPs are an

outgrowth of the simplified commercial property insurance program developed by the

Insurance Services office (ISO).

The CPP replaces the previous special multi-peril policy (SMP) that was used earlier to

cover business exposures. Through the ISO’s program, all commercial property forms

are simplified and written in standard, “user-friendly” language, with standard

declarations and conditions. Today, the CPP is used to insure large manufacturing

firms, office buildings, retail businesses, apartment complexes, hotels, and non-profit

institutions such as churches and schools.

A CPP presents numerous advantages for commercial insurance coverage. First, it is

flexible, and can be designed so that a variety of insurance needs are covered under one

policy. By unifying coverage under one policy, the chance of insurance gaps decreases.

In addition, the premium should be lower than a series of self-standing policies.

4 The CPP is also called a multiple-line policy when both property and liability insurance are present. Policies with only one coverage part (and one line of insurance) are term mono-line.


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The format of the ISO’s CPP is straightforward. Each CPP must possess a common

policy declaration page, a common policy conditions page, and at least two coverage

parts. The CPP can be described visually as follows:5:

5 This visual chart represents general ISO rules; coverages permitted are subject to state regulations.

Common Declarations

Common Conditions

1. Commercial Property 2. Commercial General Liability 3. Products/Completed Operations Liability 4. Commercial Crime 5. Commercial Inland Marine 6. Commercial Auto 7. Boiler and Machine 8. Liquor Liability 9. Pollution Liability 10. Farm


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Commercial Package Policy

Not all insurance coverages can be placed in the CPP. For example, the businessowners

policy (BOP) and professional liability coverage are not eligible for the CPP, nor are

surety bonds. Furthermore, risks eligible for homeowners insurance or workers

compensation cannot be placed in the CPP.

The common policy declarations page states who is insured, when he or she is insured,

and how he or she is insured. The “who” in a commercial insurance policy is often more

than one person. The declarations will present a “first named insured,” whose authority

is recognized for cancellation and modifications through endorsements. The “how”

includes a description of the insured property, the coverage parts that apply, and the

premium.6

The ISO’s commercial property coverage forms contain three different sets of

conditions: the common policy conditions, the commercial policy conditions, and any

conditions specific to the separate coverages.

• Common Policy Conditions

The common policy conditions apply to all elements and coverages contained in the

policy. These are interline conditions, which mean that they apply to more than one line

of insurance. This section of the policy sets the parameters for the following basic

6 It should be noted that each separate coverage in the CPP also possesses its own declarations page in addition to the common declarations page.


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operational elements: cancellation, policy changes, and rights and duties under the

policy.

Part A of the common policy conditions concerns cancellation. First, the company may

cancel the policy for nonpayment of premium, but must provide the first named

insured with ten days’ notification. Should the company cancel the policy for reasons

other than nonpayment of premium, it must provide the first named insured with thirty

days’ notification. The first named insured can also cancel the policy by returning it to

the company or providing written notice.

Part B in the common policy conditions states that the policy is the entire contract

between the company and the insured. It also outlines the parameters under which the

policy can be change. Specifically, all changes must be done through an endorsement

issued by the company. Only the first named insured has the authority to make

changes; naturally, all changes must be approved by the company.

Parts C and D of the common policy conditions set the conditions under which the

insurance company can evaluate what it is insuring. Part C states that the company may

examine the insured’s pertinent financial records during the policy term—and up to three

years afterward. Part D states that the company can inspect the insured premises. The

company can also suggest changes to correct unsafe conditions.

Part E specifies that the first named insured is responsible for premium payment. In

event of cancellation, the first named insured receives all returned premiums.


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Part F excludes any transfer of policy rights or duties without the company’s expressed

written consent in all situations except for the first named insured’s death. In event of

the first named insured’s death, rights and duties under the policy are automatically

transferred to the insured’s legal representative.

• Commercial Property Conditions

There are nine commercial property conditions that are effective over and above the

common conditions. These apply only to the commercial coverage parts.

Part A of the commercial property conditions addresses concealment,

misrepresentation, and fraud. Should any of the insureds commit fraud, the company

can withhold and withdraw any insurance pertinent to the policy’s commercial

property coverage. Fraud can occur through such actions as the withholding or

misrepresenting material facts about the covered property, claims, or the insured’s

interest in the policy.

Part B is titled “Control of Property,” and states that acts of persons over whom the

insured has no control does not affect coverage. In addition, in situations where the

insured possesses multiple locations, a violation of policy condition(s) at one location

does not invalidate coverage at other locations where there have been no violations.

Part C limits claims to coverage under one part of the policy. Therefore, if two or more

of the policy’s coverages apply to one loss, the company will not pay double the actual

amount of the loss.


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Part D prohibits legal action by the insured against the insurance company unless two

conditions have been met. First, full compliance with the terms of the coverage must be

demonstrated. Second, legal action must be taken within two years after the date of the

loss.

The insurance company has the option to revise the policy and broaden (or “liberalize”)

the coverage with no additional premium. Part E in the conditions states that should the

company liberalize the coverage, any policy in force at the time of the revision—or

effective within 45 days of the revision—will operate under the terms of the liberalized

coverage.

Part F is titled “No Benefit to Bailee.” A bailee is a person with temporary rightful

possession of another’s property. The commercial property policy will not benefit

anyone other than the insured. For example, should the insured deliver covered

property to a professional cleaner, and the cleaner destroyed the property, the

insurance company would indemnify the insured and attempt to recover payment from

the negligent bailee. The bailee, who is responsible for the loss, will not be given a “free

ride” by the insurance company.

Part G concerns how a claim is paid when more than one policy covers the same loss.

This part of the conditions creates two categories under which “other insurance”

situations may be handled. The first considers losses in which both policies possess the

same terms, conditions, and provisions. The second situation considers all other

possible policy designs.


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When the policies are the same, the loss is paid out on a pro rata by limits basis. This

means that the total limits available from both companies are totaled and the resulting

number is divided into the limits available from each policy.

Policies with different terms and conditions create a different situation. Losses in this

situation are paid on what is called an excess basis; the company will only pay the

amount in excess of the limits in the other policy.

The final part of the commercial property conditions is Part H, which concerns the

policy period and the coverage territory. This part specifies that the policy will only

indemnify losses that occur during the timeframe shown in the declarations period. In

addition, the policy only provides coverage for losses occurring in the United States,

Puerto Rico, and Canada.

• Building and Personal Property Coverage Form

The building and personal property coverage form is one of several possible forms to be

used under the commercial property coverage part of the ISO program.7 This form

insures buildings, business property, and personal property of others located on the

insured premises against direct physical loss.

In this sense, the building and personal property coverage mirrors the standard fire

policy. To receive coverage, a loss must be caused by an insured peril, and this peril

7 A complete portfolio of commercial property coverage usually consists of common policy conditions, commercial property conditions, a building and personal property coverage form, and one or more causes of loss forms.


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must be the proximate cause of the damage. “Proximate” means that an unbroken chain

of events connects the peril to the loss.

The building and personal property coverage form consists of eight sections: coverage,

exclusions, limits of insurance, deductible, loss conditions, additional conditions,

optional coverages, and definitions. Part A is the heart of the policy, and outlines what

the company will (and will not) cover.

The first section of Part A describes the building coverage. The building coverage

applies to all buildings and structures for which a limit of insurance exists in the

declarations page. This coverage also applies for all additions, alterations and repairs to

the covered property. This coverage also applies to repairs in progress, as well as

necessary supply materials that are within 100 feet of the premises.

This coverage also pertains to permanently installed fixtures (both indoor and outdoor),

machinery, and equipment. In addition, personal property used to maintain or service

the building and/or structure is covered.

Other personal property covered is described in the section “Your Business Personal

Property.” This section outlines the available coverage for furniture and fixtures not

covered in the previous section. It also states that the policy covers “stock,” which is

defined as stored merchandise, partially finished goods, raw materials, and shipping

supplies.

This section also covers the labor, materials, or services furnished or arranged by the

insured on another’s personal property. In addition, it covers fixtures, alterations,


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additions, and installations that the insured makes through his or her own expense to a

building he or she does not own.

If leased property is not insured under the personal property of others section, or a

leased property endorsement, this section of the policy will provide coverage. Insurance

for leased items often requires a specific level of insurance. If this specified level is

above the form’s coverage limit, a separate endorsement must be used to reach the

required level.

The second section outlines the coverage afforded to the personal property of others

that is in the insured’s care, custody, and/or control. To receive coverage, this property

must be located in or on the covered building, or within a 100-foot proximity to the

insured premises. Property receiving coverage in this 100-foot proximity may be in the

open or in a vehicle. The company’s payment for damage to the personal property of

others is only payable to the account of the owner of the property.

Part A of the form also lists the property that is not covered. The items excluded include

the following:

1. Accounts, bills, currency, deeds, food stamps and evidences of debt,

money, notes, or securities;

2. Animals, unless classified as “stock” inside a covered building or owned

by a party other than the insured and boarded by the insured;


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3. Automobiles held for sale;

4. Bridges, roadways, walks, patios, or other paved surfaces;

5. Contraband;

6. The cost of excavations, grading, back-filling, or filling;

7. Foundations of buildings, structures, machinery, or boilers when the

foundation is below the lowest basement floor or, when there is no

basement, below the surface of the ground;

8. Land—including the land that the property is on—water, crops, and

lawns;

9. Personal property while airborne or waterborne;

10. Pilings, piers, wharves, and docks;

11. Retaining walls that are not part of the insured building;

12. Underground pipes, flues, or drains;

13. The cost to research, replace, or restore the information and records,

including that which exists on electronic or magnetic media


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14. Vehicles or self-propelled machines, including aircraft and watercraft, that

are licensed for use on public roads and operated principally away from

the covered premises;

15. Grain, hay, straw, fences, radio or antennas plus their lead-in wiring and

towers/masts, trees, shrubs, and plants (except when classified as

“stock”).

There are some exceptions and/or modifications to these exclusions. Numbers 4, 5, 7,

and 10 from the above list can receive commercial property coverage at the same rate

that applies to the building by using an endorsement for additional covered property.

This endorsement spells out the items and their values for coinsurance purposes.

Section four of Part A covers four additional property coverages available in the form.

The first of these is debris removal. Under this coverage, the company will pay for the

expense of removing debris from the covered property as a result of a covered cause of

loss. Losses must occur during the policy period, and must be reported to the company

in writing within 180 days of the date of the loss. The maximum that the company will

pay under this coverage is 25% of the amount for direct physical damage to the covered

property, plus the applicable deductible. This additional coverage excludes costs due to

the extraction of pollutants from land or water and/or the removal, restoration, or

replacement of polluted land or water.

The second of the additional coverages is listed as preservation of property. If it becomes

necessary for the insured to move covered property from the insured premises to

preserve it from loss or damage, the company will pay for any direct physical damage


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to that property while it is in transit or in temporary storage with the intent of moving

it. This coverage is only payable if the damage occurs within ten days from when the

property was moved. While payment under this coverage will reduce the available

limits of insurance, the coverage significantly broadens the insured’s property

protection. Any direct loss to the property is covered in this situation up to the

applicable limits of liability, even if the policy would otherwise exclude said loss.

The third additional coverage is fire department service charge. Through this coverage, the

company will pay up to $1,000 for the insured’s liability charges. No deductible is

applicable for this coverage.

The final additional coverage is pollutant clean up and removal. This coverage states that

the company will pay the insured’s expenses for extracting materials defined as

pollutants from land or water at the insured premises when the discharge, dispersal,

seepage, migration, release, or escape of the pollutants is caused by a covered cause of

loss during the policy period. To receive coverage, all losses of this nature must be

reported to the company in writing within 180 days of the date on which the loss occurs.

This coverage does not apply to costs for the testing, monitoring, or assessing of the

existence, concentration, or effects of pollutants. However, coverage can be extended for

testing that is performed in the course of extracting pollutants.

Section five of Part A concerns coverage extensions. These extensions provide an

additional amount of insurance. The coverage extension is only available with a

coinsurance percentage of 80% or more. This coinsurance percentage must be present in

the declarations page of the policy.


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The extended coverages pertain to five areas. The first is newly acquired or constructed

property. The insured may extend insurance on a covered building to include new

buildings that are being constructed on the insured premises as well as buildings

acquired at locations other than the insured premises. The newly acquired buildings

must be intended for use that is similar to that described in the declarations or as a

warehouse.

The maximum the company will pay for a physical damage loss under this extension is

25% of the limit of insurance for the building described in the declarations. The amount

also cannot exceed $250,000 for each building.

The insured may also extend the insurance that applies to business personal property to

property newly acquired at any location other than fairs or exhibitions. The maximum

the company will pay for a loss in this instance is 10% of the limit of insurance for

business personal property described in the declarations (but not more than $100,000).

Insurance under this extension for newly acquired or constructed property ends when

any of the following occurs:

1. The policy expires.

2. 30 days expire after the insured acquires, or begins construction of, new

property.

3. The insured reports the values to the company.


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An additional premium is charged for values reported from the date construction

begins or the new property is acquired.

Coverage extensions also exist for the personal effects (i.e. items routinely worn or carried

on one’s person) and property of others. Coverage may be extended to apply to the

insured’s own personal effects as well as their partners or employees. Coverage can also

be extended to the personal property of others in the insured’s care, custody, or control.

This extension does not apply to loss or damage by theft. The most the company will

pay for loss or damage under this extension is $2,500 at each premises.

Insurance may also be extended to apply to valuable papers and records and the cost of

research. The extension applies to the costs the insured would incur to research, replace,

or restore lost or damaged information or records. This coverage also pertains to lost or

damaged records that exist on electronic or magnetic media and do not exist in

duplicate form. The maximum the company will pay for this extension is $1,000 at each

insured location.

The insured may also extend coverage to apply to property off-premises. Property

available for extended coverage in this situation includes any covered property

temporarily at a location not owned, leased, or operated by the insured. Property

classified as “stock” is excluded from this extension. Also excluded is property in or on

a vehicle, property in the care, custody, or control of the insured’s salespersons, and

property at any fair or exhibition. The most the company will pay for loss or damage

under this extension is $5,000.


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The final area of coverage extensions pertains to outdoor property. The insured may

extend coverage to include fences, radio and television antennas, signs (except signs

attached to buildings), and trees, shrubs and plants (except those designated as stock).

In addition, the company will pay for the removal of debris caused by, or resulting

from, fire, lightning, explosion, aircraft, or riot. The most the company will pay for loss

or damage under this extension is $1,000, but never more than $250 per tree, shrub or

plant.

Part B of the building and personal property coverage form refers to exclusions. The

exclusions are detailed in the applicable Causes of Loss form (i.e. Basic, Broad, or

Special).

Part C of the form describes the limits of insurance that the company will pay in event of

loss or damage in any one occurrence. The limits that were previously stated in the

coverage extensions, the fire department service charge, and pollutant clean-up and

removal additional coverages are in addition to the limits of insurance.

The deductible terms for this form are stated in Part D. The standard deductible applying

to all perils (except earthquakes) is $250. Higher deductibles are also possible. The

deductible is only charged once per occurrence.

Part E describes applicable loss conditions. These conditions apply in addition to the

common policy conditions and commercial property conditions listed above. There are

seven loss conditions in Part E.


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The first of the conditions in Part E is abandonment. The insured may not leave any

damaged property with the company.

Second, Part E makes a provision for an appraisal should the insured and the company

disagree on the value of property or amount of a loss. Either party may make a written

demand for an appraisal of the loss, and each party may choose an appraiser. The two

appraisers subsequently select an umpire. In the event that the two appraisers do not

agree on the value of the property and amount of loss, the matter may be turned over to

the umpire. The decision, reached either in accord by the two appraisers or separately

by the umpire, stands as final.

Should the appraisal process be enacted, it is understood that both parties will pay for

their own appraiser, and share the expenses for the umpire. Even though the decision

reached in the appraisal is final, the insurance company still has the right to deny any

claim.

The third part of the loss conditions list the insured’s duties in the event of loss or damage.

There are eight duties that must be met by the insured.

1. Notify the police if any law may have been broken.

2. Give the insured prompt notice of the situation, describing the property

and the sustained loss or damage.

3. Provide the insurance company with a timely description of how, when,

and where the loss or damaged occurred.


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4. The insured must take all reasonable steps to protect the insured property

from additional damage by a covered loss. The insured is also to keep an

expense record for all emergency repairs to be used in consideration

during the settlement of the claim.

5. At the company’s request, the insured is to furnish complete inventories

of all damaged and undamaged (covered) property, including quantities,

costs, values, and the amount claimed.

6. The insured must allow the company reasonable inspections of the

property to prove the loss or damage and examine pertinent records. The

company will be permitted to make necessary copies from the supplied

records. The company will be permitted to take sample data from the

property, as well as conduct reasonable tests and analyses.

7. The insured must deliver to the company a signed, sworn proof of loss

that contains the requested information. This must be done on company-

supplied forms within 60 days after the request.

8. The insured must agree to cooperate with the company during any

investigation or settlement of the claim.

In addition to the above, the company has the right to examine any insured under oath

about any matter that relates to the insurance coverage and/or the claim. Such an

examination may take place at times that are deemed reasonable and necessary. The


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examination will be in a form in which the insured’s responses are recorded and

identified as the insured’s by the presence of the insured’s signature.

The fourth of the loss conditions concerns loss payment. This section explains the four

choices the company has concerning loss. These choices include the following:

1. Pay the value of lost or damaged property;

2. Pay the cost of repairing or replacing the lost or damaged property;

3. Take all or any part of the property with other property at an agreed or

appraised value;

4. Repair, rebuild, or replace the property with other property of like kind

and quality.

The company promises to give notice of its intentions regarding a loss payment within

30 days of receiving proof of a loss. If the insured has complied with all the terms of the

coverage form, and the insured and the company agree on the amount of the loss, the

company will pay for a covered loss within 30 days after receiving notice of the loss.

The company reserves the right to adjust losses with the owner(s) of the lost or

damaged property when the owner(s) are other than the insured. Payment to owners of

property other than the insured is considered satisfaction of the insured’s claims against

the company for the loss.


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Whether paying the insured or property owner(s) other than the insured, the company

will not pay more than the owner (‘s) financial interest in the covered property.

Part five of the loss conditions refers to recovered property. It handles the necessary

readjusting that can occur if stolen property is recovered. If after a loss settlement either

the company or the insured recover any property, they are to give the other party

timely notice. If the company recovers the property and the insured wishes it returned,

the company promises to do so. In return, the insured promises to return the sum that

the company had paid for the lost property. The company will pay all expenses relating

to recovery and repair of property, up to the limits of the policy.

Vacancy situations are discussed in part six of the loss conditions. A building is defined

as vacant when it does not contain enough business personal property to conduct

normal business operations. Buildings under construction are not considered to be

vacant.

If the building where a loss or damage occurs has been vacant for more than 60

consecutive days before the loss or damage event, the company will place exclusions on

the causes of loss it will cover. These exclusions apply even if they pertain to existing

covered causes of loss. The exclusions include the following:

1. Vandalism;

2. Sprinkler leakage, unless the system was protected against freezing;

3. Building glass breakage;


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4. Water damage;

5. Theft;

6. Attempted theft.

The seventh section of the loss conditions concerns valuation. Usually, the policy will

pay the actual cash value for damage or loss. However, exceptions exist to this general

rule. For example, if the limit of insurance satisfies any applicable coinsurance

condition, and the loss is $2,500 or less, the company pays the cost of replacement. This

provision also does not apply to losses for awnings, floor coverings, outdoor equipment

or furniture, and appliances for refrigerating, ventilating, cooking, dishwashing, or

laundering.

Should a loss occur to stock that is already sold but has not yet been shipped, the

company will pay a sum based on the stock’s selling price less any normal and

customary discounts and expenses pertinent to the sales transaction.

A physical damage loss to glass will be replaced by the company with the appropriate

safety glazing material required by law.

Physical damage or losses to tenants improvements and betterments is another situation

found in the valuation section of the form’s loss conditions.8 Two options for settlement

on these losses are possible, both based on the time-frame in which the physical damage

8 No settlement is made, however, is someone other than the tenant repairs the damaged improvements/betterments.


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is repaired. When the damage is promptly repaired, the settlement is made on an actual

cash value basis. When the damaged property is not promptly repaired, the settlement

is done on a proportional basis.

When a proportional settlement is called for, the original cost of the improvement is

multiplied by the number of days from the loss date to the lease’s expiration or the

expiration of the renewal option period. This figure is divided by the number of days

from the implementation of the physical improvement to the expiration of the lease (or

renewal period option).

Valuable papers and records only include the cost of blank materials for copying the

records and the labor costs for copying and/or transcribing. The “blank materials for

reproducing and duplicating records” that the company will replace does include

electronic media such as computer disks, but it does not include pre-packaged software

Part F of the building and personal property coverage form refers to the additional

conditions present in the policy. These conditions exist in addition to those described in

the common policy conditions and the commercial property conditions.

The coinsurance clause is the first of the additional conditions. Coinsurance allows for

the insured to carry insurance at an amount that is at least equal to a percentage of the

actual cash value or replacement cost of the property. The percentage is stated in the

declarations. Percentages can be written at various levels, but 80% is the most common.9

If the insured does not carry the required percentage of coverage, he or she must make

up the difference in event of a loss.

9 Different types of insurance can require different percentage levels.


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The second additional condition concerns mortgage holders. For the purposes of this

section of the policy, the term mortgage holder also includes trustees.

In the event of a covered loss, the company will pay each mortgage holder listed in the

declarations in their order of precedence. Each mortgage holder has a right to receive a

loss payment, even if a foreclosure is in process.

If the insured has had a claim denied because of his or her acts, the mortgage holder

still has the right to receive loss payment if the following occurs:

1. The mortgage holder pays any premium due at the company’s request;

2. He or she submits a signed, sworn statement of loss within 60 days after

receiving notice from the company of failure to do so;

3. He or she notifies the company of any change in ownership, occupancy, or

risk.

If the company pays the mortgage holder for any loss while denying the insured’s

claim, the mortgage holder’s right under the mortgage will be transferred to the

company in proportion to the amount that the company pays.10 In addition, the

mortgage holder will retain subrogation rights and can attempt to recover the full claim

amount.

10 At the insurance company’s option, the mortgage holder may be paid the entire principal and accrued interest on the mortgage. The mortgage and note is subsequently transferred to the company.


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If the insurance company cancels the policy, it agrees to give written notice to the

mortgage holder. The timeframe in which this notification takes place is 10 days before

the effective date of cancellation in event of non-payment of premium and 30 days

before the effective date of cancellation for any other reason. If the company chooses not

to renew the policy, it will give the mortgage holder a written notice at least 10 days

prior to the policy’s expiration.

Three optional coverages—agreed value, inflation guard, and replacement cost—can be

attached to the building and personal property coverage form. If they are added, they

will be shown in the declarations.

Agreed value eliminates coinsurance for any covered property that this optional coverage

applies. Through this coverage, any loss to a covered property will be fully covered,

and the insured will not become a coinsurer, as long as the insured carries an agreed

upon amount of insurance.

An expiration date for the agreed value coverage will be shown in the declarations. If it

is not extended, the coinsurance additional condition will be reinstated.

The inflation guard is an optional coverage that helps limit the effects inflation has on a

policy’s protection level. An inflation guard will automatically increase a policy’s

liability limits by a stated percentage.

Replacement cost is an optional coverage that takes the place of actual cash value

valuation (however, an insured can still request an actual cash value settlement). Under


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this coverage, the company will not pay more for the loss on a replacement cost basis

than the least of the three following options:

1. The limit of insurance applicable to the lost or damaged property;

2. The cost to replace the lost or damaged property with other property of

comparable material and quality;

3. The amount the insured actually spent that is necessary for repairing or replacing

the property.

The replacement cost option does not apply for losses to the following: property of

others; contents of a residence; manuscripts; works of art; and stock (unless the stock

was listed in the declarations).

Cause of Loss Forms

The cause of loss form in the commercial property program describes the perils

resulting in direct physical losses to an insured’s property and their coverage from the

insurance company. There are three causes of loss forms, each representing

progressively higher levels of protection. The basic form, the first form, insures against

eleven perils. The broad form, the second form, insures against fifteen perils. The third and

last, the special form, is an open perils form, and insures against any peril that is not

specifically excluded.


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• The Basic Form

The basic form is divided into three sections. Section A lists the covered causes of loss.

Section B lists the exclusions to the coverage. And Section C states the coverage

limitations.

Section A “Covered Perils for the Basic Form”

1. Fire

Fire is not defined specifically in the policy—however, court precedents have maintained

two themes: a) fire is any combustion that produces flame or glow; and, b) to be

covered, a fire must be hostile.

2. Lightning

Damage caused by lightning directly or indirectly is covered.

3. Explosion

Explosion, like fire, is a peril that the policy does not specifically define. However, the

policy does explicitly state that the explosion of gases or fuel in the furnace of any fired

vessel, or in the flues or passages through which combustible gases pass, is covered.11

11 A “fired vessel” is equipment that uses fire to operate and perform its designed function.


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The policy does not cover damage or loss caused by the rupture, bursting, or operation

of pressure relief devices. In addition, it does not cover damage or loss caused by

rupture or bursting due to expansion or swelling that has resulted from water.

4. Windstorm or Hail

Windstorm and hail are not defined specifically in the policy. Court precedent defines

“windstorm” as a wind strong enough to disturb the usual condition of the

environment, i.e. cause damage. “Hail” is defined as precipitation in the form of ice

stones.

Specified, related weather phenomena are excluded by this coverage. For example, frost,

snow, sleet, and ice that are not in the form of hail are not covered.

5. Smoke

Physical damage or a loss caused by sudden and accidental smoke is covered except for

two cases: agricultural smudging and industrial operation.

6. Aircraft or Vehicles

The policy covers physical damage or loss caused by the direct physical contact of aircraft,

spacecraft, self-propelled missile, vehicle, or an object “thrown up” (i.e. detached) from

a vehicle. Therefore, the policy protects against “direct hits” from the named perils as

well as any physical object originating from the named perils. The company will not,


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however, pay for damages or losses caused by vehicles that the insured owns or are

operated in the course of the insured’s business.

7. Riot or Civil Commotion

This section states that the policy will cover physical damage or loss caused by riot or

civil commotion. The policy does not specifically define these terms, and the lack of

definition can cause confusion, especially because the policy explicitly excludes

coverage for physical damage and losses caused by insurrection, rebellion, or war,

including undeclared or civil war. When does a “civil commotion” become an

“insurrection?”

Generally, a riot or civil commotion is described as a gathering of persons whose

actions are violent and disruptive and cause physical damage or loss to persons or

property. For the purposes of the policy, physical damage or loss is covered under this

section in the following circumstances:

a) acts of striking employees while occupying the insured property;

b) looting that occurs at the time and place of a riot or civil commotion.

8. Vandalism

Vandalism is defined by the policy as willful and malicious damage to, or destruction

of, the property described in the declarations by persons other than the insured. There

are three main limitations to this coverage.


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First, the company will not pay for vandalism-related damage or losses on any property

that has been vacant for more than 60 days. Second, the company will not pay for

physical damage or loss caused by or resulting from theft except for the damage caused

by forced entry and exit of the burglars. Third, with the exception of glass building

blocks, the company will also not pay for loss or damage to glass that is part of the

building structure.

9. Sprinkler Leakage

The policy defines “sprinkler” as any automatic fire protective or extinguishing system.

This also includes any connected sprinklers, discharge nozzles, ducts, pipes, valves,

fittings, pumps, private fire protection mains, and tanks with their components. When

the sprinkler is supplied from an automatic fire protective system, the definition also

extends to non-automatic fire protective systems, hydrants, standpipes, and outlets.

The company will pay for physical damage or loss caused by leakage or discharge of

any substance from the sprinkler system(s) described above. “Leakage or discharge”

also includes the actual collapse of a tank that is a part of the system.

In addition, the company will take steps to prevent sprinkler damage from reoccurring.

To this end, the company will pay the cost to repair or replace damaged parts of the

sprinkler system that resulted in sprinkler leakage, or that were damaged directly by

freezing. The company will also pay the cost to tear out and replace any part of the

insured property to repair the sprinkler system.


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10. Sinkhole Collapse

Sinkhole collapse refers to physical damage or loss caused by the rapid sinking or

immediate collapse of surface land into an underground cavity. The company will pay

for such losses when the cause of the sinkhole is the action of water on limestone or

dolomite. The company will not pay when the sinking or collapse is caused by man-

made activities, such as mining. In addition, the company will not pay for the cost of

filling in the sinkhole, whatever the cause.

11. Volcanic Action

This section of the policy refers to physical damage or loss caused by a wide range of

volcanic activity. These phenomena include: airborne shock waves caused by the

eruption’s blast; lava flow; and ash, dust, or particulate matter. All volcanic activity

occurring within any 168-hour period is considered a single occurrence.

This coverage does not pay for the cost to remove ash, dust, or particulate matter that

does not cause physical damage or loss to the insured property.

Section B “Exclusions and Limitations to the Basic Form”

The causes of loss form lists a series of exclusions in part B. The first seven exclusions

listed in the policy are considered concurrent causation exclusions. The insurance

company will not pay for the loss or physical damage caused directly or indirectly by any

of the following.


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1. Ordinance or law

A loss or physical damage to the insured property that is caused by the enforcement of

an ordinance or law that regulates the construction, use, or repair of property is not

covered. Should an ordinance or law require that a property be torn down, the policy

will not pay for the demolition or the debris removal.

2. Earth Movement

Except for a sinkhole collapse within the parameters defined in Section A, the company

will not pay for physical damage or loss caused by earth movement. The causes of earth

movement can include earthquake, landslide, mine subsidence or earth sinking, rising,

or shifting. However, if the loss or damage is caused by fire or explosion resulting from

the earth movement, the company will pay for the resulting damage.

The company will also not pay for damage cause by earth movement resulting from

volcanic eruption, explosion, or effusion. However, if the loss or damage is caused by

fire or volcanic action (as described above), the company will pay for the resulting loss

or damage.

3. Government Action

When property is seized or destroyed by order of a governmental authority, the

company will not pay for the physical damage or loss. However, the company will pay

for physical damage or loss to covered property when the damage was done to prevent

the spread of fire.


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4. Nuclear Hazard

The company will not pay for loss or physical damage caused by radiation and

radioactive contamination. However, the company will pay for damage by fire caused

by the nuclear reaction or radiation.

5. Off-Premises Services

“Off-premises services” refers to utilities such as power. The company will not pay for

physical damage or loss caused by the failure of a utility if the failure occurs off of the

insured property. On the other hand, the company will pay for physical damage or loss

by a covered cause that results from a power failure.

6. War and Military Action

The company will not pay for physical damage and losses caused by war and military

action. “War and Military Action” includes the following:

a) War, including undeclared war and civil war;

b) Warlike action by a military force, including military preparations;

c) Insurrection, rebellion, revolution, or action taken by a governmental

authority in hindering or defending against these actions.

7. Water


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Damage caused by water is excluded coverage when in the following forms: flood,

surface water, waves, tides, tidal waves, overflow, and spray. The policy will also not

cover water damage in the form of a mudslide or mudflow. Furthermore, water back-

up from a sewer or drain is not covered. Underground water that presses on or seeps

through foundations, walls, floors or paved surfaces, basements, or openings such as

doors or windows, is not covered. Coverage is provided, however, for any resulting

physical damage or loss that is caused by fire, explosion, or sprinkler leakage.

In addition to these seven exclusions, there exists a second group in the policy. These

exclusions are grouped in the following categories:

1. Artificially generated electric current, including electric arcing, that harms or

affects electric devices, appliance, or wires;

2. Rupture or bursting of water pipes (other than sprinkler systems) excepting

when caused by a covered cause of loss;

3. Leakage or discharge of water or steam resulting from the breaking or cracking

of any part of a system or appliance containing water or steam (except a

sprinkler system) excepting when caused by a covered cause of loss;

4. Explosion of steam boilers, steam pipes, steam engines or steam turbines

owned, leased, or operated by the insured;

5. Mechanical breakdown, including rupture or bursting by centrifugal force.


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The causes of loss basic form also includes an additional set of “special exclusions.”

These exclusions pertain to business income, extra expense, leaseholder interest, and

legal liability. These exclusions all apply to their individual coverage forms.

The basic form also provides a section on coverage limitations. Specifically, the form

states that the company will pay for the loss of animals only if they are killed or their

destruction is made necessary.

• Broad Form

This form provides coverage for the same perils found in the basic form plus four

additional perils and one additional coverage. The additional coverage pertains to

collapse. It is not additional insurance, and does not increase the limits of insurance

provided by the policy. The broad form shares the same exclusions and limitations as

the basic form.

Additional Covered Perils for the Broad Form

1. Breakage of Glass

The broad form provides coverage for the breakage of glass that is a part of the insured

building or structure. Neon tubing, however, is excluded from this coverage. In

addition, the company will not pay more that $100 for each plate, pane, multiple plate

insulation unit, solar heating panel, jalousie, louver, or shutter. The company also will

not pay more that $500 total for any one occurrence.


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2. Falling Objects

The broad form will provide coverage for loss or physical damage caused by a falling

object within the following framework. The company will not pay for a loss or physical

damage to property that has been left out in the open. The company also will not pay

for loss or physical damage to the interior of the insured building or structure unless the

building’s roof or outside wall(s) is first damaged by a falling object.

3. Weight of Snow, Ice, or Sleet

The company will pay for loss or physical damage caused by the weight of snow, ice, or

sleet. The company will not, however, pay when the loss or damage occurs to personal

property that has been left outside. The company will also not pay for loss or physical

damage to gutters and downspouts.

4. Water Damage

In this context, water damage refers to the accidental discharge or leakage of water or

steam as the direct result of the breaking or cracking of any part of a system or

appliance containing water. It does not refer to discharge or leakage from a sprinkler

system, as this is already covered in a previous section of the form. This coverage does

not apply if the insured property has been vacant for more than 60 days.

If the building or structure housing the system or appliance is a covered property, the

company will also pay for the cost of removing and replacing any part the building

necessary for repairing the damage.


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The company will not pay for the following:

1. The cost to repair any defect(s) that caused the loss or damage;

2. Loss or damage caused by continuous or repeated seepage or leakage occurring over

a period of 14 days or more;

3. Loss or damage caused by freezing.12

Broad Form Additional Coverage – Collapse

The broad form stipulates that the company will pay for loss of physical damage

involving the collapse of the insured building. “Collapse” does not include settling,

cracking, shrinkage, bulging, or expansion. The cause of collapse can only be one or

more of the following:

1. Fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles,

riot or civil commotion, vandalism, leakage from fire extinguishers,

sinkhole collapse, volcanic action, breakage of building glass, falling

objects, weight of snow, ice, or sleet, water damage;

2. Hidden decay;

3. Hidden insect or vermin damage; 12 The company will pay, however, if the insured did its best to maintain heat in the insured property and/or drained all affected equipment and shut off the water supply when heat could not be maintained.


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4. Weight of people or personal property;

5. Weight of rain collecting on a roof;

6. Use of defective materials or methods in construction, remodeling or

renovation.13

Coverage for outdoor antennas, lead-in wires, masts, towers, awnings, gutters,

downspouts, yard fixtures, swimming pools, fences, docks, retaining walls, walks,

roadways, and paved surfaces will not be extended unless the cause of collapse is

among those listed in part one above.

• Special Form

The causes of loss special form provides open perils coverage. This means that it

provides insurance coverage for all perils not specifically listed as exclusions. The basic

and broad forms, on the other hand, provide named perils coverage, or coverage only

for the causes of loss specifically listed.

Therefore, the causes of loss special form provides insurance coverage for all perils

stated in the basic and broad forms plus any peril not listed in its section on exclusions.

In this sense, the form is analogous to the property protection provided by the H0-03 –

Special Form.

13 In this circumstance, the company will only pay when the collapse occurs during the course of the construction, remodeling or renovation.


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• Property in Transit

The special form possesses two “additional coverage extensions” – property in transit

and water damage. The additional coverage extension for property in transit is additional

insurance; however, additional condition and coinsurance do not apply. This extension

only applies to the insured’s personal property. It does not cover property in the care,

custody or control of the insured’s salespersons.

This coverage extension is in effect when personal property is in transit more than 100

feet from the insured building or structure. To receive coverage, the property must be in

or on a vehicle owned, leased, or operated by the insured. The most the company will

pay for a loss or damage under this extension is $1000.

In addition, the loss or damage must result from one or more of the following perils:

1. Fire, lightning, explosion, windstorm or hail, riot or civil commotion, or

vandalism;

2. Vehicle collision, meaning the accidental collision of the insured’s vehicle

with another vehicle or object;

3. Theft of an entire bale, case or package. The theft must be through forced

entry into a securely locked body or compartment of the vehicle

• Water Damage


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The second extension pertains to damage caused by water, other liquids, powder, or

molten material. Unlike the previous coverage extension, it does not provide an

additional amount of insurance. Under this extension, if a loss or physical damage

occurs through any of the above perils, the insurance company will pay for the costs

necessary for tearing out and replacing any part of the insured building or structure

necessary for repairing the damaged system or appliance from which the water, liquid,

etc. escaped.

• Exclusions Specific to the Special Form

The special form includes all of the exclusions applicable to the basic and broad forms,

plus an additional set. These additional exclusions pertain to a wide variety of perils.

The additional exclusions in the special form include the following perils that tend to

occur gradually over time:

1. Wear and tear;

2. Rust, corrosion, fungus, decay, or deterioration;

3. Settling, cracking, shrinking or expansion;

4. Insects, birds, rodents, or other animals

In regards to personal property, the following “wear and tear” perils are excluded:


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1. Dampness or dryness of atmosphere

2. Changes in or extremes of temperature

3. Marring or scratching.

Additional perils for which the company will not pay for a loss or physical damage

include the following:

1. Dishonest or criminal acts by the insured, any of the insured’s partners,

employees, directors, trustees, authorized representatives, or anyone to

whom the insured has entrusted property;14

2. Voluntary parting with any property

3. Collapse, except as provided for in the additional coverage for collapse;

4. Weather conditions

5. Acts or decisions, including failure to act or decide, by a person, group,

organization, or governmental body;

6. Faulty, inadequate, or defective:

14 This exclusion applies whether the act occurs during working or non-working hours.


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a) Planning, zoning, development, surveying, siting;

b) Design, specifications, workmanship, repair, construction, renovation,

remodeling, grading, compaction;

c) Materials used in repair, construction, renovation, or remodeling;

d) Maintenance

Commercial General Liability

A liability exposure is the possibility of financial loss due to a claim by a third party.

There are three categories of liability exposure: personal, professional, and business.

• Personal Liability

A personal liability refers to the possibility of claims by a third party based on an

individual’s own, private actions. Driving an automobile and owning a home are two

activities that can lead to personal liability situations.

• Professional Liability

Professional liability is the possibility of claims by a third party based on one’s actions

(or failure to act) in a professional capacity. The two primary elements for determining

professional liability are:


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a. Did the action (or failure to act) occur when the individual was acting in his

or her professional capacity?

b. Were the acts those of a professional or private nature

Personal and professional liability are not covered by the commercial general liability

policy (CGL). However, the third category of liability exposure—business liability—is

covered by this specialized form of coverage.

• Business Liability

Business liability can embrace a broad set of actions and circumstances. General liability

is a subcategory of business liability. It refers to the legal liability occurring from

business operations other than liability for automobile accidents, aviation accidents, or

employee injuries.

Major exposures in the general liability category include the following:

1. Premises and Operations

This liability pertains to the ownership and maintenance of the business premises and

the operation of day-to-day business.

2. Products Liability


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This exposure(s) refers to the liability of businesses—manufacturers, wholesalers,

resellers, and retailers—for persons injured or property damaged by defective products.

3. Completed Operations

"Completed operations" pertains to liability that results from faulty work that is

performed outside or away from the business premises after a job has been completed.

4. Contractual Liability

This exposure arises when a business assumes the legal liability of another party by

written or oral contract.

5. Contingent Liability

Contingent liability pertains to liability from the work of independent contractors.15

The CGL can be written as a self-standing policy or attached to a commercial property

package (CPP). The CGL has two coverage forms: the occurrence form and the claims-

made form. Both forms offer essentially the same broad liability coverage, and the two

forms are also nearly identical in format. The structure of the CGL is as follows:

• Common policy declarations

• Common policy conditions

15 Typically, businesses are not liable for the work of independent contractors. However, liability can occur in three situations: when the work performed is inherently dangerous; when the work performed in illegal; when work does not allow for delegation of authority.


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• The CGL coverage form

• Applicable endorsements

The CGL forms consist of five principal sections. The first section pertains to the

applicable coverages and exclusions.

Coverages

• Bodily Injury and Property Damage Liability

This coverage is commonly referred to as BI & PD. This part of the policy states that the

company will pay all sums that the insured is legally obligated to pay because of bodily

injury or property damage resulting from a covered cause of occurrence. Naturally, the

company will only pay up to the limits of the policy.

• BI & PD Exclusions

• Intentional acts

The company will not pay for bodily injury or property damage that is intentionally

caused. However, bodily injury caused by the reasonable use of force for the purpose of

protecting persons or property is covered.


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• Contractual liability

The policy excludes liability created by contract or agreement. This exclusion does not,

however, apply to insured contracts (i.e. lease of premises, easement agreement, elevator

maintenance, or tort liability assumption.)

• Liquor liability

This exclusion is only applicable to companies that are in the business of making,

distributing, and serving alcoholic beverages. To handle the liquor liability exposure,

specific liquor liability coverage must be added to the policy.

• Workers compensation

Any claim to which the insured is obligated to pay for via workers compensation is

excluded.

• Employers liability

Liability for bodily injury to an employee resulting from employment is excluded.

• Pollution and contamination

Liability for bodily injury and physical damage caused by pollution or contamination

are excluded, as are the cleanup costs resulting from a governmental or municipal

order.


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• Aircraft, auto, and watercraft ownership and operation

The CGL excludes liability from the ownership, operation, and maintenance of aircraft,

automobiles, and watercraft except for the following: watercraft while ashore on

premises owned or rented by the insured; nonowned watercraft less than 26 feet in

length; parking automobiles on or next to the insured insured premises.

• War

Bodily injury or property damage due to war, declared or undeclared, insurrection,

rebellion, or rebellion, is excluded.

• Care, custody and control

Physical damage to property in the insured’s care, custody, or control is excluded.

• Property damage to insured’s product

Physical damage to the insured’s product is excluded if the damage is caused by a

defect in the product.

• Property damage to the insured’s work

The insured’s work refers to the work or operations of the insured as well as material

and equipment used for the work. However, this exclusion does not apply when the


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work is performed by a subcontractor.

• Property damage to impaired property

Impaired property refers to property that cannot be used, or is less useful, because it

incorporates the insured’s product or work. If property is impaired because of a defect

in the product or work, the company will not pay for a loss or physical damage.

• Product recall

Losses and physical damage resulting from a product recall are excluded from

coverage.

• Personal and Advertising Injury Liability

The company will pay for the costs resulting from the insured’s legal obligations to pay

because of a personal injury or advertising injury. A personal injury can include the

following:

• False arrest, detention, and imprisonment

• Wrongful entry or eviction

• Libel and slander


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• Violation of privacy rights

An advertising injury includes the following:

• Publication of slanderous or libelous material

• Publication of material that results in a violation of privacy rights

• Copyright infringement

• Medical Payments

This coverage section handles the medical expenses for persons injured in an accident

on the insured premises or as a result of the insured’s operations. To receive coverage,

the medical expenses must be incurred within one year of the accident. This coverage is

paid without regard to liability.

• Supplementary Payments

Both the BI & PD coverage and personal and advertising injury liability coverage

receive supplementary payments. These range from cost of bail bonds resulting from

auto accidents and traffic violations, loss of earnings due to time off from work, pre-

judgment interest, and interest that accrues after entry of the judgment.


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• Who is an Insured?

The insureds include the named insured stated in the declarations. Along with the

named insured, the following are classified as insureds: employees, drivers of mobile

equipment owned by the insured, managers of real estate belonging to the insured, and

organizations newly formed or acquired by the insured.


The limits of insurance sections concern the limits that the company will pay. These

limits are broken into six categories:

• General Aggregate Limit

This is the maximum amount that the company will pay for the total of all damages

under the BI & PD and personal damage & advertising coverages. This is also the

maximum amount that the company will pay for the total of all medical expenses under

the medical payments coverage.16

• Products Completed Operation Aggregate Limit

This is the maximum amount the company will pay under the BI & PD coverage

because of physical injury or property damage in the products-completed operations

hazard.

16This excludes physical injuries and property damages included in the products-completed hazard.


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• Personal & Advertising Injury Limit

This is the maximum amount the company will pay under the personal & advertising

injury limit.

• Each Occurrence

This is the maximum amount the company will pay for the total of all damages under

the BI & PD coverage and for medical expenses under the medical payments coverage

resulting from one occurrence.

• Fire Damage Limit

This is the maximum amount the company will pay under the BI & PD coverage for

property damage to rented premises from a single fire.

• Medical Expense Limit

This is the maximum amount the company will pay under the medical payments

coverage resulting from a bodily injury sustained by any one person.

The final sections of the form include the conditions and definitions pertinent to the

coverage.


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The other CGL form is the claims-made form. The occurrence form covers claims that

resulting from occurrences during the policy period. The claims-made form, on the

other hand, will only provide coverage for claims first reported during the policy

period, provided the occurrence was after the retroactive date stated in the policy. If the

occurrence happens before the retroactive date, the company will not pay.


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Chapter Six – Business Owners Policy

A businessowners policy (BOP) provides a broad package of coverages for small and

medium-sized apartment buildings, offices and retail stores. Each policy includes

mandatory property and liability coverages, and offers optional coverages. Many

standard conditions and exclusions apply. A BOP is a self-contained, complete package

policy.

BOP forms are modeled after the coverage components of the commercial package

policy program. The same wording, organization of coverages and design are followed.

Businessowners coverage parts are attached to the policy declarations and a

businessowners common conditions form. ISO has made recent changes in the BOP

program as of 2002.

• Eligibility

The types of risks that are eligible for a BOP include:

• apartment buildings that do not exceed six stories in height and do not have

more than 60 dwelling units (incidental mercantile, service or processing risks

that do not exceed 15,000 square feet, and incidental offices are permitted);

• office buildings that do not exceed six stories in height and do not exceed 100,000

square feet in total area (incidental mercantile, service or processing risks that do


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not exceed 15,000 square feet, and apartments within the office building are

permitted);

• mercantile risks that do not exceed 25,000 square feet and do not have annual

gross sales in excess of $3 million;

• service or processing risks that do not exceed 25,000 square feet and do not have

annual gross sales in excess of $3 million, provided that no more than 25 percent

of their gross sales is derived from off -premises operations; and

• building owners and business operators who are tenants are eligible. Residential

condominium associations and office condominium associations are eligible.

Service and processing risks are newly eligible for coverage (previously,

mercantile risks involving retail sales of merchandise were eligible, but risks

involving service or processing were not eligible).

• Motels

• Self-storage facilities

• Contractors

• Fast food and limited-cooking restaurants up to 7,500 square feet

• Convenience stores with gasoline sales of up to 75 percent of the total revenue


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• Dry cleaners that clean on premises

The businessowners program is designed to provide coverage for a variety of landlords

and business operators who have moderate insurance exposures. For this reason,

eligibility is defined to exclude certain risks that do not fit the intended exposure

pattern.

The following risks are ineligible for coverage under the program: automobile dealers

and all types of automotive repair and service operations, banks and all types of

financial institutions, places of amusement and wholesalers.

These types of risks all have special insurance exposures, and must be insured outside

of the businessowners program.

• Components of a Businessowners Policy

Each BOP is a complete contract and must include the following parts:

• the Businessowners policy declarations;

• the Businessowners Policy Coverage form (ISO BP 00 03 07 02); and

• endorsements as required.


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• Policy Declarations

The policy declarations will show the policy number, name of the insurance company,

name of producer, name and address of the named insured and the policy period.

Spaces are provided for a description of the business, the form of business, locations of

described premises, and name and address of any mortgage holder.

Limits of insurance will be shown for buildings and for business personal property.

Limits of insurance for optional coverages will be shown, and optional coverages will

apply, only if the appropriate boxes are checked indicating that optional coverages

apply.

• Property Coverage

Property coverage must be written on either the standard or the special property

coverage form. The two forms may not be combined. Most coverages provided by the

two forms are identical. The major differences are in the “covered causes of loss”—

“standard” coverage is similar to “basic” coverage provided by other commercial

forms, while “special” coverage means the same “open perils” type coverage provided

by the special causes of loss form. There are minor differences in the optional coverages

available with each form.

However, the major property coverages are the same and businessowners property

coverage can be discussed as a single topic.


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Both businessowners forms provide the following two major coverages:

• Coverage A—Building(s); and

• Coverage B—Business Personal Property.

A limit of insurance must be shown in the declarations for each type of property

covered. For example, an insured business that is a tenant would not require the

building coverage.

• Coverage A—Buildings

Building coverage means the buildings and structures described in the declarations. The

coverage also applies to completed additions; fixtures, machinery and equipment that

are permanently installed; the insured’s personal property in apartments or rooms

furnished by the insured as landlord; outdoor fixtures; and the insured’s personal

property used for service or maintenance of the building or its premises (such as fire

extinguishers, outdoor furniture, floor coverings and appliances used for refrigerating,

ventilating, cooking, dishwashing or laundering).

If not covered by other insurance, building coverage also includes additions under

construction, building alterations and repairs, and materials, equipment, supplies and

temporary structures on or within 100 feet of the premises used for making additions,

alterations or repairs to the buildings or structures.


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• Coverage B—Business Personal Property

Coverage for business personal property has traditionally been known as “contents”

coverage. But it includes more than building contents because it applies to property of

the named insured located in or on the described building, or within 100 feet of the

described premises while in a vehicle or out in the open.

Personal property includes property owned by the insured and used in the insured’s

business; property of others in the insured’s care, custody or control; and the insured’s

interest as a tenant in “improvements and betterments” made at the insured’s own

expense but which cannot be legally removed. Coverage for the property of others is

limited to the amount for which the insured is legally liable, plus the cost of labor,

materials or services furnished by the insured.


Both businessowners forms list the same items as “property not covered.” Some items

are not insurable (i.e., contraband), while others are more appropriately the subject for

other types of insurance (i.e., automobiles). Covered property does not include:

• aircraft, automobiles, motor trucks and other vehicles subject to motor vehicle

registration;

• money and securities, except as provided in Optional Coverages;


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• contraband, or property in the course of illegal transportation or trade;

• land (including land on which the property is located), water, growing crops or

lawns;

• outdoor fences, radio or television antennas, including lead-in wires, masts or

towers, signs that are not attached to buildings, trees, shrubs or plants, except as

provided in the Outdoor Property Coverage Endorsement or Outdoor Signs

Optional Coverage;

• watercraft (including motors, equipment and accessories) while afloat;

• accounts, bills, other evidences of debt, accounts receivable or valuable papers

and records; and

• computers that are permanently installed (or designed to be permanently

installed) in any aircraft, watercraft, truck or other vehicle subject to motor

vehicle registration.

• Additional Coverages

In addition to the coverage for direct loss to insured property by covered causes of loss,

a BOP provides a number of additional coverages. The standard policy form has six

additional coverages, and the special form adds two more for a total of eight.


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The additional coverages are:

• debris removal expenses;

• loss to property while removed from the premises to preserve it from loss;

• fire department service charges;

• business income;

• extra expense;

• pollutant cleanup and removal;

• collapse (special form only); and

• damage by water or other substances (special form only).

• Debris Removal Expenses

Expenses of removing the debris of covered property will be covered when the debris

results from a covered property loss. These expenses are paid only if reported to the

insurance company in writing within 180 days of the date of loss. The most the

insurance company will pay for debris removal is 25 percent of the amount paid for

direct loss plus the applicable deductible. However, if debris removal expense exceeds


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that 25 percent threshold, or if the combined amount of loss and debris removal

expense exceeds the policy limit, the insurance company will pay up to an additional

$10,000 for debris removal at each location.

• Preservation of Property

The preservation of property coverage, traditionally called removal coverage, applies to

direct loss or damage to covered property while it is being moved or temporarily stored

at another location for the purpose of protecting it from a covered cause of loss. This

coverage applies only for loss or damage occurring within 30 days after the property is

first moved.

• Fire Department Service Charges

If the fire department is called to protect covered property from a covered loss, the

insurance company will pay up to $1,000 of the insured’s liability for fire department

service charges if those charges are required by local ordinance or are assumed by

contract or agreement prior to the loss.

• Collapse

Coverage for loss caused by collapse of a building or part of one is provided only on the

special form. This is standard collapse coverage that is provided by broad forms and

special forms of the commercial property policy. It applies only to loss involving


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collapse caused by a cause of loss which is not excluded, or by the specific perils of

breakage of building glass, hidden decay, hidden insect or vermin damage, weight of

people or personal property, weight of rain that collects on a roof, or defective building

materials or building methods.

• Water Damage

If a covered loss by water or other liquid, powder or molten material occurs, the special

form also covers the cost to tear out and replace any part of the building or structure to

repair damage to the system or appliance from which the water or other substance

escaped. It will not pay the cost of repairing any defect in the system that caused the

damage, except for repair or replacement of damaged parts of fire extinguishing

equipment if the damage resulted in discharge of any substance from such system or is

directly caused by freezing.

• Business Income

If it is necessary to suspend operations because of direct physical loss caused by a

covered cause of loss, the insurance company will pay for loss of business income

during a period of restoration. It will only pay for loss of business income that occurs

within 12 consecutive months after the date of loss. This additional coverage is not

subject to the limits of insurance shown on the policy.

• Extra Expense


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The insurance company will also pay extra expenses incurred during a period of

restoration for the purpose of avoiding or minimizing a suspension of operations. This

coverage also applies only during the 12 consecutive months following a direct loss and

is not subject to the limits of insurance.

• Pollutant Cleanup and Removal

The insurance company will pay the expenses to extract pollutants from land and water

at the described premises if the release or discharge of pollutants is caused by a covered

cause of loss during the policy period. These expenses are paid only if reported to the

insurance company in writing within 180 days of the date of loss. The most the

insurance company will pay for loss at each location is $10,000 for all such expenses

during each 12-month period of the policy.

• Civil Authority

Coverage is provided for business income and extra expense incurred because of the

action of a civil authority that prevents the insured from accessing the business

premises. This coverage applies even if the building is not physically damaged.

• Money Orders and Counterfeit Paper Currency

Coverage is provided for when an insured receives counterfeit currency or money

orders that are not convertible into cash. The receipt must take place during the regular


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course of business and the maximum amount of coverage is $1,000.

• Forgery or Alteration

Coverage is provided up to $2,500 for loss from a forgery of the insured’s check. This

coverage also includes any legal expenses incurred in connection with the forged check.

• Increased Cost of Construction

Coverage is provided to enable the insured to rebuild to the standard required by new

building codes if damaged by a covered loss. Coverage is available up to $10,000 per

described location.

• Business Income from Dependent Properties

Coverage is provided for the insured’s loss due to a loss at another property on which

the insured depends to provide either materials or services to run the insured’s

business. The coverage is for $5,000, but higher limits are available. There is also a 72-

hour waiting period before this coverage begins.

• Glass Expenses

Coverage is provided for boarding up broken glass windows and doors if repairs

cannot be made before damage to the interior of the building would result.


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• Fire Extinguisher Systems Recharge Expense

Coverage is provided for the lesser expense of recharging or replacing fire extinguishers

if they have been used to protect the building or contents, within 100 feet of the

described premises. The maximum coverage is $5,000.

• Coverage Extensions

The businessowners standard and special property forms provide the same four

extensions of coverage, which are in addition to the limits of insurance shown on the

policy. The extensions of coverage available are:

• Personal property at newly acquired premises;

• Personal property off premises;

• Outdoor property;

• Personal effects;

• Valuable papers and records; and

• Accounts receivables.


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• Newly Acquired or Constructed Property

The insured may extend the coverage for buildings and business personal property to

apply at any premises newly acquired. The most the insurance company will pay under

this extension is $250,000 at each building and $100,000 for business personal property

at each premises. Coverage under this extension will end as soon as any of the

following occur: the policy expires, the insured reports actual values to the insurance

company, or 30 days expire after the date the premises is acquired or construction

begins. An additional premium will be charged from the date of acquisition for the new

values reported.

• Personal Property Off Premises

The insured may extend the coverage for personal property to apply to covered

business personal property, other than money or securities, while off premises in the

course of transit or temporarily at a premises the insured does not own, lease or

operate. The most the insurance company will pay for loss or damage under this

extension is $1,000.

• Outdoor Property

The insured may extend the insurance to apply to outdoor property, such as fences,

radio and television antennas, signs that are not attached to buildings, trees, shrubs,

plants, including debris removal expense, for losses resulting from the specific perils of


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(1) fire, (2) lightning, (3) explosion, (4) riot or civil commotion, or (5) aircraft. The most

the insurance company will pay for loss under this extension is $2,500, and not more

than $500 for any one tree, shrub or plant.

• Personal Effects

The insured may extend coverage that applies to business personal property to also

apply to personal effects owned by the insured, officers, partners or employees. But this

extension of coverage does not apply to the peril of theft, or to tools or equipment used

in the business. The maximum amount the insurance company will pay under this

extension is $2,500.

• Valuable Papers and Records

The insured may extend the coverage that applies to business personal property to

apply to the costs of researching, replacing or restoring the lost information on valuable

papers and records that have suffered loss or damage, including those that exist on

electronic or magnetic media for which duplicates do not exist. The most the insurance

company will pay under this extension is $10,000 at each described premises and $5,000

at an off-premises location.

• Accounts Receivable

The insured may extend coverage that applies to business personal property to also


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apply to accounts receivable. The most the insurance company will pay at the described

premises is $10,000 and off premises $5,000. The insurance applies not only to the actual

amounts owed to the insured by customers, but also to interest charges on loans needed

to offset amounts the insured was not able to collect while waiting for the insurance

payment, collection expenses in excess of normal collection expense and other

reasonable expenses to re-establish accounts receivable records.

• Exclusions

Because this coverage form is an open perils policy, coverage is shaped by policy

exclusions and limitations. The businessowners coverage form excludes loss or damage

caused by or resulting from:

• ordinance or law;

• earth movement (other than sinkhole collapse), including earthquake, volcanic

eruption, landslide and mine subsidence;

• governmental action;

• nuclear hazard;

• power failure;

• war and military action;


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• water (flood, waves, mudflow, etc.);

• certain computer-related losses, including hardware, software, operating

systems, microprocessors, and other electronic equipment or components;

• electrical apparatus, including artificially generated current and arcing that

disturbs electrical devices, appliances, or wires;

• consequential losses, including delay, loss of use, or loss of market;

• smoke, vapor or gas from agricultural smudging or industrial operations;

• explosion of steam boilers, steam pipes, steam engines or steam turbines that are

owned, leased, operated or controlled by the named insured;

• frozen plumbing, including damage by leaking water, other liquids, powder or

molten material from plumbing, heating, air conditioning or other equipment

(except fire protective systems), unless the insured attempted to maintain heat in

the building, or shut off the water supply and drained the equipment;

• dishonesty or criminal acts by the named insured, or the insured’s partners,

employees, directors, trustees, authorized representatives, or anyone entrusted

with property;


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• voluntary parting with property if induced to do so by any fraudulent scheme,

trick, device or false pretense;

• rain, snow, ice or sleet to personal property out in the open;

• collapse, except as provided in the additional coverage for collapse;

• the release, discharge, dispersal, seepage, migration or release of pollutants,

unless it is caused by one of the “specified causes of loss” that are defined in the

policy (fire, lightning, extended coverage perils, vandalism, leakage from fire

extinguishing equipment, sinkhole collapse, volcanic action, falling objects,

weight of snow or ice or sleet, or water damage);

• neglect;

• maintenance types of losses, such as wear and tear, rust, corrosion, fungus,

hidden defects, smog, settling or cracking, infestation by insects or birds or small

animals, mechanical breakdown, dampness or dryness, changes in or extremes of

temperature, and marring or scratching;

• errors or omissions of computer programming;

• installation, testing and repair of computer installations;

• electrical disturbance if it causes damage to electronic media and records;


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• weather conditions;

• acts or decisions, or the failure to act or decide, of any person, group,

organization or government body; and

• faulty, inadequate or defective planning, zoning, development, design,

workmanship, construction or repair (or materials used in construction, repair or

remodeling), or maintenance.

• With respect to accounts receivables, there is no coverage for electrical or

magnetic injury or reassure of electronic records caused by programming errors

or improper machine instructions or poor installation

• With respect to business income and extra expense coverages, the insurance

company will not pay for any increase in the business income loss or the amount

of the extra expenses resulting from (1) a delay in repairing, rebuilding or

replacing property or restoring operations due to interference by strikers or other

persons, or (2) suspension, lapse or cancellation of any license, lease or contract,

or (3) any other consequential loss.

• Limitations

In addition to the applicable exclusions, the special form has the following limitations

that either exclude certain types of losses or cap the amount of particular coverages. The

policy will not pay for loss or damage:


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• to steam boilers, steam pipes, steam engines or steam turbines caused by or

resulting from any condition or event inside such equipment (except the

explosion of gases or fuel within a fired vessel, which is covered);

• to hot water boilers or water heating equipment caused by any internal condition

other than an explosion;

• to property that is missing if there is no evidence to show what happened to it,

such as an inventory shortage (this does not apply to optional coverage for

money and securities);

• to property that has been transferred to a person or place outside the described

premises on the basis of unauthorized instructions;

• to glass parts of a building or structure (other than glass building blocks) in

excess of $100 per plate, pane, insulating unit, radiant or solar panel, or in excess

of $500 per occurrence for all such losses (this does not apply to losses by the

“specified causes of loss,” except vandalism);

• to fragile articles, such as glassware, statuary, marbles, chinaware or porcelains,

if broken, unless caused by the “specified causes of loss,” or to building glass

breakage (but this restriction does not apply to glass parts of a building or

structure, containers of property held for sale, or photographic or scientific

instrument lenses); and


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• for loss by theft (1) in excess of $2,500 for furs, fur garments, and garments

trimmed with fur, or (2) in excess of $2,500 for jewelry, watches, watch

movements, jewels, pearls, precious and semi-precious stones, bullion, gold,

silver, platinum, and other precious alloys or metals, or (3) in excess of $2,500 for

patterns, dies, molds, and forms.

• Policy Limits

On both businessowners coverage forms, the most the insurance company will pay for

loss or damage in any one occurrence is the applicable limit of insurance shown in the

declarations. However, there are some exceptions: the limit for loss or damage to

outdoor signs attached to buildings is $1,000 per sign, per occurrence; and the limits

stated in the additional coverages for “fire department service charges” and “pollutant

cleanup and removal,” plus all limits applicable to the “coverage extensions” are in

addition to the limits of insurance.

To allow for inflation, businessowners policies have a built-in automatic increase in the

building limit. On each policy anniversary date, the limit of insurance for buildings will

automatically increase by 8 percent unless a lower or higher percentage is shown in the

declarations.

Permissible percentages range from 2 percent to 16 percent and the percentage shown

must be an even increment of 2 percent. If any building was added or policy limits were

changed during a policy year, the annual increase in limit will be adjusted by dividing

the number of days since the last policy change by 365.


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The limit for business personal property will automatically increase by 25 percent to

provide for seasonal variations, but only if the limit of insurance written is at least equal

to 100 percent of the average monthly values during the 12 months immediately before

the date of loss, or during the period of time the insured has been in business if less

than 12 months.

• Deductibles

The standard deductible for property losses is $500 per occurrence, but no deductible

applies to the additional coverages for fire department service charges, business income

loss and extra expenses. Higher deductibles may be written, and the premium will be

adjusted accordingly. Regardless of the amount of the deductible written, the most the

insurance company will deduct for loss or damage under optional coverages for money

and securities, employee dishonesty, exterior or interior glass, and outdoor signs is $500

for any one occurrence.

• Property Coverage Conditions

Each businessowners property form has two sets of conditions—a set of property loss

conditions and a set of property general conditions.

• Property Loss Conditions

Under loss conditions, the forms contain standard property insurance provisions


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regarding abandonment, appraisal, insured’s duties in the event of loss, legal action

against the insurance company and payment of losses. A special limitation applies to

business income losses resulting from loss or damage to electronic records—such losses

will not be covered beyond the longer of 60 days from the date of loss, or the end of the

period necessary to repair or replace property other than records.

Valuation of buildings will normally be at replacement cost, but if the “actual cash

value” option applies, buildings will be valued at ACV. Some types of property will

always be valued at ACV.

If a valuable papers and records loss occurs, coverage will be limited to the cost of blank

materials and the cost of labor to transcribe or copy the records.

After payment of a loss, if any party recovers property, the other party must be

promptly notified. The insurance company may allow the insured to retain recovered

property, but any amount paid for loss will have to be returned to the insurance

company. A condition on resumption of operations says that the insurance company

will reduce business income losses and extra expense losses to the extent that

operations can be resumed.

A vacancy condition states that if a building where loss occurs has been vacant for more

than 60 days, there will be no coverage for loss by vandalism, sprinkler leakage (unless

precautions were taken against freezing), building glass breakage, water damage, theft

or attempted theft, and the insurance company will reduce by 15 percent the amount of

any other losses covered by the policy. This is because a vacant building represents a

greater exposure than one that is occupied.


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• Property General Conditions

Under the general conditions, the forms include standard provisions concerning control

of property (acts or neglect by a person outside of the insured’s control will not affect

the insurance), mortgage holders, no benefit to bailee, policy period and coverage

territory.

• Optional Coverages

Each form includes a number of optional coverages that may be activated by

declarations entries. Most of these are the same on the standard and special coverage

forms, but there is one exception—coverage for “burglary and robbery” is available

only under the standard form, while broader coverage for “money and securities” is

available only under the special form. The optional coverages are:

• outdoor signs;

• burglary and robbery (standard form only);

• money and securities (special form only);

• employee dishonesty; and

• mechanical breakdown.


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• Outdoor Signs

The coverage forms only provide limited coverage for outdoor signs (coverage for those

attached to buildings is limited to $1,000 per sign, while under the extensions of

coverage signs not attached to buildings are covered for $1,000 subject to limited perils).

The insured may purchase additional coverage for outdoor signs, in which case a limit

of insurance will be shown in the declarations.

• Money and Securities

The special coverage form also has an option for money and securities coverage, which

provides broader protection for this type of property. Coverage applies to money and

securities while at the described premises, while at a bank or savings institution, while

at the quarters of the named insured or a partner or an employee, and while in transit

between any of these locations. Losses resulting from theft, destruction or

disappearance are covered—this includes many more perils than “burglary and

robbery,” and even includes mysterious disappearance. A dollar amount of coverage

must appear in the declarations and an additional premium is charged for this

coverage.

• Employee Dishonesty

Both BOP forms offer the same optional coverage for employee dishonesty. Coverage

applies to loss of business personal property, including money and securities, resulting


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from dishonest acts of employees. Losses that result from any criminal or dishonest acts

of the named insured or any partners are not covered. This coverage carries a

“discovery period” of one year after the policy expiration date, and losses discovered

after that time will not be covered. A dollar amount of coverage must appear in the

declarations and an additional premium is charged for this coverage.

• Mechanical Breakdown

Both BOP forms also offer optional coverage for mechanical breakdown, which is a

boiler and machinery coverage. This coverage applies to direct damage to covered

property caused by the sudden and accidental breakdown of an “object” that results in

actual physical damage to the object and necessitates repair or replacement. “Object”

means boiler and pressure vessels, including expansion tanks, piping and valves, and

air conditioning units having a capacity of 60,000 BTU’s or more. A dollar amount of

coverage must appear in the declarations and an additional premium is charged for this

coverage.

An “accident” does not include deterioration, wear and tear, breakdown of a computer,

the functioning of any safety or protective device, or the explosion of gases or fuel. This

coverage, like other boiler and machinery coverages, gives the insurance company the

right to suspend the insurance when a defect, dangerous condition or special risk of loss

is known to exist. Whenever an object is known to be exposed to such a condition or

risk, the insurance company or any of its representatives may immediately suspend the

coverage.


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• Definitions

As stated in previous chapters, definitions in an insurance policy are very important—

especially when disputes over coverage arise.

“Computer” means programmable electronic equipment used to store, retrieve and

process data, including peripheral equipment.

“Counterfeit” means an imitation of an original intended to be assumed to be the

original.

“Electronic media or records” means media, data, computer programs and software.

“Manager” means a person who is a director for a limited liability company (LLC).

“Member” means one of the owners of an LLC.

“Money” means currency, coins, bank notes in current use and having a face value,

travelers checks, register checks and money orders held for sale to the public.

“Operations” means the insured’s business activities occurring at the described

premises.

“Period of restoration” means the period of time that:


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• begins with the date of physical loss or damage caused by or resulting from any

covered cause of loss at the described premises; and

• ends on the date when the property at the described premises should be

repaired, rebuilt or replaced with reasonable speed and similar quality.

“Period of restoration” does not include any increased period required due to the

enforcement of any law that regulates the construction, use or repair of property, or

requires the tearing down of any property, or that requires the insured or others to test

for, monitor, clean up, remove, contain, detoxify or assess the effects of pollutants.

Business income and extra expense coverage is not affected by policy expiration, and

the expiration date of the policy will not cut short any “period of restoration.”

Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant,

including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. “Waste”

includes materials to be recycled, reconditioned or reclaimed.

Securities means negotiable and non-negotiable instruments or contracts representing

money or other property. This term includes tokens, tickets, revenue stamps and other

stamps in current use, and evidences of credit card debt, but does not include “money.”

Specified causes of loss means only the following—fire, lightning, explosion, windstorm

or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, leakage from fire

extinguishing equipment, sinkhole collapse, volcanic action, falling objects, weight of

snow, ice or sleet, and water damage.


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Sinkhole collapse means the sudden sinking or collapse of land into underground

empty spaces created by the action of water on limestone or dolomite. Coverage does

not include the cost of filling sinkholes, or losses resulting from the sinking or collapse

of land into man-made underground cavities.

Coverage for falling objects does not include loss of or damage to personal property out

in the open, or to the interior of a building or structure and contents within a building

or structure unless the roof or an outside wall is first damaged by a falling object.

Water damage means accidental discharge or leakage of water or steam as the direct

result of the breaking or cracking of any part of a system or appliance containing water

or steam.

• Endorsements

Some optional coverages are not activated by declarations entries, and endorsements

must be attached to make the coverage effective.

An endorsement may be used to attach accounts receivable coverage to a BOP. The

coverage is very similar to what is provided by the monoline accounts receivable

coverage form. When applicable, it will pay amounts due from the insured’s customers

that cannot be collected because of loss or damage to records by a covered cause of loss,

plus interest charges on loans required to offset uncollectible accounts due, and

collection expenses in excess of normal amounts.


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Another endorsement provides valuable papers and records coverage, which is also

similar to its monoline counterpart. Valuable papers and records coverage has

traditionally been used to insure against loss or damage to inscribed, printed or written

documents, manuscripts and records, such as books, deeds, drawings, films and

mortgages. Coverage does not apply to money or securities.

With the latest revision of the policy forms, optional coverage is now also available for

electronic media and records, such as data processing storage media, stored data and

programming records.

An earthquake form may be attached to a BOP to add coverage for earthquake and

volcanic eruption losses. Coverage will continue for up to 168 hours after policy

expiration if an earthquake or volcanic eruption “event” begins before the policy

expires.

Among the other available endorsements are a number of forms for condominium risks.

One provides condominium association coverage, while another provides coverage for

condominium commercial unit-owners coverage. These forms follow their commercial

property counterparts and alter certain policy provisions to address the unique

ownership situation when condominiums are insured. Commercial condominium unit

owners may also purchase a unit-owners optional coverages endorsement.

• Liability Coverages

The businessowners liability coverage form provides the following two major

coverages:


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• business liability; and

• medical payments.

The business liability insurance covers the insured’s legal liability for damages because

of bodily injury or property damage, and it also covers personal injury and advertising

injury. This broad definition of “business liability” is very similar to the combination of

Coverages A and B in a commercial general liability form. Businessowners coverage for

bodily injury and property damage is always written on an “occurrence” basis.

Coverage includes fire legal liability coverage, for which a separate limit of insurance

for any one fire or explosion will be shown in the declarations.

The insurance company provides defense costs and the standard set of supplementary

payments found on liability policies (i.e., cost of bail bonds, settlement expenses, loss of

earnings, prejudgment and postjudgment interest on amounts awarded).

The medical expense insurance covers medical expenses for bodily injury caused by an

accident on premises the insured owns or rents, including the ways next to such

premises, or an accident because of the insured’s operations. Medical expenses incurred

within one year of the accident date are covered, and payments are made without

regard to fault or negligence.

• Exclusions

The businessowners liability form includes a long list of exclusions. In total these are


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similar to the combined exclusions applicable to bodily injury and property damage

liability, personal injury, advertising injury and medical payment coverages found on

commercial general liability forms. You should be aware of the types of exclusions

applicable to these coverages. Some of the exclusions are complex and very detailed.

Rather than repeat the entire exclusions, the following list is presented in summary

fashion.

The businessowners liability coverage form does not cover:

• bodily injury or property damage expected or intended by the insured;

• bodily injury or property damage assumed under contract or agreement other

than an “insured contract”;

• liquor liability (this only applies to an insured business that manufactures,

distributes, sells, serves or furnishes alcoholic beverages);

• obligations under any workers’ compensation, disability benefits, unemployment

compensation law or similar law;

• bodily injury to any employee arising out of and in the course of employment by

the insured;

• bodily injury or property damage arising out of actual, alleged or threatened

discharge, release or escape of pollutants;


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• bodily injury or property damage arising out of the ownership, maintenance, use

or entrustment to others of any aircraft, auto or watercraft owned or operated by,

or rented or loaned to, an insured businessowner;

• bodily injury or property damage arising out of the transportation of mobile

equipment by an auto owned or operated by, or rented or loaned to, an insured

businessowner;

• bodily injury or property damage arising out of the use of mobile equipment in,

or while in practice or preparation for, any prearranged race, speed or

demolition contest, or any stunting activity;

• bodily injury or property damage due to war;

• bodily injury or property damage due to rendering or failing to render

professional services;

• property damage to property the insured owns, rents or occupies, or property in

the insured’s care, custody or control;

• property damage to the insured’s product;

• property damage to the insured’s work arising out of any part of it and included

in the “products-completed operations hazard”;


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• property damage to “impaired property” or to property that has not been

physically injured arising out of a defect or deficiency in your product or work,

or a delay or failure to perform a contract or agreement; and

• damages claimed for any loss, cost or expense because of loss of use, withdrawal,

recall, repair, removal or disposal of your product, work or impaired property.

• Personal and Advertising Injury Exclusions

• personal or advertising injury arising out of publication of material by or at the

insured’s direction with the knowledge that it is false, or arising out of any

willful violation of a penal statute or ordinance by or with the insured’s consent;

• personal or advertising injury arising out of any material first published before

the beginning of the policy period, or for which the insured has assumed liability

under a contract or agreement;

• advertising injury arising out of breach of contract, or failure of goods, products

or services to conform with advertised performance, or the wrong description of

the price of goods, products or services; and

• advertising injury arising out of an offense committed by an insured

businessowner who is in the business of advertising, broadcasting, publishing or

telecasting.


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• Medical Expense Exclusions

• medical expenses for bodily injury to the insured, or a person hired to work for

the insured, or a tenant of any insured businessowner;

• medical expenses for bodily injury to any person if the bodily injury is covered

by a workers compensation or disability benefits law, or similar law

• medical expenses for bodily injury to a person injured on that part of the

insured’s premises that the person normally occupies;

• medical expenses for bodily injury to any person injured while taking part in

athletics; and

• medical expenses for bodily injury to any person if the injury is excluded under

the “business liability” coverage, or is included within the “products-completed

operations hazard,” or is caused by war.

• Business Liability and Medical Expense Exclusion

• business liability or medical expenses resulting from the hazardous properties of

nuclear materials (this exclusion is not found on a CGL form, but the broad form

nuclear energy liability exclusion endorsement is always attached to CGL

coverage).


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• Who Is An Insured

If the insured buys this insurance as an individual—rather than as a corporate entity—

the insured’s spouse is also an insured with respect to conduct involved with the

insured’s business. If the named insured is a partnership or joint venture, all members

and partners and their spouses are insured with respect to their business activities. If

the named insured is a corporation or organization other than a partnership or joint

venture, all officers and directors are insured with respect to their duties as officers and

directors, and stockholders are insured with respect to their liability as stockholders.

Employees are insured with respect to their activities as employees, and any person or

organization acting as the insured’s real estate manager, or having custody of the

insured’s property, or operating mobile equipment with permission is insured, but only

with respect to their exposure in that capacity. Volunteer workers are considered

employees in this definition.

• Policy Limits

The declarations will show three separate limits of insurance.

The first limit is for liability and medical expenses. It is a combined single limit and is

the most the insurance company will pay for all bodily injury, property damage and

medical expenses arising out of one occurrence, and all personal injury and advertising

injury sustained by any one person or organization. Note that the BI and PD coverage is


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on an “occurrence” basis, while the personal and advertising injury coverage is on a

“per person or entity” basis.

The second limit is a per person limit for medical expenses. The per person medical

expense limit is a sublimit that applies within the overall liability per occurrence limit.

The third limit is for fire legal liability and it applies on a per fire or explosion basis.

This is a separate limit of insurance that applies only to liability for damages to a

premises rented by the insured and arising out of a fire or explosion.

While not shown on the declarations, the coverage form defines two aggregate limits

that apply:

• The policy period aggregate for all injury and damage under the

products/completed operations hazard is the liability and medical expense limit

shown.

• The aggregate for all other injury or damage (except fire legal liability) and all

medical expenses is twice the limit shown in the policy for liability and medical

expenses.

If the policy is written for more than a one-year period, the aggregates will apply

separately to each annual period.

• Conditions Businessowners liability coverage is subject to a number of standard policy conditions.


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Bankruptcy of the named insured will not relieve the insurance company of any

obligations. In the event of an occurrence, claim or suit, the insured must notify the

insurance company, provide information and submit copies of any demands or legal

papers. With respect to any vehicles or mobile equipment subject to a financial

responsibility law, the policy will provide the minimum coverage required by law.

Legal action against the insurance company may not be taken unless all terms of the

policy have been fully complied with.

There will be a so-called “separation of insureds,” with respect to rights, duties, claims

and suits under the policy. This means that everyone covered by the policy will be

treated separately except with respect to the limits of insurance.

• Definitions

The policy also includes a number of standard commercial liability definitions.

“Advertising injury,” “auto,” “coverage territory,” “impaired property,” “insured

contract,” “mobile equipment,” “personal injury,” “products-completed operations,”

“your product” and “your work” mean the same things they do on a CGL form.


There are 12 common policy conditions that are part of the BOP.

• Cancellation


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The first condition addresses cancellation. The “first named insured” shown in the

declarations may cancel at any time by giving advance written notice to the insurance

company. If the insurance company cancels, it must give written notice to the first

named insured at least five days in advance if special circumstances apply, or 10 days in

advance if the reason is nonpayment of premium, and at least 30 days in advance if

cancelling for any other reason.

The provisions allowing for only five days notice in special circumstances are built in to

the businessowners form (these are attached to other commercial property coverages by

endorsement). The shorter notice time is permitted if the building has been vacant or

unoccupied for 60 or more consecutive days, or if repairs for insured damages have not

been started or contracted for within 30 days after payment for a loss, or if the building

has been declared unsafe or has an outstanding order to be vacated or demolished.

Reduced notice is also allowed when property taxes are more than one year overdue

(unless the taxes are in dispute), or if certain items are being removed, or if heat, water,

sewer service or electricity have not been furnished for 30 days. These cancellation

provisions may be amended by endorsement in certain states to satisfy state

regulations.

• Changes

The second condition concerns policy changes. All agreements between the parties to

the contract are contained in the policy. The first named insured shown in the

declarations is authorized to make changes in the policy terms only with the insurance


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company’s consent. Terms can be changed or waived only by endorsement issued by

the insurance company and attached to the policy.

• Fraud

Concealment, misrepresentation and fraud are addressed by the next condition. The

policy will be void in the case of fraud by the named insured. It will also be void if any

insured intentionally conceals or misrepresents a material fact concerning the policy,

the covered property, insurable interest in the covered property or a claim under the

policy.

• Examination of Books and Records

A brief condition mentions that the insurance company may, to the extent that it relates

to the insurance, examine the books and records of the named insured, and may make

an audit, during the policy period and up to three years afterward.

• Inspections

The next condition establishes the right of the insurance company and rating

organizations to make inspections and surveys, to report on findings, and make

recommendations for the purpose of establishing insurability and determining

premium charges. An inspection will not constitute a warranty that the property or

operations are safe, healthful or in compliance with any law.


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• Actual Damages

If two or more coverages of the policy apply to the same loss or damage, the insurance

company will not pay more than the actual loss or damage.

• Liberalization

A liberalization condition states that the insurance company will automatically and

immediately apply to the policy any revisions made during the policy period or within

45 days prior to the effective date if those revisions broaden the coverage without

additional premium.

• Other Insurance

In the event of other insurance covering the same loss or damage as this policy, the

insurance company will only pay the amount of covered loss or damage in excess of the

amount due from the other insurance company, whether collectible or not. Liability

coverage will always be excess over any coverage that insures for direct loss or damage.

When the insurance is excess, the insurance company has no duty to defend any claim

or suit that any other insurance company has a duty to defend, but will undertake to do

so if no other insurance company defends.

• Premiums A condition on premiums specifies that the first named insured shown in the


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declarations is responsible for all premium payments, and will be paid any return

premiums. The premium shown in the declarations is based on rates in effect and

exposures known at the time the policy was issued. At each renewal or anniversary

date, the insurance company will compute the premium due based on rates and rules

then in effect. Any undeclared exposures or change in business operations may require

an additional premium, which will also be determined in accordance with rules and

rates then in effect.

• Premium Audit

The insurer in some cases estimates the premium for the policy based on the insured’s

sales and payroll. This condition allows the insurance company, after the policy period

ends, to do an audit of the insured’s records to see if it must bill for additional premium

or return premium to the insured.

• Subrogation

The next condition involves transfer of rights of recovery, which is the standard

subrogation clause. If any person or organization to or for whom payment is made

under the policy has rights of recovery against another, those rights must be transferred

to the insurance company to the extent of the payment made. That person must do

everything necessary to secure those rights and do nothing after a loss to impair them.

However, the insured may waive rights against another party in writing prior to a loss,

or after a loss—if that other party is insured under the policy or a business owned or

controlled by the insured or his or her tenant.


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• Transfer of Policy Rights

The final condition prohibits a transfer of rights under the policy without the insurance

company’s consent, except in the case of death of a named insured. In earlier policies

this provision was known as an “assignment clause.” If a named insured dies, his or her

rights and duties under the policy are automatically transferred to his or her legal

representative, or to anyone having temporary custody of the property until a legal

representative is appointed.

• Endorsements

Endorsements may be used to alter the coverage or to provide additional coverages.

A hired auto and non-owned auto liability endorsement may be used to add coverage

for either or both of these automobile exposures if the insured does not have a

commercial auto policy. If the insured has a commercial auto policy, the endorsement is

not available for attachment to a BOP.

A comprehensive business liability exclusion endorsement may be used to exclude

specific operations or locations from coverage. A limitation of coverage to designated

premises or project endorsement may be used to exclude coverage except for the

premises or projects specifically designated in the declarations.

A variety of different endorsements may be used to add additional insured parties to

the policy. Special endorsements exist for managers or lessors, state or political


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subdivisions, townhouse associations, co-owners of premises, engineers, architects and

surveyors, and others.


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Part Three – Social Insurance and PC Insurance Coverages

While private industry provides the majority of insurance services in the United States,

there is a parallel set of insurance programs provided exclusively by state or federal

government or in conjunction with state or federal government. These insurance

programs are referred to collectively as social insurance.

The purpose of social insurance is to handle those needs that are not readily met within

a competitive free market system. Social insurance develops in modern free market

economies for three primary reasons:

1. A free market economy naturally creates certain undesirable instabilities and

variable economic insecurities;

2. A competitive free market economy will naturally possess certain situations that

are difficult to privately insure;

3. Society possesses certain needs that affect all, or the vast majority, of its

members; the federal government is usually the only organization with resources

to meet these needs.

Just as private insurance possesses basic characteristics, social insurance has elements

specific to its nature. First, social insurance provides benefits that are mandated by law;

in effect, these are entitlements. Second, social insurance is generally compulsory.


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Third, social insurance provides benefits that are supplementary, providing only a

safety net of income that meets specific basic needs.

• Social Security

The best known—and most debated—social insurance program is Social Security, or

Old Age, Survivors, Disability, and Health Insurance Program (OASDHI). Social

Security is operated by the federal government and managed by the Social Security

Administration. Participation in Social Security is mandatory for all persons eligible for

coverage. Social Security can provide the following benefits: retirement benefits for the

elderly; survivorship benefits for dependents of a deceased worker; disability payments

for totally disabled workers; and medical benefits to the elderly.

• Unemployment Insurance

Unemployment insurance developed from the Social Security Act of 1935.

Unemployment insurance programs are operated by state governments, and the

specifics of each plan vary from state to state. All unemployment insurance programs,

however, must meet minimum federal standards. In Michigan, unemployment

insurance operations are supervised by the Michigan Employment Security

Commission (MESC).

The purpose of unemployment insurance is to provide income to workers who are

temporarily and involuntarily unemployed. By providing an income safety net,

unemployment insurance helps workers maintain their economic viability and


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subsequently provide stability to the workforce and economy. Unemployment

insurance offices also help place workers in employment positions.

Eligibility for unemployment insurance in Michigan is based on a series of factors, all of

which must be met unless specifically waived. First, one must be unemployed. This

means the candidate did not work at all during the week or weeks for which benefits

are claimed. If the candidate did work, the earnings must be less than one and one-half

times the candidate’s weekly unemployment benefit rate.

Second, the candidate must be physically and mentally capable of working and actively

seeking employment. The candidate is expected to maintain a log of their job search,

detailing when and with whom they spoke.

Finally, the candidate must register for work and file an application with Job Service.

The candidate must be ready and willing to take full-time employment for any shift

during which his or her work is ordinarily performed.

Determining whether the eligibility requirements have been met is accomplished by the

Eligibility Review Program. The Eligibility Review is conducted by an MESC employee,

and may be scheduled once every eight weeks while one is receiving unemployment

benefits.

Determining the level of benefits one may receive from unemployment insurance

requires demonstrating past employment and specific earning minimums over a set

period of time. This information provides the “base period” and “credit weeks” that are


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used for benefit calculation.17

To receive benefits, a candidate must have at least 20 credit weeks within his or her base

period or at least 14 credit weeks and gross base period wages greater than a specified

multiple of the State Average Weekly Wage.18

In addition to state sponsored unemployment benefits, an unemployed worker may be

eligible for benefits through federally sponsored programs. In Michigan, the MESC acts

as the agent of the federal government for the following federal unemployment

programs:

• Unemployment Compensation for Ex-Service Personnel (UCX)

• Unemployment Compensation for Federal Employees (UCFE)

• Adjustment Assistance for Workers Under the Trade Act of 1974

Major Federal Property Insurance Programs

The federal government makes insurance protection available for a series of loss

exposures that private insurance providers largely avoid.

17 A “base period” is the 52 weeks prior to the week that an unemployment claim was filed; a “credit week” is a base period calendar week during which the candidate earned a specific amount, typically a multiple of the state’s minimum wage. 18 Only 10 credit weeks can be used from employment in a business that is more than 50% owned by the candidate, the candidate’s son, daughter, or spouse, or any combination of the above.


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• National Flood Insurance Program (NFIP)

Floods are the most common natural disaster—more than 80% of all federally declared

disasters include flooding. In addition, the growth of the United States’ population has

resulted in even more physical development in areas prone to floods.

Prior to 1968, flood insurance was virtually impossible to find from a private insurer. In

order to help reduce the costs of costly disaster relief payments, Congress authorized

the National Flood Insurance Program (NFIP) through the National Flood Insurance

Act of 1968.

The 1968 Act created the availability of federally subsidized flood insurance for owners

of improved real estate or mobile homes located in a floodplain.19 To be eligible for this

insurance, the property owner must be a member of a community that participates in

the NFIP.

In order to participate in the NFIP, a community must adopt and enforce floodplain

management measures for regulating all new construction. In addition, the community

must ensure that substantial improvements to existing structures within Special Flood

Hazard Areas (SFHAs) are designed to eliminate or minimize future flood damage.20

From 1968 until 1973, the purchase of flood insurance was voluntary. However, the

Flood Disaster Protection Act of 1973 made the purchase of flood insurance for many

19 The Act defines improved real estate as real estate on which a walled and roofed building, either completed or in the course of construction, is located. 20 An SFHA is defined as an area within a floodplain that has a 1% or greater chance of flood occurrence in any given year.


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properties compulsory. Through this Act, regulated lending institutions could no longer

make, increase, extend, or renew any loan secured by improved real estate located in an

SFHA in an NFIP participating community unless the secured property was covered by

flood insurance for the life of the loan.

The National Flood Insurance Reform Act of 1994 further strengthened the 1973 Act by

imposing new obligations on both mortgage originators and services, including

mandatory escrow requirements for flood insurance mandatory provisions for forced

placement.

For the purposes of coverage under the NFIP, a flood is defined as the following: a

general and temporary condition of partial or complete inundation of areas that are

normally dry. The inundation can result from: overflow of inland or tidal waters; the

unusual and rapid accumulation of runoff or surface waters; mudslides that are

proximately caused by flooding.

Federal flood insurance was initially available only through agents operating with the

Federal Insurance Administration (FIA). Since 1983, a write-your-own (WYO) program

has been in effect as a supplement to the FIA’s direct policy program. Through the

WYO program, a private insurer sells flood insurance under its own name and collects

the premiums. The private insurer completely services the policy, adjusts losses, and

pays claims. If the insurer has losses not covered by premiums and investment income,

it is reimbursed for the difference. Profits from the arrangement are returned to the

United States Treasury.


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• Federal Crime Insurance

Federal crime insurance has been available in select states since 1971 through the

Federal Crime Insurance Program. This program provides crime insurance in states

where businesses and individuals find coverage difficult to obtain from private

insurers. Federal crime insurance is sold by private sector insurance agents in eligible

states and by a servicing carrier.

There are two federal crime policies: a residential policy and a commercial policy. The

residential policy covers the loss of personal property from a burglary or robbery while

the property is on the insured premises or in the presence of the insured.21 In order to

qualify, the individual seeking coverage must maintain protective devices that must

meet a defined set of specifications. Under this program, all covered losses must be

reported to the police—even a claim is not filed with the insurance company.

The commercial crime policy covers industrial, commercial, nonprofit, and public

property against a variety of crime perils. Coverage applies to robbery inside or outside

of the insured premises, safe burglary, theft from the night depository, burglary or

robbery of a security guard during non-business hours. It also covers physical damage

to the premises caused by burglary or robbery. As with residential crime insurance, the

insured must install and maintain specific protective devices and report all losses,

whether a claim is filed or not.

21 Burglary is the unlawful taking of property by someone uses forced entry to gain access to the premises; robbery is the unlawful taking of property by the use or the threat of violence.


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• Federal Crop Insurance

Federal crop insurance is available through the Federal Crop Insurance Corporation

(FCIC). The FCIC seeks to improve economic stability in agriculture by providing

insurance for more than 60 crops. The FCIC is overseen by the Risk Management

Agency (RMA). The management of the FCIC is vested in a Board of Directors that is

subject to supervision by the Secretary of Agriculture.

Crop insurance available through the FCIC is sold and serviced by private insurers.

Policies are available that cover such perils as drought, hail, plant disease, freezing, and

floods. Coverage through the federal program is available at subsidized rates.

• Fair Access to Insurance Requirements (FAIR) Plans

FAIR plans emerged out of the Urban Property and Reinsurance Act of 1968. The

purpose of FAIR plans is to make property insurance available to urban property

owners who would be unable to obtain coverage in the regular insurance market. FAIR

plans also make property insurance more available to property owners with exposures

to losses over which they have no control. While the state government mandates FAIR

plans, the administration is left to private insurers who share the costs.


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Workers Compensation And Employers Liability Insurance

• The Development of Workers Compensation

The oldest example of social insurance is workers compensation. Workers

compensation developed out of the social needs created by a changing socio-economic

environment. The 19th-century in America witnessed a move from an agrarian economy

to an industrial one. This new economy exposed a growing portion of the population to

machinery that was continually becoming more complex, powerful, and dangerous.

Machine safety mechanisms and effective workplace design were still in their infancy,

and the number of disabling accidents increased at a disturbing rate. From this context,

workers compensation insurance evolved with the aim of reducing the economic

insecurity caused by occupational disability.

Before the creation of actual workers compensation laws, employer liability for

industrial accidents was determined by English common law. English common law was

further refined by American courts into a body of case law that created a set of

expectations for workers that included the following:

• Provide a safe workplace;

• Provide reasonably safe tools and equipment;

• Provide reasonably sufficient warning of work-place dangers;

• Develop and enforce reasonable safety rules.


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At this early stage of development, workers injured on the job did have the right to sue

their employers. However, under the common law of industrial accidents, the employer

was able to counter the vast majority of suits through three common law defenses:

• Contributory negligence doctrine

If the employee’s negligence contributed to the injury, the injured worker could not

collect damages. This was defense was often used and could serve as a complete

defense.

• Fellow-servant doctrine

The worker could not collect damages if the injury resulted from the negligent actions

of a reasonably competent fellow employee.

• Assumption-of-risk doctrine

The worker could not collect damages if he or she was aware of the risk and

nevertheless proceeded.

As the pace of industrialization increased, and the number and severity of industrial

accidents exploded, the legal situation began to change. The beginning of the

Progressive Era in the early 20th-century saw the creation of employers liability laws

that weakened some of the old common law defenses, and eliminated others.


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By 1907, 26 states had enacted laws to make it more difficult for employers to avoid

liability for workplace injuries. In 1908, the federal government passed a workers

compensation law that covered specific federal employees.

By 1910, leading members of the early labor movement began pushing for legislation to

create benefits for workplace injuries, regardless of who was at fault. Their efforts first

triumphed in Wisconsin in 1911. California, Nevada, New Jersey and Washington all

followed with the passage of similar no-fault workers compensation laws in the same

year. By 1948, every state in the nation had some form of workers compensation laws.

Workers compensation laws vary in specifics from state to state, but the majority have

the following features:

• Unlimited medical benefits

• Disability income benefits

• Rehabilitation benefits

• Death benefits

Most states have a provision for an uncompensated waiting period following a “lost

time” injury. Disability benefits can usually be applied retroactively, dating from the

time the workplace injury occurred.


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Most occupations are covered by workers compensation. However, some job classes are

exempted, or only partially covered. Typically, exempted workers include the

following: agricultural workers, migratory workers, domestic workers, and casual

employees. Some states permit the exemption of businesses with fewer employees than

the minimum number mandated in their state law, and some states exempt a business

owner’s relatives or partners. Employers may usually cover employees in an exempted

class voluntarily.

To comply with state law, an employer must obtain workers compensation coverage.

The sources of workers compensation coverage are determined by the state’s own

particular laws. The three possible methods of obtaining coverage are:

• Purchase of a workers compensation policy from a private insurer

• Self-insurance

• Obtaining coverage from a monopolistic or competitive state fund

While each state is different in the specifics of its workers compensation requirements,

the broad goals are the same: provide insurance coverage for employees suffering

occupational injury and disease; promote economic stability; encourage workplace

safety; reduce litigation. The differences in state workers compensation programs

usually occur in the following areas:

• Defining covered employment;


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• Defining the level and nature of benefits;

• The presence (or absence) of a state monopolistic fund

In Michigan, the following employers must carry workers compensation coverage:

• All public employers;

• All private employers regularly employing one or more employees 35 hours or more

per week for 13 weeks or longer during the preceding 52 weeks;

• All private employers regularly employing three or more employees at one time

(including part-time employees);

• Agricultural employers that employ three or more employees 35 hours or more per

week for 13 or more consecutive weeks;

• Householders employing domestic workers if they employ anyone 35 hours or more

per week for 13 weeks or longer during the preceding 52 weeks.

For the purposes of workers compensation eligibility, Michigan law defines an

“employee” as the following: any person in the service of another, under any contract of

hire, express or implied. Typically, a partner or corporate officer is considered an

employee of the partnership or corporation.


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Michigan law allows an employer to comply with the mandatory requirement for

workers compensation coverage through the following:

• Obtaining a policy from a licensed and approved insurance carrier;

• Obtaining a policy through the assigned risk pool;

• Obtaining coverage through a self-insured group fund;

• Obtaining authorization from the bureau director to be an individual self-insurer;

• Filing an exclusion form with the bureau director.

An employer can use an exclusion form only it all of its employees can be excluded

according to the Workers Disability Compensation Act. The following employers may

exclude employees:

• Sole Proprietorship – When it has one or more employees and all employees are the

spouse, child, or parent of the sole proprietor;

• Partnership – When all employees are partners;

• Stock Corporation – When all employees are corporate officers and own 10% or more

stock in the corporation


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• The Workers Compensation Policy

The workers compensation policy contains a declarations page that is termed the

information page. This page sets the effective date of the coverage and provides for any

amending endorsements.

The second part of the coverage form is the general section. This section defines who is

an insured, the meaning of workers compensation, and what is meant by the term

state.22

The remainder of the workers compensation policy is broken down in following

manner:

• Part One, Workers Compensation Insurance

• Part Two, Employers Liability Insurance

• Part Three, Other States Insurance

• Part Four, The Insured’s Duty If Injury Occurs

• Part Five, Premium

• Part Six, Conditions

22 The insured is the employer named in the information page; partners are insured there, and members of joint ventures can be added to the coverage by endorsement.


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The first three sections of the workers compensation policy refer to coverage types. The

statutory compensation section and the employers liability section each possess their

own sets of identifiable insuring agreements, conditions, and limitations.

• Part One –Workers Compensation Insurance

This section states the insurance coverage applies to bodily injury by accident or

disease. To be covered, the bodily injury must occur during the policy period. Bodily

injury by disease must be caused or aggravated by the conditions of employment. The

employee’s last day of last exposure to the conditions causing or aggravating the injury

or disease must also occur during the policy period.

This section states that the company will “pay promptly when due” the benefits

required of the employee by workers compensation law.

The policy further states that the company will maintain the right and duty to defend

any claim, proceeding, or lawsuit against the insured for benefits payable by the

coverage. In order to accomplish this task, the company retains the right to investigate

and settle claims, proceeding, and lawsuits. The company will also pay the following

costs that may accrue from a claim:

• Reasonable expenses incurred at the company’s request, but not loss of earnings;

• Premiums for bonds to release attachments and for appeal bonds in bond amounts

up to the amount payable under the coverage;


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• Litigation costs taxed against the insured;

• Interest on a judgment as required by law until the company offer the amount due

under the coverage;

• Expenses the company incurs

The company will not, however, pay more than its share of benefits and costs required

by the workers compensation insurance and other insurance or self-insurance. In

addition, the insured is responsible for any benefits in excess of the payments regularly

provided by workers compensation law, including those required because of the

following:

• The insured’s serious and willful misconduct;

• The insured knowingly employs a worker in violation of the law;

• The insured fails to comply with health or safety laws and regulations;

• The insured fires, coerces, or otherwise discriminates against an employee in

violation of workers compensation law.

This section of the policy states that the principle of subrogation is in force for the

coverage. The company holds the insured’s rights, and the rights of persons entitled to

the benefits of coverage, to recover payments from anyone liable for injury. In addition,

the insured must do everything reasonable to protect these rights.


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• Part Two—Employers Liability Insurance

The second part of the policy concerns employers liability insurance. This coverage

applies to bodily injury by accident or disease. The bodily injury must result from and

in the course of the workers employment by the insured. The injury by accident must

occur during the policy period. Injury by disease must be caused or aggravated by the

conditions of employment. The employee’s last day of last exposure to the conditions

causing or aggravating the disease must occur during the policy period.

If the insured is sued, the original suit and any related legal actions for damages must

be brought in the United States, its territories or possessions, or Canada.

The company will pay all sums that the insured must pay as damages because of bodily

injury to employees as long as the bodily injury is covered by this employers liability

insurance. The company will pay for the following damages (where recovery is legally

permissible):

• Damages for which the insured is liable to a third party by reason of a claim or suit;

• Damages for care and loss of services;

• Damages for consequential bodily injury to a spouse, child, parent, brother, or sister

of the injured employee, provided that the damages are the direct result of bodily

injury resulting from and in the course of the injured worker’s employment with the

insured.


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This section of the policy outlines the company’s right and duty to defend the insured

in event of a lawsuit. The company’s commitment to pay for costs resulting from legal

action, as well as its rights to subrogation, is the same as in the previous section.

Unlike the previous policy section, however, Part Two of the policy specifically states

both exclusions and limits of liability. There are twelve exclusions listed. The company

will not provide coverage for the following:

1. Liability assumed under a contract;

2. Punitive or exemplary damages because of bodily injury to a worker

employed in violation of the law;

3. Bodily injury to a worker while employed in violation of law with the

insured’s, or the insured’s executive officers’, actual knowledge;

4. Any obligation imposed by a workers compensation, occupational disease,

unemployment compensation, or disability benefits law;

5. Bodily injury intentionally caused or aggravated by the insured;

6. Bodily injury occurring outside the United States, its territories or

possessions, and Canada;23

23 However, this exclusion does not apply to bodily injury to a citizen or resident of the United States or Canada who is only temporarily engaged in a foreign country.


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7. Damages resulting of wrongful discharge, coercion, discrimination,

defamation, or harassment of an employee;

8. Bodily injury to any person in work that is subject to the Longshore and

Harbor Workers Compensation Act, the Nonappropriated Fund

Instrumentalities Act, the Outer Continental Shelf Lands Act, the Defense

Base Act, the Federal Coal Mine Health and Safety Act of 1969, and any other

federal workers or workers compensation laws;

9. Bodily injury to any person in work subject to the Federal Employers Liability

Act, any other federal laws obligating an employer to pay damages to any

employee due to bodily injury resulting from or in the course of employment,

or any amendments to those laws;

10. Bodily injury to a master or member of the crew of any vessel;

11. Fines or penalties imposed for violation of federal or state law;

12. Damages payable under the Migrant and Seasonal Agricultural Worker

Protection Act.

The sums for the employers liability coverage are listed on the policy’s information

page. There are two separate limits for bodily injury by accident and bodily injury by

disease. The company will not pay any claims for damages beyond the applicable limit

of liability in the contract.


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The final part of the employers liability insurance section is titled “Actions Against Us.”

It outlines the insured’s rights to sue the company under the terms of the policy.

• Part Three – Other States Insurance

This section is a policy feature that replaces the broad form all states endorsement. The

feature is aimed at situations in which the insured faces out of state operations. It

provides for reimbursement to the insured for the benefits required by the workers

compensation law if the company is not legally permitted to pay benefits directly (e.g.,

the insurer is non-admitted in the other state).

The other states insurance applies only to states listed in the information page. It is

operational when the insured begins work in one of the named states after the effective

date of the policy and if the insured is not insured or self-insured for such work.

• Part Four—The Insured’s Duty if Injury Occurs

Should injury occur, the insured is responsible for performing the following duties:

1. Inform the company that an injury has occurred;

2. Provide for immediate medical and other services required of workers

compensation law;


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3. Provide the company with all notices, demands, and legal papers relating to

the injury, claim, proceeding suit;

4. Cooperate fully with the company in the investigation, settlement or defense

of any claim, proceeding or suit;

5. Do nothing after an injury occurs that would interfere with the company’s

right to recover;

6. Do not voluntarily make payments, assume obligations or incur expenses,

except at the insured’s own cost.

• Part Five—Premiums

This section is broken into seven parts. It concerns how the cost of workers

compensation coverage will be afforded.

The first part states the premiums for the policy will be determined by the company’s

manuals of rules, rates, rating plans and classifications. In this part, the company

reserves the right to change its manuals and apply the changes to the policy if and when

authorized by law or a governmental authority with controlling authority.

Part two of this section describes how jobs will be classified. Essentially, it restates the

concept of grouping by homogenous exposure units for statistical purposes.


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The third part states that the premium for each work classification will be determined

by multiplying a rate times a premium basis. The premium basis includes payroll and

all other remuneration paid or payable during the policy period.

Parts four through seven of this section deal with the mechanics of the premium. For

example, these sections state explicitly that the premium must be paid when due; the

stated premium must be paid even if part or all of the workers compensation law is not

valid.

This section of the policy also states that the premium shown on the information page is

an estimate. The final premium is determined after the policy ends by using the actual,

not the estimated, policy premium basis. If the final premium is more than what the

insured paid to the company, the insured must pay the balance. Should the insured

have paid more than is actually owed to the company, the company will refund the

balance.

If the policy is cancelled by the company, the final premium is calculated pro rata based

on the time the policy was in force. If the insured cancels, the final premium is more

than pro-rata. The final premium in this instance will be based on the time the policy

was in force, and increased by the company’s short rate cancellation table and

procedure.

In this section, the company affirms its rights to conduct necessary audits of all

pertinent records belonging to the insured. The insured is advised of his or her duty to

keep accurate records, and provide copies of these records to the company when

requested.


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• Part Six—Conditions

• Inspection

The company has the right to inspect the insured’s workplaces at any time. The

company’s inspections are not safety inspections, and the company does not warrant

that the insured’s workplaces are safe and in compliance with applicable laws,

regulations, codes, or standards. The company may recommend changes; the company

may also provide the insured with reports of the findings of any inspections

undertaken.

• Long Term Policy

If the policy period is longer than one year and sixteen days, all provisions of the policy

will apply as though a new policy were issued on each annual anniversary that the

policy is in force.

• Transfer of Rights and Duties

The rights and duties of the insured in the policy cannot be transferred without the

written consent of the company. Should the named insured die, the company will cover

the deceased insured’s legal representative if notice is received within thirty days after

the named insured’s death.

• Cancellation


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The policy may be cancelled. The insured may cancel the policy by mailing or

delivering written notice to the company. The company may cancel the policy, but must

provide the insured with ten days prior notice.

• Sole representative

The first named insured on the information page acts as sole representative of the other

insureds. The first named insured is the only insured to possess authority to change the

policy, receive return of premium, and cancel the policy.

Michigan Rules and Regulations for Workers Compensation

• Definitions

Workers compensation is a form of social insurance. Its purpose is to reimburse

employees injured in the course of, and arising out of, their employment. The range of

reimbursement benefits is broad. It can include loss of wages, hospital and medical

benefits, payments for permanent and partial disability, and payments to dependents.

Also included in this form of insurance coverage are last sickness and burial expenses.

• Prohibited Defenses Another result of workers compensation insurance is the elimination of common law


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defenses that had previously been used by employers to defend against these liability

issues. An employer in legal action is proscribed the use of the following defenses to

avoid a workers compensation claim: 1) contributory negligence; 2) fellow servant; and

3) assumption of risk.

• Employers

Michigan’s workers compensation law applies to employers in the following categories:

• Private employers who regularly employ 3 or more employees at one time

• Private employers who regularly employ less than 3 or more employees if at least

one of them has been employed for at least 35 hours or more per week for at lest 13

weeks during the preceding 52 weeks

• Public employers, regardless of the number of people employed

• Agricultural employers of 3 or more employees who are paid hourly wages and are

employed for 35 hours or more per week for 13 weeks or more during the preceding

52 weeks. Coverage applies only to regularly employed employees

• Agricultural employers of 1 or more employees who are employed for 35 hours or

more per week for 5 or more consecutive weeks must provide for the employees’

medical and hospital coverage for all personal injuries arising in the course of

employment suffered by the employees. All other agricultural employers not

included here are exempt from workers compensation.

• Employees Michigan’s workers compensation laws consider the following as employees:


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• People working for the state or a county, city, township, village, or school district

• People employed by contractors of the state

• Police officers, firefighters, on-call members of fire departments, safety patrol

officers, volunteer civil defense workers, and volunteer ambulance drivers and

attendants

• All persons working for another party under a contract of hire and employed full

time

• Working members of a partnership

• Persons engaged in a federally funded training program or work experience

program

• Every person performing services in the course of the trade, business, profession or

occupation of an employer

• Excluded Employees and Subcontractors

Excluded employees, while exhibiting aspects of employment for hire, are not

considered employees for the purposes of workers compensation coverage and benefits.

• A household domestic servant is not considered an employee when the person is a

wife, child or other member of the employer’s family residing in the house.

• A private employer is not liable to any person employed as a household domestic

servant for less than 35 hours per week for 13 weeks or longer during the preceding

52 weeks24

24 Unless the private employer assumes liability.


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• An employee of a limited liability company who owns at least a 10% interest may be

excluded by giving written notice of his or her election to do so the insurance

company.

Under Michigan’s workers compensation laws, an employer insurance company is

liable to subcontractors for benefits. Sole proprietors who contract to provide services in

the course of an employer’s business must be covered by the employer unless they have

a separate place of business and hold themselves out to render service to the public.

• Benefits

For the purposes of paying benefits, Michigan workers compensation laws define

“personal injury” as a disease or disability due to causes and conditions characteristic

of, and unique to, the employer’s business and that arise out of and from employment

in that particular business. “Disability” is defined as the limitation of an employee’s

ability to earn wages in work suitable to his qualifications and training, when this

limitation is caused by personal injury or work-related disease. Disability does not

create the presumption of a loss of wages.

The benefits available from workers compensation coverage are very broad. The core of

workers compensation coverage is benefits for reasonable medical, surgical and

hospital care, and medicines. These benefits are provided to covered employees injured

during the course of, or arising from, employment for the first 6 months and thereafter

as mandated by state law. After 10 days, the employee is allowed to select his own

physician for care.


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Additional benefits are available for dental services, artificial limbs, eyeglasses, and

hearing aids. Medical and vocational rehabilitation services, including retraining and

job placement, must be provided if the employee can no longer perform the work for

which he has training and experience. Vocational rehabilitation cannot exceed 52 weeks

without special authorization.

Indemnity benefits, paid weekly in the amount of 80 % of the employee’s after tax

wage, not to exceed the maximum weekly rate set by the state, must be paid while the

employee is completely unable to work.25 Conclusive presumption of total and

permanent disability does not extend beyond 800 weeks from the date of injury. After

that point, the question of total and permanent disability must be determined in

accordance with facts as they currently exist.

It is required that compensation be paid promptly and directly to the injured worker

and becomes due and payable on the 14th day after the employer has notice and

knowledge of the disability or death. All compensation must be paid weekly.

Work loss benefits are payable on the 8th day of disability. Should the disability last

longer than 2 weeks, benefits will be paid retroactively from the initial day of injury.

After 6 months from the date of injury, a lump-sum payment may be made. A lump-

sum payment requires agreement from all concerned parties. , and is subject to

approval from a hearing referee.

25 The maximum weekly rate of compensation is adjusted annually with the increase or decrease in average weekly wage of covered employment as determined by the Michigan Employment Security Commission. The maximum weekly rate of compensation for injuries is 90% of the state average weekly wage.


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• Termination of Insurance

Michigan law requires that the Bureau of Workers’ Disability Compensation be notified

20 days in advance of the date that a workers compensation policy is terminated or

cancelled. The notification sent to the Bureau must contain the date of the

termination/cancellation, and the policy is required to stay in force for 20 days after

receipt.

• The Workers Compensation Placement Facility

The Workers Compensation Facility exists to provide workers compensation insurance

to employers who are unable to purchase this coverage in the regular (voluntary)

market. All agent producers authorized to solicit workers compensation insurance on

behalf of the Facility must offer to place workers compensation insurance through the

facility when requested to do so by the applicant. Agent producers receive commissions

for placing insurance through the Facility at rates provided in the Facility’s plan of

operation.


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Part Four – Specialty Insurance – Commercial Inland Marine

Commercial Inland Marine

• The Development of Inland Marine Insurance in the United States

The major difference between ocean marine insurance (sometimes referred to as “wet

marine”) and inland marine insurance can be traced back to London in the late 1700’s and

early 1800’s. Until that time, it was customary to insure goods under an ocean marine

policy only when the property was aboard some type of sea faring vessel. At that time,

there was no demand for hazards other than that provided under the ocean marine

policy. As modes of transportation and communication (such as railroads, motor

vehicles, aircraft, and telecommunications) quickly advanced in the United States, new

insurance needs developed because each new improvement created new and unique

transportation risks. Consequently, the ocean marine policies were extended to cover

the cargo while on a dock or in a warehouse, for example. The ocean marine policies

were then extended to cover the goods while they were on connecting land and water

conveyances until they reached their destinations.

As inland business and commerce became increasingly more complex, the ocean marine

insurers realized that they could not continue to use the regular ocean marine cargo


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policies, even with the “warehouse to warehouse” and other such clauses attached.

Policies written in this manner were not fully adaptable to meet all the new

transportation needs that arose.

For at least several important reasons, it was natural for the marine, rather than the fire

or casualty insurers, to insure the new risks through the development of a variety of

special policies, each designed for a specific purpose or need.

One reason was the lack of legal authority on the part of the fire and casualty insurers to

produce the desired insurance. In most states, the monoline policy was followed; that is,

the law required an insurer to restrict its underwriting activities to only one of the

following types of insurance: life, fire, casualty, or marine; consequently, it was not

possible for either a fire insurance company or a casualty insurance company to write

the variety of special insurance that was desired. On the other hand, the marine insurers

did not suffer under any such prohibitions. Their charters and state laws granted them

the power to assume liability against loss or damage to property growing out of the

perils of transportation.

There was no exact definition of what constituted a risk, and the imaginations of the

ambitious marine underwriters led to some ingenious interpretations of the “perils of

transportation.” In fact, the marine underwriters insured many risks in which the perils

of transportation were incidental to the basic coverage provided. Most fire and casualty

insurers originally did not object strenuously to these early developments because they

believed that broad coverage on such risks as bridges and jewelry stores was a

hazardous and undesirable business.


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A second reason for the development of commercial inland marine insurance was the

expertise of the marine insurers in the insurance of transportation perils, much of which

was gained under policies that were written to fit a particular situation.

A third, and probably the most important reason that inland marine insurance began to

flourish in the United States, was the strict regulation of the forms and rates that were

used by the fire and casualty companies. This regulation tended to create a lack of

flexibility for the fire and casualty companies that was incredibly helpful to the new

inland marine insurance industry. Marine insurers never have been subjected to

regulation of rates and forms to any significant extent because of the international and

competitive nature of the business.

Due to this absence of powerful regulations, the inland marine companies had greater

latitude in which to conduct their business. Consequently, marine insurers were able to

reduce their rates and began to write policies for virtually any types of businesses as

they saw fit. They were able to undercut the fire and casualty companies by accepting

business that had little, if anything, to do with inland transportation. This created a rift

between the marine insurance companies and the fire and casualty companies.

This rift became so intense that in the early 1930’s, the fire and casualty companies

demanded that the New York Insurance Department take action to deter the inland

marine companies from undercutting their interests. In 1932, the superintendent of the

New York Insurance Department enacted a ruling which both defined and narrowed

the scope of powers of marine insurers. During the next year, the National Convention

of Insurance Commissioners extended the superintendent’s decree. This established the

Nationwide Definition and Interpretation of the Power of Marine and Transportation


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Underwriters. This has been shortened to what is currently known as the Nationwide

Marine Definition, which specifies exactly what types of insurance fall within the

boundaries of marine insurance companies. The definition was updated in 1953 and

again in 1977. Currently, it contains the accepted powers and regulations esoteric to

both ocean and marine companies. As it now stands, the Nationwide Marine Definition

has determined the following broad classes of exposures as eligible for inland marine

policies:

A. Imports

Imports are eligible under the definition so long as the goods

remain segregated and identifiable and have not been (1) sold

by the importer, or (2) removed from storage and placed on sale,

or (3) moved into a manufacturing or processing operation.

B. Exports

Exports are eligible under the definition from the time the good are designated and

being prepared for export.

C. Domestic Shipments

Domestic shipments qualify under the definition so long as the goods are in transit, on

consignment, or otherwise in the custody of someone other than the owner.

Such shipments are not covered at manufacturing premises nor after arrival at premises

owned, operated, or leased by the insured.

D. Means of Communication


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Eligible under the definition are: bridges, tunnels, piers, pipelines, power transmission

lines and towers, and outdoor cranes. Specifically excluded are: buildings, their

improvements and betterments, furniture and fixtures, and supplies held in storage.

NOTE: Although the definition allows ocean cargo (imports and exports) to be written

by inland marine providers, ocean marine underwriters usually write these types of

coverages.

The final section of the National Marine Definition identifies the exposures that do not

qualify as marine risks unless specifically covered in the preceding section. The

following do not qualify under the definition:

A. Storage of an insured’s merchandise.

B. Merchandise in the course of manufacture on the premises of the

manufacturer.

C. Furniture and fixtures and improvements and betterments to

buildings.

D. Monies and securities in safes, vaults, safety deposit vaults, banks,

or the insured’s premises, except while in the course of transportation.

Finally, in 1986 the last transformation in the development of commercial inland marine

insurance took place. The Insurance Services Office created a simplified version of its

policies affecting commercial inland insurance.

The Insurance Services Office had also rewritten simplified language versions of the

commercial lines coverage forms. The 1986 version developed for commercial inland


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marine coverage is basically formatted in the same way as the other simplified

commercial lines forms introduced by the ISO. This format makes it possible for an

inland marine coverage part to be composed of only one coverage part—only property

coverage or only liability coverage (this is known as a monoline policy); or, in

conjunction with coverage parts of other simplified language programs (i.e. commercial,

property, crime, liability, or builder and machinery), in what is known as a multi-line

policy.

• Commercial Inland Marine Insurance and it Relationship to Other Lines of Insurance

Because commercial inland marine insurance is a relatively new type of insurance, it

was forced to rely on the experience of form preparation and underwriting strategies

that were developed by other longer-standing lines of insurance, especially ocean

marine and fire and casualty insurance.

The influence of ocean marine insurance is self-evident from much of the terminology

found in the policies and the fact that the coverage deals primarily with property in or

related to transportation. The breadth of coverage, written at a time when other types of

insurance believed that the writing of more than a single peril in the same policy was

not in the best interest of the insurance providers, is also an indication of the influence

of ocean marine insurance on inland marine insurance. This influence is readily

apparent in the use of open and blanket policies and the application of the valued

property concept.


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Evidences of the influence of the fire and casualty business may be seen in the treatment

of assignment, cancellation, automatic reinstatement, other insurance, the basis of

valuation, and the use of named perils in defining coverages for some inland marine

policies. In addition, commercial inland marine insurance shares with the fire and

casualty field much of the common law developed in the interpretation of similar

words, phrases, and insuring concepts. For example, the legal definition of the peril of

fire would be identical in all situations.

Currently, inland marine insurance is one of the most varied types of property and

casualty insurance. According to a survey conducted by Best’s Insurance Reports, out of

twenty-one lines of insurance, commercial inland marine policies rank eleventh in the

total net premiums written, accounting for approximately two and one-half percent of

the entire insurance industry. Its range can be anywhere from a small liability, such as

that of a laundry owner’s liability for customers’ clothes that are destroyed in a fire all

the way to a major liability, such as the loss of tons of cargo lost in a hurricane or flood.

Furthermore, inland marine coverages can be established to cover possible exposures

that are not currently covered by other commercial policies; consequently, inland

marine underwriters are extremely flexible when it comes to endorsements written by a

producer. Because of this flexibility, inland marine insurance providers have a

competitive advantage.

It should also be noted at this point that a major difference between inland marine

insurance and most other types of property and casualty insurance concerns the types

of forms on which they are written. Currently, inland marine insurance utilizes both

filed forms and nonfiled forms. Filed forms are so called because by law they have to be

submitted to insurance departments in those states that require a filing (regulations and


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restrictions vary from state to state). Filed forms are usually standardized and produced

by an advisory rating organization such as the Insurance Services Office or the

American Association of Insurance Services. Nonfiled forms are implemented for most

of the inland marine policies (those types that are discussed at the end of this course);

nonfiled forms are so called because they are written by the insurer that offers them,

and because they are not subject to the regulations and restrictions of the filed forms

(for example, there is no statutory inland marine foundation form that compares to a

standard fire insurance policy), they are negotiable between the producers and

underwriters.

NOTE: A form which is nonfiled in most states may be subjected to filing regulations in

some other states; consequently, producers should be careful in determining which type

of filing applies to a certain state.

As of the time of this writing, the Insurance Services Office and the American Association

of Insurance Services (AAIS) have established twelve distinct classes of commercial

inland marine coverages. These filed classes of inland marine insurance consist of the

following:

• Accounts Receivable

• Camera and Musical Instruments

• Commercial Articles

• Equipment Dealers

• Film

• Floor Plan

• Jewelers Block

• Mail


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• Physicians and Surgeons Instruments

• Signs

• Theatrical Property

• Valuable Papers and Records

The majority of the remainder of this course will concentrate on: 1) the study of the

specifics of these twelve filed forms, and 2) some of the basics of common nonfiled

forms.

Upon completion, an inland marine coverage contract is composed of the declarations,

any required inland marine coverage forms, any common policy conditions pages, the policy

conditions which are specifically applicable to the commercial inland marine coverage

form, any exclusions and any other essential endorsements.

Declarations

The Insurance Services Office commercial lines forms contain a Commercial Inland

Marine Declarations page. Additionally, each of the separate commercial inland marine

filed forms has its own declarations page specifically detailed to meet the specific needs

of that class. Because the wide diversity of forms that can be attached to a declarations

page prevents much standardized preprinting, the declarations page is generally

succinct. Quite often, it consists of simply the insured’s name and address, a rate, the

effective and expiration dates, a premium, an amount of insurance, and a location for

the producer’s countersignature. Sometimes a more detailed and complex declarations

page is implemented. It might include such additional information as limits,


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deductibles, various locations schedules, and any other information required by the

policy.

The insuring agreements of commercial inland marine policies vary widely. Typically,

however, they include: 1) the covered property, 2) the perils insured, 3) the onsequences

of loss, and 4) the territorial limits of the policy.

• Covered Property

Some commercial inland marine policies cover only owned property, whereas other

policies also insure items that are in the care, control or custody of the insured. For

example, motor truck cargo policies can cover a trucker’s legal liability for loss of a

customer’s goods.

• Perils Insured

Although commercial inland marine policies can be written on either an open perils

(“risks of direct physical loss”) basis or on a named perils basis, the majority are written

on an open perils basis because it offers broader coverage. However, no coverage is

absolutely “all risks.” A covered cause of loss means risks of direct physical loss to

covered property with the exception of those causes of loss that are listed in the

exclusions. It is the intention of the insurance provider to cover only direct damage to

the property and not to provide coverage for losses resulting from extraneous variables

such as interruption of business.


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Even though most policies are written on an open perils basis, sometimes a client will

prefer a policy containing named perils. Such a policy would likely include some

combination of the following causes of loss:

• Flood

• Hurricane or tornado

• Fire and/or lightning

• Collision and/or overturning of a transporting conveyance

• Explosion

• Earthquake

• Consequences of Loss

Coverage in most commercial inland marine is limited to direct loss, a loss resulting in a

loss of value to property. Some policies, however, provide coverage for indirect loss

sometimes called consequential loss), a loss resulting in decreased income and

increased expenses resulting from a direct property loss; for example, if only a portion

of a property were damaged and cannot be replaced, the indirect loss coverage would

be available to cover the reduction in value of the entire property. Other policies

provide coverage for some income lost when the subject of insurance has been

damaged or destroyed.

• Territorial Coverage Limits

Typically, a commercial inland marine overage form will declare that the coverage will

only apply to property which is located within the United States, Canada, and Puerto


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Rico. Those covered properties that are in transit via air cargo or ships are not covered

under this condition; they would most likely be covered by aviation insurance or ocean

marine insurance.

Certain other policies impose stricter limitations on coverage locations. They provide

coverage only at specifically listed covered locations or while property is in transit

within the coverage territory.

Occasionally, for an additional premium, an inland marine policy will provide coverage

irrespective of the location.

Because of territorial limitations, many insureds, to be on the safe side, will decide to

purchase aviation insurance or ocean marine insurance as well as inland marine

insurance. Thus, the insurance provider should be certain that the insured is completely

aware of the territorial limits of coverage.


The following policy conditions are found in the Insurance Services Office filed forms as

well as in many nonfiled forms. The filed forms are subject to the commercial inland

marine conditions forms, as well as the common policy conditions.

Commercial inland marine coverage forms contain two sets of policy conditions: 1)

common policy conditions--those conditions that apply to more than one coverage part;

and 2) commercial inland marine policy conditions--a policy including both common

policy conditions and two or more coverage parts.


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The Common Policy Conditions

The common policy conditions set forth in endorsement “IL 00 17,” is established in the

opening sentence of the endorsement, implementing the wording, “All coverage parts

included in this policy are subject to the following conditions.” The reference to “IL”

indicates interline, which signifies that the endorsement is applicable to two or more

lines of insurance. This endorsement establishes the regulations for the following

conditions:

• Policy cancellation

• Policy changes

• Provisions allowing the insurer to examine the insured’s records

• Provisions allowing the insurer to complete inspections and surveys

• Premium payment

• The transfer of rights and duties

Policy cancellation

This condition establishes the procedures to be implemented if either the insurer or the

insured decides it wants to nullify the policy. Quite often, insurance polices have more

than one named insured--the party or parties designated on the declarations page of the

policy. It is not uncommon that one of the parties wants to cancel or modify the policy,

while a second or third party does not. The common policy conditions establish that

only the first named insured, the party first listed on the policy, has the authority to

cancel the policy by supplying the insurer with written notice at least 30 days prior to


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the date of cancellation. In addition, only the first named will receive any return

premium and any cancellation notice. Finally, this condition establishes that the insurer

may cancel the policy for nonpayment of premium; the insurer must give the insured

notice of not less than 10 days. If the insurance provider wishes to cancel the policy for

any reason other than nonpayment, it must give at least thirty days’ notice.

Policy changes

This condition stipulates that the policy must contain all the agreed conditions

established between the insurer and the insured. Nothing in the policy is considered

part of the contract unless it is in writing (this is legally called integration). This

condition further establishes that, with the consent of the insurer, the first named

insured may make changes to the policy and that the terms of the policy may be altered

or waived only via an endorsement issued by the insurer.

Examination of the records

This condition permits the insurer to inspect and, if necessary, audit the insured’s

records and books as they relate to a policy period and up to three years afterward; it

also enables the insurer to substantiate policy-rating information.

Inspections and surveys

This condition authorizes the insurer to examine the insured’s premises and to suggest

any requisite changes; furthermore, this condition permits the insurer to examine what

it is insuring, and if, for example, an inspector discovers an unsafe condition, the


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insurer has the exclusive right to suggest changes to insure safety. This condition

further clarifies that any inspections or surveys are made for the benefit and protection

of the insurance providers. In turn, the insured agrees not to rely on the inspection to

indicate every feasible condition that could possibly lead to a loss. If the inspection

omits something, the insured cannot hold the insurance provider liable for any loss.

Any inspections, surveys, reports, or recommendations relate only to insurability and

the premiums to be charged. Furthermore, the insurance providers will not make

routine inspections.

Premium payment

This condition provides that the first named insured is responsible for the payment of

the premiums and that he or she will be the payee of any return premiums that the

insurance provider is obligated to pay.

The transfer of rights and duties

This condition dictates that the insured may not transfer his rights or duties expressed

in the policy without the permission of the insurance provider. However, if the insured

dies, all rights and duties are conveyed to the named insured’s legal representative. If a

legal representative has not yet been appointed, anyone having proper temporary

custody of the policy owner’s property will have the rights and duties with respect to

the insured property.

• Commercial Inland Marine Policy Conditions


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Attached by endorsement CM 00 01, the commercial inland marine conditions is the

second set of conditions that apply to the commercial marine coverage forms. This

endorsement supplements five generic conditions of the commercial inland marine

insurance policy and eleven policy conditions that deal specifically with loss.

1. General Conditions of Inland Marine Insurance

Concealment, misrepresentation of a material fact and fraud

In the event that the named insured or any other insured is guilty of concealment,

misrepresentation of a material fact or fraud, all commercial inland marine insurance is

considered legally void.

Action at law (legal action against the insurance provider)

Under this condition, no one may bring a legal action against the insurance provider

unless:

• The insured has been in full compliance with all the terms of this coverage part.

• The suit is brought by the insured within two years after the initial knowledge of

the loss (a two-year statute of limitations).

Policy period

In order to be guaranteed under a commercial inland marine policy, the loss must have

occurred sometime during the policy period indicated in the declarations.


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Valuation

The amount that can be recovered for lost or damaged property will be the least of the

following:

• The property’s actual cash value

• The cost of reasonably restoring the property to its previous condition

immediately before the loss

• The cost of replacing the property with substantially identical property

The value of any damaged or lost property is its value at the time of the loss or damage,

not at the time when the policy was enacted.

The valuation clause is very often amended. For example, other valuation clauses might

specify how property in transit is to be valued at the time of loss. Shipments are

normally valued at their invoice costs plus any incurred charges. Some policies,

however, substitute replacement cost or market value for actual cash value, and others

are “valued properties” that specify the amount of insurance that is agreed upon for

each insured item.

No benefit to bailee

Insurance provided under a commercial inland marine policy cannot benefit any entity

other than the named insured; the policy will not cover any liability of a bailee, a person

to whom the property is entrusted. This condition, along with the subrogation condition,

makes it clear that the insurance company has no intention to provide coverage for

someone else who has a legal obligation for the safekeeping of the insured’s property.


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Subrogation

One of the most important differences between commercial inland marine loss

adjustments and those in connection with other property insurance policies is that a

large proportion of the commercial inland marine claims offer chances of recovery

through the process of subrogation, the process whereby the insurance company can

legally acquire rights to a loss that it has covered. This same fact, of course, affects the

underwriting and rating of a given risk. Quite often, property in transit is in the care of

a common carrier or a bailee who has some degree of responsibility for the safe and

timely delivery of the property. To the extent recovery of a given loss is made from the

carrier or bailee, the insurance company’s loss is reduced. Bailees and common carriers

frequently attempt to take advantage of the insurance purchased by the policy owner

by inserting inappropriate wording in the bill of lading. On the other hand, most inland

marine policies specifically provide that “this insurance shall in no way inure directly or

indirectly to the benefit of any carrier or other bailee.” However, these two provisions

are in direct conflict. In order to pay the insured the loss with no delay and at the same

time prevent the carrier or bailee from taking advantage of the payment to reduce their

liability, the majority of carriers use a loan receipt. Through this mechanism, the

insurance company lends the amount of the loss to the policy owner, subject to the

condition that the loan will be repaid only if the loss is recovered from the carrier or

bailee in a lawsuit brought in the name of the insured. Historically, the courts have

upheld this method of handling the conflict.

2. Loss Conditions

Abandonment


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Because insurance companies are established to provide protection and do not wish to

operate as “salvage companies,” the insured is not allowed to simply abandon damaged

property by leaving it with the insurance companies.

Appraisal of the property

This condition provides that if either the insured or the company wishes to have a

formal valuation of a loss, or cannot agree on the assessed value, they will separately

choose and pay for an appraiser; if those two appraisers cannot agree on a valuation,

the dispute is given over to a mediator or umpire, who is either selected by the

appraisers or is appointed by a judge; subsequently, any agreement that may be

reached by any two of these three parties is the resulting valuation of the loss. Any

extenuating expenses are to be divided equally between the insured and the insurer.

Duties in the event of loss

In the event of a loss, the insured is required to supply information to the insurance

company in the form of a notice of loss. Within sixty days, the notice of loss must be

followed by a signed, sworn statement of loss. In addition, the insured is expected to:

• Cooperate with the insurance company; this includes granting permission for

inspections of property and business records and submitting to questioning

under oath.

• Separate any damaged property from any undamaged property.

• Notify the police if any law may have been broken in the course of the loss.

• Protect the property from any further damage.


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• Keep track of the costs involved in protecting the property for consideration in

the settlement of the claim.

• Immediately forward any legal papers to the insurance provider.

• Abstain from making any statements about the loss without permission of the

insurance provider.

• Allow the insurance company to inspect the property and records concerning the

loss.

Insurance under multiple coverages

If two or more of the policy’s coverages apply to the same loss, the insurance provider

will not pay more than the actual amount of the loss. This condition prevents multiple

coverages, under a single policy, from providing more than one recovery in the event of

loss. Limits cannot be “stacked.”

Loss payment

The insurer will pay or make good on any loss covered under this policy condition

within thirty days after:

• The insurer reaches an agreement with the insured.

• The entry of final judgment.

• The filing of an appraisal award.

The insurance provider will not be liable for any part of a loss that has been paid or

made good by others.


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Relationship to other lines of insurance

If other insurance is covering damaged or lost property, the commercial inland

insurance forms answer on an excess insurance basis; subsequently, the coverage

provided by commercial insurance will apply only after any, and all, other insurance

covering the property has been exhausted.

Pair, sets or parts

This condition, found in some inland marine coverage forms, furnishes the procedure

for recovery of losses that are part of a pair (for example, one of two candlesticks), a set

(for example, a single knife from a set of knives), or a part (for example, a missing

piston from an engine); it limits the amount of the recovery to a fair and equitable

proportion on a damaged article that is a component of something. An article that is

part of a pair or set may be repaired if this will restore it to its original value. If this

cannot be done, the loss is calculated as the difference between the value before and

after the damage. In the event of loss or damage to any part of an insured item, the

insurer is responsible only for the value of the lost or damaged part. This is sometimes

referred to as the “machinery clause” or “labels clause” because the loss of a part

usually involves some sort of mechanical device or damage to labels, capsules, or

wrappers; these clauses are sometimes found in nonfield policies where they will not be

subjected to restricted provisions.

Privilege to adjust with owner


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When the personal property of others is damaged while in the insured’s custody, the

insurance provider may directly make payment to the owner of said property; this will

satisfy any claim of the insured. In addition, under this condition, the insurance

provider, at its expense, may elect to provide a defense for the insured against any

action at law resulting from the claims involving the property of others.

Recoveries

This condition conveys to the insurance provider any items that are recovered or

salvaged subsequent to a payment for a covered loss. Any recovery on a loss will accrue

entirely to the insurance provider’s benefit until the sum paid by the provider has been

made up.

Reinstatement of limit after loss

Except for payment of a claim for the total loss of a scheduled item, payment of losses

does not reduce the policy’s amount of insurance.

If a total loss to an item that is specifically scheduled occurs, any unearned premium

for the loss of that item will be refunded to the insured, or it may be applied to the

insurance premium for a replacement item; however, if property is totally lost, the limit

of insurance for that property will not be reinstated.

In some nonfiled policies, an alternative provision declares the premium fully earned in

the event of a total loss. For example, a clause might read, “Each claim paid hereunder

reduces the amount of insurance by the sum paid, but the amount of such loss shall be


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reinstated automatically, and a pro rata additional premium shall be payable from the

date of the occurrence when the amount of such loss is determined.”

This type of clause should be eliminated because insureds are often disgruntled by

having to pay additional premiums to reinstate coverage after a loss. If it is not possible

to eliminate the provision, the insurance company should be obligated to quote the cost

to insure the unearned premium. The ensuing charge should be the rate multiplied by

one-half of the premium due to the fact that, on average, losses will occur when half the

premium has been earned.

Transfer of rights of recovery against others to the insurer

This condition defines the insurer’s subrogation rights under the policy; the insurer

acquires any rights the insured may have in recovering monies from a third party. This

provision indicates that the insured must do everything necessary to secure the

insurer’s rights and must not do anything after a loss that might potentially impair

those rights. This condition in the commercial inland marine loss conditions does not

include the specific provision to waive rights of recovery that is found in the

commercial property conditions. By implication, however, the insured has the right to

waive subrogation before a loss because the provision declares that the insured must

not do anything after a loss to impair the rights of the insurance company.

Conditions similar to those in filed policies are found in nonfiled commercial inland

marine policies as well. In contrast to the filed forms, however, no standardized

wording is required in the nonfiled forms. Additionally, conditions are very often

modified or possibly eliminated through negotiations between the producer and the


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underwriter. In addition, certain policies, such as those covering transportation perils,

contain clauses that are substantially different from those found in filed forms.

Common Exclusions

Exclusions set the boundaries on the promises of the insuring agreement. They are

included for the purpose of clarification of coverage, eliminating risks that cannot be

insured at reasonable rates, or excluding coverage that might encourage the policy

owner to be careless or reckless. Commercial inland marine exclusions deserve a

producer’s scrutiny because many of the forms offer very broad protection in the

insurance agreement but limit that same coverage through exclusions. Because of the

wide variety of property covered by inland marine insurance and the diversity of forms

used to cover that property, each of the policy exclusions needs to be read thoroughly

and carefully.

Beginning in 1986 with the introduction of the Insurance Services Office simplified

coverage forms, all classes of inland marine property have been insured against risks of

direct physical loss; this covers loss or damage to insured property unless the event(s)

that caused the loss is excluded. (Although the types of perils have already been

discussed, they need to be repeated here since they play an extremely important role in

the nature of exclusions.) This class of coverage is known as “open perils” coverage

(sometimes referred to as “all risks”), where any loss or damage is covered unless

specifically excluded in the policy, as opposed to “named perils” coverage, a narrower

coverage in which an insurance policy covers lost or damaged property only if such

loss or damage results from one of the perils specifically named in the policy. The


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actual coverage is defined by the exclusions. Prior to the ISO’s simplified language

program, the policies promised to insure against all risks of direct physical loss, except

those that were specifically excluded. The legal system played a significant role

concerning the wording (and subsequent rewording) of the commercial inland marine

coverage forms. A quick examination of two related cases can serve to further clarify

the courts’ impact.

In 1982, the California courts held “that certain losses, even if excluded in the contract,

were, in fact, covered because the occurrence that started a chain of events leading to

the loss was not excluded.” In tort law, this is known as proximate cause. In the

insurance industry, this is known as the concurrent causation doctrine.

In the case of Safeco Insurance Company of America v. Guyton, the California Federal Court

held “that damage caused by flood waters had to be covered by an ‘all risks’

homeowner’s policy, despite its flood exclusion, because the flooding was caused by a

third party’s negligent maintenance of flood structure, which was considered an

insured peril.”

In a related case (Premiere Insurance Company v. Welch) the following year, the court

held that “the earth movement exclusions of an ‘all risks’ homeowner’s policy did not

exclude landslide damage to the insured’s house because faulty installation of a drain

by a third party was considered to be a covered, concurrent cause of loss.”

One could conclude from these two cases that concurrent causation losses are most

likely to be insured under “all risks” policies, such as the old commercial inland marine

policies. The courts were suggesting that, under an “all risks” provision, negligence of a


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third party is considered an insured peril because it is not specifically excluded in the

policy.

In response to the court rulings, the Insurance Services Office reworded the phrase “all

risks of direct physical loss” to “risks of direct physical loss.” By eliminating the word

all, the ISO intended to avoid creating an expectation that a policy would cover any

loss, even if it was specifically excluded.

The concurrent causation exclusions that follow remove certain coverages from the

contract whether or not any other concurrent causes or events contribute to a loss. The

ISO language now excludes loss caused directly or indirectly by any of the following,

irrespective of any other cause(s) or event(s) that contributes concurrently or in any

sequence to the loss:

• Concurrent Causation Exclusions

War and military action

This exclusion applies to four related causes of loss:

• War with another nation

• Civil War

• Warlike action by any government sponsored military force

• Acts of insurrection, rebellion, revolution, or usurped power

Government action


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This exclusion declares that the seizure or destruction of covered property as an act of

the government is not covered. For example, the government’s power of eminent

domain allows the government to seize private property for public use. However,

authorized destruction of property by the government in order to prevent the spread of

fire is covered.

Nuclear hazard

Like the risk of war, nuclear reaction is a true catastrophic exposure. This exclusion

eliminates coverage of loss by any weapon using atomic fission or fusion, or by nuclear

reaction, nuclear radiation, or radioactive contamination regardless of the cause.

However, the insurance company will cover for a direct loss caused by any resulting

fire if said fire would otherwise be covered under this coverage form.

Moral and morale hazard

Exclusions that are related to moral and morale hazards attempt to eliminate coverage

for certain types of losses caused by dishonesty, neglect, recklessness, or lack of concern

on the part of the insured.

It is a fact that the property covered by commercial inland marine insurance is very

often of high value, quite mobile, often difficult to identify, and readily convertible into

cash. It logically follows that these characteristics make this line of coverage particularly

susceptible to possible unethical or even illegal behavior on the part of the insured.

Moral hazard, as a rule, arises from a combination of moral weakness and financial

difficulty. For example, facing a financial crisis, the owner of an insured piece of


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valuable art may claim a theft for the needed cash but conceal the piece of art; the

insured could then collect on the policy and still own the piece of art. A second example

of a moral hazard would be a situation in which an insured attempted to purchase

enough coverage to insure his business for $100,000,000 even though it was worth only

a maximum of $500,000. In this case, it would benefit the insured if his business were to

burn to the ground. The insurance companies would not allow a client to take

advantage of this situation by not allowing the client to insure the business for more

than its appraised value. It is a fundamental rule of underwriting that where moral

hazard is suspected, the underwriter must turn down the application. Searching for

danger signals and avoiding risks that involve a moral hazard call for careful

investigation and vigilance on the part of the underwriter.

A morale hazard, a related problem for insurers, is essentially the absence of a desire to

safeguard property or the absence of concern over the reasonable settlement of a

liability or compensation claim. It is an attitude problem tending to merge into moral

hazard. For example, a policy owner may not actually set his business on fire but

demonstrates little, if any, concern about allowing conditions to exist that potentially

could cause a fire. In addition, the insured may choose to do little to prevent a fire from

spreading once it has started. It is also a morale hazard if the insured purchases life

insurance and then commits suicide. Most insurance companies will refuse to pay the

survivors under this circumstance; some companies will pay only after two years of the

policy’s purchase date.

Specifically regarding commercial inland marine insurance, certain policies exclude

theft from an unattended or unlocked vehicle, and the contractors equipment form

excludes loss due to weight of a load that exceeds the manufacturer’s rated capacity.


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Excessive hazard

Property subject to an excessive hazard such as property on exhibition is usually

excluded from coverage since the average policyholder does not need such protection.

However, it can be covered for an additional premium.

Property normally covered by other insurance

Property normally covered by other insurance is rated on a different basis and is also

excluded under a commercial inland marine “all risks” contract. For example,

automobiles, motorcycles, snowmobiles, and aircraft are typically insured under

separate, specially designed policies.

Policyholder carelessness

Losses due to marring and scratching of fragile articles are usually the subject of

exclusion as a loss due to any refinishing, renovating, or repair process on the part of

the insured. In each case, these losses are partially or wholly within the control and care

of the insured, and it is felt that to cover such losses could very well lead to carelessness

or dishonesty on the part of the policyholder and an excessive number of claims.

Loss due to artificially generated electricity


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Loss due to artificially generated electricity, if include at all, is more common in the

business coverages. It applies to electrical apparatus only and does not exclude

coverage for any subsequent fire.

Dampness and extremes of temperature

The exclusion of dampness and extremes in temperature may be found in inland

marine contracts that are particularly susceptible to such risks. The rationale is similar

to that involved in the wear and tear exclusion.

Employee dishonesty:26

Most commercial inland marine policies exclude employee dishonesty. The insurance

companies are not interested in duplicating the coverage where there is

misappropriation, secretion, infidelity, or any dishonest act on the part of the insured,

his employees, or others to whom the property may be entrusted. For example, the

valuable papers and records form excludes loss “caused by or resulting from dishonest

acts by you, anyone else with an interest in the property, or your or their employees or

unauthorized representatives, or anyone entrusted with the property.”

Unexplained or mysterious disappearance

Loss of property that is missing without clear evidence that it was stolen is not covered

under this exclusion. For example, suppose that a jeweler places a ring in his pocket

26 NOTE: Carriers for hire are not subjected to this exclusion.


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after showing it to a potential customer. He forgets about the ring until he arrives at his

house later that day and realizes that it is no longer with him. Although the ring might

have been stolen, there is no conclusive evidence of theft. It is possible that the ring fell

out of his pocket early in the day and became lost. The insurance provider probably

would not pay for the claim for the missing ring if the policy excludes unexplained loss

or mysterious disappearance.

Inventory shortage

The exclusion of loss that is discovered upon taking inventory complements and

extends the unexplained or mysterious disappearance exclusion. A physical inventory

almost always differs from inventory determined from the insured’s books and records.

In the event that the physical inventory is less than the book inventory, that fact alone is

not sufficient to prove a loss. The shortage might have resulted from numerous causes

which are not covered by the policy. Some examples of this are employee dishonesty,

record-keeping mistakes, or inaccurate counting of the inventory. However, if the cause

of loss can be shown to have been caused by a covered peril, the amount of the loss can

be determined by using inventory calculations.

Earth movement

This exclusion eliminates coverage for both earth movement and volcanic eruption,

explosion, or effusion. Earthquake and other types of earth movement (such as

landslide, mine subsidence, or earth sinking) are excluded. Volcanic action, which

includes the aboveground effects of a volcano, is covered as a basic peril; however, the

belowground concussion, which is similar to an earthquake, would be excluded.


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Volcanic eruptions typically take place over a period of days or weeks. This creates a

unique dilemma: Does a separate deductible apply to each eruption? The answer is

“no”; the form states that all volcanic eruptions that occur within a single week are

considered as a single occurrence and, therefore, are subject to a single deductible and

one limit of insurance.

Water

Loss that is a direct result of flood, mudslide, or water that backs up or overflows from

a sewer or drain is excluded. Damage caused by water under the surface of the ground

that presses, flows, or seeps through foundations, walls, floors, basements, doors,

windows, or other openings is excluded also.

This exclusion does not eliminate coverage for all damage caused by water. For

example, water damage resulting from firefighting actions or sprinkler leakage is

covered by the basic filed forms, and other types of water damage coverage are

provided by special, nonfiled forms. The broader nonfiled forms contain the following

four important exclusions:

1. Discharge or leakage from any of the following:

A. An automatic sprinkler system.

B. A sump pump or related equipment and parts, including

overflow due to sump pump failure or excessive volume of

water.

C. Roof drains, gutters, downspouts or similar fixtures or

equipment.


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2. The cost to repair any defect that caused the loss or damage.

3. Loss or damage caused by or resulting from continuous or

repeated seepage or leakage that occurs over a period of two or

more weeks.

4. Loss or damage caused by or resulting from freezing, unless:

A. The insured does his best to maintain heat in the building

or structure.

B. The insured drains the equipment and shuts off the water

supply if the heat is not maintained.

A separate flood insurance policy, written through the National Flood Insurance Program

or by a private insurance company reinsured by the program, can cover flood-related

perils. Flood insurance is also available under the Flood Coverage Endorsement.

Trick and device and false pretense

The trick and device and false pretense exclusion is implemented to cover for losses in

the event that the insured might be duped into voluntarily giving up possession of

property. For example, somebody might impersonate a delivery service employee, and

the insured might surrender a number of packages to the imposter. Or a dry cleaner

might hand over cleaned clothing to somebody pretending to be a customer.

This exclusion also applies to any person in the custody or care of the property. For

example, the exclusion would apply when an employee, an agent, or a transportation

firm is tricked into voluntarily giving possessions of the insured’s property to a thief.


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However, a fraud and deceit clause, which can improve coverage by covering losses

that would otherwise be excluded, is often available. A policy containing such a clause

would provide the insured with better protection than a standard policy.

Unauthorized Instructions

Closely related to the trick and device and false pretense exclusion is the exclusion of

loss caused by “unauthorized instructions to transfer property to any person or any

place.” One type of loss that is not covered due to this exclusion is computer fraud. This

type of loss might occur when an outsider gains access to an insured’s computer system

and enters fraudulent shipping instructions.

• Other Common Exclusions

Under current commercial inland marine policies, the insurance provider will not pay

for a loss caused by or resulting from:

• Weather conditions

• Acts or decisions (inclusion or exclusion)

• Faulty, inadequate or defective conditions

• Wear and tear

• Collapse

Any ensuing losses occurring from a non-excluded cause of loss are covered; the policy

exclusions do not preclude coverage for other losses that may “flow from” the excluded

event, if the other loss is covered in the contract.


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Weather conditions

Weather conditions include lightning; windstorm; hail; weight of snow, ice or sleet; or

rain that collects on a roof. This exclusion applies only if weather conditions contribute

in any way with one of the concurrent causation exclusions to cause a loss.

Acts or decisions, including any failure to act or decide, of any person, group,

organization, or government body

This condition ensures that if a covered cause of loss results from acts or decisions (or

failure of such), coverage will apply; however, any excluded loss that is caused by or

results from acts or decisions (or failure of such) will not be covered.

Faulty, inadequate, or defective conditions

This condition includes:

• Planning, zoning, development, surveying or siting.

• Design, specifications, workmanship, repair, construction, or renovation.

• Remodeling, grading or compaction.

• Materials used in repair, construction, renovation or remodeling.

• Maintenance of a part or all of any property wherever it is located.

As an example of a covered ensuing loss with regard to the last two exclusions, an

insured whose business burns because a contractor made the decision to repair a


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furnace, instead of properly replacing it, will be covered for any resulting fire damage

to property covered under the commercial inland marine coverage form.

Wear and tear

This condition excludes any quality in the property that causes it to damage or destroy

itself, or resulting from:

• Hidden or latent defect

• Insects

• Vermin or rodents

• Gradual deterioration

• Mechanical breakdown

• Corrosion rust

• Dampness

• Heat or cold

• Depreciation

Because it is inevitable that the physical condition of property will deteriorate

over time, the wearing out of property is not a risk of loss.

A related type of loss, that arising from inherent vice, is also excluded. This refers to

losses arising out of a quality within an object that results in the object’s tending to

destroy itself. For example, tires will deteriorate even if they are never actually put into

actual use.


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With the exception of accounts receivable, film, and mail, the remainder of the

commercial inland marine forms contains a variety of combinations of the

aforementioned items, but all forms include “gradual deterioration” and “any quality

in the property that causes it to damage or destroy itself.”

Collapse:

This condition removes coverage for collapse in filed forms (collapse is seldom

excluded in nonfiled forms) except as provided by the additional coverage provisions

explained below.

Additional Coverage Provision-Collapse

Concerning any commercial inland marine coverage, damage to insured property

resulting from collapse is covered if caused by one or more of the specified causes of

loss: windstorm; hail; fire; lightning; explosions; aircraft; smoke; motor vehicles; civil

disturbance; vandalism; malicious mischief; broken glass; falling objects; weight of

snow, ice or sleet; water damage; hidden decay; hidden insect or vermin damage;

weight of people or personal property; weight of rain which collects on a roof; use of

defective materials or materials in construction, remodeling or renovation if the collapse

occurs during the course of construction, remodeling or renovation.27

Accounts Receivable

27 NOTE: The “use of defective material or methods of construction, remodeling or renovation” allows recovery for a loss or damage to insured property resulting from collapse losses that are caused by defective materials or construction methods only if the collapse occurs during the course of the construction. After a structure is finished, collapse is covered only if caused by one or more of the aforementioned causes.


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As with all commercial inland marine forms, the accounts receivable coverage form - CM

00 66 - is assimilated with a declarations page, a common policy form, and an inland

marine general conditions form to create a policy.

At times, damage or destruction may make it impossible to collect on monies owed to

the insured because his or her records are not readily available. This possible risk led to

the creation of protection for accounts receivable. Accounts receivable insurance is

really a type of consequential insurance, so named because it is not an immediate risk.

The loss is a result of a consequence deriving from the direct physical harm to tangible

property. The risk insured by the accounts receivable coverage form is loss resulting

from an insured’s inability or impossibility to collect monies owed to him because of

accidental loss or damage to accounts receivable by an insured peril. It does not cover

losses arising from debtor’s bankruptcy or unwillingness to pay (credit insurance can

cover such bad debt losses). In order for an insured to qualify for coverage, the loss or

damage to these records (evidence) must result from a covered cause of loss. Coverage

is on an “all risks” basis, but it applies only while the records are on the premises. The

policy requires that the records must be secured in described vaults, safes, or

containers, except when they are in use.

• Coverage

The insurance provider will pay for the following:

• All amounts due from the insured’s customers that the insured is unable to

collect.


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• Interest charges on any loan required to offset amounts the insured was unable

to collect pending an insurance company’s payment of those amounts.

• Collection expenses in excess of the insured’s normal collection expenses that are

rendered necessary by the loss.

• Other reasonable expenses that the insured incurs in order to re-establish his

records of accounts receivable.


Coverage does not apply to:

• Records of accounts receivable in storage away from the premises shown on the

declarations page.

• Contraband or property in the course of illegal transportation of trade.

• Protection of Records

Whenever the insured is not open for business, and except while said insured is actually

using the records, the insured must keep all records of accounts receivable in

receptacles that are described in the declarations.

An insured can lower his premiums by maintaining high safety standards for his or her

records and by creating the conditions by which any foreseeable problems could be

logically anticipated. It should be noted that the Insurance Services Office rules allow

substantial rating credits (which will lead to lowered premiums) for loss control


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measures, such as duplication of records in a timely manner, storage of the records at

another premises, or storage of accounts receivable records in safes or vaults.

• Limitations

Under form CM 00 66, the insurance is subject to three limitations, each of which is

specified on the declarations page, and is not subject to a deductible. These limitations

apply to the following:

• Property at the named insured’s premises.

• Property away from the named insured’s premises.

• Property at all locations. Under this limitation, the policy is subject to an overall

aggregate amount.

These limitations represent the maximum amount that the insurance provider will pay

for losses in any single occurrence.28

• Coverage Territory

The insurer will cover records of accounts receivable that are:

1) Within the insured’s premises (the address shown on the declarations page).

28 NOTE: If any single occurrence, such as a flood or a hurricane, damages records being held at more than one location, the insured cannot recover any monies in excess of the aggregate, even if the total sum of the damages exceeds the overall limitation. For example, if an insured has records safely stored at three locations, each with its own $10,000 maximum, and the records at all three locations suffer damage that totals $30,000, if the aggregate amount was set at $20,000, the insured will recover only that $20,000.


357

2) Away from the insured’s premises while in transit or within the premises of others if

those premises are located or the transit is within the United Sates, Canada, or Puerto

Rico.

There is no coverage for records of accounts receivable that are in storage away from

the premises established on the declarations page; furthermore, the insured must have a

limit of coverage away from the premises determined on the declarations page in order

to be covered. If an insured does not need or want such added protection, the space on

the declarations page for property away from the insured’s premises is left blank.

• Coinsurance

All accounts receivable, except those in transit, must be insured for at least 80% of their

total value at the time of loss, or the insured will incur a penalty. This penalty is that the

insurance company will pay only the proportion of any loss that the limit of insurance

shown in the “Declarations for Coverage Applicable at All Locations” bears to 80% of

the total value of all accounts receivable at all locations as of the time of any loss;

however, this penalty will not be applicable to records of accounts receivable in transit,

interest charges, excess collection expenses or expenses to re-establish the insured’s

records of accounts receivable. For example, if an insured had records that were valued

at $200,000 for all locations and maintained insurance of only 60% of that value

($120,000), the insurance company would be required to pay only three-quarters of a

loss ($120,000 / $160,000).

• Exclusions


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Of all the exclusions that are common to all commercial inland marine insurance

coverage forms that were addressed in Unit V (Common Exclusions), the only one that

does not apply to the accounts receivable coverage form is the wear and tear exclusion.

Logic would suggest that any chance of loss to records that are properly stored is highly

unlikely.

The insurance company will not pay for loss caused directly or indirectly by any of the

following. Such loss is excluded irrespective of any other cause(s) or event(s) that

contributes concurrently or in any sequence of the loss:

Delay, loss of use, loss of market or any other consequential loss

This exclusion includes coverage for losses that are not physical losses, but result from

physical losses.

Dishonest acts by

• The insured or the insured’s employees or authorized representatives.

• Any other person with an interest in the property, or his or her employees or

authorized representatives.

• Any other person or persons to whom the property is entrusted.

This exclusion applies whether or not such named persons are acting alone or in

collusion with other persons or such acts occur during the hours of employment;


359

however, this exclusion does not apply to covered property to others who are

considered carriers for hire.

Alteration, falsification, concealment or destruction of records of accounts receivable

This exclusion is in effect when someone attempts to conceal or otherwise falsify the

wrongful giving, taking or withholding of money, securities, or other property (a moral

hazard); however, the exclusion applies only to the extent of the wrongful giving,

taking, or withholding itself. For instance, if, in an effort to conceal the illegal act of

embezzlement, an insured’s employee destroys the insured’s accounts receivable

records, coverage for any subsequent impossibility to collect accounts receivable is

precluded, but only with regard to those losses directly related to the illegal act of

embezzlement. The insured would be denied coverage for any uncollectable accounts

that were the focus of the fraudulent act of the embezzler; however, the insured could

still collect insurance monies for any losses resulting from destruction of those records

that are unconnected to the embezzlement.

Bookkeeping, accounting, or billing errors or omissions

Losses caused by any of these circumstances are more aptly covered under a

professional liability policy, such as that for an accountant’s errors and omissions.

Electric or magnetic injury, disturbance or erasure of electronic recordings

This exclusion allows for no coverage for events that are caused by or resulting from:

• Programming errors or faulty machine instructions.


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• Faulty installation or maintenance of data processing equipment or component

parts.

• An occurrence that took place more than one hundred feet from the insured’s

premises.

• Interruption of electrical power supply, power surge, blackout or brownout if the

cause of such occurrence took place more than one hundred feet from the

insured’s premises.

The insurance provider will, however, pay for direct loss caused by lightning.

Voluntary parting

This exclusion is in effect if there is any voluntary parting with any property by the

insured or anyone entrusted with the property if induced to do so by any fraudulent

scheme, trick, device, or false pretense.

Unauthorized instructions to transfer property to any person or any place

Under this exclusion, loss caused by any unauthorized means is not covered.

Shortage found upon taking inventory

Because inventory records may not be completely accurate, any shortage discovered

during the time of inventory is not covered.

• Coverage Extension—Removal


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The accounts receivable coverage form, if not read in its entirety, may appear to exclude

coverage for any property which is removed from the insured’s premises due to an

impending danger of loss if the property is removed to another of the insured’s

locations not described on the declarations page. This is due to the fact that the coverage

territory includes only property within the described location, or while in transit, or

within the premises of others. Nevertheless, the coverage form contains an extension

that provides coverage for any loss occurring while accounts receivable have been

removed from the insured’s premises because of an impending loss, such as fire. The

property is covered while it is at a secure location away from the declared premises, or

while it is being taken to or returned from that place. Furthermore, coverage under this

extension is applicable only if the insured furnishes the insurer with a written notice

within ten days of the removal of the records to a secure location. This coverage

extension, however, does not represent a separate insurance amount; it is included

within the limit of insurance that is applicable to the premises from which the accounts

receivable records have been removed.

• Recoveries

The insured will pay the insurance provider the amount of all recoveries he or she

receives for a loss covered by the company; however, the insured is entitled to any

recoveries in excess of any amount the provider has already paid.

• Determination of Receivables


362

This condition includes the method of valuation which is to be in effect when adjusting

for losses and the method of calculating settlement amounts.

In the event that the insured cannot accurately establish the amount of accounts

receivable outstanding as of the time of loss, the following method will be

implemented:

First, the parties determine the total of the average monthly amounts of accounts

receivable for the twelve months immediately preceding the month in which the loss

occurs and adjust that total to any normal fluctuations in the amount of accounts

receivable for the month in which the loss occurred or for any demonstrated variance

from the average for that month. For example, the Blackstone Company has an average

outstanding monthly accounts receivable balance of $100,000, but suffers a loss to its

records in December, a month when accounts receivable are inflated to $150,000 due to

holiday purchases; in this situation, settlement of the claim is based on the December

balance, not the $100,000 monthly balance.

Succeeding this, the following will be deducted from the total amount of accounts

receivable, irrespective of how the amount is established:

• The amount of the accounts for which no loss exists; for example, any records

that were saved.

• The amount of the accounts that the insured is unable to re-establish or collect.

• An amount to allow for reasonably foreseeable bad debts that the insured is

normally unable to collect.

• All unearned interest and service charges.


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• Endorsements

Policy owners whose accounts receivable are subject to wide fluctuations may opt for

coverage on a reporting basis; this is accomplished by endorsement CM 66 06. This

endorsement bases premium charges on values actually at risk. Values must be

reported correctly and within a “reasonable time,” and a sufficient limit of insurance

must be maintained to cover the maximum value at any time. Contrasting this, using

the standard, non-reporting coverage for insuring fluctuating accounts receivable

requires the premium payment to be based on the maximum amount of accounts

receivable at risk at any time during the policy period, allowing no premium credit for

those periods when the number of receivables is lower.

Two other endorsements are available for use only with the accounts receivable

coverage form:

1. Endorsement CM 66 01 allows the insured to exclude loss of records of receivable

accounts pertaining to specified customers, a request that may be initiated only from an

insurer’s underwriting department because certain accounts may be too speculative or

valuable to safely insure.

2. Endorsement CM 66 04 stipulates that the insured will practice a form of risk

management by way of risk reduction and duplicate a specified percentage of its

records of accounts receivable, and keep those records for at least six months at a

specified other premise. The advantage of duplicating records and keeping them

separated is that an insured can qualify for rating credits since the probability of loss is

lessened.


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Camera and Musical Instruments Dealers

By employing form CM 00 21, camera equipment and musical instruments dealers can

insure their inventories. The two floater policies may be considered together because

they are identical except for the description of the inventory. As is true with the other

commercial inland marine coverage forms, CM 00 21 is assimilated with a declarations

page, a common policy conditions form, and an inland marine general conditions form

to create an insurance contract.

• Eligibility

Marketers in cameras or musical instruments and any related accessories and

equipment (such as furniture, fixtures, office supplies, improvements and betterments,

and fittings) and any similar property of others that is in their care, custody, or control

are eligible for the CM 00 21 coverage provisions. This form covers property while at

the premises of the insured or in transit. If it is written on a camera or musical

instrument department of a discount or department store, the coverage does not apply

to any assemblage that is unusual to the insured’s department; additionally, dealers

engaged primarily in the manufacturing operations may not be insured under form CM

00 21.

• Coverage


365

Subject to specific exclusions that will be described in detail later, the camera and

musical instruments dealers coverage form provides for open perils coverage. Although

it is first written on a standard amount basis, endorsement CM 99 02 is available to

convert it to a reporting form basis. In cases where the insured has wide fluctuations in

the amount of his inventory, this is advantageous because a limit of insurance is set for

the highest value at any given point in time, but the premium is based on the average

value at risk during a given year. The average is calculated from periodic reports that

the insured makes covering the total values available at the time of the report; the

reports are typically conducted on a monthly basis.


The camera and musicians instruments coverage territory includes property located

anywhere within the United States, Canada, and Puerto Rico.


Property covered under CM 00 21 consists primarily of cameras or musical instruments

and related equipment and accessories; however, this broad definition includes

miscellaneous items that a dealer may carry in the interest of his customers.


Covered property does not include:


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• Property that has been sold and delivered to customers, including property sold

under a deferred payment sales agreement.

• Accounts, bills, currency, deeds evidences of debt, money, notes or securities.

• Furniture, fixtures, office supplies, improvements and betterments, machinery,

tools, fittings, patterns, molds, and models.

• Property while in the mail, unless registered mail or government insured mail.

• Contraband or property in the course of illegal transportation or trade.

• Coinsurance

Form CM 00 21 is subject to a coinsurance requirement of 80%. All covered property,

except property in transit, must be insured for at least 80% of its total value as of the

time of loss, or the insured will incur a penalty. This penalty is that the insurance

provider will pay only the proportion of any loss that the limit of insurance shown on

the declarations page for all covered property at all locations bears to 80% of the total

value of all property at all locations as of the time of the loss.

• Limitations


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Coverage under CM 00 21 is subject to five limitations; each of these is to be included in

the declarations page. Limitations apply to any of the following:

• Property at each location identified as an insured location.

• Property that employees have with them when they are away from an insured

location.

• Property that is in transit.

• Property not at an insured location, but not in transit or in the care of an

employee (for example, cameras or musical instruments that are on loan to a

school).

• “All covered property at all locations”; under this limitation, the policy is subject

to an overall aggregate limit.

• Theft Damage to Buildings

In addition to the collapse peril conditions discussed in UNIT V, a coverage extension

provides for theft damage to buildings as well as certain equipment within buildings.

The insurance provider will pay for damage caused directly by theft or attempted theft

to:

• That part of any building containing covered property.


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• Equipment within the building used to maintain or service the building;

however, this applies only if the insured owns the building or is legally

responsible for the damage.

• The insurance provider will not pay for damage:

• That is caused by a fire.

• To glass or to lettering or artwork on glass.

This coverage extension is included within the limit of insurance applicable to the

covered property at the premises where the damage occurs.

• Exclusions

In addition to the exclusions common to all commercial inland marine coverage forms,

the camera and musical dealers coverage form is subject to the following additional

exclusions:

Water

Losses from flood, surface water, waves, tides, tidal waves, overflow of any body of

water, or its spray, and all weather driven by wind or not are excluded. However, the

insurance providers will pay for direct loss caused by any resulting fire, explosion or

theft if these causes of loss are otherwise covered under this coverage form. This

exclusion applies only to property at the insured’s premises. Both property in transit

and property off-premises in an employee’s care are covered for flood.

Earthquake


369

Earthquake itself is excluded; however in case of earthquake, the insurance provider

will pay for direct loss caused by resulting fire if said fire would otherwise be covered

under this coverage form. This exclusion applies only to property at the insured’s

premises.

Theft from an unattended vehicle

Theft from any unattended vehicle is excluded unless at the time of theft the vehicle’s

windows, doors and compartments were closed and locked, and visible signs of forced

entry were evident; however, this exclusion does not apply to property in the custody

of a carrier for hire, such as a delivery service.


This condition excludes coverage for losses that are not physical losses, but result from

physical losses. For example, if an expected shipment is delayed, and the insured’s

customers go elsewhere to purchase the product, this policy does not cover any

subsequent loss of income. In addition, no coverage exists for lost sales. For example, if

the insured’s inventory of cameras is destroyed just before a high-volume sales season,

the insurance provider is not liable for any anticipated sales.

Marring, scratching, exposure to light, breakage of tubes, bulbs, lamps or articles

made largely of glass (with the exception of lenses)


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Such losses are covered if caused directly by fire, lightning, windstorm, vandalism,

aircraft, rioters, strikers, theft or attempted theft, or by accident to the vehicle carrying

the property, if these causes of loss would otherwise be insured under this coverage

form.

Unexplained disappearance

If certain items are missing, it is possible they were stolen or inadvertently discarded;

irrespective of how they disappeared, no coverage applies.


If some inventory is missing, one cannot logically conclude that it was lost because of an

insured peril; therefore, no coverage applies.

Dishonest acts committed by

1) the insured or the employees or authorized representatives of the insured.

2) any other person with an interest in the property, or his or her employees or


3) any other person or persons to whom the property is entrusted.

This exclusion applies whether or not such persons are acting alone or in collusion with

other persons or such acts occur during the hours of employment; however, this

exclusion does not apply to covered property that is entrusted to others who are carriers

for hire.


371

Processing or work upon the property

The insurance provider will pay for direct loss by resulting fire or explosion, if these

causes of loss would otherwise be covered under this coverage form.

Artificially generated current creating a short circuit or other electric disturbance

with an article covered under this coverage form

However, the insurance provider will pay for direct loss caused by resulting fire or

explosion, if these causes of loss would otherwise be covered under this coverage form.

This exclusion applies only to the item of property where the electrical disturbance

occurs.

Voluntary parting

This condition excludes coverage for the voluntary parting by the insured or any

persons entrusted with the property if they are induced to do so by any fraudulent

scheme, trick, device, deception or false pretense.


Loss caused by the transfer of property without proper authorization is not covered.

• Additional Conditions

Valuation in the Commercial Inland Marine Conditions is replaced by the following:


372

1) Unsold property. The value of unsold property will be the least of the

following amounts:

• The actual cash value of that property.

• The cost of reasonably restoring that property to its condition

immediately before loss.

• The cost of replacing that property with substantially identical

property.

2) Sold property. The value of property sold but not yet delivered will be

the

insured’s net selling price after all allowances and discounts.

3) Property of others. The value of property in the insured’s care,

custody, or

control will be the lesser of the following amounts:

• The amount for which the insured is liable, plus the value of labor and materials

the insured may have added.

• The actual cash value, including labor and material the insured may have added.

4) Negatives, positives, or prints. Negatives, positives or prints are not

included in

the above three conditions; their value will be the cost of any unexposed film or

developing paper, including labor and materials that the insured may have added

in their developing.

Records and Inventory


373

The insured is required to keep accurate and current business records and to retain

them for three years after the policy term ends. These records will consist of the

following:

1) An itemized inventory of the insured’s stock in trade.

2) Records of all purchases and sales, whether cash or credit.

3) Records of property of others in the insured’s care, custody, or control.

4) Records of property the insured sends to others for any purpose.

The insured is further required to take a physical inventory of all stock in trade at least

once every twelve months.

Protective Safeguards

The insured is required to maintain the protective safeguards stated by same to be in

effect at a location when the coverage begins. If the insured fails to keep the protective

safeguards:

1) In working condition at a location; and

2) In operation when closed for businesscoverage for which the protective safeguards

apply is automatically suspended at that location. This suspension will last until the

equipment or services are back in proper working condition.

For example, if an insured neglects to maintain a declared smoke detector or sprinkler

system at his or her premises, fire damage is not covered as long as the declared

equipment is inoperable; however, theft or other coverages are not affected. In addition,

if a declared burglar alarm system is not maintained properly and theft occurs, other

coverages are not suspended.


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• Coverage Options

In order to suit the needs of a variety of insureds or to accommodate an insurance

provider’s particular concerns, the camera and musical instrument dealers coverage

form may be amended through any of the five following endorsements:

Additionally covered property

The camera and musical instrument dealers coverage form can be altered by

endorsement CM 99 01 to extend coverage to furniture, fixtures, and office supplies; the

insured’s interest in improvements to a landlord’s building; machinery, tools, fittings;

and patterns, dies, molds, and models. Signs may also be covered by another separate

endorsement--CM 00 28.

Coverage may be limited

Simply by substituting the word only for the word principally in the covered property

section of the form, coverage can be restricted to cameras and related equipment and

accessories, or to musical instruments and accessories.

The earthquake and flood exclusion may be expunged.

Increased limits of insurance for property in an employee’s custody and elsewhere


375

According to manual rules, the camera and musical instrument dealers coverage form

provides limits not to exceed 10% of the limit for the insured’s specified locations to

property in the employee’s care and elsewhere. For an additional premium, this limit

can be increased.

Reporting endorsement

Form CM 99 02 modifies coverage to a reporting basis.

Commercial Articles

• Coverage Covered property, as used in this conversion form, means:

• Property that is used by photography studios, including cameras, film and

related equipment and accessories.

• Property that is used by motion picture production companies, including,

projection machines, film, and related equipment and accessories.

• Musical instruments and equipment, including stationary organs used for

generating income or playing before the public.

• Property that is used by organizations, such as boards of education and

municipalities.


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Generally, the commercial articles form is intended to cover property that is used for

commercial purposes only.29

As with all other commercial inland marine policies, the commercial articles form is

assimilated with a declarations page, a common policy conditions form, and a

commercial inland marine common policy conditions form to create a policy. Although

provisions are in place for blanket coverage, a type of coverage covering all items within a

described class, the commercial articles form often requires that individual items be

scheduled (each insured item must be a listed and described separately).


Covered property generally does not include contraband or property in the course of

illegal transportation or trade. Specifically, property not covered under this coverage

form includes television cameras and equipment, coin or token operated devices,

property of camera dealers or manufacturers, and aerial or radar cameras.

• Additionally Acquired Property

The commercial articles form anticipates the acquisition of new property. As long as the

property is of a kind already insured by the form (not an excluded type of property),

automatic coverage is available on the new items for the lesser of 25% of the existing

29 NOTE: Camera or musical instrument dealers are not eligible for this coverage, as that specialized class of risk can be insured by the camera and musical instruments dealers form (CM 00 21) that was explained in Unit VII.


377

limit or $10,000. The coverage extension for newly acquired property ceases after thirty

days from the date of acquisition, at which time the policy owner is required to submit

a received property schedule to the insurance provider.


Any part (or all) of any property that is covered by the commercial articles form may be

insured on a blanket coverage basis. Blanket coverage insures covered classes of property

for one total amount of insurance; for example, $50,000 on camera equipment. No

single item within a covered area is assigned a specified value. When blanket coverage

is in effect on a commercial articles form, the form contains a 100% coinsurance

condition. This stipulates that the insurance must be carried to 100% of the value of the

insured property. In addition, when blanket coverage is in effect, the “additionally

acquired” property provisions are expunged.

CM 20 02 Large Schedule Endorsement: alternatively, if an insured does not elect to

comply with the 100% coinsurance provision, or does not wish to lose the additionally

acquired property requirement, but has a large number of items to be scheduled, the

implementation of form 2 CM 20 02 eliminates the need for a lengthy

schedule of items to be attached to the commercial articles form; however, the schedule

must be signed and dated by an authorized company representative, typically an

insurance agent.

Equipment Dealers


378

The Insurance Services Office equipment dealers coverage form is a filed “all risks”

form designed for dealers in mobile construction equipment and agricultural

equipment. (The American Association of Insurance Services files a similar form titled

Implement Dealers Coverage). The policy can be written on either a reporting or

nonreporting form.


As with all other forms under the scope of commercial inland insurance, the equipment

dealers form is combined with policy declarations, common policy conditions,

commercial inland declarations, and any applicable endorsements to create a policy.

Equipment dealers coverage is written as inland marine insurance under the

authorization of the National Marine Definition and Interpretation of the Powers of Marine

and Transportation Underwriters (addressed in the “Background” section). In addition to

mobile construction equipment and agricultural equipment, coverage is also provided

for dealers’ stock in trade (those specific items the insured sells) and similar property of

others in the care, custody, or control of a dealer.

The National Marine Definition establishes a fine line of distinction between the kinds of

mobile equipment that are covered under the equipment dealers form and those motor

vehicles specifically designed for uses on roads and highways. Mobile equipment such

as agricultural machinery and construction equipment can be insured under form CM

00 22. Conversely, motor vehicles designed specifically for use on roads and highways

are not proper subjects for coverage under this form.


379


Covered property under form CM 00 22 does not include:

• Automobiles, motor trucks, motorcycles, aircraft, or watercraft.

• Accounts, bills, currency, deeds, money, notes, securities, and evidence of debts.

• Property while in the course of manufacturer.

• Property leased, rented or sold, including property sold under a deferred

payment sales agreement after it has left the insured’s custody or the custody of

carriers for hire when the insured is responsible for the delivery.

• Furniture, fixings, office supplies, improvements and betterments, machinery,

tools, fittings, patterns, dies, molds, and models.

• Property of others described in the declarations.

• Contraband or property in the course of transportation of trade.

Regarding “furniture, fixtures, office supplies, improvements, and betterments,

machinery, tools, fittings, patterns, dies molds, and models,” coverage may be extended

to any of the aforementioned excluded items; this is accomplished by entering the

amount of insurance in the space provided in the declarations page for additionally

covered property by attaching form CM 99 01, the additionally covered property

endorsement.

In regard to “property of others described in the declarations,” the condition applies

only to any property of others that the insured does not wish to cover; if the insured

chooses, he can exclude specific property of others from his coverage under form CM 00


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22. The most common reason that an insured would request that property of others be

excluded is that the form does not include any provision for loss of use payments.

Given the kinds of equipment dealers might possess, loss of use could involve a

considerable amount of money. It is possible that in some cases, the damage from loss

of use amounts to more than the actual cost of the equipment itself; subsequently, as an

alternative, the insured may opt to cover property of others under a separate liability or

bailee coverage that makes provisions for these payment types.

Equipment Dealers Declarations

The equipment dealers declarations form that is recommended by the Insurance

Services Office consists of two pages (however, individual insurers may choose another

arrangement when printing their own declarations page). In addition to the policy

number, effective date, and rate and premium information, the first page contains a

schedule of the property to be covered and respective limits of insurance. Five separate

property categories, or items, are listed and described below:

• Property at the insured’s premises – with separate limits for coverages inside and

outside the describe building.

• Property at other premises acquired after the policy is in effect; this coverage

applies for only thirty days after the location is acquired. By that time, the

insured should have informed the insurer of the new premises and requested

that it be endorsed onto the policy.

• A provision that is intended to set a limit for property in transit.


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• A provision that applies a limit to property not at the insured’s premises, and not

included in any other of the three categories listed above.

• A provision that applies a total maximum for all property at all locations.

The rates and premiums section has spaces in which the insured can indicate

nonreporting or reporting rate and premium information. For the reporting form, there

are provisions for deposit premium (an estimate of the final premium), minimum

annual premium, reporting period (how frequently values are to be reported to the

insurer), premium adjustment period (when the actual premium will be calculated), the

premium base (either values or gross sales), and rates.

The applicable deductible along with a blank space for any special provisions that

potentially might be added to the policy will be shown on page two of the declarations.

There are spaces where separate limits of insurance for each of four kinds of

additionally covered property that, if coverage for them is desired, can be listed:

• furniture, fixtures, and office supplies.

• machinery, tools and fittings.

• patterns, dies, and molds.

• improvements and betterments.

• Scope of Coverage

The equipment dealers form (CM 00 22) promises to pay for “loss” (a specifically

defined term that means “accidental loss or damage”) to covered property from any

cause or loss.


382

• Collapse

The additional coverage of collapse that was discussed in Unit V is an included

coverage under the equipment dealers form; this provides coverage for damage arising

out of a building or structure collapse that is a result of one or more of the specified

causes of loss. Covered property is described as the insured’s stock in trade, principally

consisting of agricultural and construction mobile equipment, and similar property of

others in the care, custody, or control of said insured. As with all other marine forms,

coverage of loss is on an open perils basis: “risks of direct physical loss to covered

property except those causes of loss listed in the exclusions.”

• Theft Damage to Buildings Extension


to:

• That part of property of any building containing covered property.

• Equipment within the building used to maintain or service the building only if

the insured owns the building or is legally responsible for the building.

• Nevertheless, the insurer will not pay for damage:

• Caused by a fire

• To glass or to lettering or artwork on glass.

This coverage extension is to be included within the limit of insurance that is applicable

to the covered property at the premises where the actual damage occurs.


383

• Exclusions

In addition to the common exclusions to all commercial inland marine insurance

coverage forms, this coverage form is subject to the following conditions:

Water

This includes flood, surface waves, waves, tides, tidal waves, overflow of water or their

spray, and all weather driven by wind or not; however, the insurance company will pay

for a direct loss caused by any resulting fire, explosion or theft if these causes of loss

would otherwise be covered under the coverage form. This exclusion applies only to

property at the insured’s premises.

Delay, loss of use, loss of market, or indirect loss

This condition excludes coverage for losses that are physical losses, but physical losses.

For example, if an expected shipment is delayed, and the insured’s customers go

elsewhere to purchase the product, this policy does not cover any subsequent loss of

income. In addition, no coverage exists for lost sales. For example, if the insured’s

inventory of cameras is destroyed just before a high-volume sales season, the insurance

provider is not liable for any anticipated sales.



384

If certain items are missing, it is possible they were stolen or inadvertently discarded;

regardless of the nature of the disappearance, no coverage applies.


If some inventory is missing, one cannot logically conclude that it was lost because of an

insured peril; therefore, no coverage applies.

Dishonest acts by

• The insured, any of his or her employees or any authorized representatives.

• Any other person with interest in the property, or his or her employees or






for hire.

Processing or work upon property

The insurance provider will, however, pay for direct loss caused by resulting fire or

explosion if these causes of loss would otherwise be covered under this coverage form.

Artificially generated current creating a short circuit or other electronic disturbance

within an article covered under this coverage form


385

The insurance provider will pay for direct loss caused by resulting fire or explosion, if

these causes of loss would otherwise be covered under this coverage form.

Voluntary parting

Voluntary parting with any property by the insured or any or person or persons

entrusted with the property if induced to do so by any fraudulent scheme, trick, device

or false premise is not covered.

Unauthorized instructions

This exclusion is in effect if there are any unauthorized instructions to transfer property

to any person or any place.

• Coinsurance

All covered property, except for property in transit, must be for a minimum of at least

80% of its total value at the time of any loss, or the insured will incur a penalty; this

penalty is that the insurance provider will pay only the proportion of any loss that the

limit of insurance shown in the declarations for all covered property at all locations

bears to 80% of the total value of all property at all locations as of the time of loss.

When the coverage is written on a reporting basis, the coinsurance clause is waived in

favor of a full reporting clause. This means that, instead of using a coinsurance clause, the

insured is required to report all values on a monthly basis. The full reporting clause


386

stipulates that the insured receives only 90% of the amount otherwise due if any

required reports have not been submitted, or, if the last report of values filed prior to

any loss is less than the actual value at risk at the time the report is filed, the insured’s

recovery is reduced in the same proportion as the reported values bear to the actual

amount at risk.

For example, Herman, an equipment dealer, reported insured property values of

$100,000 on hand as of December 31; however, following a loss on January 20, it was

determined that Herman should have reported values of $150,000. As a result,

Herman’s insurance company paid only two-thirds of Herman’s loss, in the same

manner that Herman had reported only two-thirds of his value.

• Records and Inventory

The insured is required to keep accurate records of his or her business and retain them

for three years after the date of the end of the policy. These records will consist of the

following:

• Any itemized inventory of the insured’s stock in trade.

• Records of all purchases and sales, whether cash or credit.

• Records of property of others in the insured’s care, custody or control.

• Records of property the insured sends to others for any purpose.

The insured will also take a physical inventory of all stock in trade at least once every

twelve months.


387

Film

As with the other commercial inland marine coverage forms, the film coverage form

(CM 00 45) is combined with a declarations page, a common policy conditions form,

and the commercial inland marine general conditions to create a policy.

• Coverage

The insurance provider will pay for:

• Exposed motion picture film and its sound track or other sound record.

• Properly recorded magnetic or videotape and its sound track or other sound

record. Tape, under this coverage, is considered to be property recorded if it had

been replayed and checked after recording.

The insured must have these items shown on the declarations page and be the owner of

said items or be in the care, custody or control of such items.

NOTE: This coverage extends only to commercial operations, and not to private

productions of hobbyists.

The film coverage form is written on an open perils basis, subject to the terms in the

“property not covered” that will be discussed below. In order to qualify for coverage,

productions must be specified on the declarations page, and each production receives

its own insurance maximum. If a production is in process when the policy expires, and

the policy is renewed, the production must be listed on the renewal policy in order to


388

receive continued coverage. In addition, coverage of collapse is included as a part of the

film coverage form’s protection.



• Cutouts

• Unused footage

• Positive prints of film

• Library stock

• Contraband or property in the course of illegal transportation or trade

• Additional Exclusions

The film coverage form is subject to its own eight additional exclusions. Losses caused

by the following events are excluded from the film coverage form:

• Delay, loss of use, loss of market or any other consequential loss.

• Deterioration, atmospheric dampness or changes in temperature.

• Exposure of negative film to lights.

• Use of developing chemicals.

• Developing, cutting or printing of film or other laboratory work.

• Electric or magnetic injury, disturbance or erasure of electronic recordings or

videotape; however, the companies will pay for direct loss caused by lightning.


389

• Voluntary parting with any property by the insured or anyone entrusted with

the property if induced to do so by any fraudulent scheme, trick device or false

pretense.

• Unauthorized instructions to transfer property to any person or to any place.

• Policy Period

The insurer agrees to cover property until whichever of the following events occurs

first:

• The full quota of positive prints or films has been completed.

• The insured’s interest in the property has ceased.

• The policy period expires.

• The coverage is cancelled.


The insurerance providers cover any property under this form wherever it is located

within (or within fifty miles of) the United States, Canada, and Puerto Rico.

• Valuation

The value of covered property will be the cost of production costs covered by this

coverage form that are applicable to the production. In the event of loss, the covered

property will be the sum of the following amounts:


390

1). The cost of reproducing the lost or damaged property.

2). The reduction in value of undamaged parts of production.

The payment shall not exceed the value of the covered production as indicated

in the insured’s books as of the time of loss. The insured may use any available property

or other methods of reproduction to reduce the amount of loss.

The value of the covered property will not include the cost of a story, scenario, music

rights, continuity, permanent sets, owned wardrobes, and props. The majority of these

items can be insured under separate non-marine forms covering commercial property.

• Reports and Premium

The insured will send the insurer a written report for each production when this

coverage form ceases to cover that production. This report will state the actual cost,

related overhead expenses and any other expenses of the completed production for all

items covered by this coverage form. The insured’s report will list each studio,

laboratory, vault and cutting room used as well as the period of time this coverage form

insured the property at each of these locations. In addition, it will include such other

information the company may require. The actual premium to be charged for each

production will be based on the insured’s report and will be computed using the rate in

effect at the time coverage begins. If this actual premium is more than the premium for

this coverage, the insured will pay the company an additional premium. If it is less than

the premium paid, the company will return the difference to the insured.


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• Records

The insured will keep accurate records of his or her business affairs and retain them for

three years after the policy ends.

• Optional Coverages

As already mentioned, the film coverage form is issued on a reporting basis; however,

coverage may be converted to a nonreporting basis by attaching endorsement CM 45 01.

This endorsement replaces the reports and premium condition with an 80% coinsurance

clause; this clause states that all covered property, with the exception of property in

transit, must be insured for at least 80% of its actual value as of the time of loss; if the

insured fails to maintain this level of insurance, the insurer will pay only the proportion

of the loss that the limit for all locations bears to 80% of the total value of the covered

property at the time of loss.

Two other coverage option endorsements are available for use with form CM 00 45 01:

1) coverage may be restricted to specific locations, and 2) the reports and premiums

may be amended to require monthly reporting, instead of the per production reporting

that is standard for the film coverage form.

Floor Plan


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A floor plan is an arrangement by which merchandise or equipment is placed in the

custody of a dealer by the manufacturer or wholesaler of the equipment. Floor plan

coverage is written to cover dealers’ merchandise that has been financed through a

lending institution; in return, the merchandise or equipment is used as a guarantee for

the loan. It usually covers property in which the insured has an interest or in which the

insured and a secured lender have a mutual interest. As the pledged unit is sold, the

loan secured by the unit is repaid. Form CM 00 52 covers property that is on premises,

in transit, or at an unscheduled premise. Coverage ceases at the time the unit is sold to

the customer. This arrangement is typically used in the distribution and sale of items

that are relatively inexpensive, individually identifiable by serial numbers, and subject

to only moderate turnover; household appliances and furniture are examples of items

that fall within this classification. The floor plan coverage is written on a monthly

reporting basis; payments are also due on a monthly basis.

The floor plan coverage form may be used in two ways: 1) it can insure the interest of

either the dealer or the financial institution in merchandise held for sale (this is called

single interest); and 2) it may use both the dealer’s interest in conjunction with the

financial institution’s interest in the same policy to create a dual interest. Eligibility for

the floor plan coverage form does not extend to the manufacturers or processors of the

merchandise.

Eligible merchandise under CM 00 52 is subject to two restrictions: 1) covered property

must be specifically identifiable as that financed by the lending institution; and 2) the

dealer’s right to sell or otherwise dispose of covered property is subject to the release of

any encumbrance placed on the property by the financial institution.


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As used in this coverage form, covered property means:

• Property that is specified in the declarations and is at the risk of the insured.

• Property at the risk of the insured that is specifically encumbered to a secured

lending institution that is named in the declarations.

The insured must have a pecuniary interest in the property; in addition, he must risk

the loss of money if the property is destroyed or lost. Covered property does not

include 1) property in which the insured’s interest have ended, property that has been

sold and delivered or otherwise disposed of and 2) contraband or property in the course

of illegal trade or transportation.

• Exclusions

Property covered under a floor plan form is insured against risks of direct physical loss

(an open perils basis). In addition to the common exclusions for other commercial

inland marine insurance forms, the floor plan coverage form is subject to the following

exclusions:

Water

This exclusion includes flood, surface water, waves, tides, tidal waves, overflow of any

body of water and their spray, all weather driven by wind or not; however, the

companies will cover for direct loss caused by resulting fire, explosion or theft if these


394

causes would otherwise be covered under this coverage form. This exclusion applies

only to property at the insured’s premises.

NOTE: Flood is excluded but can be insured for an additional premium.

NOTE: The form is subject to the concurrent causation exclusion for water. This means

that the policy has language that excludes loss caused directly or indirectly, and,

“regardless of any other cause or event that contributes concurrently or in any sequence

to the loss” from water.

Delay, loss of use, loss of market, or any other consequential loss





the insured’s inventory is destroyed just before a high-volume sales season, the

insurance provider is not liable for any anticipated sales.

Bankruptcy, foreclosure, or similar proceedings.

Dishonest acts by:

• The insured, his employees or authorized representatives.

• Any other person with an interest in the property, or his or her employees or

representatives.



395


other persons or such acts occur during hours of employment; however, this exclusion

does not apply to covered property that is entrusted to others who are carriers for hire.

Artificially generated current

Loss related to the creation of a short circuit or other electrical disturbance within an

article covered under this form is excluded; however, the company will pay for direct

loss caused by resulting fire or explosion, if these causes would otherwise be covered

under this coverage form. This exclusion applies only to loss to an item in which the

disturbance occurs.

Breakage of glass or similar fragile property

The insurance provider will, however, pay for such loss caused by fire, lightning,

explosion, windstorm, vandalism, falling aircraft, rioters, strikers, collapse of buildings,

theft or attempted theft, or by accident to the vehicle carrying the property, if these

causes of loss would otherwise be covered under this policy form.

Rain, hail, sleet, snow, or freezing

This exclusion applies to property in the open, but does not apply to property in transit.

Voluntary parting


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Voluntary parting by the insured of any property by the insured or any person or

persons entrusted with the property if induced to do so by any fraudulent scheme,

trick, device or false pretense is not covered.

Unauthorized instructions

If an insured transfers property to any person or place without first receiving

permission to do so, there is no coverage under the floor plan form.

• Conditions

The commercial inland marine policy conditions and common policy conditions apply

to the floor plan coverage form along with the six following conditions:

• Valuation

Three conditions are used to establish an insured’s amount of loss:

• Unsold Property - the value of unsold property will be the least of the following

amounts:

1. The cost of reasonably restoring that property to its

condition immediately before the loss.

2. The cost of replacing that property with substantially

identical property.

3. The purchase price to the dealer, including

transportation costs.


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• Sold Property - the value of property sold but not yet delivered is valued based

on the insured’s net selling price after all allowances and discounts.

• Loss Limitation-Single Interest - the insurance provider will pay only that

proportion of any loss that the amount of the insured’s interest bears to the value

of the property. In the event of loss, the value of the property will be determined

as of the time of loss.

Coverage Territory

The insurer will cover property wherever located within the United States Canada, and

Puerto Rico.

Transit Coverage in the Event of Cancellation

If the policy is cancelled, the insurance provider will cover property already in

transit until it reaches its destination.

Dual Interest

As mentioned earlier, the floor plan form can be issued on a single interest or a dual

interest basis. Under the dual interest coverage, the form insures both the dealer and the

lending institution’s interests. The dual interest condition states that all provisions of

the policy are binding on all parties that have an interest in the covered property;

however, the protection given a secured lender named in the declarations will not be

impaired by the failure of another party of interest to comply with all provisions, if the


398

secured lender is diligent in trying to obtain compliance with all provisions. This means

that if a lender is named in the declarations, any failure of any other named insureds to

comply with the policy provisions will not automatically jeopardize the lender’s

recovery in the event of a loss to insured property. For example, if, after a loss, a dealer

fails to file a statement of loss with the insurance company, the lender’s claim is not

jeopardized by this if the lender attempted to secure the compliance of the dealer.


The insured is required to keep accurate inventory of his stock in trade including the

following:

• All property of others.

• Actual locations.

• Property in transit.

• Purchase price of property to the dealer.

• Transportation charges.

• An itemized inventory of stock values.

• All outstanding balance payments or values at risk.

• All property sent to others for any purpose.

In addition, the insured must take physical inventory at least once every twelve months.

Reports and Premium

The reporting requirements of this form stipulate that reports are due from the insured

within thirty days of the end of each month. If the policy covers the dual interests of


399

both the lending institution and the dealer, the reports must consist of the total value of

the property at risk; however, if the policy covers only the single interest of either the

dealer or the lending institution, the report has to contain the total payments made by

the dealer, or, if for the lender, the outstanding balance of the loan. Premiums are

calculated by applying the monthly rate shown on the declarations as multiplier, to the

total values of the insured merchandise reported to the insurer each month; premium

payments for floor plan coverage are made on a monthly basis.

Jewelers Block

Form CM 00 52, the jewelers block form, provides an open perils coverage that is

specifically designed for the needs of dealers in the retail jewelry trade. When it is

written for jewelry retailers with inventories under $250,000, jewelers block coverage is

a filed, “all risks” reporting form. Nonfiled forms are used for manufacturers, retailers,

and wholesalers with inventories in excess of $250,000.


Covered property as used in form CM 00 52 includes the following: The insured’s stock

in trade consisting of jewelry precious and semi-precious stones, precious metals and

alloys, watches, porcelains, crystal and silverware. Covered property also includes

items similar to those listed above that have been sold but not delivered, and similar

property of others that are in the care, custody or control of the insured; however,

property of others in the jewelry trade that is in the care, custody, or control of the


400

insured is covered only to the extent of the insured’s insurable interest. Property that

has been shipped is also covered. The property is insured only to the extent of the

amount of money the insured has advanced, or to the extent of the insured’s legal

liability for the property.


Covered property does not include any of the following:

1. Property sold under a deferred payment sales agreement after it leaves the insured’s

premises.

2. Property while at any exhibition promoted or financially assisted by any public

authority or trade association.

3. Property while exhibited in showcases or show windows away from the insured’s

premises.

4. Property while being worn by the insured or any one of the following:

a. any officer, director employee, agent, member or messenger of the insured or any

other organization engaged in the jewelry trade.

b. any member of the family, relative or friend of the insured or while in their care,

custody or control for the purpose of being worn; the insurer will, however, cover

watches while being worn solely for the purpose of adjustment.

5. Property in transit by any of the following:

a. mail, unless sent by the United States Postal Service registered mail.

b. express carriers.

c. railroads, waterborne or air carriers. Nevertheless, the insurance providers do cover

shipments under receipt of their passengers’ parcel transportation or baggage service.


401

NOTE: Air carriers’ passenger baggage service subject to air freight tariffs with delivery

to the passenger at destination shall be considered as accompanied baggage and subject

to the limit of insurance specified in the declarations applicable to “property away

from” the insured’s premises and are not included above.

d. motor carriers.

However, the insurance companies do cover shipments:

a. by a carrier operating exclusively as a merchant’s parcel delivery

service.

b. by armored car service.

c. by parcel transportation or baggage services of

passenger bus lines.

6. Contraband .

7. Property in the course of illegal transportation or trade.

A coverage extension is available for damage to buildings occurring during a burglary.

Coverage options are also available for property in show windows and for money.

Those coverage options are included within the limit of insurance.

The Insurance Services Office rules allow for a standard deductible amounts as well as

for deductibles of $10,000 or higher. Credit is allowed for membership in the Jewelers’

Security Alliance, and coverage is subject to an annual proposal.

• Eligibility


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Jewelers block coverage is written on a nonreporting basis and is available to retailers

with average inventories that do not exceed $250,000. The following businesses are not

eligible for coverage under the jewelers block coverage form: wholesalers and

manufacturers, pawnbrokers, auction dealers, fine arts and antique dealers, watch

repair shops, and exhibitions.

NOTE: The standard jewelers block form does not provide insurance for exhibitions,

such as trade shows, promoted or assisted by a public authority or trade association;

however, for an additional premium, coverage can be extended to property at such

exhibitions through an endorsement that specifies the location and duration of the

exhibition.

• Warranties

The jewelers block policy is one of only a select few policies that includes the proposal

for insurance (the insurance application) as a part of the policy itself. In the majority of

instances, the proposal of insurance is simply a representation (a statement concerning

loss exposure made by an applicant for insurance) on the part of the insured; however,

with the jewelers block policy, the insurance application takes on a more significant

role. At the policy’s conclusion is a provision entitled “Attachment of Proposal”; this

attachment requires that a signed copy of the proposal is attached to and made part of

the form. A statement immediately above the signature states that the proposal becomes

a warranty if the policy is issued.

A misrepresentation is a false statement of a material fact relied on by an innocent party

when entering into a contract; it may render a contract voidable. For example, a


403

representation by a jeweler that his store is located in a low crime area, when, in fact, it

is located in a high crime area would constitute a misrepresentation. It is a false

statement of a material fact. There does not have to be a specific intent to deceive for a

misrepresentation to occur and render a contract voidable.

Warranties differ from representations in one very significant way. A misrepresentation

must be material to the contract in order to render the contract voidable, but warranties

do not have the same limitations. In insurance law, warranties are statements or

promises contained in an insurance policy that, if not factual, would render the policy

voidable, irrespective of their materiality.

If an insured misrepresents certain information, the insurance company must prove that

the misrepresentation affects a claim in a material way in order to deny coverage.

However, violation of a warranty does not have to contain a material effect for an

insurer to be able to use the violation as a positive defense against coverage;

consequently, the jewelers block form’s proposal (form CM 59 90) should be completed

in an assiduous manner.


The jewelers block coverage territory for this form differs in two ways from the

coverage territory listed on most commercial inland marine forms: 1) the coverage

territory includes anywhere within or in transit in the United States, Canada, or Puerto

Rico; and 2) with the company’s underwriting approval, an insured can extend this

territorial limitation through an endorsement and an additional premium.


404

While the coverage territory is very broad, detailed limits of liability, which will be

discussed later in this unit, bind and restrict coverage to specific locations or specific

transport situations within the designated areas. Because the property insured under

this form is typically quite valuable, the company protects itself by imposing strict

limitations.


The limits of insurance, included in the declarations, establish the maximum possible

recovery amounts for the insured in the event of loss. In addition, the jewelers block

policy provides separate limits for each of the following locations or situations:

1. Stock at each of the insured’s stores. However, if an insured moves to a new location

during the term of the policy, there is no automatic coverage. In order to be eligible for

coverage, the insured must specify the new location and have it added to the policy.

The limitation on stock at the insured’s store is required to be equal to at least 80% of

the average inventory values. These values are detailed in the proposal form.

2. Property in a secure safe deposit vault of any bank, trust, or safe deposit

company.

3. Property on the premises of any dealer, processor or similar bailee in the jewelry

trade.

4. Property in transit by:

a. registered mail


405

b. armored

c. a merchant’s parcel delivery service

d. various other means of public transportation as covered in this

form

Property away from the insured’s premises is not included above. This limit of liability

essentially relates to the value of hand delivered shipments by travelers or messengers

who are employees.

If coverage during the various off-premises circumstances is not advantageous to, nor

desired by, the insured, the limits would be declared to be “zero.” For example, the

coverage form under the section entitled Property Not Covered states that “we do cover

shipments by armored car service.” Obviously, this coverage is optional. If the insured

does not want it, then “zero” must shown on the declarations page as the “most we will

pay” on property that is shipped by armored car.

• Additional Coverage – Collapse

Concerning any commercial inland marine coverage, damage to insured property

resulting from collapse is covered if caused by one or more of the specified causes of

loss:

Windstorm; hail; fire; lightning; explosions; aircraft; smoke; motor vehicles; civil

disturbance; vandalism; malicious mischief; broken glass; falling objects; weight of

snow, ice or sleet; water damage; hidden decay; hidden insect or vermin damage;

weight of people or personal property; weight of rain which collects on a roof; use of


406

defective materials or materials in construction, remodeling or renovation if the collapse

occurs during the course of construction, remodeling or renovation.

NOTE: The “use of defective material or methods of construction, remodeling or

renovation” allows recovery for a loss or damage to the insured’s property resulting

from collapse losses that are caused by defective materials or construction methods only

if the collapse occurs during the course of the construction. After a structure is

finished, collapse is covered only if caused by one or more of the aforementioned

causes.

• Theft Damage to Buildings


to:

• That part of any building containing covered property.

• Equipment within the building used to maintain or service the building.

These coverage extensions apply only if the insured owns the building or is legally

responsible for the damage. The coverage extension does not include damages caused

by fire or any damage to glass or artwork on glass. The coverage extension does not

represent a separate amount of insurance, but is included as part of the limit of

insurance for covered property.



407

Two additional coverage options are available to extend coverage within the limits of

insurance:

1. Show windows:

If limits of insurance for show windows are shown on the declarations page, the

insurance provider will pay for loss to covered property in show windows at the

insured’s premises from theft or attempted theft resulting from the smashing or cutting

of the insured’s show windows.

2. Money:

If the limit of insurance for money is shown in the declarations, the company will pay

for the loss of money in locked safes or vaults in the insured’s premises, or by theft

when the safes or vaults are broken into.

Other categories of property may be covered by adding a separate endorsement (form

CM 99 01). These categories include: furniture, fixtures, office supplies, improvements

and betterments, machinery, tools, fittings, patterns, dies, molds and models. All listed

items must be insured for at least 80% of their total value, except for furniture, fixtures,

office supplies, and improvements and betterments; these must be covered to 100% of

their cash value.

The jewelers block form excludes coverage for earthquake and flood perils for property

on the insured premises, but these perils may be covered by endorsement if the

underwriter agrees to those coverages. Although the earthquake exclusion eliminates

coverage for any loss caused directly or indirectly by earthquake, there is an exception

for loss caused by a resulting fire, if the fire would have otherwise been covered by the

policy.


408

• Other Exclusions In addition to the exclusions common to the other commercial inland marine coverage

forms explained in Unit V, the jewelers block coverage form is subject to the following

exclusions:






the insured’s inventory of cameras is destroyed just before a high-volume sales season,

the insurance provider is not liable for any anticipated sales.

Theft from any vehicle

This exclusion is in effect unless the insured, an employee, or any other persons whose

only duty is to attend to the vehicle are actually in or about such vehicle at the time of

the theft. This exclusion does not apply to shipments of covered property that are in the

custody of the United States Postal Service or other carriers for hire. Even in cases

where the vehicle is locked, there is no jewelers block coverage the vehicle is left

unattended.



409

Under this exclusion, any unexplained, enigmatic disappearance of property is not

within the scope of this coverage form.


Because inventory records may not be completely accurate, any shortage discovered

during the time of inventory is not covered.

Shortage of property claimed to have been shipped

This exclusion is in effect when a consignee receives a package that is in good condition

with the seals unbroken. Essentially, this is the same exclusion as the previous one,

except it relates to occurrences involving mail.

Dishonest Acts by

1. The insured, the insured’s employees or authorized representatives.

2. Any other person with an interest in the property, or his or her employees or


3. Any other person or persons to whom the property is entrusted, except:

a. when the property has been deposited for safe custody by the insured or any of the

insured’s officers or members, or salesmen while traveling.

b. to shipments of covered property in the custody of the United States Postal service or

other carriers.

c. when the property is in the custody of a porter or helper not in the insured’s employ.

This exclusion applies whether or not such persons are acting alone or in


410

collusion with other persons.

Theft or attempted theft of property in display windows

This exclusion is in effect at the insured’s premises and results from the cutting

or breaking of the windows. However, if limits of insurance are shown in the

declarations for show windows, this exclusion does not apply.


Direct loss caused by resulting fire or explosion, however, is covered.

Insufficient or defective packaging

Breakage of fragile articles

Notwithstanding, the insurance provider will pay for such loss caused directly or

indirectly by fire, lightning, explosion, vandalism, windstorm, aircraft, rioters, strikers,


losses would otherwise be covered under this coverage form.

Voluntary parting

This exclusion is in effect when it involves any property by the insured or anyone

entrusted with the property if induced to part with the property by any fraudulent

scheme, trick, device, or false pretense.


411



• Additional Conditions

In addition to the commercial inland marine conditions and the common policy

conditions, the following conditions also apply to the jewelers block coverage form:

Valuation

The valuation condition of the jewelers block coverage form provides for the

adjustment of insured losses on the basis of the lowest of the following values:

• The actual cash value of the property.

• The cost of reasonably restoring the property to its condition immediately prior

to the loss

• The cost of replacing that property with substantially identical property.

• The lowest figure assessed to the property in the insured’s inventories.

• stock books, stock paper, or lists existing as of the time of the loss.


If the insured indicated on the insurance proposal that any premises were protected by

any protective safeguards, such as fire alarms, sprinkler systems, or burglar alarms,


412

these safeguards must be kept in good working order and operative when closed for

business.

In the event that the safeguards are not kept in good working condition, or are not in

operation during nonbusiness hours, any coverage cogent to their operation is

suspended. For example, by virtue of the protective safeguards clause, burglary coverage

is suspended at a location while a burglar alarm described in the proposal is

inoperative. Similarly, any fire coverage would be suspended if the fire alarm system

were subsequently found to be neglected or inoperative.


This condition explains the list of records that the insured is required to keep for three

years after the expiration of the policy.

The insured is required to maintain records of all property of others held by the

insured, records of travelers’ stock, and records of all other property away from the

insured’s premises. In addition, the insured must take a physical inventory at least once

every twelve months. If the insured fails to submit to the requirements of this condition,

and cannot prove the extent of any loss he or she may suffer, the insurer would not

have any foundation on which to base a claim settlement, and consequently the

probability of costly, time consuming litigation would intensify.

Changes to Premises

Unless the insurance provider agrees in writing, it will not cover:


413

1. Property where the risk of loss has been materially increased by changes in the

insured’s premises.

2. Property located in expansions of the insured’s premises shown in the declarations.

Mail

Implemented to insure valuable mail shipments by financial and trust institutions, the

mail coverage form (CM 00 60) is written on a reporting basis; it provides open perils

coverage against risks of direct physical loss when property is sent via first class mail,

certified mail, the United States Postal Service express mail, or registered mail.

Coinciding with the other commercial inland marine parts, the mail coverage form may

be used by itself to insure property on a monoline basis; it may also be used in

conjunction with coverage parts of other simplified language programs on a multi-line

basis.

When a monoline mail policy is implemented, it is created by assimilating a mail

coverage form (CM 00 60), any applicable endorsements and essential, additional

declarations, a mail coverage declarations page (showing any limits for covered

property by type of mail shipment utilized and any special provisions), a reporting

declarations (showing deposit and annual minimum premiums, reporting period, and

applicable rates by type of covered property), a common policy conditions form (LL 00

17), and a commercial inland marine conditions form (CM 00 01).

• Eligibility


414

Eligibility for mail coverage form use is restricted to financial and fiduciary institutions;

therefore, those entities that use the mail coverage form include the following:

• Banks and bankers.

• Trust companies.

• Security brokers.

• Investment companies whose business is primarily fiduciary.

• Insurance companies.

• Corporations that function as their own security transfer agents or

registrars for their own security issues.

The mail coverage form, however, is not contrived to insure single, specific mail

shipments. If this were the case, the insurance companies would spend too much extra

time canceling and rewriting policies; instead, mail shipped according to the policy

provisions is covered for the entire stated policy period.


Under the mail coverage form, open perils coverage is extended only to those items of

property that have been recorded and maintained by the insured according to the

policy provisions. In addition, the property must have been dispatched by a type of

mail which for a limit of insurance is indicated on the declarations page; therefore, an

insured can be selective about which types of mailings he or she wishes to insure.

As used in this coverage form, covered property means the following when sent by first

class mail, certified mail, United Sates Postal Service direct mail, or registered mail:

1. Bonds, stock certificates, certificates of deposit and other securities.


415

2. Coupons if detached from bonds.

3. Postage and revenue stamps, postal express and other money orders, checks, drafts,

notes, bills of lading, warehouse receipts and other commercial papers, other

documents and papers of value, with the exception of food stamps, unsold travelers

checks, and currency.

Covered property also means the following, but only when it is sent by registered mail:

1. Bullion, platinum, and other precious metals.

2. Currency, unsold travelers checks, food stamps, precious and semi- precious

stones and similar covered property.


Like all other forms, covered property does not include contraband or property in the

course of illegal transportation.

• When Coverage Applies

The insurance provider covers property in the care, custody, or control of a government

postal service. It also covers property in transit by common carrier or messenger to or

from the government post office. The insurer covers property until it has been:

• Delivered to the addressee at the address stated on the shipping package.

• Delivered at the proper address in the event of non-delivery by reason of error in

address or removal of address.

• Returned to the premises of the sender in the event of non-delivery.


416

However, the provider does not cover property at the premises of any mail-receiving

agency.

• Exclusions

The open perils coverage that the mail form provides is modified by three exclusions.

The insurance provider will not pay for a loss caused directly or indirectly by any of the

following; such loss is excluded irrespective of any other cause(s) or event(s) that may

contribute concurrently or in any sequence to the loss:

1. Government action. This includes the seizure or destruction of property by order of

government authority. However, the company will pay for acts or destruction ordered

by government authority and taken at the time of a fire to prevent its spread if the fire

would otherwise be covered under this coverage form.

2. Weapons. This includes any weapon employing atomic fusion or fission or any mine

or torpedo. Any loss resulting from nuclear reaction, radiation, or radioactive

contamination from any cause (such as a nuclear meltdown) is not excluded in this

coverage form; however, it is in the other commercial inland marine coverage forms.

3. Warlike action and action by a military force, including action in hindering or

defending against an actual or expected attack by any government, sovereignty, or

other authority using military personnel or other agents.


417

This exclusion further includes any undeclared civil war, insurrection, rebellion,

revolution, usurped power or action taken by governmental authority in hindering or

defending against any of the aforementioned.

However, the insurance provider will pay for any direct loss caused by fire, explosion,

stranding, heavy weather, collision or contact with aircraft, rockets or missiles, or any

fixed or floating object (with the exception of any mine or torpedo), if warlike action

does not contribute directly to these causes of loss.

• Valuation

The valuation provision of the mail coverage form replaces the valuation of the

Commercial Inland Marine Conditions form.

The value of covered property will be its actual value, but not less than its market value

on the date of mailing.

In the event of loss:

1. The insurance provider will furnish a bond or indemnity necessary to reissue or

duplicate the covered property after receipt of the insured’s statement of loss. If the

provider does this on behalf of the registered owner, and that owner finds or recovers

the property after its reuse or duplication and fails to return it for cancellation, the

insured’s rights of recovery against that owner are transferred to the insurance

provider.


418

2. If the insured is required to deliver and cannot borrow equivalent property prior to

the time the covered property can be reissued or duplicated, the provider will pay the

following:

• The cost of equivalent property purchased by the insured in an available market.

• The postage and insurance charges for that mailing.

• Any loss of interest actually earned on the covered property between the date of

mailing and the date the equivalent property is purchased.

3. If the covered property cannot be reissued or duplicated and if equivalent property

cannot be purchased, the provider will pay:

• The value of the covered property on the date of loss.

• The postage and insurance charges for the mailing.

• Any loss of interest actually earned on the covered property as of the date

of the mailing. However, the insurer will pay this interest only if it has not

been already included in the value that the insured recorded for that mailing.

4. If the insurance provider pays for any loss, it will pay no more than:

• One hundred and twenty five per cent of the value the insured recorded for

insurance and bonds, stock certificates, certificates of deposit and other

securities.

• The value the insured has recorded for insurance for all other covered property.

• Furthermore, if the provider pays for any loss, it will pay the insured as well as

any other person or persons the insured directs the company to pay; thereupon,

all right title and interest in the covered property will be conveyed to the

provider.


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• Reports and Premium

1. Reports. Within thirty days after the end of each reporting period shown on the

declarations page, the insured will report to the insurance provider the total values of

all property covered by this coverage form (CM 00 07) sent during the preceding

reporting period. This report will list the values separately for each kind of property

and type of mail for which a rate is shown on the declarations page.

2. Rates, Premium and Premium Adjustment. If an annual reporting period is shown on the

declarations page, the provider will apply the total computed premium to the direct

premium. If it is more than the deposit premium, the insured is required to pay the

provider the difference. If it is less than the deposit premium, the provider will pay the

insured the difference.

If any other reporting period is shown on the declarations page, the provider will apply

the computed premium to the deposit premium until it is exhausted. The insured will

pay the provider all premiums that exceed the deposit premium. The provider will

make these premium adjustments for each reporting period.

The insured is required to pay at least the minimum annual premium shown on the

declarations page.

3. If this coverage form is cancelled, the insured will promptly report to the insurance

provider the total values of all property covered by this coverage form sent up to the

date and time of cancellation. The provider will compute the premium as provided

above.


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The insured must pay a minimum premium of at least one-half of the minimum annual

premium shown on the declarations page for each month or part of a month that this

coverage applies during the policy period.


For covered property sent by first class mail and United States Postal Service express

mail, the mail coverage form coverage territory includes territory within and between

places in the United States of America, Puerto Rico, Canada, the United States Virgin

Islands and any other territories or possessions of the United States. Any property sent

by registered mail is covered anywhere in the world.

• Records

The mail form requires insureds to keep accurate records of all mailings of covered

property; such mailings must record each mailing prior to a loss. These records must

consist of a description of the covered property, its destination, and the type of mail

used. The records must also contain the value of the property contained in each

shipping package covered by this coverage form.

• Duties in the Event of Loss

In the event of loss, an insured is required to file a statement of loss with the insurance

provider. The statement of loss will include the following:


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• Proof of interest in the property.

• An affidavit of mailing.

• An affidavit of non-receipt by the addressee and, if the

insurer requests, by the owner of the property.

• If applicable, the receipt of any government postal service

for mailing.

• Loss Payment

Payment for a covered loss is made within seven days after a settlement agreement is

reached with the insured, a final judgment is entered (in the event that a court of law is

involved), or an appraisal is filed (in the case of a court or arbitrator’s decision).

• Cancellation

Any property at any point in the process of delivery will retain coverage until it reaches

its destination, even upon cancellation of the policy.

• Other Insurance

If there is any other insurance or indemnity covering the same loss as the insurance

under form CM 00 60, the insurance provider will pay only its pro rata proportion of the

loss except as follows:


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1. With respect to loss by theft on the part of employees of senders or addressees, the

insurance provider will pay only for the excess of the amount covered by any other

insurance whether the other insurance or indemnity is collectible or not.

2. With respect to loss other than by theft on the part of employees of senders or

addressees (for example, destruction of a package in a fire) which is covered by any

blanket bond, the provider will be directly and primarily liable for that loss; the

insurance provider has no recourse against any blanket bond.

• Error and Oversight

The mail coverage form contains the following two special provisions regarding error

or oversight on the part of the insured:

1. A provision that concerns the insured’s improper recording of mail shipment values

resulting from an error or oversight; it states that the insurer agrees to pay the actual

cash value of any lost or damaged property rather than the recorded value. The insured

is required to notify the provider as soon as the error is discovered and to correct that

error promptly. Payment under this provision is nonetheless subject to the applicable

limit of insurance for the covered property.

2. A provision that concerns instances where the insured’s error or oversight results in

values in a single shipping package that exceed the limit of insurance shown on the

declarations page. In these instances, payment is calculated on a pro rata basis

according to the ratio of policy limits to the values at risk.


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• Mail Form Endorsements

1. Transfer Agents Mail (form CM 60 08). This endorsement is used with the mail

coverage form when the insured operates as a transfer agent, a trustee under indentures

governing debt securities (not issued by the insured), a registrar, or as any other agency

for the issuer of the covered property; it insures against the risk of non-delivery of

covered property.

This endorsement of covered property is modified to include only nonnegototiable

securities and fractional share or script certificates, subscription warrants, rights and

similar certificates in a negotiable form (as long as the actual per package shipped does

not exceed $150). Such property must have been recorded prior to a loss and be

dispatched by a type of mail for which a limit of insurance is shown.

In order to separate the cause of loss of nondelivery from the other causes of loss

covered in the basic mail policy, an additional declarations page is implemented with

this endorsement.

2. Negotiable Securities Sent Under Air Bill. This endorsement (CM 60 09) extends mail

form coverage to shipments of negotiable securities under air bills of airline carriers

named on the declarations page; when this endorsement is in effect, this coverage

applies only to property sent within the continental United States.

3. Securities Sent by the Treasury Department – Registered Mail. This endorsement (form

CM 00 60 10) furnishes coverage for securities sent by the United States Treasury

Department or any other agency or corporation of the government to the insured or the


424

customers of the insured; however, if the customer had previously insured the mailing,

this endorsement is not put into effect.

When implementing this endorsement, the insured is required to record covered

property; however, in the event that a shipment is made without the knowledge of the

insured, coverage is still provided as long as it is recorded in a timely manner.

4. Flat Premium per Shipping Package – First Class Mail or Certified Mail (form CM 00 02).

This endorsement authorizes the premium for first class or certified mail shipments to

be determined based on the total number of mailed packages sent.

Covered property is identical to that found on the transfer agents mail endorsement

described above.

As with the transfer agents mail endorsement, the flat premium endorsement requires

an additional declarations page to indicate separate limits of insurance that apply to

form CM 00 02.

Physicians and Surgeons Equipment


Covered property, as used in this coverage form, includes the following:


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1. The insured’s medical and dental equipment, materials, supplies, and books usual to

the medical and dental professions. At the insured’s option, this form covers similar

property of others used by the insured in his or her profession.

2. The insured’s office equipment, including furniture and fixtures, while at his or her

premises.

3. The insured’s interest in improvements and betterments, meaning fixtures, alterations,

installations or additions to the premises made at the insured’s expense but that he or

she cannot remove legally. For example, a tenant’s alterations to a lighting system in an

examination room is included in this category.

This coverage applies only if the insured does not own the building in which the

premises are located.


Covered property under this form does not include:

• Radium.


NOTE: Radium used for either medical or dental purposes can be insured separately by

implementing a radium floater, a nonfiled form.

• Eligibility


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The physicians and surgeons equipment form (CM 00 26) is available for

implementation by insurds in the medical or dental professions with the following

exceptions: marketers in medical equipment, medical schools, hospitals, clinics, and

similar risks.

NOTE: Doctors who share the same facilities while maintaining separate and individual

practices are not considered clinics or similar risks and, therefore, are eligible for the

physicians and surgeons coverage form.


If so desired by the insured, the covered property limit can be increased by

endorsement to cover damage from theft or attempted theft to buildings or to

equipment within the building if the building is owned by the insured or if the insured

is legally liable for damage; like many of the other coverage forms, this form, does not

extend to fire damage, glass, structural glass, or lettering or artwork on glass.

In addition, the insured may purchase the additionally covered property endorsement

(CM 26 02), which makes provisions for five additional coverage extensions; each of

these extensions is allotted a separate limit of liability (noted in the parentheses). Each

limit of liability functions as an additional amount of insurance. These coverage

extensions are:

1. Thirty-days coverage for office equipment that is temporarily “off-premises” ($1,000

maximum limit per occurrence).


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2. Additional expense coverage to continue “normal office operations” after a covered

loss ($1,000 maximum limit per occurrence).

3. Money and stamps while on the premises (maximum of $250). However, while

outside the premises, money is covered only while it is conveyed to the bank for

deposit, and stamps are covered only while they are being conveyed from the place of

purchase to the work place. In either event, for coverage to apply, the insured property

must be conveyed by the insured or an employee of the insured. In addition, under no

circumstances does coverage apply in regard to a loss caused by dishonesty on the part

of the insured or anyone with an interest in the property, the insured’s employees or

authorized representatives, or any other person or persons entrusted with the property.

4. Personal effects of the insured, or of any other persons, is covered while it is on the

premises (maximum of $500). This coverage, which applies only if the property is not

otherwise insured, is specifically for losses from any cause of loss other than that of

theft.

5. Books of account, manuscripts, drawings, card index systems, and other indications

of the insured’s records (maximum of $500). Also included in this amount is the

expense of reproducing records.

• Exclusions

In addition to the common commercial inland marine exclusions, the physicians and

surgeons equipment coverage form is subject to the following exclusions. Under form

CM 00 26, there is no coverage for losses resulting from:


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Marring, scratching, exposure to light; breakage of tubes, bulbs, lamps or articles

composed primarily of glass (except lenses).

However, the insurance provider will pay for such loss caused directly by fire,

lightning, explosion, windstorm, earthquake, flood, vandalism, aircraft, rioters, strikers,


causes of loss would be otherwise covered under this coverage form.

Delay, loss of cause, loss of market, or any other consequential loss.




subsequent loss of income.

In addition, no coverage exists for lost sales. For example, if the insured’s inventory of

cameras is destroyed just before a high-volume sales season, the insurance provider is

not liable for any anticipated sales.

Processing or work upon the property.

However, the company will pay for direct loss caused by resulting fire or explosion, if

these causes of loss would otherwise be covered under this coverage form.


429


within an article covered under this coverage form.

However, the insurance provider will pay for any direct loss caused by resulting fire or

explosion, if these causes of loss would otherwise be covered under this coverage form.

This exclusion applies only to loss to that article in which the disturbance occurs.

Voluntary parting

Coverage does not apply to loss resulting from the voluntary parting with any property

by the insured, or any other person or persons entrusted with the property due to a

fraudulent scheme, trick, device, or false pretense.


Any loss caused by the transfer of property without proper authorization is not

covered.

Wear and tear

Any quality in the property that causes it to destroy or damage itself, gradual

deterioration, mechanical breakdown, insects, vermin, hidden or latent defect, rodents,

corrosion, or cold or heat are not considered proper causes of loss under this coverage

form.



430

The insurance company will cover property wherever located within the United States,

Canada, and Puerto Rico.

• Valuation

This condition separates property covered under the physicians and surgeons

equipment coverage form into improvements and betterments and all property other

than improvements and betterments. Separate methods of valuation pertain to each of

these divisions. Property other than improvements and betterments coverage will be

the least of the following amounts:

1. The actual cash value of that property.

2. The cost of reasonably restoring that property to its condition immediately prior to

the loss.

3. The cost of replacing that property with substantially identical property.

Improvements and betterments, on the other hand, presents a unique problem in the

valuation calculations. Even though the insured has spent his or her own money for

these improvements, they ultimately belong to the insured’s landlord. Because the

insured will benefit from them only for the duration of his or her occupation, they are

valued under the following conditions:

If the property is repaired or replaced, an actual cash value settlement as of the time of the

loss is calculated.


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If the property is not repaired or replaced, its value is calculated on a percentage of its

original cost. This percentage is calculated by dividing the unexpired term of the

insured’s rental agreement by the period of time spanning the date the property was

installed to the expiration of the rental agreement. For example, if a physician who

altered the lighting system of an examination room on the first day of a three year lease

sustained a covered loss to the lighting system on the first day of the second year of the

lease and did not repair or replace it, the physician would receive a settlement of two-

thirds of the system’s original cost. This is based on the calculation of two years divided

by three years.

• Coinsurance

The amount of insurance purchased for all covered property must be at least 80% of the

total value of the property at the time of loss. If the 80% level is not maintained, the

insurance company will impose a penalty. This penalty will not apply to property in

transit, property covered by an additionally covered property endorsement (CM 26 02),

or property insured under the endorsement entitled “Property usually carried by you”

(CM 26 01).


In the same manner as the jewelers block coverage form, the physicians and surgeons

equipment form requires that protective safeguards must be maintained both during

and after business hours. If they are not maintained, coverage may be suspended for

those causes of loss against which protection is assumed. For example, fire coverage

may be suspended until an inoperative sprinkler system is properly repaired.


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• Portable Property

Addition of the “property usually carried by you” endorsement (CM 26 01) narrows the

definition of covered property to include only the medical and dental equipment,

material, supplies, and books typically used in the professions, and usually carried by

the insured. When this endorsement is in effect, the coverage extension for theft damage

to buildings does not apply, nor does the provision for coinsurance; nevertheless, all

other terms and conditions of the physicians and surgeons form do apply

Signs

It has been estimated that the United States has more than twenty-five million electric

signs and that we are currently spending about a billion and a half dollars a year to

build and maintain these tools of modern merchandising. Most signs are small, but

signs used by a chain of motels, for example, usually represents an investment of

hundreds of thousands of dollars, and the giant “spectaculars,” such as those in Las

Vegas, may cost in excess of a million dollars per year. With these kinds of numbers, the

need for insurance coverage should be obvious.

The signs coverage form (CM 00 28) is a filed form covering signs that are generally

excluded from standard property policies. This coverage extends open perils coverage

to fluorescent, automatic, neon, or mechanical electric signs and lamps. Billboards or

ordinary fixed signs, irrespective of whether they are directly elucidated by electric

lights or not, are not eligible for coverage under this form.


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Under the commercial inland marine program’s modular format, a complete signs

policy is created by combining a signs coverage form with a declarations page on which

to schedule all covered property with limits of insurance, a common policy conditions

form, and an inland marine general conditions form; in turn, these forms may be

included with forms and endorsements of other commercial lines programs to form a

commercial package policy.


Covered property, as used in this coverage form means:

• The insured’s signs.

• Similar property of others in the insured’s care, custody or control.


Covered property does not include contraband or property in the course of illegal

transportation or trade.

• Exclusions

Property insured under the signs form is protected against risks of physical loss, subject

to the general exclusions. In addition to the general exclusions, the following causes of

loss are also excluded from the signs coverage form:


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Delay, loss of use, loss of market or other any other consequential loss



customers go elsewhere to purchase the product, this policy does not cover for any

subsequent loss of income.

In addition, no coverage exists for lost sales. For example, if the insured’s inventory of

signs is destroyed just before a high-volume sales season, the insurance provider is not

liable for any anticipated sales.

Breakage during transportation, or breakage during installation, repairing or

dismantling

This exclusion does not apply if the breakage is caused by fire, lightning, or by accident

to a conveying vehicle.

Dishonest acts by the following:

a. the insured or his or her employees or authorized representatives.

b. any other person with an interest in the property, or his or her employees or


c. any other person or persons to whom the property is entrusted.


435

Artificially generated current creating a short circuit or other electrical disturbance


However, damage caused by direct loss caused by resulting fire is covered.

Voluntary parting

This exclusion is in effect if the insured voluntarily parts with any property if induced

to do so because of any fraudulent scheme, trick, device, or false pretense.




Property is covered anywhere within the United States, Canada, and Puerto Rico.

• Coinsurance

The signs form requires 100% insurance to value on all covered property (with the

exception of property in transit), or a coinsurance penalty will be enforced. The amount

of this penalty will be based on the proportion that the limit of insurance for all covered

property bears to the actual value of all covered property at the time of loss.


436

Theatrical Property


As used in this coverage form, covered property means: the insured’s scenery,

costumes, and theatrical properties and similar property of others in his or her care,

custody or control or on which the insured has made partial payments that are intended

to be used or have been used in a production stated in the declarations page. With the

exception of carnivals, circuses, rodeos, or costume rental companies, any theatrical

production is eligible for use of this form.



• Buildings or their improvements and betterments.

• Vehicles unless actually used on the stage in the covered production.

• Jewelry comprised of precious or semi-precious stones, gold, silver, platinum, or

other precious metals and alloys.

• Accounts, bills, currency, deeds, money documents, transportation or admission

tickets, notes, securities and evidences of debt.

• Animals.




437

The insurance provider covers property wherever located in the United States, Canada,

and Puerto Rico.

• Coverage Option

Coverage may be written in one of two manners: 1) coverage may be purchased on an

individual production basis in which insurance will be in effect for the duration of a

specifically scheduled theatrical production; or 2) theatrical property coverage may be

obtained on a blanket production basis, in which, for example, the entire season of

production for a community theater group receives coverage.

• Exclusions

The insurance provider will not pay for loss caused by or resulting from any of the

following:

Theft from any unattended vehicle

This exclusion is in effect unless at the time of theft the vehicle’s windows, doors, and

compartments were closed and locked and there are visible signs that the theft was the

direct result of forced entry. However, this exclusion does not apply to property in the

custody of a carrier for hire.


438

Marring, scratching, exposure to light; breakage of tubes, bulbs, lamps or articles

made primarily from glass (with the exception of lenses).

The insurance provider will, however, pay for such loss caused directly by fire,

lightning, explosion, windstorm, vandalism, aircraft, rioters, strikers, theft or attempted

theft, or by accident to the vehicle carrying the property if these causes of loss would

otherwise be covered under this coverage form.


For example, let’s assume a stage set catches fire and, as a consequence, the opening

night of the production must be delayed by two days. While coverage in the theatrical

properties policy for loss to scenery is covered, losses of the potential gate receipts is not

covered.


As explained previously in the unit concerning exclusions, shortages in inventory may

have a multitude of explanations, such as breakage or inaccurate calculations of the

inventory. Therefore, there is no coverage if all the insured can prove is shortage upon

taking inventory. However, if the insured can prove that the shortage is the result of a

covered cause of loss, the coverage will apply.



439

This coverage exclusion is similar to the exclusion for shortage upon taking inventory;

for instance, any loss resulting from missing property, the absence of which has no

explanation, does not receive coverage under this form.

Dishonest acts

Dishonest acts that are performed by the insured or anyone else with an interest in the

property, or their employees or authorized representatives or any other person or

persons entrusted with the property, whether acting alone or in collusion with others,

are not considered as a covered cause of loss under this form. However, this exclusion

does not apply to property that is entrusted to carriers for hire.


The insurance company, however, will pay for loss caused by resulting fire or explosion

if these causes of loss would otherwise be covered under this coverage form.



However, the insurance company will pay for any direct loss caused by resulting fire or

explosion if these causes would otherwise be covered under this coverage form.

Voluntary parting


440

No coverage is available if an insured, or any other person entrusted with the property,

parts with any property due to a fraudulent scheme, trick, device, or false pretenses.

Unauthorized instructions to transfer property to any other person or to any other

place

If any property is moved or transferred to any person or place without proper

authorization, no coverage will apply.

• Coinsurance

The theatrical property coverage form (CM 00 29) contains an additional coinsurance

condition. At the time of any loss, the amount of insurance purchased for all covered

property at all locations (with the exception of property in transit) must be at least

80% of the total value of the property. In the event that this level of insurance is not

maintained, the insurance provider will impose a penalty by paying an amount of the

loss in proportion to the ratio that the limit of insurance bears to 80% of the total value

of all property; this penalty, however, does not apply to property in transit. For

example, the insured suffers a total loss due to fire on all property being utilized in a

community theatrical production. The property is worth $20,000 but was insured for

only $10,000 (50% of its value instead of the required 80%). The property should have

been insured for $16,000 (80 % of $20,000). Consequently, the insured will recover only

five-eighths (62.5 %) of the $20,000 loss. This would equal $12,500.

Valuable Papers and Records


441

The valuable papers and records insurance coverage form is issued in conjunction with

the commercial inland marine conditions form, the common policy conditions form,

and a valuable papers and records declarations page to create an insurance contract.

Many businesses processing valuable papers and records (such as blueprints,

manuscripts, deeds, historical documents, maps, or everyday business records) avoid

any potential financial consequences of loss to such items by simply maintaining

duplicates at separate locations. Policy owners who do maintain duplicates may not

have any need for valuable papers and records coverage. On the other hand, many

businesses have ownership of certain property or have operations of such a nature that

they can not sufficiently create, maintain, or store duplications. The valuable papers and

records coverage form (CM 00 67) is a pertinent coverage form for these clients. For

example, an original document written by an important person in history cannot be

replaced if it is damaged, lost, or stolen; the existence of a facsimile at a separate

location would not lessen the loss to the original valuable document. Although valuable

papers and records coverage will never be able to replace or restore the original

document, it can at least offer some financial protection.


The insurance company will cover property that is within the premises of the insured or

when it is away from the insured’s premises while in transit or within the premises of

others so long as those premises are located or the transit is within the United States,

Canada or Puerto Rico.


442


Covered property as used in this coverage form means “valuable papers and records”

that are the property of the insured or property of others in the insured’s care, custody,

or control. Form CM 00 67 defines valuable papers and records as “inscribed, printed or

written documents, manuscripts, or records, including abstracts, books, drawings,

deeds, maps, film, or mortgages.” Similar articles or property that are not specifically

listed above may be considered eligible for coverage.

When the valuable papers records coverage form is utilized for a library, a libraries

endorsement (form CM 67 01) is attached to the basic policy. This endorsement excludes

property while it is away from the insured library’s premises in the care, custody or

control of a borrower or renter. In addition, any losses resulting from the failure of a

borrower or renter to return property, vandalism, mutilation by any person or persons

using the property within the premises of the insured, unexplained disappearances of

the property, and loss that can be proven only by an audit or inventory are excluded

from coverage.

Property may be insured on any of the following: 1) a specific item-by-item scheduled

basis; 2) on a blanket basis; or 3) in both manners. However, property that cannot be

replaced with other property of “like kind or quality” should be insured either

specifically or not at all because the form excludes such property unless it is specifically

scheduled.

The valuable papers and records coverage form’s declarations page contains blank

spaces for indicating the limits of insurance for scheduled items at the insured’s


443

premises, for all other property at the insured’s premises, and for property that is away

from the insured’s premises. If no higher limit is indicated in the declarations page for

property away from the premises, $5,000 coverage is the maximum amount that the

insured will recover under a coverage extension; consequently, the insured has three

separate limits of insurance available with which to design coverage to suit his or her

specific needs.



• Property not specifically declared and described on the declarations page if such

property cannot be replaced with any property of like kind and quality.

• Property held as samples or for delivery after sale.

• Property that is in storage away from the premises shown on the declarations

page.

• Converted data, programs or instructions used in data processing.

• Money and securities.



Removal


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If the insured supplies the insurance company a written notice within ten days of

removal of the insured’s valuable papers and records because of impending danger of

loss, the insurance company will pay the loss while it is:

a. at a safe place away from the insured’s premises.

b. being taken to and returned from that place.

This coverage extension is included within the limits of insurance applicable to the

premises from which the records have been removed.

Away from the premises of the insured

The insurance company will pay a maximum of $5,000 for loss to covered property

while it is away from the insured’s premises. However, if a higher limit of insurance is

specified on the declarations page, that limit will be applicable. The limit for this

coverage extension is additional insurance.

• Operational Rate Credit for Containers

The declarations page also includes a blank space in which to describe receptacles, such

as safes or fireproof containers, the use of which may enable the insured to receive a

rating credit. These credits can range anywhere from 10% to 40%, depending on the

Underwriters Laboratory exposure rating for the container.

• Protection of Records


445

Whenever the insured is closed for business and except when he or she is actually using

the property, the insured is required to keep all valuable paper and records in

receptacles that are described on the declarations page.

• Valuation

The value of each item of property that is specifically declared and described on the

declarations page is the applicable limit of insurance shown on the declarations for that

item. The insurance company and the insured agree on the value of scheduled property

at the time of policy issuance, before a loss occurs. Scheduled items are covered on what

is often called an agreed value basis.

• Recoveries

If either the insured or the insurance company recovers any property after loss

settlement, that party must give the other party prompt notice. The insured may opt to

have the property returned to him or her. If this is the case, the insured’s loss will be

readjusted based on the amount the insured received for the property recovered, with

an allowance for recovery expenses incurred.

• Exclusions

The insurance provider will not pay for a loss caused by or resulting from any of the

following:


446






the insured’s property is destroyed just before a high-volume sales season, the

insurance provider is not liable for any anticipated sales.

Dishonest acts by:

1. The insured, his or her employees or authorized representatives.

2. Any other person with an interest in the property, or his or her employees or


3. Any other person or persons to whom the property is entrusted.




for hire.

Errors or omissions in processing or copying

However, the insurance company will pay for direct loss caused by resulting fire or

explosion if these causes would otherwise be covered by this coverage form.


447

Electrical or magnetic injury disturbance or erasures of electronic recordings

The insurance provider will cover for a direct loss caused by lightning.

Voluntary parting

Any voluntary parting with the property by the insured or any other person entrusted

with the property if induced to do so by any fraudulent scheme, trick, device, or false

pretense will not be covered.


Any loss caused by the transfer of property without proper authorization is not

covered.

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