Chapter 5 Study Notes – Insurance Wordings and Coverages
COMMERCIAL PROPERTY FORMS
Commercial property wordings include a wide array of forms insuring a variety of different property.
Names given to these wordings include fire; named perils; multi-peril; all risks; inland marine and floaters.
Historically commercial property was insured for the peril of fire. Later, wordings were developed to broaden the scope of coverage, initially to include the additional perils and thento broaden coverage to multi-peril and all risk forms
In-land marine is used to define a major line of coverage as well as to apply to specific wordings. It evolved out of ocean marine coverages to continue the insurance of transportation risks once the cargo was on dry land. They still mainly apply to risks with some degree of transit exposure.
Named Perils Form
Generally provide insurance for fire and additional perils named on the policy form. The defining essence of a named perils form is that the perils insured are expressly noted in the wording.
Perils can be as limited or expansive as the insurer chooses. Some insure the peril of fire only; others extend to include most of the major perils. The extent of coverage is clarified by the exclusions.
Property insured can be:
- buildings only
- contents only
- building and contents
Note: contents generally includes but is not limited to stock including packaging and labeling, equipment, leasehold or tenants’ improvements, property of others, and generally all contents usual to the business.
Always advise your client of the limitations of this form of coverage and draw their attention to the perils that are most relevant to their situation.
Broad Form (All Risks)
Provide insurance on an all risks basis, subject to policy conditions, limitations and exclusions.
Property insured can be:
- building
- contents
- building and contents
Be aware that “all risks” does not mean “all inclusive”. All risks is subject to these qualifiers:
“all risks of direct physical loss or damage” and “except as excluded”. All risks is not all losses.
Losses covered are for direct physical loss only and the perils are only insured so long as they are not excluded.
Hence, there are more exclusions in an all risks policy than in a named perils policy. Because of the way the policy language is written, a named perils policy can be broader than an all risks policy in some areas.
It is possible to restrict the all risks policy by so many exclusions that a named perils policy become broader.
When issuing binders for risks on all risk wordings, prominently note that the coverage is subject to exclusions. Using the term “broad form” rather than “all risks” will avoid confusion.
Most common wordings insuring property on a broad form:
- commercial building form (CBF) insuring the building
- commercial property floater (CPF) insuring stock, equipment and other contents
- commercial building equipment and stock form (CBE&S)
Similar in many respects, the CBF focuses on insurance for building risks and the CPF for contents risks.
CPF and CBE&S both have extensions insuring incidental exposures including unnamed or temporary locations, transit, salesman’s samples and parcel post. CBF doesn’t include these extensions.
In most respects, insurance provided by CBE&S can be viewed as a combination of the coverages in the CPF and CBF broad forms
Commercial building equipment and Stock Form
Exclusions – broad form wordings are framed by the exclusions contained in the wording.
Some exclusions represent opportunities to offer additional coverage; others are uninsured exposures to draw to the clients attention.
Note – many of the exclusions relevant to the CBE&S form can be found in any broad form wording.
In Quebec, the Act Respecting the Distribution of Financial Products and Services requires brokers to review all exclusions with the client.
Generally brokers will explain what the policy insures and discuss the exclusions that have the greatest impact on the client. A balanced approach is best.
Commonly, CBE&S wordings separate exclusions into two sections – loss or damage to specific property and loss or damage arising out of various perils.
Property Exclusions
- money and other valuable property
- automobiles
- watercraft
- furs or jewellery
- property vacant for more than 30 days
Specific insurance is tailored to this property and is generally advisable.
Loss or damage to any property undergoing some work in process is also excluded – referred to as the “work in progress” exclusion or as property “undergoing process of heat”.
Perils Excluded – commonly excluded under broad form wordings
Floor and Earthquake – due to the potential severity of losses arising from these causes, the standard policy form excludes them. Separate insurance is generally available for these perils singly or together. Deductibles being higher than for other property insurance.
Sewer Back – similar to flood and earthquake, losses arising from this peril are generally excluded. Depending on the clients physical location, separate insurance may be available from some insurers. In certain areas, insurers will not provide this insurance at all due to severity of the risk. Deductibles are higher and/or may be subject to a separate smaller limit of liability.
By-Laws – most wordings exclude any increase in claim amount due to the operation of building by-laws. This includes increased costs due to a requirement to demolish and rebuild an undamaged portion of a building, additional costs to rebuild with superior construction materials, costs to remove the extra debris and increased time to build resulting in an increased business interruption loss.
Insurance is available through endorsement to basic wording. While each cover can be purchased separately, the client should purchase all four by-law endorsements to ensure complete coverage.
Inventory Shortage – coverage is rarely available for this type of loss because it is difficult to prove.
To prove a loss the client must be able to show that the stock:
- was actually in his custody – documented evidence
- was stolen and who stole it – was it a crime (by outsiders) may be covered or was it fidelity loss (stolen by employees) that requires separate insurance.
Pollution – for a below ground spill or contamination on the insureds own property is excluded but can generally be added back for a small limit and in most cases premium is negotiable. Property insurance only, not legal liability)
Environmental Hazards – are a group of perils that can lead to losses arising from such causes as the presence of mould, fungus and other biological or environmental hazards. Generally uninsurable.
Terrorism – After 9-1-1 wordings were rewritten to clarify the exclusion of losses rising from this peril. Insurance can be arranged separately for losses arising from this peril in many cases using specialty markets. Conditions can be restrictive and premiums can be substantial.
Boiler and Machinery Breakdown – Separate insurance is available (discussed elsewhere in text)
Extensions – CBE&S wording generally extends to include small, specified limits (or percentages) on exposures common to many business risks.
Unnamed or Temporary Locations – Provides a limited amount of insurance for property while at locations not named on the policy.
Principally used to insure property that is occasionally off premises, such as when an employee takes files home or to insure goods at an exhibition or trade show. Can also cover overflow stock/equipment stored off-site. Many insurers include this extension for little to no premium.
Transit – Provides insurance for property while in transit to or from the insureds premises. Generally intended to afford temporary or contingent insurance for a limited amount. If the exposure represents a major portion of risk, consider arranging separate coverage.
Salesman’s Samples – insures property in the custody of the sales representatives at unnamed locations and while in transit. Limits are generally very small and there is usually no coverage for samples left in a vehicle overnight.
Limits of Insurance – as always the client determines the limits of insurance to be carried. Advise the client that when deriving values to insure the effect of the policy property, valuation terms (Replacement vs Actual Cash Value), the coinsurance clause, blanket vs separate limits and whether values fluctuate over the course of the year should be taken into account.
Valuation – client has the option of insuring property on actual cash value or replacement cost basis.
Actual Cash Value is the depreciated value of the property at the time of the loss – fair market value of property taking into account factors that may augment or reduce the value of the property
Replacement Cost is the amount it would cost to repair or replace the particular article with a new item of like kind and quality without depreciation
Whichever valuation the client chooses, the onus is on them to supply accurate valuations. Insurers expect value to be commensurate with the risk. Rates and premiums are calculated on this assumption. To ensure compliance, most insurers impose a coinsurance clause.
Coinsurance – a clause which requires an insured to carry insurance to a specified minimum percentage of the value of the property or be liable for the percentage amount by which the risk is underinsured, applied to each and every loss. Generally expressed as a percentage of the values, such as 50%, 80%, 90% or 100%.
Note – the coinsurance calculation is done at the time of loss not when the policy is made effective. Caution clients against minimizing values for insurance purposes.
Policies can also be written on a Stated Amount Coinsurance basis. In this case, the insured provides the insurer with a Statement of Values attesting to the values of all property to be insured. These values must be supported by appraisals. The insurer agrees that, provided the client insures to the values declared, they have complied with the terms on the coinsurance clause and no coinsurance penalty will be applied to any loss.
Blanket Limits – With insurer agreement, the client may have the option of insuring all property on a blanket limit instead of individual limits for each type of property.
This is done by combining the coverage at a single location, or multiple locations, into a single “property of every description” POED limit or “contents of every description” COED limit.
POED combines building and contents insurance together in one limit. Advantageous to clients who owns or uses multiple locations and has property regularly moving from one to another.
Fluctuating Values – For retailers, manufacturers or distributors who sell seasonal goods, such as golf equipment, patio furniture and toys.
Stock Reporting – for the highest anticipated value and use a reporting clause to adjust the premium. Allows the client to be confident that they are insuring to value at all times while only paying premiums for the actual values at risk. Values are reported monthly, quarterly or annually and the premium is adjusted at year-end.
Peak Season Endorsement – increases the limit of insurance at specified or unspecified locations for a specific period of time. Insurance is arranged for the normal value and use a peak season endorsement to increase the values at a specified time of the year. Allows the client to increase coverage and locations without the expense of permanently increasing the policy.
FLOATERS
A form of inland marine insurance. Insurance is usually provided for property at specific and unspecified locations and while in transit.
Coverage territory tends to be broader than on other types of wordings; some floaters being world wide.
Developed to insure specific property and sometimes to address limitations; exclusions and conditions in forms insuring property more generically such as CBE&S
Office Contents
Also knows as the office equipment floater is most commonly used when the clients business is mainly an office exposure.
Most wordings provide insurance for office furniture; equipment, supplies, tenants improvements and betterments. May also provide for:
- theft damage to the building
- theft of money or stamps
- loss/damage to personal effects of the insured and others
- extra expense
- valuable papers and records
The wording generally designates the amount of insurance applicable to each extension. In some cases the sub-limit is part of the total limit of insurance for contents; in others it is in addition to the limit.
Electronic Data Processing (EDP)
Can insure equipment as diverse as a personal computer, a laptop, a computerized telephone system, a large mainframe system or highly specialized production equipment.
The unique nature of the property and the relatively high values usually associated with it, makes it desirable to insure it separately under a wording which affords broader coverage.
EDP wordings usually provide all risks insurance subject to exclusions. Property insured is hardware, firmware and software.
Hardware is described as the physical parts of a computer – hard-drive; monitor; printer/processor (CPU).
Firmware is described as the programming instructions embedded into a hardware devise (ex: operating system on a router)
Software refers to the programs that enable a computer to perform specific tasks and functions. It can be installed or recorded onto media (hard-drives; discs; tapes)
Assessing values for EDP is challenging due to the ever-changing nature of the equipment and the rapid depreciation of hardware. Other considerations when determining values are software licensing agreements and data restoration procedures.
If hardware and software are highly specialized, proprietary or older equipment, the client may require extraordinary measures to recover from a loss:
- proprietary, highly specialized or obsolete hardware cannot be replaced or obsolete software may not be supported on new hardware requiring replacement of either or both
- the media used to back up older computer may not work with newer hardware purchased following a loss
Because laptops are portable they are often a target for thieves. Remind client that backup procedures for laptop hard drives is relevant to loss control.
Since computer equipment/software can be highly mobile, insurance generally applies at the location(s) described in the policy, while in transit or while temporarily at other locations. However, territorial limitations need to be considered. If clients are traveling outside North America, arrange insurance amending or removing the territorial limitation.
Business interruption insurance is also a consideration for EDP. In order to continue operations or reduce downtime following an insured loss a client would purchase expediting expenses.
Valuable Papers and Records
Insures property such as books, papers, files, maps and drawings among others, on an all risks basis subject to exclusions.
This extension also includes coverage for the cost of researching and gathering the lost data.
Most wordings stipulate that the valuable papers and records be kept in safes, vaults or cabinets when not in actual use. With underwriter approval, this can be removed. Recommend clients store backup copes of all valuable documents at an off-site location. Insurers may offer premium reductions for such a strategy.
Accounts Receivable
Insures the cost to reconstruct the clients account records damaged by an insured peril and the loss arising from the inability to collect debts because these account records have been lost or destroyed.
Transit
Property in transit can be insured as an extension of a property wording (CBE&S) or on a wording specifically designed for transit exposures.
Three most common types are transportation floater; motor truck cargo; and trip transit floater (inland transit only)
Transportation Floater – insures goods that are being shipped by truck, rail, air or inland water.
Usually written on an all risks for subject to exclusions but can be written on a named perils form. Clients sending many shipments by third party carriers find this coverage convenient because they can collect from their own insurers without reference to negligence of the carrier.
Limit of insurance is usually a limit per load. Premium is generally based on the size of individual shipments, number of trips made annually, radius of operations and on receipts for shipping the goods.
Motor Truck Cargo – provides insurance for most property in the course of transit. Two forms – Truckman’s form and owner’s form. Both are all risks subject to exclusions and a named perils form may be available.
Frequently insurance for valuable property (money; jewellery) is excluded. Each form commonly excludes loss or damage due to:
- marine, scratching or breakage
- shifting of the load
- changes in temperature
Truckman’s form – provides legal liability cargo insurance for goods under the cae, custody or control of carriers. Most provinces require certain classes of carriers to carry states amounts of insurance on good in their care, custody and control depending on the class of license of the vehicle.
When specific limits of insurance are required, the client may be tempted to insure only to this limit which can lead to underinsurance in the event of a loss.
Owners form – required by any business selling goods for delivery as it insures the clients interest in his own property being transported on his trucks. Unlike truckman’s form, this wording is subject to coinsurance.
Trip Transit – insures a single shipment of specific goods from one specified location to another. Perils insured are designed for a single trip. Useful for clients who send or receive shipments very infrequently, such as the purchase/sale of a single piece of unique equipment.
PROPERTY OF OTHERS
Some businesses whose operations require them to have property of others in their care, custody and control.
A person/business that receives the property of another for some purpose other than a sale is called a bailee. They are legally responsible to take ordinary care of the property entrused to them and is liable for ordinary negligence – the bailee must always exercise the care that a prudent and careful person would take of his own property.
Wordings have been developed specifically to insure the bailee’s exposure.
Bailee’s Customers
Designed to insure loss/damage to customers property while in the bailee’s possession whether or not the bailee is legally liable for the loss.
The bailee takes out insurance either because of contractual obligation or they wish to safeguard the goodwill of their clients.
Generally an all risks form is used usually in part of a package policy. Values insured and rate charged are based on clients gross receipts.
Occupancies requiring this coverage are typically clients that repair; clean or store customers goods.
- dry cleaners
- tailors
- shoe repairers
- fur storage
- appliance repair shops
A client can also be someone providing a service as part of the manufacturing operation:
- a client placing emblems on T-Shirts manufactured by others or stickers on toys manufactured by others
- a winery labeling wine for a number of other small wineries
Warehouseman’s Legal Liability
Protects warehousers from loss or damage to property of others in their care, custody or control arising from their legal liability for that property.
Form is used for risks that are strictly storage (self-storage warehouse or cold storage facility). Premium is generally calculated on the basis of storage receipts.
Coverage is a blend of liability and property insurance. It insures loss/damage if the client is legally liable for the damage and if the loss falls within the policy conditions.
Wording is subject to a deductible which is applied on an occurrence basis – the entire loss arising from any one occurrence and not separately for each property owner whose goods are damaged in the occurrence. Depending on the wording, the deductible may or may not apply to defense costs. There is no coinsurance requirement.
GLASS
CBE&S form limits insurance on exterior glass usually to named perils only. If broader coverage is required, recommend the client add glass insurance to the policy.
This wording insures loss/damage arising out of the accidental breakage of all glass described including foil, tape, lettering and ornamentation thereon, subject to exclusions and to a deductible.
Plain plate glass is rated based on size of the panes. They can be either scheduled or insured on a blanket basis (all glass at the location)
Specialty glass (double set; thermopane; leaded glass; glass blocks; stained glass) is rated based on replacement cost
BUSINESS INTERRUPTION INSURANCE
Four common wordings, tailored to protect an insured under specific circumstances. Because business interruption losses are contingent on physical property being damaged/destroyed, these wordings insure on the basis of and follow the form of the property insurance wording. Known as “follow-form” wordings.
Since most forms are subject to coinsurance, and the loss covered may occur far into the future, providing an adequate amount of insurance requires great care and should be done with the expertise of the clients accountants.
Gross Earnings or Business Income
Insure the loss of the clients gross earnings as a result of loss/damage to the premises insured and/or their contents by an insured peril.
The exposure insured is limited to loss of earnings during the time the client is unable to operate his business and to such extra expenses that will reduce the amount of loss.
The client also has the option of insuring ordinary payroll expenses that continue despite the closure of the business.
Businesses can elect to insure wages/salaries for two weeks, 30 days or more depending on anticipated interruption. For key employees an exception is made because their services would still be required following the interruption.
Insurance ceases when the client should be able to resume business operations. If there are delays, the coverage still ceases when the repairs should have been completed. Suited for clients whose business is more likely to return to the pre-loss level right away (retail stores).
Amount of insurance for gross earnings is a rough estimate calculated by taking the annual sales figures less cost of sales, projecting for twelve months into the future and increasing for inflation.
The calculation for business income is a little more involved. First determine the business income; times this by the revenue (both projected at the start of the policy) and adjust the resultant figure for inflation.
Business Income is the sum of the variable operating expenses and amounts of opening stock and work in progress subtracted from the sum of the revenue and amounts of closing stock and work in progress.
Variable operating expenses are those that may or may not continue in the event of an interruption of the business. Expenses that can be considered variable for insurance purposes are specified in the business income form
The use of a business interruption worksheet will simplify this task (sample at the end of this chapter)
Profits or Extended Business Income
Insure the loss of the clients profits as a result of loss/damage to the premises insured and/or their contents by an insured peril, the expenses that continue despite the loss (heating; taxes; extra expenses that will reduce the amount of loss).
Period of indemnity commences from the date of loss and continues until the profits from the business have returned to their pre-loss condition of period of indemnity ceases
This form is useful when there is a potential of permanent loss of customers in the event of closure
The client selects both the indemnity period and the limit of insurance. Indemnity period is generally 6, 12,18, 24 or more months. Limit of insurance takes into account the estimated gross profits for twelve months into the future plus estimates of expenses that continue despite the loss – adjusted for inflation.
Limit of insurance for extended business income is calculated the same as for business income. The only difference between the two is the factor used to project the income and sales for the indemnity period varies in the extended form based on the indemnity period selected.
Rental Income
Can be written on a specific rental income form. Usually written with a 100% coinsurance clause, use the full annual rents, including any projected rental increases as the insured amount.
If the building is designed for a specific occupancy (theatre) the client may have difficulty replacing a tenant after a loss. Consider then, on a gross rentals form – referred to as rental income profits form – like other profits wordings, indemnity continues until rental income returns to pre-loss levels.
Extra Expense
Provides protection for the additional expenses of continuing in business following an insured loss to the premises insured. Used where the business will suffer no real loss of customers but will incur additional costs to continue operations (doctor offices; real estate offices)
Extra expense is also useful where a business can mitigate or eliminate the time the business is shut down by spending additional funds to effect repairs quickly.
OTHER BUSINESS INTERRUPTION WORDINGS
Contingent Business Interruption
Some clients can suffer a loss of income because of a loss at premises other than their own. These are premises the client depends on to continue operations but doesn’t control (suppliers; major customers; anchor stores)
Suppliers – when clients rely on another business as a supplier, they will require insurance for losses suffered because that supplier is unable to provide the client with materials.
Insures losses sustained during downtime and/or the added costs of arranging supplies from a new source.
Customers – when a business relies heavily or exclusively on another business as a customer, it would suffer a loss if that customer were unable to accept the clients product.
Anchor Store – contingent business interruption exposure because of a business with which the insured has no direct economic connection but the client may suffer a loss if the major tenant in a mass suffers a loss.
In each case losses are insured provided the business interruption is caused by a peril insured on the clients policy regardless of whether or not the other party’s policy is insured for the peril causing the loss.
Contingent By-Laws
The contingent liability from enforcement of building by-laws; additional time required for rebuilding endorsement extends the coverage of the policy to include loss arising from the enforcement of a specified type of by-law that:
- requires the demolition of any undamaged part of the insured buildings or structures
- increases the time required for repairing or replacing any part of the insured buildings or structures.
Add this endorsement to any business interruption wording where your client requires by-law protection except the extended business income form which already has this coverage.
Miscellaneous Wordings
Other less common wordings, which may be separate coverages, endorsements to standard business inte3rruption forms or manuscript wordings
Educations Institutions – covers loss of tuition fees and extra expenses required to access special purpose facilities
Builders or property managers who need to insure loss of advance revenues – the potential loss of revenues that will be sustained should the building under construction be damaged/destroyed before the project is complete and occupied
Manufacturers dependent on specialized production machinery – covers unusual extra costs to mitigate the loss or to permit the client to resume operations. Consider asking these questions:
- how long will it take to replace a machine of foreign manufacturers
- what contingency plans does the client have
o is there another supplier of the machine; can it be repaired locally
o is there a backup plan to continue in business while waiting for the replacement
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