CHAPTER OBJECTIVES

When you have finished this chapter, you should be able to

• Identify the seven broad classes of property and liability insurance for business firms
• Identify and distinguish among the four broad classes of commercial property insurance, and explain the distinguishing characteristics of each class
• Describe the general nature of coverage available to business firms with respect to fixed location property
• Distinguish between direct damage property insurance coverages and indirect loss coverages
• Identify and explain the general nature and uses of indirect loss (time element coverages) and explain the circumstances in which each type of coverage is needed
• Describe the general nature of the coverage available to business firms with respect to property that is not at a fixed location
• Explain the principal features of boiler and machinery insurance and the feature that distinguishes it from other types of insurance
• Identify the two broad classes of commercial crime insurance

Our discussion throughout this book has focused primarily on insurance coverages designed for the individual and the family unit. Although a detailed discussion of the coverages available for business firms and other organizations is beyond the scope of this text, we should at least describe the insurance coverages available to cover the exposures of business firms. In this chapter and the next, we will examine the insurance coverages available to meet the property and liability insurance needs of businesses and other organizations. The wide range of insurance coverages available for commercial enterprises, generally referred to as “commercial line insurance,” can be classified into the following seven categories:

1. Commercial property insurance
2. Boiler and machinery insurance
3. Transportation insurance
4. Crime insurance
5. Commercial liability insurance
6. Commercial automobile insurance
7. Workers compensation and employers' liability insurance

This chapter treats the first four classes. The remaining three classes will be discussed in the next chapter. Although we will discuss the coverages treated in these two chapters separately for the purpose of clarity, many of the coverages are available under package policies. These package policies combine several coverages into a single contract, thereby eliminating gaps in coverage and possible overlapping. While the trend toward commercial package policies continues to gain momentum, commercial insurance packages are a case in which the whole is equal to the sum of the parts. Commercial package policies are combinations of the individual monoline coverages, which means one learns about commercial package policies by studying the individual insurance types that are combined to create the package.

COMMERCIAL PROPERTY COVERAGE

The evolution in commercial property insurance was characterized by the separate parallel development of several diverse insurance types that protect against different types of property losses. This was a natural result of the industry's monoline structure and insurer underwriting attitudes. Commercial fire insurance forms, for example, traditionally provided coverage only at the insured's premises, creating a need for a form of coverage (the marine forms) to protect property while it is away from the premises. Other forms of property insurance, such as crime insurance and boiler and machinery coverage, developed as separate fields of insurance.

In January 1986, the Insurance Services Office (ISO) implemented a long-planned overhaul of most commercial insurance forms with the introduction of its portfolio program. This program introduced simplified policy language forms for most commercial property insurance lines, including the fire insurance, plate glass, boiler and machinery, inland marine, and crime insurance.¹

Although considerable progress had been achieved in simplifying and standardizing personal line policies, until the introduction of the portfolio program, commercial line forms were a hodgepodge, with each line of insurance following a different format, style, and terminology. The portfolio program attempts to standardize commercial line forms through innovations originally developed for commercial package policies. These include modular forms and standard policy conditions.

All portfolio commercial coverages (fire and allied lines, plate glass, boiler and machinery, crime, inland marine, auto, and general liability) follow the same general format, and the policy structure is similar regardless of the coverage. A commercial portfolio policy includes a standard Common Declarations part, Common Conditions part, and forms applicable to the particular line of insurance. The Common Declarations part contains information about the insured, the policy's inception date and term, and the premium for the policy's coverages. The Common Policy Conditions Form contains items common to all (or most) coverages, eliminating the need to restate the same provision in each of several separate policies. In addition, for each coverage type, there is a separate declarations form (e.g., Property Insurance Declarations Form, Crime Insurance Declarations Form, and so on) and a coverage form or forms for the particular type of insurance. The portfolio forms may be used to create monoline contracts, or they may be combined to create package policies; the same forms are used in either case. If the policy includes both property and liability insurance, it becomes eligible for a package discount.

FIGURE 31.1 Commercial Property Coverage Policy

COMMERCIAL PROPERTY DIRECT LOSS COVERAGES

We begin our discussion with the commercial property coverages for direct loss.² ISO's commercial property coverage program consists of those insurance coverages that were traditionally known as fire and allied lines. Allied lines referred to coverages such as earthquake and sprinkler leakage that were often allied with fire insurance coverage. Actually, the term fire insurance was something of a misnomer because coverage for loss by fire was rarely written alone. Generally, coverage for loss by fire was combined with coverage against other perils; the perils of extended coverage mentioned in Chapter 24 usually represented the minimum coverage package.

Commercial Property Coverage Policies

A commercial property coverage policy is created from modular parts, which include a standard Common Policy Conditions Form, a Commercial Property Conditions Form, a Commercial Property Coverage Part, and a Causes of Loss Form. A monoline property insurance contract is illustrated in Figure 31.1.

Commercial Property Coverage Forms Different coverage forms are used for different property types and are designed to provide protection against different types of losses. There are 11 property coverage forms designed for use under the Property Coverage part of the portfolio program:

CP 00 10	Building and Personal Property Coverage Form
CP 00 17	Condominium Association Coverage Form
CP 00 18	Condominium Commercial Unit Owner's Coverage Form
CP 00 20	Builders' Risk Coverage Form
CP 00 30	Business Income Coverage (and Extra Expense) Form
CP 00 32	Business Income Coverage (Without Extra Expense) Form
CP 00 40	Legal Liability Coverage Form
CP 00 50	Extra Expense Coverage Form
CP 00 60	Leasehold Interest Coverage Form
CP 00 70	Mortgage Holder's Errors and Omissions Coverage Form
CP 00 80	Tobacco Sales Warehouses Coverage Form

Some of these forms provide coverage for direct loss; others, such as the business income and extra expense forms, are indirect or consequential loss coverages. The property coverage forms must be used with one of several standard causes-of-loss forms that specify the perils for which coverage is provided, along with the relevant exclusions. Because the perils for which protection is provided are added by another form, the basic coverage is the same regardless of the perils package selected.

Although we will not attempt to examine all of these forms, we can provide a general understanding of their nature and provide some insight by an examination of the most commonly used forms.

Building and Personal Property Coverage Form

The Building and Personal Property Coverage Form (BPP) is the standard form for insuring most business property. It may be used to provide direct damage coverage on completed buildings and structures or business personal property, including personal property of others. Coverage may be written on buildings only, personal property only, or on both in the same contract. In addition, the form can be used to provide coverage on specific classes of property (such as stock, tenants improvements and betterments, or machinery and equipment) by endorsements or by describing the property in the declarations.

The form's insuring agreement identifies three categories of covered property: Building, Your Business Personal Property, and Personal Property of Others.

Building The building coverage defines building to include the structure described, completed additions, fixtures, including outdoor fixtures, permanently installed machinery and equipment, personal property used to maintain or service the building, and if not covered by other insurance, materials and supplies within 100 feet of the building or described premises for use in additions, alterations, or repairs of the structure.

Your Business Personal Property The definition of Your Business Personal Property includes furniture and fixtures, machinery and equipment, stock, and all other personal property owned by the insured and used in the business. Coverage is provided for property within the building or in the open (or in a vehicle) if it is within 100 feet of the building or described premises. The insured's use interest in tenant's improvements and betterments is also included in the definition of personal property. As in the case of other items of property for which coverage is not desired, improvements and betterments may be excluded by endorsement. Finally, the BPP includes coverage for leased personal property which the insured is contractually obligated to insure unless such property is insured under the Personal Property of Others insuring agreement.

Personal Property of Others The Personal Property of Others coverage applies to property of others that is in the insured's care, custody, or control, and which is located in or on the building described in the declarations. Coverage also applies to property in the open or on a vehicle within 100 feet of the building or described premise.³

Replacement Cost Option Replacement cost coverage is available for all three property classes (buildings, your personal property, and personal property of others). Replacement cost coverage on personal property of others applies only when the insured is legally liable.

Additional Coverages The BPP includes certain extensions of coverage; some of these are referred to as Additional Coverages, while others are referred to as Coverage Extensions. There are six Additional Coverages.

Debris Removal The Debris Removal additional coverage provides payment for the expense of removing the debris of property damaged by an insured peril.⁴ Coverage for debris removal is limited to 25 percent of the amount paid for direct loss plus the amount of the deductible under the policy. For example, if direct damage to insured property is, say, $6000, and the deductible is $250, the insurer will pay $5750 for the direct loss and up to $1500 for debris removal (25 percent of $5750 + $250). This is not an additional amount of insurance but falls within the limits applicable to the damaged property. However, if the cost of debris removal exceeds the limits for the covered property or exceeds 25 percent of the direct loss plus deductible, an additional $25,000 is provided. An important exclusion under the Debris Removal coverage eliminates coverage for the cost of removing pollutants. Limited coverage for removal of pollutants is provided under a separate Pollutant Cleanup and Removal additional coverage.⁵

Preservation of Property Coverage for removal of covered property is provided by the preservation of property additional coverage. This coverage is on an open-peril basis and runs for 30 days.

Fire Department Service Charges The Fire Department Service Charge additional coverage is similar to the same coverage in the homeowners forms. Coverage under the BPP is provided up to a $1000 limit at each premises with no deductible.

Pollutant Cleanup and Removal The Pollutant Cleanup and Removal additional coverage provides limited protection, up to $10,000, for the insured's expense in extracting pollutants from land or water at the described premises when the discharge or release of the pollutants was caused by a covered cause of loss. The $10,000 limit may be increased by endorsement for an additional premium.

Increased Cost of Construction This additional coverage applies only to buildings insured on a replacement cost basis. It provides additional insurance to cover the increased construction cost resulting from building laws, up to the lesser of $10,000 or 5 percent of the insurance limit on the building. It does not provide coverage for the cost of demolishing undamaged building parts, loss of undamaged building parts, or the cost of upgrading undamaged building parts. Full coverage for building ordinance loss exposures is available under the Ordinance or Law Coverage endorsement, CP 04 05.

Electronic Data This additional coverage provides $2500 annual aggregate to cover the cost to replace or restore electronic data that has been damaged by a covered cause of loss. The covered causes of loss are named perils, with the specific perils depending on which Cause of Loss Form applies to coverage for Your Business Personal Property. In 2012, ISO revised the form so electronic data that are integrated into and control the building's elevator, lighting, heating, ventilation, air conditioning or security system are not subject to the $2500 limitation in coverage.

Coverage Extensions The coverage extensions, like the additional coverages, provide added coverage for specified exposures. However, unlike the previous additional coverages, the coverage extensions apply only when the policy is written with 80 percent or higher coinsurance.

Newly Acquired Buildings The Newly Acquired Building extension provides automatic coverage on newly acquired or newly constructed buildings, subject to a $250,000 cap (which can be increased by endorsement).

Newly Acquired Business Personal Property Newly acquired personal property at newly acquired locations, and in newly constructed or acquired buildings at existing locations, are automatically covered, subject to a $100,000 maximum for 30 days. The 30-day period begins on the date of acquisition or the start of construction of the portion of the building that qualifies as covered property. Earlier versions of the BPP covered newly acquired property at the existing premises, but in 2012, ISO eliminated that coverage, noting that a Reporting Form could be used to arrange coverage.

Personal Effects and Property of Others There is an extension to cover the personal effects and property of others, such as the personal effects of employees, members, or managers, and the personal property of others in the insured's care, custody, or control. The limit on this extension is $2500.

Valuable Papers and Records Coverage applies up to $2500 per location to cover the cost of labor to research and reconstruct information in business records when such records are destroyed by an insured peril. Coverage applies only if duplicate records do not exist.

Property off Premises Coverage applies to personal property while away from the premises, up to $10,000. If the on-premises coverage is open-peril, the off-premises coverage applies on the same basis. Coverage does not apply while the property is in a vehicle or in a salesperson's custody unless at a fair, trade show, or exhibition. In 2012, ISO introduced an optional endorsement Specified Property Away From Premises (CP 04 04) that can be used provide coverage for business personal property temporarily away from the premises.

Outdoor Property Certain forms of outdoor property are covered by extension. The extension includes outdoor trees, shrubs, plants, fences, detached signs,⁶ and antennas. A limit of $1000 applies, subject to a $250 sublimit per tree, shrub, or plant. Coverage applies only to loss caused by fire, lightning, explosion, riot or civil commotion, or aircraft, and it includes debris removal. The 2012 revisions added debris removal for trees, shrubs and plants not owned by the insured, with some exceptions.

Non-Owned Detached Trailers When trucking companies deliver goods to insureds, they commonly leave the trailer for unloading by the insured and return later to pick up the empty trailer. During the period the trailer is left at the insured's premises, the insured may be responsible for any damage to or theft of the trailer. The Non-Owned Detached Trailers Coverage Extension is designed to respond to these loss exposures. It provides $5000 of automatic coverage on nonowned trailers used in the insured's business if the insured is contractually obligated to pay for the loss or damage. A higher limit may be purchased.

Property in Storage Units Under this coverage extension, which is new in 2012, business personal property temporarily stored in a portable storage unit (including a detached trailer) is covered for 90 days. The unit must be located within 100 feet of the described premises, and coverage is limited to $10,000 although a higher amount may be purchased.

Perils Insured The insured may choose from a range of perils. There are three causes-of-loss forms used in connection with the BPP: Basic Causes of Loss, Broad Causes of Loss, and Special Causes of Loss. These forms more or less parallel the coverage of the similarly titled homeowners forms.

Causes of Loss—Basic Form The Causes of Loss—Basic Form covers fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action. Windstorm or hail, vandalism, and sprinkler leakage can be excluded. The coverage of these perils is similar to that of the homeowners forms.

The Basic Form excludes ordinance or law, earth movement, governmental action, nuclear hazard, utility services, war and military action, water (e.g., flood and other types of water losses), electrical current, rupture of water pipes, leakage or discharge of water or steam from appliances other than sprinkler systems, steam boiler explosion, mechanical breakdown, and neglect of the insured to protect the property from further loss.

The Form includes an additional coverage for fungus, wet rot, dry rot, and bacteria (e.g., mold). It provides an annual aggregate limit of $15,000, which is also the lifetime limit for damage caused by a single event.

Causes of Loss—Broad Form The Causes of Loss—Broad Form includes all Basic Form perils plus falling objects, weight of snow, ice, or sleet, and water damage. Collapse is included as an additional coverage, with coverage if the collapse is caused by specified named perils. There is no exclusion for leakage or discharge of water or steam from an appliance or rupture or bursting of water pipes.

Causes of Loss—Special Form The Causes of Loss—Special Form provides coverage on an open-peril basis for direct physical loss; it provides additional coverage for collapse and additional coverage extensions for property in transit ($1000 limit for personal property for certain named perils) and water damage (costs to repair damage to buildings to fix system). The special form excludes pollutants and contaminants and voluntary parting of property due to false pretenses. A theft exclusion endorsement is available.

Earthquake and Volcanic Eruption Form The Earthquake and Volcanic Eruption Form insures against earthquake and volcanic eruption, explosion, or effusion (from earthquakes or volcanoes that begin during the policy period, even if direct physical loss occurs within 168 hours of the expiration of the policy period).

Spoilage Coverage The Spoilage Coverage endorsement extends the BPP to cover damage to perishable stock owned by or in the insured's care, custody, or control and at the described premises. Spoilage coverage adds two covered causes of loss: breakdown or contamination and power outage. Breakdown or contamination is defined to include a change in temperature or humidity resulting from mechanical failure of refrigerating, cooling, or humidity-control equipment at the described premises, or contamination by the refrigerant. Power outage includes a change in temperature or humidity caused by interruption of electrical power, either on or off the described premise, caused by conditions beyond the control of the insured.

Equipment Breakdown The 2012 revisions to the commercial property program introduced a new optional endorsement covering equipment breakdown. It may only be used with the Causes of Loss—Special Form and adds equipment breakdown as an additional peril, subject to the same limits that apply to other perils. Coverage for Ammonia Contamination and Hazardous Substance is limited to 10 percent of the limit or $25,000, whichever is less.

Other Provisions In addition to those previously outlined, there are several other important provisions.

Deductible The standard deductible under the form is $250, but larger deductibles are available and may be scheduled in the declarations. The deductible applies per occurrence, regardless of the number of buildings affected.

Vacancy Condition The vacancy condition provides that 60 days' vacancy bars recovery for loss by vandalism, sprinkler leakage, glass breakage, water damage, theft, and attempted theft. For all other perils, vacancy beyond 60 days results in a 15 percent loss-payment penalty.

Valuation Condition The valuation condition provides that covered property will be valued at actual cash value. Building losses of $2500 or less are payable at replacement cost, provided the insured meets the coinsurance requirement. Glass is covered at the cost to replace with safety glazing material if required by law.

Mortgage Holders Condition The mortgage holders condition sets forth the agreement between the insurer and any mortgagee named in the policy. The provisions are almost identical with those examined in our discussion of the homeowners forms.

Coinsurance The Building and Personal Property Coverage Form—like many other commercial property forms—contains a coinsurance clause. Because the coinsurance clause and the principle on which it is based are critical elements in many forms of property insurance, we will stop to examine it more closely. However, before turning our attention to the policy provision, we should examine the underlying rationale for the coinsurance principle.

Rationale for Coinsurance To understand the logic of the coinsurance concept, one must begin by recognizing that most fire losses are partial. ISO loss statistics indicate that about 85 percent of all fire losses are for less than 20 percent of the property value, and about 5 percent result in damage over 50 percent of the property value. Since fire insurance rates are based on the ratio of losses to the total values insured, the rate will be higher if owners insure a lower percentage of their property values than if they insure the property to some high percentage of its value. This relationship can be illustrated by an example.

Assume that an insurance company insures 10,000 buildings worth $10,000 each for 100 percent of their value. On the basis of past experience, the company projects the following losses:

Since the company can expect $50,000 in losses on $100,000,000 worth of buildings, it computes the pure rate to be $0.05 per $100.00:

If the insurer assumes the loss ratio will be 50 percent of gross premiums, it will add a loading, making the gross rate $0.10 per $100.00 of coverage. If the same buildings are insured for 50 percent of their value each, the rate per $100 will be considerably higher. Assuming the same losses, we have the following total:

Again assuming that the loss ratio will be 50 percent of gross premiums, the gross rate is $0.16 per $100 of coverage.

Since insurance to value has a definite relationship to equity in fire rates, some concession must be made in the rating structure to those who insure their property for a high percentage of its value. The coinsurance clause was invented to support a concession in rates for policyholders who purchase insurance equal to a high percentage of the property value.⁷ It was designed to enforce the insured's agreement to insure the property for a specified percentage of its value, which is made in return for a lower rate.

Coinsurance Clause Under the provisions of the coinsurance clause, the insured agrees to maintain insurance equal to some specified percentage of the property value (e.g., 80 percent, 90 percent, 100 percent) in return for a reduced rate. In effect, the coinsurance rate is a quantity discount. If the insured fails to maintain insurance to value as agreed, he or she may suffer a penalty at the time of a loss. A simplified language version of the coinsurance clause states the following:

So, at the time of a loss, the company will make payment on the basis of the following formula:

The application of the provision is simple. As long as the insured carries insurance equal to the required percentage, all losses covered by the policy will be paid in full up to the policy's face amount. If the insured fails to maintain insurance to value as required, only a part of the loss will be collected.

Coinsurance Clause Illustrated To illustrate, assume the insured has purchased coverage on a $100,000 building, subject to an 80 percent coinsurance clause. In keeping with the clause's requirement, $80,000 in coverage has been purchased. In the event of a $5000 loss, the company would pay the following:

Now assume construction costs go up, increasing the building,'s value, but the insured continues to carry $80,000 in coverage. When the next $5000 loss occurs, it is found that the actual cash value of the building is $200,000. To comply with the 80 percent coinsurance clause, the insured should be carrying $160,000 in coverage. In this case, the insured becomes a coinsurer and suffers a penalty. The insurer will pay.

Two important points are illustrated by the examples. First, the coinsurance requirement applies at the time of the loss, and the required coverage amount for compliance is based on the property value at the time of loss, not the value of the property when the insurance is purchased. Second, the burden of maintaining the proper amount of insurance is on the insured. The insurance company does not check to see if the insured has kept his or her promise until a loss takes place.

Deductibles and Coinsurance Although the simplified ISO portfolio property forms stipulate the deductible is to be applied after the application of the coinsurance penalty, if any, this represents a break with tradition. In some forms in use today, the deductible is applied to the loss and the coinsurance penalty is applied to the after-deductible portion of the loss. Because contracts differ in this respect, they must be examined individually to determine the manner in which the deductible applies.

Optional Coverages Three optional coverages are available for use with the BPP: Agreed Value, Inflation Guard, and Replacement Cost. The Inflation Guard coverage and Replacement Cost coverage are similar to their personal line counterparts examined in connection with the homeowners policies. The Agreed Value optional coverage suspends the coinsurance provision for a one-year period, guaranteeing the insured will not suffer a coinsurance penalty. The insurer will grant agreed value coverage after verifying the values insured.

Specialized Valuation Endorsements Although the actual cash value and replacement cost valuation provisions are suitable for most property, there are some situations in which it is desirable to modify the basis on which property is insured. Several standard endorsements exist for this purpose.

Ordinance or Law Coverage Endorsement An Ordinance or Law Coverage Endorsement is used to provide three types of coverage related to the enforcement of building codes. The endorsement provides similar coverage to that provided by the Ordinance or Law additional coverage in the Homeowners Policy. Coverage is provided for three types of losses.

First, the endorsement permits a building owner to purchase insurance for an amount required to replace a substandard building with one that will meet code requirements. An increased construction cost limit is listed in the endorsement. In addition, under the terms of the endorsement, the insurer agrees to pay as a total loss any partial loss in which building code provisions prevent the owner from using the undamaged building parts in reconstruction. Finally, coverage may be included for the cost to demolish undamaged building parts following damage by an insured peril, when such demolition is required by the building code. Payment for damage to the structure and the demolition cost cannot, however, exceed the limit of insurance. A limit is indicated in the endorsement for the demolition cost.

Functional Building Valuation Endorsement Situations sometimes exist in which, because of advances in technology or architecture, it is possible to replace an existing structure with one that performs the same function but at a lower cost than would be required to duplicate the existing building. The Functional Building Valuation Endorsement insures buildings for the cost of repairing with less costly materials but in the architectural style that existed before the loss. For total loss, coverage applies for the building replacement cost with a less costly but functionally equivalent building. The coinsurance provision does not apply to buildings insured on a functional valuation basis.

Functional Personal Property Valuation (Other Than Stock) Coverage on personal property may be written on a functional valuation basis. In this case, coverage applies to specifically described property that can be replaced with similar property that performs the same function as the original, when replacement with identical property is impossible or unnecessary. If the property is repaired or replaced, payment is made for replacement with the most closely equivalent property available. If the property is not repaired or replaced, coverage is limited to the lowest of (a) the insurance amount, (b) the property's market value, or (c) the property's actual cash value.

Manufacturer's Selling Price Clause A manufacturer with finished goods on hand faces a loss not covered under the standard BPP form, and that is the loss of the expected profits on the goods destroyed. The policy provides coverage on stock for its actual cash value (the replacement cost less depreciation) not the selling price. Coverage for this potential loss can be obtained under the Manufacturer's Selling Price Endorsement, which provides that the value of finished stock shall be the price at which it would have sold had no loss occurred.⁸ The manufacturer's selling price endorsement is applicable only to the finished stocks of manufacturers and is unavailable to wholesalers and retailers.⁹

Blanket Insurance

Thus far, we have discussed only one approach to fire insurance, that form known as specific insurance, which applies a definite coverage amount to a stated item. Coverage may be in the form of blanket insurance, under which one amount of insurance covers more than one property type or property at more than one location. For example, a firm with multiple buildings may purchase specific insurance on each, but it can also cover them on a blanket basis, with a single amount of insurance applicable to all. When coverage is written on a blanket basis, 90 percent coinsurance is usually required.

The blanket approach has significant advantages. The major advantage is that the blanket limit is available to cover loss to any of the individual items insured. For example, suppose the XYZ Company owns 10 buildings, each worth $100,000. If the properties are insured on a blanket basis, subject to a 90 percent coinsurance clause, XYZ must purchase $900,000 in blanket coverage. In the event of a loss, coverage would apply to any building up to the full $100,000 of its value provided that XYZ meets the coinsurance requirement at the time of the loss. If the same 10 buildings were insured for $90,000 each on a specific basis, recovery would, of course, be limited to the $90,000 applicable to each. Contents at different locations may also be insured on a blanket basis, or buildings and contents can be insured in this way.

Reporting Form Coverage

Reporting forms are designed to meet the needs of business firms whose stocks of merchandise fluctuate over time. A reporting form is written with a maximum limit sufficient to cover the highest values expected during the year, the insurance amount moves with the values exposed to loss, subject to this maximum. The insured makes periodic reports (monthly or quarterly) of current values on hand and is charged on the basis of these reports, paying only for the values exposed to loss, not the limit of liability. The premium cannot be known until the year is over, so a provisional premium is paid at the policy's inception and then adjusted at year's end to reflect the true cost of the protection provided.¹⁰

The insured must report 100 percent of the values of the property insured. Late reports or underreporting of values, intentional or otherwise, may result in a penalty at the time of a loss. In the event of a late report, the amount of insurance is limited to the values contained in the last previous filing. In addition, the full value reporting clause (also called the honesty clause) provides that if the insured under-reports, the insurer's liability is limited to that percentage of loss that the last stated values bear to the values that should have been reported. Thus, if the insured reports a value of $100,000, when the property value was $200,000, recovery would be limited to 100/200, or 50 percent of the loss sustained. In effect, the full value reporting clause is a 100 percent coinsurance clause.

Builder's Risk Coverage Form

When a building under construction is to be insured, it is normally covered under a specialized contract known as the Builder's Risk Form. There is a single Builder's Risk Form under the commercial property portfolio program, which provides coverage on a completed value basis. Under this form, coverage is written for the building's final full value, and a premium based on 55 percent of the 100 percent coinsurance builder's risk rate is charged. Coverage continues during the process of construction but terminates automatically when the structure is completed and occupied. If the insured desires, the coverage can be converted to a reporting basis by endorsement. Builder's risk coverage may be written to cover the interests of the building owner, the general contractor, and subcontractors, all of whom have an insurable interest in the building under construction.

Condominium Association Coverage Form

The Condominium Association Coverage Form replaces the BPP when buildings and contents are insured in the name of a condominium association. The form states that certain property will be covered or not covered depending on whether the condominium association agreement requires the association or the unit-owner to insure it. This provision avoids the need to include a specific property description in the declarations and permits the form to be used with a bare walls or all included type of condominium agreement.

Condominium Commercial Unit-Owner's Coverage Form

The Condominium Commercial Unit-Owner's Coverage Form dovetails with the Condominium Association Coverage Form. It excludes fixtures, improvements, alterations, and appliances in units unless the association agreement places responsibility for insuring them on the unit-owner. When association and unit-owner's coverage responds to the same loss, the unit-owner's coverage is excess.

Standard Property Policy

The Standard Property Policy is a self-contained property damage form used to insure buildings and personal property on a somewhat more restrictive basis than the BPP. It is used to insure property assigned to the insurer under Fair Access to Insurance Requirements (FAIR) plans or for other properties not meeting high underwriting standards. The Standard Property Policy is similar to the BPP but provides coverage only for the perils of the Causes of Loss Basic Form. The provisions regarding cancellation, increase in hazard, and vacancy are more restrictive than those of the BPP.

Plate Glass Insurance

Until 2001, the ISO portfolio of property coverage forms included a special form to cover plate glass, called the Glass Coverage Form, providing what has traditionally been referred to as plate glass coverage. Under earlier property coverage forms, breakage of glass by causes other than fire and a number of other specified perils was limited to $100 per pane and $500 per occurrence. This limitation was eliminated in the 2001 revision of commercial property forms and glass breakage is now covered on the same basis as any other loss.

Although ISO has withdrawn its version of the plate glass coverage form, some insurers (including some who specialize in plate glass insurance) continue to offer plate glass coverage as a stand-alone form of protection. Coverage under plate glass policy applies for accidental glass breakage (except by fire) and damage caused by acids or chemicals accidentally or maliciously applied to specifically insured glass. Lettering and ornamentation are not covered unless they have been specifically insured. The policy also covers the cost of repairing or replacing frames or sashes and boarding up or installing temporary plates in broken windows.

COMMERCIAL PROPERTY COVERAGE FOR INDIRECT LOSS

Unlike the dwelling forms, commercial property forms do not provide coverage for the indirect loss resulting from damage to the insured property. Such protection must be obtained under a separate form for an additional premium. The major consequential loss coverages are business interruption insurance, extra expense insurance, contingent business interruption and contingent extra expense insurance, and leasehold interest coverage.¹¹

Business Interruption Insurance

Business interruption insurance indemnifies business firms for income loss during the period required to restore property damaged by an insured peril to useful condition. It pays based on the expenses that continue and the profits that would have been earned during a period of interruption. Although a valued form of coverage is available, most business interruption is written on an indemnity basis.

Business Income Forms Under the portfolio program, two business interruption forms are available: the Business Income Coverage (And Extra Expense) Form and the Business Income Coverage (Without Extra Expense) Form. Coverage under either form is written subject to a coinsurance provision that requires coverage equal to 50 percent, 60 percent, 70 percent, 80 percent, 90 percent, or 100 percent of the firm's annual earnings for the 12-month period of the policy. For those situations in which the business could be shut down for over a year, a 125 percent coinsurance option is available.

Both business income forms require a choice of three income coverages: business income including rental value, business income excluding rental value, and rental value only. Rental value is the anticipated rental income from tenants at the described premises minus expenses that do not continue or the fair rental value of any part of the premises occupied by the insured. The option selected determines the scope of business income for which payment is made.

If the business is interrupted, payment is made for the loss of business income, where business income is defined as the net profit that would have been earned (including or excluding rental income) and the necessary expenses that continue during the period of restoration. The restoration period is defined as the period that should be required to repair or replace the property with reasonable speed and begins 72 hours after the time of direct physical loss. An additional coverage called Extended Business Income extends the form to cover a reduction in income during the 60 days following the restoration of the property that was damaged or destroyed.

In determining the loss amount, the insurer considers the insured's experience before the loss and probable future experience if no loss had occurred. The definition of business income may be modified to delete or limit coverage on ordinary payroll (roughly, the payroll for rank-and-file workers) if the insured does not wish to collect for this expense in the event of interruption.

Loss of income coverage may be written to provide coverage against the same perils as the direct damage coverages, and payment is made only if the interruption results from an insured peril. The damage must occur during the policy period, but the indemnity period is not limited by the policy's expiration.

Resumption of Operations If damage to property triggers an interruption, the resumption of operations provision requires the insured to resume operations as soon as possible, even on a partial basis, using damaged or undamaged property at the described premises or elsewhere. If operations are not resumed when it is possible to do so, the insurer will reduce payment for income loss by the amount that resumption of operations would have reduced the loss.

Extra Expense Insurance

Under some circumstances, it may be necessary for a business to continue operations after destruction of its facilities. For example, a bank's earnings, which are derived from loans and investments, would not be affected by destruction of the bank's premises, but the bank would need other facilities to continue to service its accounts. Extra expense insurance is an alternative to business interruption insurance for those enterprises that can continue operations with other facilities. It provides payment for expenses above normal costs when such expenses are incurred to continue operations after damage to the premises by an insured peril.

The principal difference between the two business income forms is in the coverage for extra expense. The Without Extra Expense form provides payment for extra expenses incurred to resume operations or otherwise reduce the amount of the business income loss. Extra expenses are payable only to the extent they reduce the business income loss. This payment is provided under an additional coverage called Expenses to Reduce Loss. Under the And Extra Expense business income form, on the other hand, payments are made for expenses incurred to continue operations whether or not such expenses reduce the business income loss. In effect, under the form that includes the extra expense coverage, the entire amount of insurance is payable for business income or extra expense.

Optional Coverage Provisions The optional coverage provisions in the Business Income forms permit activation of the more popular time-element coverage options. There are four optional coverages:

1. Maximum Period of Indemnity. The Maxinum Period of Indemnity optional coverage replaces the coinsurance clause with a 120-day limit on the period for which indemnity is payable. There is no limit on the amount payable per month within the 120-day period.
2. Monthly Limit of Indemnity. The Monthly Limit of Indemnity optional coverage replaces the coinsurance clause with monthly limits on recovery expressed as fractions of the insurance limit. Under this option, the insured may collect a specified fraction of the insurance amount during any month for which the business is totally or partially interrupted. Options are available to permit collection of 1/3, 1/4, or 1/6 of the face amount of coverage.
3. Agreed Value. The Agreed Value optional coverage of the Loss of Income Form, like the Agreed Value Coverage of the BPP, suspends the coinsurance provision and guarantees the insured will not suffer a coinsurance penalty on a partial loss.
4. Extended Period of Indemnity. The Extended Period of Indemnity optional coverage increases the 30-day period in the coverage extension to a longer period entered in the declarations.

Contingent Business Interruption and Extra Expenses

Contingent business interruption insurance and contingent extra expense insurance protect a firm against interruption and extra expense losses resulting from damage caused by an insured peril to property that it does not own, operate, or control. There are four situations in which these coverages are used:

1. When the insured depends on a single supplier or a few suppliers for materials, the firm on which the insured depends is called a contributing property.
2. When the insured depends on one or a few manufacturers or suppliers for most of its merchandise, the firm on which the insured depends is called the manufacturing property.
3. When the insured relies on one or a few businesses to purchase the bulk of its products, the firm to which most of the insured's production flows is called the recipient property.
4. When the insured counts on a neighboring business to help attract customers, the neighboring firm is called a leader property.

The 2012 revisions to the ISO commercial property program added an option to cover certain secondary dependencies. An example of a secondary dependency is where an insured's supplier is unable to deliver raw materials because of an interruption to the business of another firm on which the supplier depends. Coverage may be added for secondary dependencies arising from contributing and recipient properties.

The contingent business income coverage under the portfolio program is provided by an endorsement, Business Income from Dependent Properties. There are two versions of the Contingent Business Income endorsement: a broad form and a limited form. The broad form endorsement provides coverage in addition to the direct business income coverage and for the same limit. The limited form endorsement provides coverage when contingent interruption coverage is written without direct business income coverage or when it is written for a different limit.

Contingent extra expense insurance operates in much the same way as does the contingent business interruption insurance, but the former is designed for the firm that would incur increased costs as a result of damage to a contributing or recipient firm's property.

Leasehold Interest Insurance

Leasehold interest coverage protects against loss due to the termination of a favorable lease caused by fire or other insured peril. Consider, for example, a property leased for $1000 a month, subject to a lease that may be canceled in the event of fire or other damage to the premises. When prevailing conditions make it impossible to secure similar quarters at less than, say, $2500 a month, the existing contract would create a leasehold interest of $1500 a month for the remaining period of the lease.

The amount of coverage under leasehold interest coverage decreases month by month, with the amount of insurance always approximately equal to the insured's interest in the lease. In the event of a loss that terminates the rental agreement, the insured is paid a lump sum equal to the discounted value of the leasehold interest for the remaining months of the lease. A variety of discount rates are available.

Rain Insurance

Before leaving the subject of business interruption, we should briefly note another specialized indirect loss coverage, rain insurance. Rain insurance is a consequential loss coverage. It does not protect against damage to property but against loss of income or the incurring of extra expenses owing to rain, snow, sleet, or hail. It is usually sold to cover outdoor events scheduled for a certain day and dependent on favorable weather for success. The coverage may be written on an indemnity basis to cover the loss of income suffered or additional expenses incurred, or it may be written on a valued basis. Some contracts specify the amount of rain that must fall before payment will be made; in other contracts any amount of rain will require payment by the insurer. Snow insurance may also be written to cover a lack of snow. This could benefit a firm whose revenues depend on adequate snow (e.g., a ski resort). Another variation, temperature insurance, may be written for events would incur a revenue loss if temperatures are below or above normal.

BOILER AND MACHINERY INSURANCE

Boiler and machinery insurance originated from the efforts of a group of engineers in Hartford, Connecticut, who offered an inspection service for steam boilers and, for a small additional charge, guaranteed their inspection by providing insurance against loss up to some limit selected by the client. The inspection service that originally served as the basis for this type of insurance remains an important part of the service provided by boiler and machinery insurers today. The boiler and machinery line is a highly specialized field, and insurers who offer this coverage employ trained engineers who seek to discover faulty conditions and mechanical weakness before such defects can cause accidents. A large percentage of the boiler and machinery premium goes to pay inspection costs.

Although it is common to think of boiler and machinery insurance primarily in terms of steam boilers, there are many types of equipment to which the insurance applies: boilers, pressure containers, refrigerating systems, engines, turbines, generators, and motors. The inspection service that proved so beneficial for steam boilers has established its worth for other types of objects as well. Large and small businesses now rely on a range of equipment that was not imagined when boiler and machinery insurance was invented. These include computers, PBX systems, copier, duplicating, and fax machines, as well as production equipment with computer-based components.

Although the inspection service is a critical part of the boiler and machinery product, payment for damage from losses that do occur is an equally important feature of this insurance. Hazards associated with boilers and machinery are usually excluded from other forms of property insurance, so boiler and machinery insurance is needed to fill this gap. Similarly, coverage for damage caused by artificially generated electricity, usually excluded in other property forms, is covered by the boiler and machinery forms.

The ISO Breakdown Protection Coverage Form

In 2001, Insurance Services Office, Inc. (ISO) revised and modernized its boiler and machinery insurance program. In addition to several changes in coverage, the basic Boiler and Machinery Coverage form was renamed and is called the Equipment Breakdown Protection Coverage Form. The new name and the changes in coverage indicate the broadening nature of equipment exposures.

The 2001 form incorporates the most common boiler and machinery coverages previously insured by separate forms into a single coverage form. Ten coverages, designated A through J, are printed in the form. A particular coverage is effective only if a limit or the word “included” is entered in the declarations for that coverage. The 10 coverages are the following:

1. Property Damage
2. Expediting Expenses
3. Business Income and Extra Expense—Extra Expense Only
4. Spoilage Damage
5. Utility Interruption
6. Newly Acquired Premises
7. Ordinance or Law Coverage
8. Errors and Omissions
9. Brands and Labels
10. Contingent Business Income and Extra Expense—Extra Expense Only Coverage.

Although the order in which the coverages are listed does not suggest any particular relationship, six of the coverages (A, B, F, G, H, and I) relate to direct damage, and four (C, D, E, and J) provide indirect loss coverage.

Direct Damage Equipment Coverages

Open-peril commercial property (fire and allied lines) forms usually exclude damage caused by artificially generated electrical current, mechanical breakdown, and explosion of a steam boiler the insured owns, leases, or operates. Like its predecessor boiler and machinery forms, the Equipment Breakdown Protection Coverage Form dovetails with these exclusions by covering losses from steam pressure vessel explosions and damage to mechanical or electrical equipment.

Property Damage Coverage A (Property Damage) pays for damage to covered property caused by breakdown of covered equipment. There is a single covered cause of loss under the Equipment Breakdown Protection Coverage Form: breakdown to covered equipment. “Breakdown” is defined to include mechanical failure, electrical failure (including arcing), and failure of pressure or vacuum equipment.¹² The definition specifically excludes several types of damage or equipment failure, such as leakage, damage to vacuum or gas tubes, brushes, and the functioning of safety devices. For machines with electronic or automated components, the definition excludes defects, erasures, errors, limitations, or viruses in computer equipment and programs. Finally, in addition to the restrictions in the definition of breakdown, specific exclusions eliminate coverage for depletion, deterioration, corrosion, erosion, and wear and tear.

Covered equipment is defined as equipment that has been built to operate under internal pressure or vacuum, electrical or mechanical equipment used for the generation, transmission, or utilization of energy and communication and computer equipment.

Covered property includes all property owned by the named insured or in the named insured's care, custody, or control and for which it is legally liable. Covered equipment refers to the specific boiler and machinery items whose breakdown is insured. The distinction between covered property and covered equipment is important because damage caused by a breakdown can extend beyond the equipment. A boiler explosion, for example, can destroy an entire building. Equipment breakdown coverage protects against damage to insured equipment and covers damage to other property caused by breakdown of such equipment.¹³

The Expediting Expense coverage (Coverage B) provides payment for the reasonable extra cost of temporary repairs and the cost of expediting permanent repairs. Expediting expense might include, for example, the cost of having parts delivered by air or the cost of overtime for workers. Coverage is limited to $25,000 but may be increased.

The Newly Acquired Premises Coverage (Coverage F) provides automatic coverage for equipment at newly acquired premises for 90 days or the number of days designated in the declarations.

Two optional coverage enhancements are available under the direct damage coverage. The Ordinance or Law Enforcement coverage (Coverage G) is similar to the comparable coverage under the commercial property program. Coverage is triggered when loss is increased by the enforcement of laws or ordinances that regulate the demolition, construction, repair, or use of the building or structure. The Brand and Labels coverage (Coverage I) relates to the value of salvage. Under this coverage, the insured may require an insurer taking undamaged property to remove the brand name and labels from salvaged property. This reduces the value of the salvaged property to the insurer but avoids the situation in which the manufacturer's products would be offered in the market with the brand and labels intact.

Hazardous Substances and Other Limitations Unless a higher limit is stated in the declarations, a separate $25,000 limit applies to each of the following losses: expenses for the cleanup of hazardous substances, damage cause by ammonia, contamination, replacement of damaged data or media, and water damage caused by other than leakage from a sprinkler system or pipes.

Indirect Loss Boiler and Machinery Coverages

There are four indirect loss boiler and machinery coverages printed in the Equipment Breakdown Protection Coverage Form: Business Income and Extra Expense, Spoilage Damage, Utility Interruption, and Contingent Business Income and Extra Expense.

Business Income and Extra Expense Business income coverage under BM 00 20 pays for the loss of business income and the extra expense the insured incurs to continue operations during the restoration period. Extra expense coverage may be purchased without business income. Business income and extra expense are defined in the same way as under the ISO commercial property program. The period of restoration begins at the time of the breakdown and ends five days after the damaged property is repaired or replaced with reasonable speed and similar quality. The five-day period may be extended by entering a greater number of days in the declarations.

The insured must complete an annual report of business income values, which is used to determine the premium for business income and extra expense coverage. If the report is not filed as required, a coinsurance provision is applicable.

Spoilage Damage Spoilage damage coverage coverage pays for damage caused by the lack or excess of power, light, heat, steam, or refrigeration. It also covers expenses necessary to reduce the amount of loss, limited, however, to the amount that otherwise would have been payable. A freezing plant, a meat locker, or a florist might purchase spoilage damage coverage for loss resulting from the breakdown of its freezing or heating equipment.

Utility Interruption Utility interruption coverage extends business income and extra expense and spoilage coverages to cover loss caused by interruption of utility service, such as electrical power, communication, sewer, air conditioning, heating, gas, water, or steam. The interruption must result from breakdown of covered equipment owned, operated, or controlled by a utility or distributor that provides these utility services to the insured.

Contingent Business Income and Extra Expense This coverage permits an insured to extend its business income to cover loss from a breakdown to covered equipment at a premises the insured does not own or operate.

Deductibles

The policy provides for five different deductible possibilities: a dollar deductible, a time deductible applicable to business income and extra expense, a multiple of daily value deductible,¹⁴ a percentage of loss deductible, and a minimum or maximum deductible. The minimum or maximum deductible may be used in connection with the multiple of daily value or the percentage of loss deductible.

Suspension

The boiler and machinery policy contains a unique provision permitting the insurance company to suspend coverage on any or all insured objects found to be in a dangerous condition. Any insurance company representative may execute suspension by handing notice of suspension to the insured or by mailing the notice to the insured's address stated in the policy or to the location of the object on which coverage is to be suspended. The suspension becomes effective immediately on delivery without prior notice or waiting period. When coverage has been suspended, it may be reinstated only by endorsement to the policy.

TRANSPORTATION COVERAGES

The property forms used to insure business firms do not generally include off-premises coverage like that of the Dwelling or Homeowners forms; for this reason, special provision must be made for business property away from the premises. Ocean marine and inland marine forms are designed to provide this coverage.

Ocean Marine Insurance

Despite the technological advances in marine transportation, ocean disasters remain an ever-present hazard for those engaged in foreign trade. Ocean marine insurance provides coverage against four types of losses, corresponding to the four major classes of ocean marine insurance:

1. Hull Insurance. Hull insurance protects the owner of a vessel against loss to the ship itself. The coverage is written on a modified open-peril basis. A special provision in the hull policy called the running-down clause provides a form of property damage liability applicable to damage to other ships.
2. Cargo Insurance. Cargo insurance, which is written separately from the insurance on the ship, protects the cargo owner from financial losses that result from its destruction or loss.
3. Freight Insurance. Freight insurance is a special form of business interruption insurance. When a vessel is lost, this coverage indemnifies the shipowner for the loss of income that would have been earned on completion of the voyage.
4. Protection and Indemnity. Protection and Indemnity coverage is essentially liability insurance that protects the ship owner from the consequences of negligent acts of his or her agents.

These contracts are written in a strange and antiquated language and are governed by principles derived from ancient maritime practice and admiralty law. Ocean marine insurance is a fantastically complicated field, so we will include a brief discussion of a few major concepts.

Perils Insured The ocean marine insuring instrument is an open-peril agreement with certain limitations. Damage arising from perils of the seas is covered, including damage caused by waves, sinking, stranding on reefs or rocks, lightning, collisions, or any number of other causes associated with transportation by water. The policy also provides coverage for perils on the seas, which are specifically listed, including fire, pirates, thieves, jettisons, barratry,¹⁵ and all other like perils. This is not all risk; the perils must be of the same nature as those specifically listed. In addition to the specified perils, marine policies are frequently expanded to include others.¹⁶

Certain perils that would otherwise be included in the broad insuring agreement are specifically excluded. The Free of Capture and Seizure (FC & S) clause excludes war in all its aspects. A separate war risk policy may be purchased to obtain coverage for the perils of war. The Strike, Riot, and Civil Commotion (SR & CC) clause excludes loss or damage caused by acts of strikers, rioters, or persons engaged in civil commotion. This exclusion may be deleted if the underwriter is willing to assume the risk.

Valuation Almost all ocean marine policies are valued policies, and the face amount of insurance is payable in the event of total loss. In addition, although the policy does not contain a 100 percent coinsurance clause, the legal custom of 100 percent insurance to value has been in existence for so long it is considered a condition of the contract, and policies are interpreted as if they did contain a 100 percent coinsurance clause.

Average Conditions The term average is considered by many people to be the most important single word in the terminology of ocean marine insurance. It is synonymous with partial loss.¹⁷ Average (or partial loss) under an ocean marine policy may be a particular average or general average.

Particular Average A particular average is defined as a partial loss to property of a particular individual. Cargo insurance is often written “free of particular average unless caused by the vessel being stranded, sunk, burnt, on fire, or in collision,” which means that partial losses from other causes are excluded. In some cases, a hull contract or a cargo policy may provide that coverage is “free of particular average under 3 percent.” In this case, the clause acts as a franchise deductible. If the loss is less than 3 percent (or some other percentage specified), it is not covered; if it exceeds 3 percent of the amount of insurance, it is covered in full.

General Average A general average loss is one borne by all parties to the venture. It is based on the ancient maritime law requiring all persons participating in a venture to share the loss when one person's goods are sacrificed to save the venture. The simplest example is the jettison of cargo to lighten the ship in time of stress. If goods belonging to one party are thrown overboard to save the ship and the attempt is successful, all other parties, including the ship owner and the other cargo owners, will share in the loss of the jettisoned cargo with its owner, based on the proportion of the total value of the venture each owns. Under the terms of the ocean marine policy, the company insuring each of the participants will pay its insured's share of the general average loss. Amounts payable for general average and salvage charges¹⁸ are in addition to the amounts payable for loss of the insured's property.

Warehouse-to-Warehouse Clause Unless the policy designates the contrary, coverage is provided only from the time goods are loaded on the ship. However, policies may be endorsed to cover goods during transportation to and from the vessel. In these cases, it is customary to endorse the policy with a warehouse-to-warehouse clause to provide coverage for the entire exposure from the time goods leave the shipper's premises until they arrive at the consignee's premises, including transit over land.

Inland Marine Insurance

Inland marine insurance developed as an extension of the warehouse-to-warehouse clause in ocean marine policies. Historically, ocean marine insurers have been exempt from state regulation, primarily because regulation would impede their ability to compete in an international market. Exercising their freedom from regulation, marine insurers began to write coverage on goods in transit not only by water but overland as well. Eventually, they turned to writing coverage on fixed-location property. In 1933, the NAIC promulgated its Nationwide Marine Insurance Definition, specifically defining the types of insurance marine insurers were permitted to write. The definition was revised in 1953 and again in 1977, when it assumed the more modest role of defining marine insurance for rate filings and for the reporting of statistics. The 1977 version of the definition recognizes six broad classes of property that may be insured under marine contracts:

1. Imports
2. Exports
3. Domestic shipments
4. Means of transportation
5. Personal property floater risks
6. Commercial property floater risks

The first two classes (imports and exports) are strictly limited to the ocean marine category. Export property is considered to be in the course of transportation and, thus, eligible for marine coverage as soon as it is designated or prepared for export. Imports are eligible until they reach their intended destination.

For purely inland marine risks, the definition recognizes four categories: domestic shipments, means of transportation, personal property floater risks, and commercial property floater risks. Although the first two classes (domestic shipments and means of transportation) are fairly homogeneous, the commercial property floater risks class includes a smorgasbord of property coverages. For the purpose of analysis, it is helpful to divide the NAIC's commercial property floater risks class into four subclasses (business floater policies, dealers' forms, bailee forms, and miscellaneous policies) and to consider the commercial inland marine field as being divided into six general classes:

1. Transportation forms insure shipments of goods by rail, motor carrier, and air carrier. These include forms that cover the legal liability of the carrier and forms to protect the owner of the goods against loss or damage of the merchandise.¹⁹
2. Means of transportation forms include policies written to cover instrumentalities of transportation and communication, including mobile property such as railroad rolling stock, and fixed objects, such as bridges, tunnels, pipelines, power transmission lines, and radio and television transmitting equipment. Although some of this property is not mobile in nature, its inclusion in the field of inland marine insurance was justified on the grounds that it is subject to the perils of transportation.
3. Business floater forms cover personal property (such as construction equipment) that is mobile in nature and, therefore, subject to damage by the perils of transportation.
4. Dealers forms cover the merchandise of certain types of businesses, such as jewelers, furriers, camera dealers, and musical instrument dealers. These forms cover the merchandise while it is on the insured's premises and provide incidental off-premises coverage.
5. Bailee forms, designed to cover goods in the custody of someone other than the owner to whom the goods have been entrusted.²⁰
6. Miscellaneous policies, which include unrelated and anomalous types of inland marine coverages such as accounts receivables and valuable papers coverages as well as electronic data processing policies.

Before turning to a discussion of the specific policy forms that are used in the inland marine field, a few preliminary observations on the nature of inland marine policies will be helpful.

Controlled and Uncontrolled Forms State insurance departments classify inland marine forms as controlled and uncontrolled. Controlled forms are those for which standardized forms have been developed, whereas uncontrolled forms are not standardized, and the terms can differ from insurer to insurer. Although the specific regulatory approach varies by state, many states do not require the rates for uncontrolled forms to be filed with the regulator, while the rates for controlled forms must be filed (and, often, subject to prior approval). Some states do not require the insurer to file uncontrolled forms with the state, whereas others subject uncontrolled forms to the same regulatory approval process as controlled forms. In the discussion that follows, controlled and uncontrolled forms are distinguished by the designations (C) and (U).

Transportation Forms The owner of goods may ship them by common carrier, by contract carrier, or on the firm's own trucks. Regardless of the means used, insurance may be needed. For example, even though the liability of a common carrier for merchandise in its custody may be broad, the carrier may not be liable for damage to goods in its care in some instances. In addition, carriers frequently make use of a release bill of lading, limiting their responsibility to, say, 50 cents per pound. Even in those instances in which the common carrier may be liable, the owner may find it more convenient to collect from his or her own insurer and permit the insurer to subrogate against the common carrier.

There are two standard approaches to insuring goods in transit, depending on whether common carriers or the firm's own trucks are used. Goods shipped by common carrier are usually insured under the Annual Transit Policy (U) designed to cover all shipments in a given year.²¹ Policies are written to meet the requirements of the individual firm and may be modified to meet the specific situation. For example, coverage may be provided on incoming shipments, outgoing shipments, or both. There are forms for insuring property in the custody of railroads and coastwise shipping firms, on trucks used to connect with railroads and steamers, solely by truck, or by air cargo. Coverage is normally on a named-peril basis, covering fire and lightning and the perils of extended coverage (except strike, riot, and civil commotion, which are optional), plus the perils of transportation, which include flood, collision, overturn of a vehicle, bridge collapse, derailment, earthquake, and landslide. Theft coverage is available by endorsement.

Goods shipped on the owner's own trucks are usually insured under a Motor Truck Cargo Owner's Policy (U) although such goods may be insured under a version of the Annual Transit Policy. Coverage under the Motor Truck Cargo Policy is similar to the Annual Transit Policy. It is subject to a limit of liability on any one truck or in any one place, with a further limit on any single disaster.

Other transportation forms include the Parcel Post Policy (C), designed for firms that make frequent parcel post shipments and prefer commercial to government insurance, and the Mail Coverage Form (C), designed for banks and other businesses that regularly ship securities, money, or other valuable property by registered mail or express. The Mail Coverage Form covers valuable property such as bonds, stock certificates, certificates of deposit, money orders, checks, drafts, warehouse receipts, and other property of a similar nature when sent by first class mail, certified mail, U.S. Postal Service express mail, or registered mail. The form may be used to cover bullion, platinum, other precious metals, currency, unsold travelers' checks, jewelry, watches, precious and semiprecious stones, and similarly valuable property when sent by registered mail.

Business Floater Policies Merchandise being shipped is not the only business property exposed to damage away from the business premises. Many classes of property are mobile in nature and, so, vulnerable to risk. To meet the need for protection on these classes, a large number of inland marine floater policies exist and fall into one of three categories:

1. Equipment Floaters. These cover business property not held for sale or on consignment that is in the hands of the owner for its intended purpose. Examples include the contractors' equipment floater (U), agricultural equipment and livestock floater (C), and salesmen's sample floater (C).
2. Processing and Storage Floaters. These insure property in temporary storage and property undergoing processing outside the owner's premises. An example is ISO's Processors Coverage Form (U), which covers the stock of a manufacturer sent off premises for processing.
3. Consignment and Sales Floaters. These policies protect goods being held for sale under consignment, being installed, or being sold under an installment plan. Examples include the installment sales floater (C), which covers goods sold on an installment basis; the Floor Plan Coverage Form (C), which covers stock pledged as collateral to a lending institution; and the installation floater (U), which covers machinery and equipment in transit for installation in a building and while being installed.

The coverage of these forms may be written on an open-peril or named-peril basis, and the coverage varies under the different forms. In several classes, the insured has a choice between open-peril and named-peril coverage. In addition, the coverage may be written on a schedule or blanket basis.

Dealers Forms Dealers forms are an anomaly in inland marine insurance. Although inland marine forms generally cover property that is mobile and commonly away from the owner's premises, the dealers forms provide coverage on a dealer's stock of goods. Although coverage applies on and off premises, the major exposure is on premises. Dealers forms are available only for specific dealers, such as jewelers, furriers, musical instrument dealers, camera dealers, equipment dealers, fine arts dealers, and stamp and coin collection dealers. The policies for jewelers and furriers are referred to as the Jewelers Block Policy (C) and the Furriers Block Policy (C).²² The other forms are referred to as dealer's forms, for example, Musical Instrument Dealers Form (C), Camera Dealers Form (C), and so on. The Equipment Dealers Coverage Form is typical of these policies. The Equipment Dealers Coverage Form insures the stock in trade of dealers in agricultural equipment and implements and construction equipment. Motor vehicles designed for highway use are ineligible for coverage under the form. In addition to the dealer's stock, the form covers property of others in the custody of the dealers. Such property of others would consist of customers' equipment in the dealer's custody for servicing or repair.

Miscellaneous Inland Marine Forms The miscellaneous class of inland marine commercial policies includes unrelated and unusual types of inland marine coverages, such as accounts receivable and valuable papers coverages and electronic data processing policies. Accounts receivable insurance and valuable papers insurance are the most common of these coverages.

Accounts Receivable (C) Accounts receivable insurance protects against the inability to collect amounts owed to the insured because of destruction of records by fire or other insured perils. The coverage is written on an open-peril basis, on either a reporting basis or, subject to an 80 percent coinsurance provision, on a nonreporting basis. The coverage is on an indemnity basis and compensates the insured for any amounts uncollectible because of the destruction of the accounting records (with allowance for bad debts). In addition, payment is made for expenses incurred to reconstruct the records, for collection expenses above normal costs, and for the interest charges on loans taken out by the insured to offset the impaired collections.

Valuable Papers Insurance (C) Valuable papers coverage may be written to insure various types of important records, including maps, film, tape, wire or recording media, drawings, abstracts, deeds, mortgages, and manuscripts. Coverage is on an open-peril basis and can be blanket or scheduled. Items specifically insured are covered for an agreed amount, whereas papers covered on a blanket basis are insured for their actual cash value.

EDP Policy (U) With the rapid spread of electronic data processing (EDP) equipment and its software, a need quickly developed for insurance coverage to protect against losses arising out of damage to or destruction of this costly equipment. The coverage was originally written by insurers with an extensive background in inland marine insurance usually on inland marine forms. The coverage is written on an open-peril basis and generally provides coverage under separate insuring agreements for damage to hardware, software, and extra expense or business interruption.

Manufacturers Output Policy The Manufacturers Output Policy was developed as an inland marine form to cover manufacturers' stocks of merchandise being shipped to dealers. The earliest versions of the policy covered automobiles being shipped from the factory to dealers and covered property only while away from the insured's premises. The standard form excludes property at any manufacturing location the insured owns, but the policy is usually endorsed to provide open-peril coverage on and off premises.

Difference-in-Conditions Coverage difference-in-conditions insurance, referred to as DIC coverage, is a special form of open-peril coverage written in conjunction with basic fire coverage to protect against losses not reimbursed under the standard fire forms. It is always written as an adjunct to separate policies covering against fire, extended coverage, and vandalism and malicious mischief (plus sprinkler leakage when the exposure exists) and does not provide coverage against losses caused by these perils. It does, however, provide coverage for most other insurable perils, including flood and earthquake. There is no coinsurance clause and no pro rata clause, and the policy may be written for an amount different from the basic policies it complements. The coverage is subject to a deductible, which is usually substantial, ranging upward from $10,000. Protection against earthquake and flood may be subject to limits and deductibles that differ from the remainder of the policy. Each DIC policy is individually rated. The coverage was originally available only to giant firms, but some insurers have developed mini-DIC forms for medium to small businesses. In some instances, consequential and transit coverages are included.

THE NATIONAL FLOOD INSURANCE PROGRAM

The general nature of the National Flood Insurance Program (NFIP) and the coverage available were discussed in Chapter 26. As in the case of residential property, the program provides different amounts of coverage under the Emergency Program and the Regular Program. As in the case of the residential program, the additional amounts of insurance available under the Regular Program are not at subsidized rates but are actuarial rates calculated to consider the probability of loss in the community.

The General Property Form Flood Insurance Policy

The NFIP consists of a policy jacket and a form. The flood policy used to insure commercial property is called the General Property Form. Many of the provisions of this form (such as the definition of flood, inception and cancellation, and the debris removal and property removal provisions) parallel those of the Residential Flood Policy discussed. Replacement Cost coverage is unavailable under the General Property Form. In addition, the General Property Form includes a special Other Insurance provision.

Other Insurance Provision The General Property Form provides that if other flood insurance is applicable to a covered loss, the NFIP's share of the loss is limited to the percentage of the loss the NFIP coverage bears to the total insurance covering the loss. The General Property Form provides that excess insurance will not be considered in determining the total insurance amount applicable to the loss.

Nonresidential Condominiums

Nonresidential condominium buildings and their commonly owned contents may be insured in the name of the association under the General Property Form. A unit-owner of a nonresidential condominium unit may not purchase flood insurance on his or her unit but may purchase contents coverage under the General Property Form.

INSURANCE AGAINST DISHONESTY

The broad field of dishonesty insurance includes all instances in which the cause of the loss is the wrongful taking of property belonging to the insured. Historical factors led to two distinct classes of dishonesty insurance: fidelity bonds, which cover employee dishonesty, and crime insurance, designed to cover dishonest acts of persons who are not employees of the insured. Each by itself provides incomplete protection against the perils of dishonesty.

Coverage for some nonemployee crime losses is included in the open-peril commercial Property Coverage Form. Property, other than money and securities, for example, if not excluded, is covered for loss by burglary, robbery, or theft under the Special Cause of Loss Form. The expansion of fire insurance coverages to include crime perils has reduced the demand for monoline crime coverages on property other than money and securities. At the same time, most property forms exclude loss to money and securities, which are exposed to loss by theft and from other perils (e.g., fire). Coverage on money and securities for perils other than dishonesty is usually combined with dishonesty perils in commercial crime forms.

Dishonesty Insurance Coverage Triggers

There are two approaches to the coverage trigger in crime insurance, called loss sustained coverage and discovery coverage. The distinction originated in the field of employee crime, where losses can occur over an extended period of time and may not be discovered until long after they occur. More recently, the distinction is applied to employee and nonemployee crime coverages.

Under the loss sustained forms, coverage for employee theft (and all other insuring agreements) applies only to loss resulting from acts committed during the policy period and that are discovered during the policy period or within a discovery period that ends one year after policy termination. Under the discovery forms, coverage for employee theft (and all other insuring agreements) applies to loss resulting from acts committed at any time, provided the loss is discovered during the policy period or a specified discovery period.

The discovery period under the loss sustained coverage forms is one year. Under the discovery forms, it is 60 days after the end of the policy period or for up to one year after the end of the policy period with respect to employee benefit plans. Under the loss sustained forms and the discovery forms, the discovery period terminates immediately upon the inception of replacement insurance.

Continuity of Coverage Under the ISO crime program, the Loss Sustained forms include two provisions titled Loss Sustained During Prior Insurance, with the first provision applying to prior insurance issued by the insurer or an affiliate and the second applying to other prior insurance. These provisions state that any loss that would have been covered under prior insurance is covered under the current bond provided there has been no lapse in coverage from the old bond to the new one.²³ Without such provisions, a loss that occurred during a previous policy period would be uninsured if it were not discovered until after that policy had terminated and its discovery period had expired. The insurer that issued the previous policy would not be obligated to pay since its policy's discovery period had expired, and the present insurer would not be obligated to pay because the acts causing the loss did not occur during its policy period.²⁴

The ISO Crime Insurance Program

ISO introduced revised commercial crime discovery and loss sustained forms in 2006. The following discussion is based on the 2006 Commercial Crime Discovery and Commercial Crime Loss Sustained Forms.²⁵

Insuring Agreements The ISO crime coverage forms contain provisions for both employee and nonemployee crime coverages. With two exceptions, all the forms contain the following eight insuring agreements, and coverage applies only to those insuring agreements for which a limit of insurance is indicated in the declarations.

A.1. Employee Theft

A.2. Forgery or Alteration

A.3. Inside the Premises—Theft of Money and Securities Coverage

A.4. Inside the Premises—Robbery or Safe Burglary of Other Property

A.5. Outside the Premises

A.6. Computer Fraud

A.7. Funds Transfer Fraud

A.8. Money Orders and Counterfeit Paper Currency

Employee Crime Coverages

Employee crime coverages, also called fidelity bonds, protect against loss resulting from employees' dishonesty and cover loss of money, securities, or other property resulting from fraud, forgery, embezzlement, or theft by the person bonded, up to the bond's face amount, which is called the penalty. The penalty under a bond is never cumulative, and a series of thefts by one person is considered a single loss. In addition to the distinction between loss sustained forms and discovery forms, fidelity bonds are classified as schedule bonds and blanket bonds.

1. Schedule Bonds. Schedule bonds cover the specific person or position listed in the policy. When several individuals are listed in a single bond, it is called a name schedule bond. Under a position schedule bond, positions to be covered are listed rather than the individuals. If a person leaves the firm or moves to another position, his or her successor is covered in the scheduled position. When more individuals occupy a scheduled position than the number originally specified, all are covered but on a decreased basis. For example, if the bond provides for two cashiers with a $100,000 penalty on each, and there are four cashiers, loss by any of the four would be covered, but only up to $50,000 each.
2. Blanket Bonds. The broadest form of fidelity coverage is provided under blanket bonds designed to cover all employees, regardless of position, with new employees covered automatically.

A.1. Employee Theft The ISO employee theft insuring agreement (coverage A.1. of the Commercial Crime Policy) provides blanket coverage and applies to theft by any individual meeting the definition of “employee” without any need to list the names of individual covered employees or covered positions. The insurance limit shown in the declarations for employee theft applies to each loss, regardless of how many employees were involved in causing the loss, and regardless of whether the employees causing the loss can be identified.²⁶ The 2006 forms, unlike the prior forms, include forgery in the definition of theft for this insuring agreement. Coverage applies for loss of money, securities, and other tangible property by employee theft. An employee is defined as an individual in the insured's service who the insured has the right to direct and control while he or she is performing services for the insured, who is compensated directly by the insured with salaries, wages, or commissions. Such individuals are considered employees for 30 days after their service terminates. The definition of “employee” can be amended to include certain nonemployees, such as partners, limited liability company (LLC) managers, directors and trustees, agents, leased workers, and data processing service providers.

Exclusions The ISO commercial crime forms contain 10 exclusions that apply to all insuring agreements, plus a number of others applicable only to particular insuring agreements. The following 10 exclusions apply to all coverages under the commercial crime forms.

Exclusion a, Theft by an Insured, Partner, or Member, excludes loss caused by dishonest acts of the insured, a partner, or member of an LLC. Coverage is available by endorsement to protect innocent partners and LLC members, but only for loss in excess of the value of the dishonest partner's or member's interest in the business and amounts owed to that partner or member. Exclusion b, Acts of Employees Learned of by You Prior to the Policy Period, was new in the 2006 form. It eliminates coverage for employee theft prior to the inception of the policy if the insured or a partner, manager, officer, or director not colluding with the employee learned of the theft prior to the policy period.²⁷

Exclusion c, Acts of Employees, Managers, Directors, Trustees, or Representatives, divides the policy coverage into employee and nonemployee components.

Exclusion d, Confidential Information, eliminates coverage for loss from unauthorized use or disclosure of confidential information.

Exclusion f, Indirect Loss, precludes coverage for indirect loss such as the income loss that may result from loss by theft, liability for damages (other than compensatory damages), or expenses incurred in establishing the existence or the amount of loss.

Exclusion g, Legal Expense, eliminates coverage for expenses related to any legal action, except when covered under the forgery or alteration insuring agreement.

Exclusions e, h, i, and j, Governmental Action, Nuclear Hazard, Pollution, and War, are the nearly universal exclusions of seizure or destruction of property by order of governmental authority, nuclear hazards, pollution, and war. The war exclusion eliminates coverage for war and for government action to defend against an attack.

In addition to the 10 exclusions applicable to all coverages, three exclusions apply to the Employee Theft Coverage.

The Inventory Shortage Exclusion precludes coverage for claims based solely on inventory computation or profit and loss figures. Inventory shortages can arise from employee or nonemployee theft, and without some evidence that indicates what caused the loss, there is no coverage. If the insured can establish through evidence other than inventory records that the loss was caused by employee theft, inventory records can be used to support the loss amount. The final two exclusions eliminate coverage for loss resulting directly or indirectly from trading and losses resulting from fraudulent activities related to warehouse receipts. The employee theft insuring agreement is subject to a policy condition, Termination As to Any Employee. This condition states that coverage is canceled with respect to an individual employee immediately on discovery by the insured or a partner, officer, director, or trustee of the insured (or if the insured is an LLC, a member or manager) of any dishonest act committed by that employee. This provision, sometimes called the prior dishonesty clause, applies to employee theft and to any other instance of employee dishonesty, including acts committed before the employee was hired.

Employee Benefit Plan Provisions The Employee Retirement Income Security Act of 1974 (ERISA) requires that those handling funds of an employee welfare or benefit plan subject to its provisions be bonded. The required amount of insurance is 10 percent of the funds handled, subject to a $1000 minimum and a $500,000 maximum. These ERISA requirements can be satisfied by including the employee benefit plans as named insureds under the crime policy. When an employee benefit plan is so named, the 60-day extended reporting period of the discovery forms is extended to one year (as required by ERISA) with respect to employee benefit plans insured under the employee theft insuring agreement.

Nonemployee Crime Coverages

Policies designed to cover against loss of money or other property through dishonest acts of persons other than employees are classified according to peril. Policies exist to protect against burglary, robbery, theft, forgery, and so on. Only the criminal activity indicated is covered, and coverage exists only when the loss meets the definition of the particular crime covered. For example, burglary consists of stealing property when the premises are closed for business and requires forcible entry into the premises. Insurance policies covering loss by burglary typically require visible evidence of forcible entry into the premises or forcible exit. Robbery, on the other hand, consists of taking property by violence or threat of violence. Theft is much broader in meaning than is burglary or robbery and includes an illegal taking of property, thus embracing burglary and robbery. All nonemployee crime forms exclude employee fidelity losses.

A.2. Forgery or Alteration Insuring Agreement The forgery or alteration insuring agreement protects an insured against loss due to the forgery or alteration of checks, bank drafts, promissory notes, and similar documents drawn on the insured's bank account. The forgery coverage conditions provide that mechanically reproduced signatures are considered the same as handwritten signatures. Also, the coverage territory for this coverage is worldwide. The only exclusions applicable to the forgery coverage are the ten exclusions applicable to all coverages.

Coverage also applies to legal expenses incurred in defending a suit that results from the insured's refusal to pay a covered instrument believed to be forged or altered. Amounts paid under this extension are in addition to the forgery or alteration limit of insurance. The insured must have the insurer's written consent to defend against the suit.

A.3. Inside the Premises Theft of Money and Securities Most commercial property insurance forms exclude loss of money and securities. For organizations with substantial amounts of money and securities, the solution is to purchase coverage under a commercial crime form. Despite its title, this insuring agreement covers theft and the disappearance or destruction of money and securities. In effect, it provides open-peril coverage on money and securities. Coverage applies only on the insured's premises, and the 2006 forms specify the theft must be committed by a person inside the premises or a bank, thus eliminating coverage for theft by remote computer. Coverage for the off-premises money and securities exposure is available under insuring agreement A.5.

Coverage also applies for damage to the building's exterior during the actual or attempted theft if the insured is the owner or is legally liable for the damage. Damage to locked safes, vaults, cash registers, cash boxes and cash drawers inside the premises that are damaged during a theft or a theft attempt are similarly covered.

Exclusions In addition to the ten general exclusions applicable to all coverages under the crime policy, insuring agreement A.3. is subject to eight additional exclusions that apply to insuring agreements A.4. and A.5.

The Accounting or Arithmetical Errors or Omissions exclusion eliminates coverage for mistakes in bookkeeping, such as underbilling an account.

The Exchanges or Purchases exclusion excludes losses such as a salesperson's undercharging on a purchase, error in making change, or giving of an unwarranted refund.

Two exclusions (Fire and Motor Vehicles and Their Accessories) exclude damage to property other than money and securities caused in the commission of a theft. Burglars often torch premises they have burglarized; such loss, even though caused by theft, is covered under the firm's property (fire) coverage. Similarly, the exclusion of damage to vehicles contemplates damage that would be covered under the vehicle's physical damage coverage.

The Money-Operated Devices exclusion provides that loss of property from a money-operated device is covered only when a continuous recording instrument in the device keeps a record of the amount of money deposited.

The Transfer or Surrender of Property exclusion eliminates coverage for loss of money and securities as a result of their transfer or surrender to a person or place outside the insured's premises (or bank) based on unauthorized instructions or because of a threat of bodily harm or property damage, including threats to the insured's computer system or products. This exclusion is aimed primarily at losses resulting from computer fraud and extortion, both of which can be covered under other insuring agreements.

A Vandalism exclusion excludes loss by vandalism to the interior or exterior of the insured premises or to a safe, vault, cash register, cash drawer, or other property. The vandalism exclusion does not apply to covered money and securities.

Finally, the Voluntary Parting of Title to or Possession of Property exclusion eliminates coverage in situations in which the insured has willingly entered into a business transaction that turns out to be fraudulent. Such losses have traditionally been regarded as avoidable by the victim and, therefore, uninsurable.

A.4. Inside the Premises—Robbery or Safe Burglary of Other Property This insuring agreement covers loss to property other than money and securities from actual or attempted robbery of a custodian inside the premises and actual or attempted safe burglary. Coverage applies to resulting damage to the premises or the exterior of the premises and resulting loss of or damage to a locked safe or vault inside the premises.

“Robbery” is defined as the taking of property from the care and custody of a person by one who has caused or threatened bodily harm to that person or committed an obviously unlawful act witnessed by that person.

“Safe burglary” means the taking of covered property from within a locked safe or vault inside the premises (as evidenced by marks of forcible entry on the safe or vault) or the removal of the safe or vault from inside the premises.

Exclusions Coverage under the Inside the Premises—Robbery or Safe Burglary of Other Property insuring agreement is subject to the 10 exclusions applicable to all coverages and the 8 exclusions discussed under the Theft of Money and Securities—Inside the Premises insuring agreement.

A.5. Outside the Premises Insuring Agreement This insuring agreement provides similar coverage away from the premises as agreement A.3 provides coverage for on-premises theft, disappearance, or destruction of money and securities. Coverage applies while the insured property is outside the premises in the custody of a messenger or an armored motor vehicle company. The coverage is subject to the same exclusions discussed earlier in connection with the Inside the Premises—Theft of Money and Securities insuring agreement.

A.6. Computer Fraud This insuring agreement covers the loss of money, securities, and other property caused by the use of a computer to fraudulently transfer covered property from inside the insured's premises or a banking premises to a person or place outside those premises. A fraudulent transfer of money from the insured's bank account to a thief's bank account is an example of computer fraud. Other kinds of computer-related loss, such as computer vandalism, are not covered. The computer fraud coverage is subject to 3 exclusions in addition to the 10 general exclusions. Loss resulting from the use of credit, debit, or similar cards is excluded, as is loss due to funds transfer fraud. Finally, the form excludes loss for which proof of its existence or amount is dependent on inventory of profit and loss computations.

A.7. Funds Transfer Fraud This new insuring agreement in the 2006 form provides coverage that was previously available by endorsement. It covers loss from a fraudulent instruction to the insured's bank to transfer funds from its account. In addition to the 10 general exclusions, insurance agreement A.7 excludes computer fraud, which is covered under insuring agreement A.6.

A.8. Money Orders and Counterfeit Paper Currency The insuring agreement provides coverage for loss caused by acceptance of counterfeit paper currency and money orders issued by a post office, express company, or bank that are not paid on presentation. The term “counterfeit” is defined in the definitions section to mean “an imitation of money that is intended to deceive and to be taken as genuine.” Although any nation's currency is covered, territory is not worldwide; only the United States, its territories, Puerto Rico, and Canada are included. Coverage under this insuring agreement is subject only to the 7 general crime exclusions.

PACKAGE POLICIES FOR BUSINESS FIRMS

Although the package policy began with the homeowners contract, the concept was soon applied to the field of commercial insurance. Eventually, two standard bureau package programs designed for businesses and institutions evolved: the Special Multi-Peril (SMP) Program and the Businessowners Policy (BOP). In addition to these programs, many insurers developed their own commercial packages although the independently filed packages usually paralleled the bureau forms. With the introduction of the new portfolio program, the ISO's SMP program was replaced by a new Commercial Package Policy.

Commercial Package Policy

One of the progressive features of the portfolio program is the use of the same standardized forms for monoline policies and for a multiline package policy called a Commercial Package Policy (CPP). The contents of a monoline policy differ from that of a package policy only in the number of coverage parts included. Because the CPP uses the same forms as the monoline coverages, the coverage is identical with the separate monoline forms.

Like the SMP before it, the CPP is a multiline policy in the truest sense of the term, and it provides property and liability insurance in a single contract. In fact, the new program goes further in this respect than did the SMP. Commercial auto insurance, which was excluded from the SMP, may be included as a part of a package policy.

Package Modification Factor One of the principal features of package policies has been a discount for the packaging. The CPP follows this principle, providing a package modification factor, which in effect discounts the premiums for individual coverages when they are combined in a qualified package. This discount is allowed only if the policy contains property and liability coverage applicable to the same premises. Usually, this will consist of coverage on the insured's building and/or contents under the Building and Personal Property Coverage Form, together with general liability coverage for the insured's premises and operations. Package discounts are unavailable for some properties or coverages.

Businessowners Policy

The Businessowners Policy (BOP) is a package policy approach to insurance for business firms similar to the CPP but designed for smaller firms. The program was introduced in 1976 and extensively revised in 1987, 1997, and again in 2006. The policy generally resembles the format of the simplified portfolio program, but the BOP is not part of the CPP; it is an independent policy. Like the Homeowners Policy, the BOP provides property and liability coverage in a single policy. The program was originally available for small and medium apartments, offices, mercantiles, and processing firms. Over the years, eligibility has been extended to include contractors, certain restaurants, convenience stores (only if gasoline sales are less than 75 percent of gross sales), and motels not exceeding three floors.

Property Coverage Under the prior 1997 BOP, the policy was created by combining a general conditions form, a businessowners liability coverage form, and either a standard or a special property coverage form. The standard property coverage form provided named-peril coverage, and the special form provided open-peril coverage. The 2006 program consists of a single form, BP 00 03, which combines the provisions previously contained in the general conditions form, businessowners liability coverage form, and special property coverage form. Thus, property coverage is on an open-peril basis although the policy can be endorsed to provide named-peril coverage.

Although the businessowners forms are similar in most respects to the simplified portfolio property forms, they differ in the following 11 ways:

1. Similar to the replacement cost coverage on dwellings in the Homeowners Policy, coverage on buildings and contents is for replacement cost if the insured limits are at least equal to 80 percent of the property replacement cost before the loss. If the limits are less than 80 percent, the policy pays the greater of the actual cash value or a proportion of the replacement cost (with the proportion equaling the limits divided by 80 percent of the property's replacement cost). The policy specifies certain classes of personal property covered on an actual cash value basis.
2. If contents coverage equals 100 percent of the average monthly values for the preceding 12 months, an automatic 25 percent increase in contents coverage is provided to offset seasonal variations in stock value.
3. Business income and extra expense coverage are automatically included. There are no limits of liability and no coinsurance clause, and the insured may collect for reduced earnings up to 12 months.
4. The BOP provides $10,000 coverage on accounts receivable on premises and $5000 off premises.
5. The BOP provides $10,000 coverage on valuable papers on premises and $5000 off premises.
6. Increased cost of construction due to ordinance or law is covered up to $10,000.
7. Money orders and counterfeit paper currency are covered for $1000.
8. There is $2500 coverage for forgery and alteration.
9. The BOP provides $10,000 for the cost to repair or replace electronic data destroyed or corrupted by a Covered Cause of Loss, including a computer virus.
10. The BOP extends business income or extra expense coverage to loss caused by an interruption of computer operations from a Covered Cause of Loss, including a computer virus, limited to $10,000.
11. Loss from fungi, wet or dry rot, or bacteria is covered up to $15,000, including business income and extra expense.

Optional coverages include contingent business income coverage, employee dishonesty, and mechanical breakdown. Other options include higher limits on accounts receivable and valuable papers, increased limit on forgery crime coverage, coverage for loss caused by utility services equipment failure, and increased limits for electronic data and interruption of computer operations.

Liability Coverage In general, the liability coverage of the Businessowners Policy is similar to the simplified CGL occurrence form (discussed in Chapter 32). Coverage is provided for premises and operations, advertising and personal injury liability, fire legal liability, and medical payments. There are separate limits for medical expenses, fire legal liability, and liability and medical expenses combined. There are two aggregate limits. The products and completed operations aggregate is two times the liability and medical expense limit, and the general aggregate is also two times the liability and medical expense limit.

SUMMARY

Although our discussion of the commercial property and liability coverages in this chapter has been brief, it should serve to illustrate the general nature of the property coverages available to the business firm for the protection of its assets. In addition to the forms discussed, other, more specialized forms have been developed to fit specific needs.

IMPORTANT CONCEPTS TO REMEMBER

portfolio program

commercial property coverage

Building and Personal Property

Coverage Form

coinsurance

Causes of Loss—Basic Form

Causes of Loss—Broad Form

Causes of Loss—Special Form

Earthquake and Volcanic

Eruption Form

blanket insurance

reporting forms

full-value reporting clause

Agreed Value coverage

Ordinance or Law coverage

Condominium Association

Coverage Form

Condominium Commercial

Unit-Owner's Coverage Form

business interruption insurance

business income

Business Income Coverage (And Extra Expense) Form

Business Income Coverage (Without Extra Expense) Form

Resumption of Operations provision

contingent business interruption

contributing property

manufacturing property

recipient property

leader property

Builder's Risk Coverage Form

leasehold interest coverage

demolition cost coverage

Equipment Breakdown Protection Coverage Form

ocean marine

hull coverage

cargo coverage

freight coverage

protection and indemnity

perils of the seas

particular average

general average

warehouse-to-warehouse clause

inland marine

perils of transportation

equipment floaters

processing and storage floaters

consignment and sales floaters

dealer's forms

accounts receivable insurance

valuable papers insurance

controlled forms

uncontrolled forms

difference-in-conditions insurance

National Flood Insurance Program

burglary

robbery

Employee Theft Coverage

discovery period

Robbery and Safe Burglary Coverage

Theft of Money and Securities Coverage

Commercial Package Policy (CPP)

Businessowners Policy (BOP)

QUESTIONS FOR REVIEW

1. List and briefly describe the extensions of coverage under the Buildings and Personal Property Coverage Form used to insure commercial buildings.

2. The Widget Manufacturing Company insures its plant against loss by fire for $900,000, under a policy with an 80 percent coinsurance clause. At the time that a $600,000 loss takes place, it is determined the building is worth $1,250,000. How much will the insurer pay? How much would be paid in the event of a total loss?

3. Briefly describe the provisions of a reporting form that apply in the event the insured (a) is late in filing a report or (b) underreports the values on hand.

4. Give two specific examples in which contingent business interruption insurance would be needed.

5. List and briefly distinguish among the four coverages written as a part of an ocean marine policy.

6. Identify and briefly describe the six broad classes into which inland marine coverages may be divided.

7. Distinguish between a general average loss and a particular average loss in ocean marine insurance. What is a free of particular average clause?

8. The Widget Manufacturing Company purchased an Employee Dishonesty Coverage Form (Portfolio Crime Form A) with a $10,000 penalty on June 1, 2005, and canceled the bond on June 1, 2007. Which of the following losses would be covered and to what extent?

1. Employee A embezzled $5000 in 2004 and $5000 in 2006, the total $10,000 loss being discovered in January 2007.
2. Employee B embezzled $15,000 in 2006, but the loss was not discovered until January 2007.
3. Employees C and D embezzled $7500 each in a collusive loss during 1996, but the loss was not discovered until May 2007.

9. Briefly distinguish between burglary and robbery.

10. Briefly describe the four coverages of the Equipment Breakdown Protection Coverage Form. What consequential loss coverages are available by endorsement?

QUESTIONS FOR DISCUSSION

1. Insurance to value is of paramount importance in the operation of the insurance mechanism. Describe the technique used to induce the insured to carry insurance-to-value in each of the following fields of coverage: (a) fire insurance, (b) fire insurance reporting forms, (c) business interruption insurance, (d) extra expense insurance, (e) boiler and machinery insurance.

2. With respect to each coverage type discussed in this chapter, indicate whether the coverage would probably be considered “essential,” “important,” or “optional” in programming insurance for the largest bookstore on or near your campus.

3. What elements of the employee dishonesty exposure make it difficult to estimate the size of the loss that can occur? In what way does the fidelity exposure differ from other property exposures?

4. Why might a business firm that purchases fire and extended coverage on its buildings and personal property need to purchase inland marine insurance?

5. The Businessowners Policy (BOP) is a standard package approach to insuring small businesses. Briefly describe the general nature of the BOP program, and identify the coverages that are included on a mandatory basis. if you were asked to develop improvements to the BOP, what additional coverages would you include?

SUGGESTIONS FOR ADDITIONAL READING

Anderson, Roberta. “Key Insurance Coveage Considerations in the Wake of Superstorm Sandy.” Insurance Coverage Law Bulletin (Jan. 2013).

Cook, Mary Ann. Commercial Property Risk Management and Insurance. American Institute for Chartered Property Casualty Underwriters, 2010.

Fire, Casualty, and Surety Bulletins, Commercial Lines Volume. Erlanger, Ky.: National Underwriter Company. Available electronically at: http://cms.nationalunderwriter.com/.

Jorgensen, James R. Business Income Insurance—How It Works, 3rd ed. Boston, Ma.: The John Liner Organization, 1991.

Commercial Property Program – Direct Damage Coverage – Building and Personal Property, Rough Notes Company, Inc. 2007.

Commercial Property Program – Time Element Coverages – Business Income, Extra Expense, and Leasehold Interests. Rough Notes Company, Inc. 2007.

WEB SITES TO EXPLORE

Business Insurance	www.businessinsurance.com
International Risk Management Institute	www.irmi.com
Lloyd's List	www.lloydslist.com
National Underwriter	www.nationalunderwriter.com
Risk and Insurance Managers Society	www.rims.org
Rough Notes Company, Inc.	www.roughnotes.com

¹Officially, the portfolio program is called the Commercial Lines Policy Rating and Simplification Project. The program was introduced and became effective January 1, 1986. Many of the property forms were revised in 1988, 1990, 1995, 2000, 2002, 2008, and in 2012. This discussion is based on the 2012 edition of the forms.

²Commercial property coverage is the term used by the ISO to designate those fields previously known as “fire and allied lines.” Because the term commercial property insurance (or commercial property coverage) is also used in reference to the range of coverages that provide protection on property of commercial risks (i.e., fire and allied lines, boiler and machinery, plate glass, marine, and crime insurance), this creates a potential for ambiguity. To minimize the confusion, we will follow the ISO's usage of the term commercial property coverage to refer to the traditional fields of fire and allied lines, and will use the term commercial property insurance when referring to the broad field of property insurance coverages.

³Although personal line forms, such as the Homeowners Policies, automatically extend coverage to property of others in the insured's custody, commercial line policies generally do not. If coverage is required on the property of others, it must be specifically purchased.

⁴Earlier forms limited coverage to removing debris of covered property. The 2012 ISO revisions expanded coverage to include removal of the debris of property of others, subject to certain conditions.

⁵The exclusion of the cost of removing pollutants in the debris removal coverage was introduced in response to court decisions that held insurers liable for extensive pollution cleanup expense under the debris removal provision. Water used to extinguish a fire at a chemical plant, for example, can result in the dispersal of chemicals into the land or water. Under earlier forms, insurers were held liable for such costs up to the face amount of the policy.

⁶In addition to the extension for detached signs, the BPP also covers signs attached to the building, subject to a $1000 limit per occurrence.

⁷The coinsurance principle is used primarily in the commercial area, and the coinsurance clause and rates are not generally applicable in the field of dwelling property. Although some people incorrectly refer to the replacement cost provision of the homeowners forms as a coinsurance provision, it is not. It is an extension of coverage that totally or partially eliminates any deduction for depreciation in loss settlement. Under a coinsurance clause, the insured may collect less than the actual cash value of the loss. Under the homeowners insurance replacement cost provision, the insured will never collect less than the actual cash value of the loss.

⁸The policy values stock that was sold but not delivered on this basis but does not provide that treatment for the unsold inventory.

⁹Retailers and wholesalers do not face the same exposure. They can normally replace their stock within a short time, and the income lost on sales during the period required to replace the stock is covered under the Business Interruption Form used for mercantile firms.

¹⁰When the fluctuation in value is limited to an identifiable period, a Peak Season Endorsement may be used. Here the amount of insurance is increased pro rata for a specified period to cover the increased values, and a pro rata premium charge is made for the added coverage.

¹¹Coverage for loss of rents or rental value was written as a separate form in the past. Under the portfolio program, loss of rents or rental value are viewed as another form of business interruption and may be insured under the Standard Business Income Form.

¹²The earlier boiler and machinery coverage forms insured against an “accident” to an “insured object” and required that the breakdown be sudden and accidental and that it manifest itself by physical damage at the time the breakdown occurred.

¹³Because other property insurance forms generally exclude steam boiler explosion, the limit on insured boilers should be high enough to cover all damage to owned property an accident may cause. The standard policy covers property on a repair or replacement basis (i.e., on a replacement cost basis), but actual cash value coverage is available by endorsement.

¹⁴The daily value deductible is determined by dividing the business income that would have been earned during the interruption by the number of days the business would have been open, and then multiplying that amount by the number of days shown in the declarations.

¹⁵Jettison is the voluntary act of destruction in which cargo is cast overboard to save the ship. In barratry, the master and/or mariners steal the ship and its cargo, willfully sink or desert the ship, or imperil the vessel by disobeying instructions.

¹⁶A good example is the Inchmaree clause, which covers bursting of boilers and latent defects in machinery or errors in navigation or management of the vessel by the master or crew. The clause is named after the ship Inchmaree, which suffered loss because of breakage of a pump through negligence in maintenance by the crew. The British House of Lords decided the loss was not covered since it was not of the same nature as the perils on the sea listed. To counteract this decision, the Inchmaree clause was added to hull policies.

¹⁷The English word average comes from the French noun avarie meaning “damage.”

¹⁸Salvage charges are expenses payable to third parties known as salvors for assistance rendered in saving property exposed to loss. Such charges may be incurred under contract, or they may be incurred to parties acting independently of any contractual obligation. For example, the ship owner and cargo owners might be assessed salvage charges if the ship was in danger of sinking and was forced to accept help from another vessel to reach port.

¹⁹The transportation forms designed to protect common carriers against liability losses arising out of damage to property being transported will be treated in the next chapter with the liability coverages.

²⁰Bailee forms are treated in greater detail in the next chapter.

²¹A Trip Transit Form is available to insure specified lots of goods for a particular trip.

²²The term block as used in connection with the jeweler's block and furrier's block policies comes from the French phrase en bloc, meaning “all together.” Thus, block policies are intended to cover all the business property in a single contract.

²³If the bond amounts differ and the current insurer wrote the prior insurance, the higher limit applies. If a different insurer wrote the prior insurance, the lower limit will apply.

²⁴Before the introduction of the portfolio program, fidelity bonds were written on a continuous basis until canceled. This continuous term was adopted because embezzlement losses can occur over an extended time period, and a continuous contract maintained the continuity required to cover losses not discovered for many years. Portfolio bonds are written for annual periods but achieve continuity of coverage through the Loss Sustained During Prior Insurance provision.

²⁵In addition to the commercial crime forms, there are also two Government Crime Forms (discovery and loss sustained). ISO also introduced a new version of these forms in 2006. Coverage provided under the commercial crime and government crime forms is available as stand-alone coverage under Commercial Crime and Government Crime Policies. Finally, there are two Employee Theft and Forgery Policies (loss sustained and discovery forms). The Employee Theft and Forgery Policies were revised by ISO in 2002.

²⁶Scheduled employee dishonesty coverage is available by endorsement, using the employee-theft name or position schedule endorsement, CR 04 08. When this endorsement is attached to the form, the limit of insurance for employee theft applies per employee for each identified employee involved in causing the loss whose name or position is shown in the endorsement schedule.

²⁷Prior to the 2006 form, the employee theft insuring agreement was subject to a specific exclusion that eliminated coverage for loss caused by an employee of the insured for whom similar insurance was canceled and not reinstated. The prior exclusion has been replaced by the Acts of Employees Learned of by You Prior to the Policy Period.