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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  Some of the changes are minor but carry new edition dates of existing form numbers; forms that are being withdrawn and new forms that are being introduced.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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New Commercial Property Forms for 2012

The ISO has submitted significant changes for the Commercial Property Forms that have an effective date of 10/2012.

The changes include:  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.  This multistate 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 acoverage 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.

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 Form
CP 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 Form
CP 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 Form
CP 00 10 (various)
Business Personal Property in Described Structures: The coverage provided for Business Personal Property is clarified to cover both in the building or structures covered in the policy. No change in coverage
Building and Personal Property Form
CP 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 Form
CP 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 Form
CP 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 Form
CP 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 Form
CP 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 Form
CP 00 10;Business Income FormCP 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 Form
CP 00 10;Business Income FormCP 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 Form 
CP 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 Loss
CP 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 Loss
CP 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 Loss
CP 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 Plants
CP 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 Expense
CP 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 Lines
CP 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 Law
CP 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 the exclusion 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 Policy
CP 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 Endorsement
CP 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 Endorsement
CP 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 Schedule
CP 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 Option
CP 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 Assessment
CP 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 Deductible
CP 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, Equipment
CP 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 Revision
CP 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 Premises
CP 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 Limits
CP 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 Breakdown
CP 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 Location
CP 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 Surfacing
CP 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 Sump
CP 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
 

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A Plastic Injection Molding Firm

Factory 1

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The insured was a plastic injection molding firm.

They had borrowed money from a bank in the amount of 1,800,000 dollars for the purchase of their equipment. The equipment collateralized the loan. The bank had requested that the agent add them on as a loss payable; provide them with notice of insurance; and provide that the insurance was non-derivative of any actions, acts or omissions of the insured. Both the request for the notice of cancellation and “separate” insurance were in the detail on the back of the bank’s standardized form for a secured loan of this sort.

The insured had become delinquent on their payments and after several months the bank representative personally went to the location and discovered that the business had vacated the premises and the equipment was gone. The bank immediately made notified the insurance company and took over the payments of the premium as coverage was still in force. What was clear was that the insured had absconded with their equipment. What also became clear was that the insured denied the bank coverage because they had been identified on the policy as a Loss Payable rather than a Lender s Loss Payable as their requirements for coverage would have dictated.

Often time a bank will request to be added as a “loss payable”. What many agents do not realize is that a “loss payable” endorsement has three separate choices as to how the policy will pay which is indicated on the Declarations Page of the policy: Loss Payable; Lenders Loss Payable and Contract of Sale. In this situation, the agent named the bank as “Loss Payable” which, according to the endorsement only provided that the policy would pay any claim for loss or damage jointly to the insured and the Loss Payee as interest may appear. This loss was NOT payable to the insured, the plastics manufacturer, as they had stolen their own property. What should have happened was that the bank be named as a Lenders Loss Payable. This clause provides: “If we deny your claim because of your acts or because you have failed to comply with the terms of the Coverage Part this loss Payee will still have the right to receive loss payment if the Loss Payee: (1) pays the premium due and (2) submits a sworn proof of loss within 60 days….” The last choice is for a contract of sale for situations wherein the loss payee has entered into a “contract” with the insured for the sale of Covered Property.

The mistake here was simply that the agent did not provide the coverage that was requested by the bank. The agent had received a copy of the request but failed to review its terms and requirements. The choice to name the bank as a Lenders Loss Payable would not have cost any more premium dollar then to have named them as Loss Payable. A word to the wise, when a bank has lent money, specifically on equipment they are requiring the Lenders Loss Payable Form. In this case it was a 1,800,000 dollar mistake.

~Laurie

 

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Q: I am having a problem with the CGL form (CG 0001 0798) with a carrier. I am asking but how policies should work (or not work).

Questions & Answers

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Q:  The client’s lease calls for “Tenant shall provide Landlord with a Certificate of insurance naming Landlord, Landlord’s lender (if any), and Realty Corporation as additional insureds, provides for a waiver of any right of recovery by way of subrogation against Landlord in the event of any loss, and provides for a thirty (30) day written notice to Landlord prior to cancellation or material change of coverage”.

Of course the standard fire insurance allows for the waiver if in writing before the loss.   Do you think this means  for liability too?   We contacted the GL carrier and they said they don’t endorse a waiver on the GL.  Is there an automatic waiver section in a GL policy similar to the property section?

Any help you can offer is appreciated.

A:  Yes, I do believe that the language you have quoted brings in every line of insurance, including property, auto, liability, work comp, etc.

ISO GL (any edition) does not require the Waiver of Subrogation endorsement CG 24 04.

The CGL Condition #8 – Transfer of Rights of Recovery Against Other To Us in the GL form demands that the Named Insured does nothing AFTER loss to impair the insurer’s rights of subrogation.  Therefore, the Named Insured may waive rights prior to a loss occurring and not violate the policy conditions.

8.  Transfer Of Rights Of Recovery Against Others To Us

If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring “suit” or transfer those rights to us and help us enforce them.

The Business Auto language is the same – the condition # is 5.

The WC policy is a problem and would have to be endorsed and the insured will have a premium charge that could be significant.

If the insured is carrying an Umbrella policy, check the form.  Many standard markets follow the underlying ISO language, but others do not.

I hope this is helpful.

 
 

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Business Income in a “Down-Turned” or “Flattened” Economy

Stock Market Fortune Cookie

A case in point: Amerigraphics, Inc. v. Mercury Casualty Company

Settlements on Business Income forms have been challenging under “normal” conditions. But now with the state of the economy earmarked by businesses closing doors or just surviving we have new challenges to deal with. The first question is whether we, as insurance agent/brokers, should be offering business income insurance to a business client that is not making a profit and the second question is how this economy has changed how claims are being settled. Both of these questions are difficult to answer definitively but we can certainly shed some light on some of the considerations we have to take into account.

Starting with the basics, the following language is the definition of Business Income in the industry standard ISO form CP 00 30:

“Business Income means the:
(i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred, but not including any Net Income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses; and
(ii) Continuing normal operating expense incurred, including “payroll expenses.”

At first reading this definition appears to be straightforward but is far from plain language when there is a claim dispute. Let’s begin with the premise that an insurance policy is not intended to make an insured any better than they were prior to the loss. Let’s continue that thought by asking whether an insured who is operating at a loss should be paid their continuing operating expenses in their totality when, in fact, they could not have afforded those expenses in the absence of the loss. Looking more carefully at the two paragraphs in the definition we need to determine if they are “grammatical” statements as stand alone concepts or are they “mathematical “ and are dependent on one another to determine a settlement. Will the insurance company pay all of the continuing operating expenses or reduce them to the extent the insured is operating at a loss? Not easy questions—not easy answers!

Our previous way of looking at these two statements has just taken an about face based on a recent California appellate case that overturned a long standing interpretation of the application of the definition of “business income” in a case where the insured was operating at a net loss. The case is Amerigraphics, Inc. v. Mercury Casualty Company, 2010 Cal. App. LEXIS 377 (Cal. App. 2nd Dist. March 23, 2010). The facts of the case involved a building that was leased by Amerigraphics, a printing/graphic design operation, that was flooded with resultant damage to Amerigraphics’ printing equipment, other equipment and tenants improvements and betterments. Amerigraphics made claim under both their property policy and business income coverage. While the property claim was under dispute, the business income claim presented an even bigger problem; to wit whether the insured could make a claim for business income when their actual operating loss was less than the projected operating loss?

Mercury denied business income coverage based on this very argument and Amerigraphics filed suit against Mercury with the result that in a pre-trial judicial determination the court ruled that Mercury’s interpretation was incorrect and that the “projected” operating loss should not have been offset against the actual continuing operating expenses. In simple terms the court ruled that all of the continuing operating expenses should have been paid and not offset by the loss treating the two paragraphs of the definition as separate statements rather than dependent upon one another. The trial court thereby construed the policy in favor of a “plain language” interpretation by an “ordinary” insured to conclude that in the event of a covered loss that forced the complete suspension of its business operation, the policy would provide coverage for any lost profits, and even if there were no lost profits, for ongoing expenses incurred during the period of suspension. If the court had not interpreted the language this way then the insured would be denied benefits under the policy for coverage of its “normal continuing operating expenses”. The courts stated that the two paragraphs are really two different and distinct coverage’s.

Prior court decisions in other states, involving the same coverage form, came to a different conclusion. In Liberty Mutual Insurance Co. v. Sexton Foods Co., a 1993 Arkansas case and Continental Insurance v. DNE Corp., a 1992 Tennessee case, both courts held that the language in the policy required that projected operating losses should be subtracted from the continuing normal operating expenses. The Tennessee court said it best: That to ignore a net loss “…would put the insured … in a better economic position from having its business interrupted…” than if no loss had occurred.
The California court dismissed these prior rulings by stating “…we are not bound by out-of-state authorities and the resultant impact of this decision is to put the insured in a better financial position than if no loss had occurred – the very antithesis of a normal contract of indemnity.
The national result of the California decision is hard to predict at this time. Other states could consider this decision or could leave California in isolation with this unusual decision. The policy drafters could also use this case to make changes in future editions of the coverage. Many courts look to California to take the lead on these types of decisions

Back then to the first question of this article as to whether we, as insurance agent/brokers, should be offering business income insurance to a business client that is not making a profit. There are a couple of thoughts as relates this question. First, I think we should be offering the coverage as there will be many situations for which the policy would respond. Second, while the insured may be operating at a loss when we write the policy their situation could improve and we would use that information for the loss projections. Third, the financial loss could be partly a function of the financial statement and not be of issue in the settlement. And last, based on this decision, the form could provide them with the continuing operating expenses during their suspension if the loss occurred within California jurisdiction.

The second discussion area of this article is how this economy has changed how claims are being handled and settled. In speaking with Robb Greenspan, SPPA, Partner in the Public Adjusting firm of The Greenspan Co./Adjusters International, he identified there is conflict in the settlements based on “projected” income and the effects of vacancies and un-occupancies of buildings. Business Income forms provide that in determining loss, due consideration shall be given to: “the earnings of the business before the dates of damage or destruction and to the probable earnings thereafter, had no loss occurred…” In a weakening economy the insurance companies are taking the position that the economy is only getting worse; they are reducing forecasts of future income; downplaying any argument for increases and looking at a shorter window of pre-loss income for projection purposes. While in the past the companies would take into account prior income from two years prior to the loss, now the companies are cherry picking the prior period they wish to base the income projection on so as to get a better ( lower) projected income loss. All of this makes it very difficult for an insured to “estimate” in any positive light what they could have earned had not loss occurred because of the impact of a downturned economy.

Vacancy weighs heavy on the denial of claims from several angles. The first one is coverage driven based on perils. As the Business Income Coverage form is attached to a Cause of Loss form then any exclusionary language would then follow to coverage under Business Income. Specifically if coverage is denied for a vandalism loss because of prolonged vacancy then that denial would follow through to the Business Income loss. The old argument that an insured could have rented a unit or space that was vacant prior to the loss is falling on deaf ears in the reality of the national vacancy rates. Another impact of vacancy concerns the Business Income adjustment. Should the building owner have a loss, where the building was completely occupied by tenants, many insurance companies are looking at the lease terms, lease termination dates and the types of tenants business and questioning whether the tenants would have continued at the same rent during the restoration period or even if they would have continued at all. A number of agents and their clients have experienced this in recent losses and while most of the clients ended up receiving full compensation for their loss of rents, the adjusting process was less than smooth and increased the proof requirements substantially. . Many insured who would not in the past seek the help of Public Adjusters on their claims now find they need to bring one in to offset the skills the Forensic Accountants have that the carriers employ to protect their interests by reducing claim payments in the claims adjustment.

The questions and concerns we have discussed in this article will be ongoing. The downturned economy will continue to weigh heavily on claims settlements and more and more cases will be brought to court due to unsatisfactory settlements. Only time will tell how this will all turn out but keep a watchful eye on new developments and decisions.

Find more information at http://www.insurancecommunitycenter.com

~Laurie

 

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