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New Commercial Property Forms Update Eff Date 4-1-2013

New Commercial Property Forms Update

 Proposed Effective Date 4/1/13

Materials are copy written by ©Insurance Services Office, Inc., 2011

The ISO has submitted significant changes for the Commercial Property Forms that have an effective date of 10/2012. While the forms carry a 10/12 date the proposed effective date on the April 1, 20l3 is proposed by ISO in all jurisdictions where the ISO establishes dates.  This date places more importance on these significant changes as the companies begin to actually adopt the language.

This is the biggest change in forms that we have seen for many years.  The majority of the key forms are taking on some sort of change.  Some of the changes are minor but carry new edition dates of existing form numbers; forms that are being withdrawn and new forms that are being introduced. The information, upon which this article relies, is the ISO Circular dated January 3, 2012 and review of the forms within the 10/12 series.   This multi-state revision will be applicable to the following jurisdictions:

Alabama Kentucky Ohio
Alaska Maine Oklahoma
Arizona Maryland Oregon
Arkansas Massachusetts Pennsylvania
California Michigan Rhode Island
Colorado Minnesota South Carolina
Connecticut Missouri South Dakota
Delaware Montana Tennessee
District of Columbia Nebraska Texas
Florida Nevada Utah
Georgia New Hampshire Vermont
Guam New Jersey Virgin Islands
Illinois New Mexico Virginia
Indiana New York West Virginia
Iowa North Carolina Wisconsin
Kansas North Dakota Wyoming

Many of the ISO changes have already been adopted in insurance company forms while other changes represent clarification of the “intent” of the form.  We will include a listing of the forms that will be part of the 10/2012 edition date. Specifically we will highlight those changes that have any significant impact and new endorsements to the form series. This chart is a summary of the form changes and each form must be reviewed in its entirety to understand the impact of the changes. As you review the impact of the form changes you will note that there are many instances where there is no change in coverage.  What this means, typically, is that the language of the form has been modified by adding or removing a word or substituting a word that is clearer.  There is no change in the intent of the form.  Some changes result in a coverage increase typically in a sub-limit that is provided.  Some changes result in coverage being reduced for example removing am extension or sub-limit that appeared in a prior edition date.  Some changes will show coverage is broadened which typically means that form language has been added to make the coverage more comprehensive. There are some new endorsements that are being introduced that we will discuss in more detail as they are new to the form series.

COMMERCIAL PROPERTY FORMS COVERAGE FORMS AND CAUSES OF LOSS

CP 00 10 Building and Personal Property CP 00 50 Extra Expense Coverage
CP 00 17 Condominium Association Coverage CP 00 70 Mortgage holders Errors and Omissions
CP 00 18 Condominium Unity Owners CP 00 80 Tobacco Sales Warehouses Coverage
CP 00 20 Builders Risk CP 00 99 Standard Property Policy
CP 00 30 Business Income and Extra Expense CP 1010 Causes of Loss—Basic Form
CP 00 32 Business Income Without Extra Expense CP 10 20 Causes of Loss—Broad Form
CP 00 40 Legal Liability Coverage Form CP 10 30 Causes of Loss—Special Form

ENDORSEMENTS

CPDS 65 Flood Coverage Schedule CP 10 47 Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment
CP 03 21 Windstorm or Hail Percentage Deductible CP 10 66 Flood Coverage Endorsement
CP 03 29 Deductibles by Location CP 11 21 Builders Risk-Theft of Building Materials, Fixtures, Machinery, Equipment
CP 04 02 Increased Cost of Loss and Related Expenses for Green Upgrades CP 12 18 Loss Payable Changes
CP 04 04 Specified Business Personal Property Temporarily Away from Premises CP 14 30 Outdoor Trees , Shrubs and Plants
CP 04 05 Ordinance or Law CP 14 70 Building Glass Tenant’s Policy
C CP 04 08 Higher Limits CP 1501 Business Income From Dependent Properties Limited International Coverage
CP 04 09 Increase in Rebuilding Expenses Following Disaster (Additional Expense Coverage on Annual Aggregate Basis) CP 15 02 Extra Expense From Dependent Properties Limited International Coverage
CP 04 11 Protective Safeguards CP 15 15 Food Contamination Business Interruption and Extra Expense
CP 04 15 Debris Removal Additional Expense CP 15 08 Business Income From Dependent Properties Broad Form
CP 04 17 Utility Services Direct Damage CP 15 09 Business Income from Dependent Properties Limited Form
CP 04 18 Condominium Commercial Unit Owners Optional Coverages CP 15 10 Payroll Limitation or Exclusion
CP 04 38 Functional Building Valuation CP 15 15 Business Income Report/Worksheet
CP 04 60 Vacancy Changes CP 15 25 Business Income Changes Educational Institutions
CP 10 32 Water Exclusion Endorsement CP 15 21 Ordinance or Law Increased Period of Restoration
CP 10 33 Theft Exclusion CP 15 34 Extra Expense from Dependent Properties
CP 10 34 Exclusion of Loss Due to By Products of Production or Processing Operations (Rental Properties) CP 15 45 Utility Services Time Element
CP 10 36 Limitations on Coverage for Roof Surfacing CP 15 50 Radio or Television Antennas—Business Income or Extra Expense
CP 10 38 Discharge from Sewer, Drain or Sump (Not Flood-Related) CP l7 98 Condominium Commercial Unit Owners Changes Standard Property Policy
CP 10 40 Earthquake and Volcanic Eruption CP 17 99 Condominium Association Changes Standard Property Policy
CP 10 44 Theft of Building Materials and Supplies (Other than Builders Risk) IL 04 15 Protective Safeguards
CP 10 45 Earthquake and Volcanic Eruption Sub Limit Form  
CP 10 46 Equipment Breakdown Cause of Loss  

 

Highlights on some NEW ENDORSEMENTS:

Exclusion of Loss Due to By Products of Production or Processing Operations (Rental Properties) CP 10 34

This endorsement is as a result of the landlord/tenant business risks relating to the rental of the property.  While the landlord may enter into a lease that holds the tenant responsible for damages arising from a variety of causes, the insurance contract is not intended to compensate a landlord for the expected consequences of usage of the rental premises as intended. One example provided by the ISO in explanation would be when a premise is leased for use as a restaurant and there is damage from the residue of the cooking operation.  This is deemed a business risk innate to the occupancy not loss compensated by insurance.  This question becomes much more interesting and complex when the property is rented for illegal purposes such as the rental of premises that is used as a methamphetamine laboratory in which the damage from methamphetamine “cooking” operations can be likened to the residue from cooing operations in a restaurant.  Needless to say there are many issues at the heart of this discussion that goes beyond the coverage issue such as:  did the landlord know about the operation; should the landlord have known about the operation and so on.

A case in point that the ISO used in their circular was the Graff v. Allstate Insurance Company, 113 Wash, App.799; 54P.3d 1266 (Wash, Ct. App.2001).  In the case the insured filed a claim for cleanup expenses after a tenant’s methamphetamine laboratory damaged his rental house and the insurer denied the claim citing the policy’s contamination exclusion.  The insured sued and the trial court held in favor of the insured finding that his insurance policy covered the cleanup expenses.  The appellate court affirmed the lower court’s decision and stated that the operation of a methamphetamine laboratory is vandalism and therefore covered under the policy. Thus both the contamination and vandalism issues came into play.  The Insurance company,  (plaintiff),  contended that coverage is not intended to extend to the inevitable effect of a production operation which is emphasized in the language of the Special Form.  As a result of this case and similar claims, the ISO has introduced this endorsement to be attached to all polices issued to owners and tenants of rental property.

Equipment Breakdown Cause of Loss CP 10 46

Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment CP 1047

The ISO is introducing a new Cause of Loss form for Equipment Breakdown that is compatible with the Special Cause of Loss Form. Currently in the Special Cause of Loss Form there are three major categories of exclusions that relate to equipment breakdown:  artificially generated electrical current; mechanical breakdown; explosion of steam boilers…  By use of this new endorsement those exclusions are eliminated.  There are limitations specific to Equipment Breakdown coverage that is then added in the form language.   Ammonia Contamination and Hazardous Substance amounts of insurance can be scheduled on the form. Because of the introduction of the new Equipment Breakdown Form, the ISO has also introduced the Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment to allow the insurance companies to either suspend or reinstate coverage for certain pieces of equipment.

Increase in Rebuilding Expenses Following Disaster CP 04 09

This endorsement is introduced as a response to nationwide disasters and catastrophic events that have tested the limits of the policy as relates costs of labor; cost of materials due to demand and limited resources (demand surge). The ISO circular references Hurricanes Katrina and Rita wherein estimates per square footage of housing reconstruction quadrupled in the first six months after the events.

The new endorsement provides an option for insuring additional expenses when the costs of labor and/or building materials increase as a result of a disaster AND the total cost of repair or replacement exceeds the applicable limit of insurance.  Some significant sections of the endorsement include:

  1. Buildings to be insured are indicated on the endorsement
  2. Coverage will only apply as a result of an event that is declared a disaster as well as damage resulting from an event which occurs in close proximity to the disaster
  3. Coverage is on an annual aggregate basis
  4. The maximum amount of additional coverage is determined by applying a specified percentage to the limit of insurance for specific insurance.

Dependent Properties in the Supply Chain (Business Interruption)

Dependent Property Coverage is written by scheduling the business locations that the insured is “dependent upon” and have chosen to insure.  The new endorsement allows for secondary dependencies. An example provided by the ISO of a secondary dependency is a situation in which the insured’s supplier (a dependent property identified in the schedule of the current endorsement) is unable to deliver products/services due to interruption in the business of an entity (for example, a manufacturer) upon which the supplier depends but was NOT a supplier that the insured directly depended upon or was identified in the endorsement.

The new option for covering secondary dependencies is focused on contributing and recipient locations as defined in the form.  Business Income losses arising out of physical loss or damage at the secondary location is subject to the same Limit of Insurance that applies to the scheduled dependent location and does not increase the coverage.  The coverage territory is reiterated on the form to avoid any confusion that the coverage goes beyond the stated territory of the policy for example for locations outside of the United States.

Form Change Impact

COVERAGE FORMS

Building and Personal Property FormCP 00 10 Debris Removal:  The additional limit provided is increased from $10,000 to $25,000. When no Covered Property sustains direct physical loss there is coverage in the amount of $5,000 provided for removal of debris of others’ property. Coverage is increased and expanded in definition
Building and Personal Property FormCP 00 10 Fire Department Service Charge:  The policy clarifies that the $1000.00 limit provided applies to each premises insured. No change in coverage
Building and Personal Property FormCP 00 10 (various) Business Personal Property in Described Structures:  The coverage provided for Business Personal Property is clarified to cover both in the building orstructures covered in the policy. No change in coverage
Building and Personal Property FormCP 00 10 (various) Coverage Radius:  The language is clarified as relates “where” coverage must occur for coverage to apply.  The form extends coverage to 100 feet from the building or 100 feet from the described premises, whichever distance is greater. The revision broadens coverage with respect to a tenant in a multiple-occupancy building in such situation where the premises are described in terms of the actual area (quarters) occupied by the tenant. Note:  many company forms already include this clarification.
Building and Personal Property FormCP 00 10 (various) Property in Storage Units:  A new coverage extension is introduced on the Commercial Property Form for Business Personal Property Temporarily in Portable Storage Units.  The coverage is for 90 days with a sub-limit of $10,000.  The property must be located within 100 feet of the described premises. A higher limit can be indicated on the Declarations Page. This can be considered an extension of coverage, however, if an insurer previously treated property in storage as property in the open then then coverage is decreased to the sub-limit.
Building and Personal Property FormCP 00 10 Newly Acquired Business Personal Property: Currently the Commercial Property forms provide $100,000 additional coverage at each building covering newly acquired business personal property.  This provision has been removed.  There is no change for newly acquired business personal property located at newly acquired locations.  If the insured has “newly acquired” property at their location, the coverage should be increased accordingly to reflect that limit. Coverage is reduced
Building and Personal Property FormCP 00 10 & Cause of Loss Forms Vegetated Roofs:  This is one of the new “green” extensions in Commercial Property. Currently the property form excludes trees, shrubs, plants and lawns and then sub-limits the coverage. The property form is revised to include lawns, trees shrubs and plants which are part of a vegetated roof and thereby treating such property as an insured part of the building so that an existing vegetated roof can be replaced with like kind in the event of a loss.  There are some exclusions that are revised to relate directly to a vegetated roof. Coverage is broadened.
Building and Personal Property FormCP 00 10 & Business Income Form (various) Electronic Data in Building Equipment:  Currently ISO Commercial Property forms limit coverage for electronic data to $2,500 on an annual aggregate basis. The form is revised to remove the $2,500 limitation with respect to loss or damage to electronic data which is integrated in and operates or controls the building’s elevator, lightning, heating, and ventilation, air conditioning or security systems.    Coverage is broadened
Building and Personal Property FormCP 00 10; Business Income Form  CP 00 30/00 32; Cause of Loss Forms(various) Ordinance or Law Exclusion:  The form is revised to include the word “compliance”.  The new form states the “enforcement of or compliance with any ordinance or law.  This is a clarification of language No change in coverage
Building and Personal Property FormCP 00 10; Business Income Form  CP 00 30/00 32; Cause of Loss Forms(various) Options for Increasing Specified Limits:  The coverage forms currently include the ability to increase coverage via an entry on the Declarations Page for certain categories of coverage.  This change allows for increased coverage via Declarations for the additional coverages of Electronic Data;  Newly Acquired Locations; Interruption of Computer Operations and Limitations for Theft. These changes are new coverage options
Business Income FormCP 00 30 and CP 00 32 Extended Business Income, Extended Period of Indemnity:  The Business Income forms provide automatic coverage for 30 days’ following the end of the period of restoration for residual loss of income. The form revises the 30 days to 60 days. Coverage is increased.  Note: Many insurance company forms automatically include more than 30 days.
Cause of LossCP10 10, CP10 20,CP 10 30 Earth Movement Exclusion:  The term “earthquake” now incorporates tremors and aftershocks. Language is added to the Earth Movement exclusion to reinforce that earth movement is excluded regardless of whether it is caused by an act of nature or is otherwise caused. No change in coverage
Cause of LossCP10 10, CP10 20,CP 10 30 Water Exclusion:  The Water Exclusion CP 1032 and is now incorporated in the base policy forms No change in coverage
Cause of LossCP 10 30 Entrusted Property:  The revision is included to distinguish between those who have a role in the insured’s business such as partners/employees and others to whom property may be entrusted such as bailees or tenants. Specifically there is an exclusion for loss or damage caused by…dishonest or criminal acts by…anyone to whom the insured entrusts the property. Coverage is broadened
Cause of LossCP 10 30 Wear and Tear Exclusion—Special Form:  The coverage is expanded to include coverage for water damage in the “specified causes of loss” to include accidental discharge or leakage of water or waterborne material as the direct result of the breaking apart or cracking of certain off-premises systems due to wear and tear. Coverage is broadened
Cause of LossCP 10 30 Covered Cause of Loss:  The term “risk of” is deleted.  This change has been done specifically to clarify the collapse exclusion but has a broader impact. This is modified for clarity purposes No change in coverage
Form Change Impact

ENDORSEMENTS

Business Income Report/Work Sheet:CP 15 15 The worksheet has been modified to 60 days rather than 30 days for the Extended Period of Indemnity as modified in the Business Income Form No change in coverage
Debris Removal and Outdoor Trees, Shrubs and PlantsCP 04 15 and CP 14 30 Debris Removal:The $10,000 additional limit for debris removal is increased to $25,000. Note: Many company forms automatically include this limit automatically.

Outdoor Trees, Shrubs and Plants:

This specifies that debris removal is included in the limit provided for this coverage

Coverage is broadened
Radio or Television Antennas—Business Income or Extra ExpenseCP 15 50 The endorsement removes a “reference” to the Cause of Loss Earthquake.  If the Earthquake Form were attached to the policy it’s terms and conditions are therein specified No change in coverage
Utility Services—Overhead Transmission LinesCP 04 17 (Direct) and CP 15 45 (Time Element) The endorsement clarifies that the term “transmission lines” also includes “distribution lines” which is the vernacular in the power industry for a system that provides electricity to residential and commercial users by reducing voltage through the use of substations, transformers and other devices.  The forms now reinforce the intent to cover both transmission and distribution systems which serve in the transmission of power or communication service. No change in coverage
Ordinance or LawCP 04 05; CP 04 38; CP 15 01; CP 15 02; CP 15 08; CP 15 09; CP15 25; CP 15 31; CP 15 34 Ordinance or Law:  The endorsement form is revised in the same manner as theexclusion in the Coverage Forms to include the word “compliance”.  The new form states the “enforcement of or compliance with any ordinance or law. This is a clarification of language No change in coverage
Condominium Commercial Unit-Owners Changes—Standard Property PolicyCP 17 98 The endorsement modifies three sections of the Condominium Unit Owners Policy: Coverage Radius; Business Personal Property in Described Structures; and Newly Acquired Property.

  1. Coverage Radius is modified to state 100 feet from the building or described premises whichever is greater
  2. Clarifying that coverage applies both in a building or structure

 

No change in coverage
Building Glass Tenants Policy EndorsementCP 14 70 This endorsement was first introduced in 2007 to facilitate writing coverage for building glass under a tenant’s policy that did not cover the building. This endorsement simply allows for the deductible for this coverage to be added on the endorsement rather than on the Declarations Page No change in coverage
Theft Exclusion EndorsementCP 10 33 The Theft Exclusion Endorsement currently does not contain a schedule.  The new edition date will display a schedule of locations so that there is clarity as to which location the exclusion applies No change in coverage
Flood Coverage Endorsement and ScheduleCP 10 65; CP DS 65 Currently the Flood Endorsement states there is no coverage for loss from any Flood that begins before or within 72 hours after the inception date of the endorsement.  The prior form did not make any distinction concerning renewal policies. The revised form provides that the 72 hour waiting period will not apply when the prior policy included flood coverage and the policy periods are consecutive without a break in coverage. Coverage is broadened
Payroll Limitation or Exclusion OptionCP 15 10 The payroll endorsement is being modified to provide a means of limiting or excluding the payroll expense of “any category of employees or individual employees” The term “ordinary payroll expense” and its definition are removed from the endorsement.  The title, also, will no longer refer to the word “ordinary” and the word “ordinary” will no longer appear in other sections such as the “coinsurance section”. The revised endorsement serves the same purpose as the prior one but can be used to address any category of employee on the insured’s payroll. No change in intent—clarification of definition
Condominium Commercial Unit-Owners Optional Coverage:  Loss AssessmentCP 04 18 Currently the endorsement places a $1,000 limitation on an assessment as a result of a deductible on the condominium association policy.  This endorsement provides a means for selecting a higher limit. Coverage is broadened
Utility Services—Wastewater Removal (Time Element)CP 15 45 The Utility Service Time Element endorsement is being revised to add a new category of utility service:  wastewater removal property. By definition, wastewater removal property is a utility system for removing wastewater and sewage from the described premises other than a system designed primarily for draining storm water. The utility property includes sewer mains, pumping stations and similar equipment for moving the effluent to a holding, treatment or disposal facility; and includes such facilities. Coverage is broadened
Earthquake Sprinkler Leakage DeductibleCP 10 40; CP 10 45 In 1999, the EQSL Endorsement CP 10 39 was withdrawn from the series and EQSL could be purchased by activating the EQSL ONLY option on the EQ endorsements CP 10 40 and CP 10 45. The revision in this form adds language providing that the EQ deductible provisions outlined in the EQ endorsement (that is, the percentage deductible) do not apply to the EQSL—Only coverage. Instead the Fire deductible applies. Coverage is clarified and broadened
Builders Risk—Theft of Building Materials, Fixtures, Machinery, EquipmentCP 11 21 This change relates back to the issue of “entrusted property” discussed above. Entrusted Property:  The revision is included to distinguish between those who have a role in the insured’s business such as partners/employees and others to whom property may be entrusted such as bailees or tenants. Specifically there is an exclusion for loss or damage caused by…dishonest or criminal acts by…anyone to whom the insured entrusts the property. There is no change in “intended coverage”
Green Upgrades Endorsement RevisionCP 04 02 The schedule on the form is revised to identify which property is subject to upgrade when not all personal property is not to be covered for Green Upgrades. No change in coverage
Form Change Impact

NEW ENDORSEMENTS

Exclusion of Loss Due to By-Products of Production or Processing Operations (Rental Properties)CP 10 34 New form introduced to be attached to policies issued to owners and tenants of rental premises.Discussion of the change is included above. There is no change in “intended coverage”
Specified Property Away from PremisesCP 04 04 New form introduced to provide coverage for business personal property temporarily away from the described premises in the course of daily business activities, while in the care, custody or control of the insured or an employee of the insured.  Coverage is broadened
Higher LimitsCP 04 08 Currently the insurance form has many options to increase coverage via the Declarations Page. This endorsement is an alternative to activating the coverages on the Declarations Page by using this multi-purpose endorsement No change in coverage but new coverage option
Equipment BreakdownCP 10 46 This is a new optional endorsement which is compatible with the Special Form Cause of Loss CP 00 13.Discussion of the change is included above New Coverage Option
Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment CP 10 47 Because of the introduction of the new Equipment Breakdown Form, the ISO has also introduced the Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment to allow the insurance companies to either suspend or reinstate coverage for certain pieces of equipment.Discussion of the change is included above New Coverage Option
Deductible By LocationCP 03 29 Currently there is a Multiple Deductible Form CP 03 20 adopted in most states which is designed to allow for the selection of different deductible by location and peril.  This schedule of endorsement shows separate locations and the deductible for each location. This is a new optional way to show deductibles but does not affect existing deductible options.
Limitations on Coverage for Roof SurfacingCP 10 36 This endorsement provides options for insuring roof surfacing on an ACV basis and for excluding cosmetic damage to roof surfacing. The cosmetic exclusion option applies only to the perils of wind and hail, and could be written without regard to the underlying valuation clause. New Coverage Option. This would be chosen by an insurer when they deem it necessary typically on an older building
Increase in Rebuilding Expenses Following Disaster CP 04 09 This is a new endorsement to add additional expenses following a disaster.Discussion of the change is included above New Coverage Option
Dependent Properties in the Supply Chain (Business Interruption)Endorsement to CP 15 01; CP 15 02; CP 15 08; CP 15 09; CP 15 34. Dependent Property Coverage is written by scheduling the business locations that the insured is “dependent upon” and have chosen to insure.  The new endorsement allows for secondary dependencies.Discussion of the change is included above New Coverage Option
Discharge From Sewer, Drain or SumpCP 10 38 This is a new endorsement to cover discharge from a sewer, drain or sump and pertains to physical damage and/or time element loss as indicated in the schedule. The amounts stated in the schedule are sub-limits and therefore do not increase the underlying limits of the insurance provided.  An annual aggregate limitation can be selected via the schedule on the endorsement. New Coverage Option
Theft of Building Materials and Supplies (Other Than Builders Risk)CP 10 44 Currently there is a limitation under the Special Cause of Loss form for theft coverage for building materials and supplies that are not part of the building or structure to that which is held for sale by the insured.  The new endorsement provides coverage for the theft of building materials and supplies that are located on or within 100 feet of the premises when such property is intended to become a permanent part of the building or structure. New Coverage Option
Protective Safeguards (Fire)CP 04 11 The new endorsement replaces the interline form IL 04 15.  This endorsement, therefore, only pertains to Commercial Property insurance and contains the same provisions as the current endorsement. No Change in Coverage
Food Contamination (Business Interruption and Extra Expense)CP 15 05 This new option covers extra expenses and business income loses arising out of food contamination and pertains to the Business Income And Extra Expense Coverage Form.  Coverage is limited to loss of income/extra expense due to the closure of the business. Covered expenses include: cost of cleaning equipment; cost of replacing food; medical testing and vaccination and advertising expense. New Coverage Option

Written by:
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR
President, Insurance Community Center

 

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Insurance Lessons Learned from Hurricane Sandy

Hurricane Sandy is said to be the most damaging hurricane recorded in U. S. history.

 

Hurricane Katrina in the Gulf of Mexico near i...

 

There appears, however, to be some dispute as to whether Hurricane Katrina holds that dubious honor.  The loss estimates and concerns are changing daily .The cost of the storm, estimated by private firms including PricewaterhouseCoopers and the PFM group,  points to the fact that Hurricane Sandy destroyed or damaged more units of housing, affected more businesses and caused more customers to lose power. Here is the breakdown provided on November 26, 2012: http://www.governor.ny.gov/press/11262012-damageassessment

                                                        Sandy in New York ALONE        Katrina & Rita in Louisiana
Housing units damaged or destroyed    305,000                                      214,700
Power Outages (peak)                         2,190,000                                   800,000
Businesses Impacted                          265,300                                      18,700

•     Number of deaths is more than 110 from Hurricane Sandy http://articles.latimes.com/2012/nov/03/nation/la-na-nn-hurricane-sandy-deaths-climb-20121103
•    The official death toll from Katrina was 1,723. http://robertlindsay.wordpress.com/2009/05/30/final-katrina-death-toll-at-4081/
•     7.5 million power outages throughout Hurricane Sandy’s two day assault on land
•    Moody’s Analytics estimates the loss in the vicinity of the storm to be $50 billion, of which $30 billion will be directly from damage to property and the remaining $20 billion from economic activity, not all of which is going to come from an insurance policy.
•    60% of the losses in economic activity, or about $12 billion, will come from the New York City metropolitan area.
•    Because of the storm’s intensity and the breadth and scope of the damage, President Obama declared New York and New Jersey federal disaster zones without waiting for any damage estimates.
•     As of 12/3/2012, the Federal government has already issued $180 million in federal contracts related to Sandy.
•    The President has declared several areas as disaster areas, which means that federal funds will now be available to storm victims. (This is not limited to those without flood insurance.) This federal disaster assistance usually takes the form of low-interest loans to help home and business owners rebuild, which you can learn more about on the Disaster Loan page.

The statistics are staggering as are the losses (both covered and not covered) that are emerging from the storm.  We will attempt to discuss some of the unique and troublesome issues that are arising from the storm.
Article Discussion Points:
•    Definition of “Storm” and its impact on insurance
•    Flood or NOT Flood?—that is the question (or the hope)
•    Personal Auto salvage concerns
•    The Lawyers are out to get you

DEFINITION OF “STORM” AND ITS IMPACT ON INSURANCE
A storm reaches tropical storm status by reaching sustained winds of 39 MPH.  The National Hurricane Center creates annual lists of names from the database of names maintained and updated by the World Meteorological Organization.  If a storm causes significant damage and /or loss of life, the name is retired from the list permanently.  Thus, there will be no Katrina II or Sandy II.

1.    What Does The Definition Of “Storm” Have To Do With Insurance?  There May NOT Be Coverage On The DIC.

 
Thousands of businesses were affected by Sandy. Many times those larger clients have flood and wind coverage, but written on a large property or DIC (Difference in Conditions) policy.
In those policies there may be restrictions, sub-limits or different deductibles that apply to “Named Storms.” Those policies will define what that is, and should include flood, wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain into this category once the storm has been declared by the National Weather Service to be a hurricane, typhoon, tropical cycle, tropical storm or tropical depression, thus bringing into focus the entire life cycle that a storm may go through.
We have found a number of articles written by law firms that are already taking on the issue of “named storm,” claiming that even though the NWS had named the storm, it was not at hurricane strength when it reached landfall.  A comprehensive definition of “named storms” would be helpful to clarify coverage.  The fact that the meteorologists are discussing the attributes of this storm to be more like a winter storm rather than a tropical storm may end up on the chopping block of justice in a civil court or two and test the insurance policy coverages.

2.    What Is Unique About Hurricane Sandy?

•    Sandy has defied normal storm behavior by moving east to west; it acted both like a hurricane and a cyclone simultaneously.
•     The result of this last odd wind pattern was the root cause of the flood tides and the inundation of the New York subway system.
•    The storm qualified as a hurricane at the time of landfall and its wave “destruction potential” reached a 5.8 on the National Oceanic and Atmospheric Administration’s 0 to 6 scale.

3.    One Storm or Two Storms:

Bad memories of the World Trade Center came immediately to mind when I read about this potential concern relating to Hurricane Sandy.  You might remember there was a significant concern that a second storm, following the initial impact of Sandy,  was going to hit which would have further devastated the area.
Richard Mackowsky, a member of the firm’s global insurance group, said” new damage from a second storm could result in a separate occurrence, potentially requiring a separate set of deductibles.”

“If there is damage caused by a second storm but related to the first storm, issues arise as to whether there were one or two occurrences. A second storm could impact causation as to what is really driving the loss. If the only reason the second storm caused damage was because of damage from Sandy, the question then becomes whether that is a covered cause of loss,’ Mackowsky said. ‘A second storm could trigger a separate limit of liability if it’s a big enough situation,’ he said.

But even one storm can create causation questions. Was the damage from wind or flooding? Not a simple question to answer, litigation stemming from previous storms has shown.”

http://www.dailyreportonline.com/PubArticleDRO.jsp?id=1202577583424&Hurricane_Sandy_insurance_claims_Double_trouble&slreturn=20121103130917
Saved by the bell on this one—the second storm never hit but the insurance pundits were armed and ready.

TO FLOOD… OR NOT TO FLOOD?—THAT IS THE QUESTION
This appears, at first glance, to be Insurance 101—most of this damage was either directly or indirectly caused by the condition of flooding.  That is sure what it looked like to me and that is NOT a very popular observation. Why?? Because most people did not have Flood Insurance and if they did, the Flood insurance policy has limited amounts of insurance and significant restrictions such as NO business income coverage.

1.    Dilemma Of The Federal Flood Insurance Program—It’s A Problem:
Even if it is covered on the Flood insurance policy there is real concern about the overall program.  According to Reuters:
“ ‘The federal government’s flood insurance program may not have access to enough funds to cover anticipated claims from Hurricane Sandy victims,’ a top official at the Federal Emergency Management Agency said on Thursday.
Edward Connor, FEMA’s deputy associate administrator for federal insurance, told an insurance advisory panel on Thursday that his agency is projecting a flurry of flood-related claims in the neighborhood of $6 billion to $12 billion.
‘That is well above FEMA’s current borrowing power,’ he said, ‘which is maxed out at $2.9 billion. To extend it would require authorization from Congress, something Connor said he expects the Homeland Security Department will request soon.’ ”
http://news.yahoo.com/hurricane-sandy-claims-may-exceed-insurance-program-funds-200945560.html

2.    Flood or NOT Flood
Whether talking about homeowner’s insurance (including renters and condominium owners) or commercial property insurance, those forms most often include an exclusion for flood.  So, here is where it gets a little tricky:
a.    Did the property owner sustain damage from storm surge,
b.    Was the loss due to  rising flood waters
c.    Was the loss due to  too much rain that entered into the building because the wind removed the roof, blew out the windows or knocked a part of the building down
“It is an ongoing saga,” says insurance lawyer Frank Darras, who has worked extensively on litigation scenarios following Katrina. “If you are a homeowner, you are going to argue that you have damage caused by wind and wind-driven rain. If you are the carrier, you are going to say the damage was caused by flood, tidal surge or a hurricane, which requires hurricane coverage.”  In a unique twist, New York has a specific website that contains a regularly updated scorecard on insurance company performance.  Here’s the link:  http://www.nyinsure.ny.gov/nys-insurer-report-cards.html  For example, State Farm has had 48,109 claims; 6,363 closed with payment; 5,229 closed without payment.

3.    Problems With The Flood Insurance Solution
FEMA says that less than 15% of homeowner’s nationally carry flood coverage.  Federally backed lenders have been lax in enforcing the obligation to purchase flood insurance (THAT may change due to higher penalties being imposed upon the banks as of July, 2012).
The NFIP program anticipates claims between $6 and $12 billion but has borrowing power at $2.9 billion.  Reauthorization from Congress would be required and Homeland Security is expected to request appropriation soon.  Those current and new policyholders of NFIP coverage will be getting a scheduled rate increase that predates Sandy.
Even if the person or business purchased flood coverage, there are still problems and concerns.
a.    The limits of insurance available through the National Flood Insurance Program are small.
b.     Replacement cost coverage applies only to a dwelling and not to commercial structures.
c.     There may be wind damage to the building that the flood insurer will not pay but are covered in the homeowner’s policy.
d.     The insured will get to pay two deductibles for those two separate policies.
e.     What kind of coverage is there if the first layer of property coverage is the NFIP coverage and the insured purchases excess layers of flood coverage above that policy?
i.    Will it drop down to pick up the replacement cost difference?  No.
ii.    Will it drop down to pick up business income, extra expense coverage?  It should.  Check the policy language.

4.    The Future Of Flood Insurance
The future of the entire program is bleak enough, add to that the impact of Hurricane Sandy on the future purchase of flood insurance.  Homeowners in storm damaged coastal areas who had flood insurance , and many more who did not, still now may be required to carry Flood insurance and will face premium increases for Flood from an estimated 20 to 25 percent per year beginning January.  This is due in part to legislation enacted in July to shore up the debt ridden National Flood Insurance Program and is exacerbated by Hurricane Sandy.
“ ‘Because private insurers rarely provide flood insurance, the program has been run by the federal government, which kept rates artificially low under pressure from the real estate industry and other groups. Flood insurance in higher-risk areas typically costs $1,100 to $3,000 a year, for coverage capped at $250,000; the contents of a home could be insured up to $100,000 for an additional $500 or so a year,’ said Steve Harty, president of National Flood Services, a large claims-processing company.”
http://www.nytimes.com/2012/11/29/nyregion/cost-of-coastal-living-to-climb-under-new-flood-rules.html?pagewanted=all&_r=1&
Lenders, in addition, will be affected by Hurricane Sandy if they fail to enforce the requirement for their lenders to carry Flood Insurance.  They will face even higher penalties than they have in the past.

5.    Ordinance or Law
a.    Many of those properties damaged by Hurricane Sandy had been built a number of years ago. So here are the questions:
i.    Does the Homeowner’s Policy, Commercial Property Policy or DIC include contingent ordinance or law coverage, demolition coverage and increased cost of construction coverage?
ii.    What about the loss of use for the homeowner as well as the business interruption coverage?
b.    The NFIP policy is out as there is no coverage for the indirect loss.
c.    Many DIC policies do not include ordinance or law automatically and many more do not include ordinance or law – increased period of restoration to cover the additional down time due to code or law enforcement.

6.    Power Loss
Earlier we quoted the statistic of approximately 7.5 million power outages throughout Hurricane Sandy’s two day assault on land.  Many of these outages lasted days and weeks.  There are several issues relating to insurance in terms of the power outages:
d.    Requirement Of An Off Premises Endorsement:
In order for businesses to have coverage for either direct or indirect losses relating to power outage, the insurance would first  have “off premises” or “utility coverage” on the policy.  Typically, losses stemming from off premises situations are excluded on property insurance policies.
e.    Causation Of The Power Outage:
If there was coverage on the property policies for the off premise loss, the situation that occurred off premises would have to be covered.  For example, if the off premises loss were caused by a windstorm, that cause of loss is typically covered on a Commercial Property Policy or personal form.  If the loss were caused by flooding, then that cause of loss is excluded and the off premises endorsement would not apply.
f.    Off Premises Deductible:
Off premises coverage oftentimes has a “time” deductible or waiting period of 72 hours unless endorsed. This waiting period would have eliminated coverage for many of the properties that had their power back in three days or less.
g.    Direct vs. Indirect Loss:
An Off Premises Endorsement would have to cover both direct damage and indirect to pick up a loss for Business Income.
h.    Other Perils such as Equipment Breakdown  (EB):
The cause of off premises loss may be due to a power surge that results from the storming.  If the EB policy has off premises coverage and Business Income coverage then recovery can be sought under that policy.
i.    Some Off Premises Policies Have Distance Limitations:
It must be ascertained if there is any distance indication on the policy to which the off premises is being attached. For example some policies have a 500-foot distance radius which means the source of the off premises loss must be within 500 feet of the insured’s premise.
j.    Spoilage:
It may be that the loss the insured sustained while the power was out was spoilage, such as loss to refrigerated items AND the business income that stems from that loss.  This could be covered on either an Equipment Breakdown Form depending on whether there was a “breakdown” or on a Commercial Property Spoilage Form.  Some Homeowners have limited coverage built in for refrigeration loss but not for the peril of Flood.

7.    Business Income:  Now we are talking about one of the bigger claims that will result from Hurricane Sandy and much of it will NOT be covered.  Here are some of the pressure points of this coverage:
a.    Cause of Loss—back to that one. Flood is excluded on the Commercial Property form so there will be no response for Business Income.
b.    The Flood insurance policy does not cover business income.
c.    If the cause of loss is determined to be “windstorm” and the insured has Business Income insurance then the policy should respond from the causation point of view assuming they had direct damage.
d.    The insured will have to prove that their income loss is directly attributable to Hurricane Sandy.
e.    The policy has a waiting period for coverage typically 72 hours unless endorsed.
f.    The policy would have to be endorsed with Off Premise coverage for the Business Income stemming from loss of power to apply.
g.    There is NO building ordinance for the business income—it would have to be endorsed.
h.    Civil Authority:  Many of the businesses did not sustain direct damage but where closed by civil authority.
i.    There is limited coverage on the BI form
ii.    There may be distance limitations
i.    Ingress/Egress:  A bigger problem is the ingress/egress issue which basically means “because of the condition, itself, access to an area is affected or unavailable.”  For example, if a road is flooded out so that there is no access to a grocery store, the grocery store will be able to demonstrate they are losing customers.  However, if the store was not directly affected by the physical loss, there will be no trigger on their business income form.  Civil Authority did not close down the area—it was closed to natural events in this case.
Traditional Business Income Policies require that there be direct damage to the premises by a peril insured against for there to be any business income insurance response.  However, there is talk, in the aftermath of Hurricane Sandy of what is referred to as Non-Damage Business Interruption or Non Physical Business Interruption Insurance. It is referred to as NDBI.  While articles are referring to these coverages, as if they are readily available, I believe they are truly exceptional in availability and accessibility.  Sometimes these forms are part of a “supply line coverage” for very large businesses that often have an international component.  There is also the TDI or CDI coverage—Trade Disruption which could come into play; however, that coverage has a very limited market.  Bottom line, the average business that sustained damage as a result of Hurricane Sandy had neither one of these types of coverage.  Here is a link to Liberty International that apparently has a program.  http://www.liueurope.com/productgroup?productgroupid=51&productid=102

8.    Automobile Losses from Hurricane Sandy
Autos are the easiest part of this equation:  whether wind, flood or a combination, all are covered under the “Other Than Collision” coverage.  The salvaging of these autos is where it gets interesting.  Canadian officials are now bewailing the fact that thousands of autos, some estimates are as high as 250,000, are likely making their way to Canada.  Those storm damaged vehicle are classified in Canada as “non-repairable” and are illegal to sell.  But, in the aftermath of Katrina, Canadian citizens were buying these vehicles in the thousands and they expect the same thing to happen again.  What I wonder is, who is selling those vehicles?  The original owner?  The salvage company the insurer uses?

THE LAWYERS ARE OUT TO GET YOU
Errors and Omissions Litigation
Well, as if all the foregoing isn’t depressing enough, we cannot end this article without a little nudge to the insurance agent and broker.
If you are relying upon “conversations” with your client along the lines of “Do you want flood insurance?  No.  OK, then,” you are going to be sadly mistaken that your client is not going to enjoin you in litigation over your standard of care.  Your client is going to claim an increased standard of care, yes including New York residents, and that you had a duty to advise and quote coverage for them or at the very least, tell them in writing of the limitations of coverage in the policies they purchased and that they relied upon you for your expertise.  Many agents simply renew, year after year, their direct bill homeowner’s and small business clients without ANY documentation of coverage offers.  Even those handling larger accounts somehow rely upon the client’s memory and good will not to sue you.  So, again, for the millionth time already, please, please DOCUMENT your file, in writing, to the insured, with a rejection signature every year or, for larger accounts, an authorization to bind affirmation from the insured.
As we were all glued to the TV, watching reporters being blown around reporting the devastation, my insurance brain immediately went to “flood exclusions.” I saw the wind ravaging the houses, the uprooted trees blocking the roads, but also saw the rising waters in the streets; along the shores; in the housing areas.  The question will come down to that simple reality—was the damage due to flooding or not.  The attorneys are out in force, fighting for first page on the Google search engine so you get to them first.  A quotation from the Stephenfoster law site got my attention:
“There are reports that hurricane Sandy insurance claims are not being promptly or fully paid. Hurricane Sandy has caused billions of dollars of property damage. Fighting an insurance company’s hurricane Sandy appraisal is possible and, sadly, frequently necessary. Hurricane Sandy claims are handled similarly to other storm damage claims but there are some unique differences.
One common tactic that is employed by insurance companies or their adjusters is stating that damage is “flood damage”. Flood damage is typically not covered by standard homeowner’s policies or business interruption policies. It is important that people that have suffered losses realize that just because they are told it is “flood” damage doesn’t necessarily mean that the loss is not covered.
Hurricane Sandy insurance claims are expected to be huge. Stephen Foster is handling hurricane claims against insurance companies for claim denial, claim delay, loss of use of home, property damage, roof damage, loss of use of business, water damage, water damage caused by wind and bad faith claim handling. If an insurance company does not fulfill honor their promises to pay for damage caused by Hurricane Sandy then an insured should consult with an experienced hurricane insurance claim attorney.”
I love that last paragraph.  It reminds me of an old Gun Smoke movie—ready, aim, fire.  Barrels are being loaded against the insurance companies.
There is no easy way to end this article, although I am sure all of you who reached the very end are hopeful that I will.  The storm was one of the biggest ever and the insurance story will not end soon.  There is so much more we could say but best end this with a heads up to watch and see how these claims unravel; and, for those of you who did not insure any of these damaged properties, I say a toast of champagne is in order.

 

Written By:
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR
President, Insurance Community Center, Insight Insurance Consulting
and
Marjorie L. Segale AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR
Director of Education, Insurance Community Center & President, Segale Consulting Services, LLC

 
 

 

 

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