AAI 81 Foundations of Insurance Production (Segment C)

Explain how an insurer's taking a salvage can pose a problem for an insured.

After an insurer pays for loss to covered property, it has the right to take any salvage, such as smoke-damaged merchandise. This ca pose a problem for an insured that bases its marketing appeal on a brand-name reputation for high quality. The salvaged material might be saleable but not meet the insured's quality standards.

Identify a potential negative consequence of ignoring improvements and betterments when setting the amount of insurance that a tenant should carry.

Ignoring improvements and betterments when setting the amount of insurance a tenant should carry can result in severe underinsurance difficulties when a loss occurs.

Explain how the loss settlement under the Functional Building Valuation endorsement differs from the loss settlement under the replacement cost coverage option.

In the event of a total loss, the Functional Building Valuation endorsement covers the cost to repair or replace the building with a less costly building that is functionally equivalent to the original one. For a partial loss, the insurer's payment for the damaged portion's repair or replacement is calculated on the basis of using less costly material, if available, in the architectural style that existed before the loss.

Explain the Ensuing Loss provision of the ISO earthquake endorsements.

In the event of ensuing loss caused by another covered peril (such as fire), the most the policy will pay for the entire loss (for example, all loss caused by earthquake and following fire) is the limit for the other covered peril (fire in this case). The insurer will not pay the sum of the two limits.

What information is contained on a commercial property declarations page that pertains specifically to property insurance?

- A description of the property insured -A list of mortgagees, if any -The deductible amount -A list of the property coverage forms and endorsements attached to the policy -The applicable coinsurance percentage(s) -Any optional coverages

Identify the components of a commercial property coverage part.

-Commercial property declarations -One or more commercial property coverage forms -One or more causes of loss forms -Commercial Property Conditions -Any applicable endorsements

Identify examples of theft-related acts for which coverage is excluded under the Special Form.

-Dishonest or criminal acts (including theft) of the insured or of partners, members, officers, managers, directors, or employees of the insured -The voluntary surrendering of property as the result of a fraudulent scheme or trickery -Loss by theft of construction materials not attached as part of the building -Loss of property that is simply missing without explanation or that is evidenced only by an inventory shortage

Identify the typical elements of a commercial property coverage form.

-Insuring agreement -Delineation of the property covered and not covered -Additional coverages and coverage extensions -Provisions and definitions that apply only to that coverage form

Identify the components of a commercial package policy's (CPP's) coverage parts.

-One or more declerations forms (containing information about the insured and the particular loss exposures insured). -One or more coverage forms (containing most of the essential terms of coverage). -For some lines of insurance, a general conditions form. -Any applicable endorsements (modifying the terms of the coverage form or general conditions form). -In addition to coverage parts, a CPP also contains a "common declarations form" for the entire policy and the Common Policy Conditions form. In many cases, insurers combine the common declarations form with the separate declarations forms that apply to the individual coverage parts.

List the benefits of commercial package policies for the insured.

-Premium savings -Fewer separate transactions -Simplified loss adjusting -Fewer coverage overlaps or unintended coverage gaps -Systematic premium payments

Identify reasons why the BPP excludes some kinds of property from coverage.

-Some kinds of property, such as smuggled goods being held for sale, are illegal to insure. -Some property may be much less susceptible to loss by most of the perils insured against. -Some kind of property are excluded because they can be insured more advantageously under other forms.

Identify examples of perils that the Special Form specifically excludes.

-Wear and tear -Rust, corrosion, decay, deterioration, or hidden or latent defect -Smog -Settling, cracking, shrinking, or expansion -Infestations and waste products of insects, birds, rodents, or other animals -Mechanical breakdown -Dampness or dryness of atmosphere, changes or extremes in temperatures, or marring or scratching (applicable to personal property only)

Identify the three types of causes of loss forms.

1. Basic 2. Broad 3. Special

List the three causes of loss forms available for commercial property coverage.

1. Basic 2. Broad 3. Special

Identify the three broad categories of property covered by the Building and Personal Property Coverage Form, also referred to as the BPP.

1. Building 2. Your Business Personal Property 3. Personal Property of Others

What elements are included in the BPP's definition of Building?

1. Buildings or structures listed and described in the declarations 2. Completed additions to covered buildings 3. Fixtures (including outdoor fixtures) 4. Permanently installed machinery and equipment 5. Personal property owned by the insured and used to maintain or service the building or its premises. 6. If they are not otherwise insured, additions, alterations, or repairs in progress

Identify the advantages to the insured of purchasing the Causes of Loss - Special Form.

1. Certain causes of loss that are omitted or excluded under the Broad Form are not excluded - and are therefore covered - under the Special Form. 2. By covering direct physical losses other than those that are specifically excluded, the Special Form covers losses that the insured might not have anticipated. 3. The Special Form shifts the burden of proof from the insured to the insurer.

Identify the classifications into which personal property falls for insurance purposes.

1. Contents 2. Property in transit 3. Property in the possession of others 4. "Floating" property

Identify the causes of loss that are covered under the Broad Form that are not covered under the Basic Form.

1. Falling objects 2. Weight of ice, snow, or sleet 3. Water damage

Describe the two coverage extensions provided in the Builders Risk Coverage Form.

1. The Building Materials and Supplies of Others extension provides up to $5,000 to cover building materials and supplies owned by others, such as building materials brought by a subcontractor onto the work site. 2. The Sod, Trees, Shrubs, and Plants extension covers landscaping outside of buildings on the described premises for five causes of loss (fire, lightning, aircraft, riot/civil, and explosion). Coverage is limited to $1,000 in any one loss and to $250 for any one tree, shrub, or plant.

What are two advantages of the Legal Liability Coverage Form?

1. The Legal Liability Coverage Form covers losses by an insured peril to property of others in the insured's care, custody, or control, but only if the insured is legally liable for the loss. Consequently, Legal Liability Coverage Form rates are significantly lower than those with the Building and Personal Property Coverage Form: typically the rate is reduced 50 percent for personal property and 75 percent for building coverage. 2. The Legal Liability Coverage Form has no coinsurance provision and, therefore, no requirement that the insured purchase insurance in an amount equal to the value of the covered property - a value that insureds frequently do not know. 3. The inclusion of coverage for loss of use means that the insurer will pay for loss of income or rental of replacement property.

Describe the three coverages available under the Increased Cost of Loss and Related Expenses for Green Upgrades endorsement.

1. The first coverage provides an additional limit of insurance to cover the increased cost of replacing damaging property with more environmentally sound materials or methods. 2. The second coverage provides an additional amount for expenses related to green updates, including waste reduction and recycling expenses. 3. The third coverage applies only if Business Income or Extra Expense coverage is included in the policy. This coverage extends the period of restoration for any increased construction time resulting from the use of green upgrades. The extension period lasts for thirty days or the number of days shown in the schedule, whichever is greater.

What are the components of commercial property loss exposure?

1. The type(s) of property 2. The cause(s) of loss to property 3. The financial consequences of property losses

Describe the three conditions in the Standard Property Policy (SPP) that restrict coverage.

1. Vacancy and unoccupany - Under the SPP, the insurer will not pay for loss or damage by any peril if the building has been vacant or unoccupied for more than sixty days. After thirty days of vacancy or unoccupancy, coverage for vandalism ceases. 2. Increase in hazard - Coverage is suspended during any period in which the hazard has been increased by means within the named insured's knowledge and control. 3. Cancellation - The insurer may cancel the policy by providing only five days' advance notice to the insured.

Explain how a cause of loss affects property.

A cause of loss adversely affects property and leaves it in an altered state. Some causes of loss do not alter the property (such as stolen property) but affect the owner's ability to use it.

What are the two bases that usually determine the type of insurance a condominium association must purchase?

A condominium association agreement an/or applicable state law usually determine the type of insurance a condominium association must purchase.

Explain how the liberalization clause affects commercial property coverage.

A liberalization clause provides that if the policy coverage or endorsement forms are broadened and require no additional premium, then all existing similar policies will be construed to include the broadened coverage.

Describe the key provisions of the Loss Payment condition in the BPP.

Among the key provisions of the Loss Payment condition are those indicating that the insurer must notify the insured of its intent either to pay the claim or to deny payment within thirty days after receipt of a satisfactory proof of loss. Additionally, the insurer must pay the insured within thirty days after the parties have agreed on the amount of loss or completion of an appraisal (subject to the limit of the insured's financial interest in the covered property). The insurer may deny payment because of either a lack of coverage under the policy or the insured's failure to comply with one or more of the policy conditions.

What is a major advantage of blanket insurance?

An advantage of blanket insurance is that the full blanket limit can be applied to any one loss. The minimum amount of blanket insurance to comply with coinsurance would fully protect property at each location.

Explain how an insured with blanket insurance would meet coinsurance requirements.

An insured with blanket insurance would meet coinsurance requirements by purchasing more insurance than otherwise would be required. This is true because the minimum coinsurance clause is 90 percent, but the rates are the same as for 80 percent coinsurance. The insured with blanket insurance must insure to 90 percent of value to avoid a coinsurance penalty but does not receive the 5 percent discount that applies to specific insurance with a 90 percent coinsurance clause.

A used celebrity guitar business conducts most of its sales via its website. Its warehouse and office operations are housed in a large building, which is insured under a BPP. The office contains the company's servers, currently valued at $300,000. Two years ago, the company purchased a separate electronic data processing (EDP) equipment policy to cover its computer hardware. The company has kept the policy in force, but it has not increased the original $200,000 amount of insurance. A computer room fire destroys all of its servers. How much will each policy provide in covering the loss?

Because EDP equipment policy specifically describes the computer hardware, its coverage is primary and will cover the loss for its $200,000 limit. The company's BPP policy will then cover the remaining $100,000 of the loss as business personal property.

A costume rental and sales company that has stores in ten large cities including New Orleans and Hollywood ships costumes from all of its stores to New Orleans before Mardi Gras and to Hollywood when it receives contracts to supply film productions. Describe the benefits that blanket insurance for the store's personal property would provide in ensuring adequate coverage for its costumes.

Blanket insurance covering personal property at all of the stores would provide a single limit of coverage for all of the costumes regardless of their location. Blanket coverage would provide coverage for the entire inventory regardless of its location. If scheduled insurance was written for the costumes, the values reflected at the various locations would have to either change with the inventory fluctuations or be written for the maximum possible inventory to provide against adequate coverage.

Describe the limitation on coverage for collapse in the Builders Risk Coverage Form.

Collapse coverage in the Broad and Special forms includes damages caused by collapse as a result of defective materials or methods if the collapse occurs during the course of construction, remodeling, or renovation. In the Builders Risk Coverage Form, however, collapse coverage is limited, in that this portion of collapse coverage is removed by the "Restriction Of Additional Coverage - Collapse" condition.

Describe the three coverage provided by the Ordinance or Law Coverage endorsement.

Coverage A of the Ordinance or Law Coverage extension covers the reduction in value of the undamaged portion of the building that must be demolished to comply with an ordinance or law. Coverage B covers the cost to demolish the undamaged portion of the structure and to remove its debris. Coverage C covers the increased cost to repair or reconstruct damaged property, or to reconstruct or remodel undamaged portions of the property, in conformity with the minimum requirements of an ordinance or a law.

What is the purpose of coverage for Personal Property of Others?

Coverage for Personal Property of Others is designed to protect the insured against loss of or damage to the personal property of others while such property is in the custody of the insured. It is an important coverage for businesses (bailees) that have customers' property in their custody?

Explain how the Spoilage Coverage endorsement provides broader coverage for spoilage losses than the Utility Services - Direct Damage endorsement.

Coverage under the Utility Services - Direct Damage endorsement applies only if the loss of power is caused by damage to power-supply services by an insured peril. The Spoilage Coverage endorsement provides broader coverage. Not only does it cover spoilage resulting from power outages, but it also covers spoilage resulting from change in temperature or humidity caused by mechanical breakdown or mechanical failure of refrigerating, cooling, or humidity-control apparatus or equipment on the described premises.

How does specific insurance, as defined in the Value Reporting Form, affect a loss settlement?

Coverage under the Value Reporting Form is excess over the amount recoverable under specific insurance (plus the amount of the deductible under the specific insurance).

Describe the information provided in commercial property coverage forms.

Each commercial property coverage form contains an insuring agreement, describes the property covered and not covered, lists any additional coverages and coverage extensions, and includes provisions and definitions that apply only to that coverage form.1.

In order to be insured under the BPP, where must Your Business Personal Property be located?

Except for an extension that provides limited coverage for property while away from the insured premises, coverage for Your Business Personal Property applies only when the property is located in or on the described Building or in the open (or in a vehicle) within 100 feet of the building or structure or within 100 feet of the described premises, whichever distance is greater.

Jack owns and operates restaurants in several different locations. However, he is not sure of the insurable value at each location. Describe Jack's duties in this situation if he had the following kinds of insurance. a. Specific insurance b. Blanket insurance

Jack's duties are as follows: a. If Jack had specific insurance, he would either have to purchase a higher amount of insurance to provide a cushion against error in estimating insurable values or risk an uninsured loss. b. If Jack had blanket insurance, assuming the restaurant locations are not likely to be damaged by the same occurrence (such as a hurricane that devastates a wide area), the minimum amount of insurance needed to comply with coinsurance would be sufficient to protect Jack's properties fully.

If the insured makes timely and accurate reports of values, will the Value Reporting Form limit recovery for a loss that occurs today to the amount last reported? Explain.

No. The Value Reporting Form will cover the actual amount of the loss, even if it is greater than the amount last reported. However, the insurer will pay no more than the applicable limit of insurance.

How do the two versions of the ISO Earthquake and Volcanic Eruption Endorsement differ with regard to limits and coinsurance.

One of the ISO earthquake endorsements (CP 10 40) is subject to the attached policy's coinsurance clause, and therefor the limit for the endorsement should be the same as the policy limit applying to other perils. The other earthquake endorsement (CP 10 45, called the sub-limit form) is not subject to coinsurance and thus permits earthquake coverage to be written subject to a sublimit that is lower than the regular policy limit.

Explain why it is important that information in the Agency field of the ACORD Commercial Insurance Application be completed accurately.

Producers should be aware that the agency name and address, as well as other contact information entered in this field, will also appear on issued policies. Agencies with multiple locations or producers engaged in brokering through other agencies should ensure that if policy declarations are mailed, they are sent to the proper location.

Contrast real property and personal property.

Real property is tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land. All property that is not real property is personal property.

Identify the types of supplemental information a producer could include in a commercial account submission.

Supplemental information could include a cover letter, financial information, multimedia presentations, and/or personal presentations.

Describe the policy condition "Need For Adequate Insurance" in the Builders Risk Coverage Form.

The "Need For Adequate Insurance" condition is, in effect, a 100 percent coinsurance clause based on the building's completed value. It requires that coverage be maintained at a limit equaling 100 percent of the building's completed value. A penalty applies if the amount of insurance at the date of the loss is less than 100 percent of the complicated value.

Identify four types of property that can be covered under the Additional Covered Property endorsement.

The Additional Cover Property endorsement can cover foundations of buildings, underground pipes, fences outside buildings, and retaining walls that are not part of a building. (Many other answers are possible.)

When does coverage cease under the Builders Risk Coverage Form?

The Builders Risk Coverage Form covers a building only during the course of construction. The policy states that coverage ceases when of of these first occurs: 1. The policy expires or is canceled 2. The property is accepted by the purchaser 3. The insured's interest in the property ceases 4. The insured abandons the property with no intention to complete it 5. Unless otherwise specified writing: (1) 90 days after construction is complete or (2) 60 days after any building described in the declarations is (a) occupied in whole or in part or (b) put to its intended use

With what must the Builders Risk Coverage Form be combined to be considered a complete policy?

The Builders Risk Coverage Form must be combined with a Basic, Broad, or Special causes of loss form plus any necessary endorsements to be a complete policy.

Identify the coverage territory for commercial property policies.

The Commercial Property Conditions state that insured property is covered only while it is located within the United States (including its territories and possessions), Puerto Rico, or Canada.

Describe the purpose of the Condominium Association Coverage Form.

The Condominium Association Coverage Form is a commercial property coverage form designed for insuring the buildings and business personal property of condominium associations.

Describe the purpose of the Condominium Commercial Unit-Owners Coverage Form.

The Condominium Commercial Unit-Owners Coverage Form is a commercial property coverage form designed for insuring the business personal property and building improvements and betterments of unit owners in commercial condominiums.

Describe the Debris Removal additional coverage in the Building and Personal Property Coverage Form, also referred to as the BPP.

The Debris Removal additional coverage pays 25 percent of the sum of the direct loss payment plus the deductible amount. Because this amount may not be sufficient in some cases, the limits of insurance section of the BPP coverage form provides an additional $25,000 limit per location under certain policy conditions.

Describe the causes of loss that apply to the Outdoor Property coverage extension in the BPP.

Under the Outdoor Property coverage extension, property is only covered for fire, lightning, explosion, riot or civil commotion, or aircraft.

Describe the insurer's rights under the Examination of Your Books and Records policy condition.

The Examination of Your Books and Records condition gives the insurer the right to audit the insured's books and records during the policy period and for up to three years afterward. This condition is included because many commercial policies are used with estimated premiums, and final premiums are not determined until after the policy periods and final insured exposure values have been calculated.

Describe the circumstances under which the Functional Building Valuation endorsement might be an appropriate addition to a BPP.

The Functional Building Valuation endorsement is appropriate when the insured building has a replacement cost that is far in excess of its market value. This is typically an old building that was constructed using materials and techniques that are now prohibitively expensive to reproduce.

Describe the circumstances in which the Functional PersonalProperty Valuation endorsement might be an appropriate addition to a BPP.

The Functional Personal Property Valuation endorsement might be appropriate when insuring older machinery or equipment that is no longer available, such as a machine that has been superseded by a newer, more efficient, less-expensive model.

What is the purpose of the Leasehold Interest Coverage Form?

The Leasehold Interest Coverage Form is a commercial property coverage form for insuring a tenant's financial losses resulting from the cancellation of the tenant's lease because of damage to the premises by a covered cause of loss.

What is the purpose of the Legal Liability Coverage Form?

The Legal Liability Coverage Form is a commercial property coverage form for insuring buildings or personal property of others in the insured's care, custody, or control, but only if the insured is legally liable for the loss.

Identify the purpose of the Loss or Damage to Products exclusion.

The Loss or Damage to Products exclusions eliminates coverage for damage to merchandise, goods, or other products resulting from production errors, such as adding wrong ingredients or measuring ingredients incorrectly.

Explain how the Manufacturer's Selling Price endorsement modifies coverage under the Building and Personal Property Coverage Form, also referred to as the BPP.

The Manufacturers' Selling Price endorsement values finished stock manufactured by the insured at selling cost (less discounts and unincurred expenses). This valuation approach applies regardless of whether the finished stock has been sold at the time of loss.

Describe the coverage provided by the Non-Owned Detached Trailers coverage extension in the BPP.

The Non-Owned Detached Trailers coverage extension extends business personal property to any trailer the insured does not own if used in the insured's business or in the insured's care, custody, or control. It also covers trailers if the insured has a contractual responsibility to pay for loss or damage to the trailer.

What basic problem is addressed by both the peak season endorsement and the Value Reporting Form?

The Peak Season Limit of Insurance endorsement and the Value Reporting Form address the fluctuation in personal property values during the policy period. In different ways, these two options reduce the premium that the insured must pay to cover actual values a risk. The insured does not have to pay fir unneeded insurance when property values are reduced.

Identify the time period for coverage under the Preservation of Property additional coverage in the BPP.

The Preservation of Property clause extends the policy to protect covered property while it is being moved to another location to preserve it from loss or damage, but only if the loss or damage occurs within thirty days after the property is first moved.

Describe the provisions of the Recovered Property loss condition.

The Recovered Property loss condition states that if either the insurer or the insured recovers property (such as stolen property) for which the insurer has paid a loss, the party that makes the recovery is obligated to notify the other party promptly. The insured has the option of taking the recovered property and refunding the loss payment to the insurer.

What is the purpose of the Standard Property Policy (SPP)?

The SPP is a commercial property policy form for covering buildings and business personal property on restricted terms when insurers are reluctant to grant the broader coverage of the Building and Personal Property Coverage Form, also referred to as the BPP, and related causes of loss forms.

Identify the three main adverse financial consequences of property loss exposures.

The adverse financial consequences of a property loss may include a reduction in the value of the property, lost income, and/or extra expenses.

An agent's client is purchasing a condominium unit for use as a restaurant. In addition to the unit, the client will have exclusive use of a structure, owned by the association, next to the pool to operate a concession. What coverage forms should the agent recommend to the client?

The agent should recommend a Condominium Commercial Unit-Owners Coverage Form to provide coverage for the unit. Additionally, the agent should recommend the Commercial Unit Owners Optional Coverage Endorsement to cover the structure next to the pool.

Describe the all-in concept of condominium insurance coverage.

The all-in concept includes coverage for improvements made by the unite owner, not just the original installations or replacements of like kind and quality. So if a unite owner replaced laminate kitchen counters with granite and replaced wood flooring with marble, the association would be responsible for insuring the upgraded installations.

Identify the causes of loss that are excluded under the Causes of Loss - Basic Form.

The causes of loss excluded from the Causes of Loss- Basic Form are ordinance or law; earth movement; governmental action; nuclear hazard; utility services; war and military action; water; "fungus," wet rot, dry rot, and bacteria; electrical, magnetic, or electromagnetic energy; rupturing or bursting of water pipes; leakage of water or steam; explosion of steam boilers, steam pipes, steam turbines, or steam engines; mechanical breakdown; and loss resulting from the neglect of the insured to use all reasonable means to save and preserve property at and after the time of loss.

List the covered causes of loss in the Cause of Loss - Basic Form.

The covered causes of loss in the Causes of Loss - Basic Form are fire, lightning, explosion, wind-storm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action. Additional limited coverage is available for "fungus," wet rot, dry rot, and bacteria.

How are deductibles expressed in the ISO earthquake endorsements? (Limit your answer to deductibles applicable to specific insurance that is not thirteen on a blanket, value reporting, or builders' risk basis.)

The deductible is expressed as percentage. In the coinsurance form of the endorsement (CP 10 40), the deductible is the specified percentage of the limit of insurance on the damaged property. In the sublimit form, the deductible is the specified percentage of the value of the property that has sustained covered loss. If the insured selects only the sprinkler-leakage option, the regular earthquake deductible does not apply. Instead, the deductible is the same one that applies to fire losses.

Explain why it is important for a producer ti distinguish between the first named insured and all other named insureds when completing an ACORD Commercial Insurance Application.

The first named insured on policies receives certain rights and is subject to certain responsibilities. All other named insureds should be specified in the Name (Other Than Named Insured) field or in an attached schedule.

A building's value at completion is $400,000, and the limit in the Builders Risk Coverage Form is $200,000. The insured has a covered loss of $100,000. Disregarding any deductible, how much would the insured collect for this loss? Explain.

The insured would collect $50,000, minus any applicable deductible. Coverage is reduced by 50 percent because of the 100 percent coinsurance requirement in the "Need for Adequate Insurance" condition.

Describe the conditions under which the insurer can cancel an insurance policy.

The insurer can cancel the policy by mailing or delivering written notice of cancellation to the first named insured. This notice must be sent ten days before the effective date of cancellation if the policy is being cancelled for nonpayment of premium. If the policy is being cancelled for any other reason, the notice must be sent at least thirty days before the effective date of cancellation.

Explain how the deductible applies to covered property losses.

The insurer is not obligated to pay anything to the insured unless the loss exceeds the deductible. The applicable deductible is applied to the amount of the loss and not to the limit of insurance. The deductible applies per occurrence, not per item insured.

Explain how much the insurer is obligated to pay under the Functional Personal Property Valuation endorsement if the insured contracts for repairs or replacement within 180 days after the loss.

The insurer is obligated to pay only the smallest of these amounts: the applicable limit of insurance, the cost to replace on the same site the damaged item with the most closely equivalent property available, or the amount necessarily spent to repair or replace the property.

How does the peak season endorsement modify the BPP?

The peak season endorsement provides differing amounts of insurance for selected time periods during the policy term, as indicated by specific dates shown in the endorsement.

Describe the type of loss information the producer should provide to the underwriter when completing a commercial account submission.

The producer should provide currently valued loss information, including date and description of the occurrence or claim, amount paid, amount reserved (if the claim is still open), and any additional loss information. This information can significantly assist the underwriter in determining risk eligible and rating. Producers should explain, in particular, any large or unusual losses that the applicant has experienced.

A producer is reviewing loss exposures and coverage needs with a prospective client who is leasing a unique building for her art gallery. Because of a family relationship with the property owner, the gallery owner pays a monthly rent that is below market value in the area. She has made significant alterations to the building and holds a long-term lease with a cancellation clause if the building is damaged. What coverage form should the producer recommend for this loss exposure?

The producer should recommend the Leasehold Interest Coverage Form to insure the client's financial losses resulting from potential cancellation of the lease.

Explain how the provisional premium is determined and what occurs at the end of the policy period.

The provisional premium is typically 75 percent of the annual premium that would be required to purchase nonreporting coverage with the same limit. Ordinarily, the provisional premium must be paid at the beginning of the policy period. The earned premium for the entire policy period depends on the average values reported during the policy term. At the end of the policy period, an additional premium may be due or a refund may be owed to the insured.

What is the special exclusion in the causes of loss forms that applies only to the Legal Liability Coverage Form?

The special exclusion in the causes of loss forms that applies only to the Legal Liability Coverage Form relates to damages that the insured is legally liable to pay solely by reason of the insured's assumption of liability in a contract or an agreement. The exclusion does not apply if the insured would have been liable in absence of the assumption of liability.

Describe how coverage for theft of building materials and supplies can be provided under the Builders Risk Coverage Form.

Theft of building materials and supplies not attached as part of a building or structure is not covered under the Special Form, and no theft coverage at all is provided by the Basic or Broad forms. Coverage for theft of building materials and supplies not yet attached to a building can be provided by endorsement (Builders Risk - Theft Of Building Materials, Fixtures, Machinery, Equipment [CP 11 21]). The coverage does not apply when construction is not in progress, unless a guard is on duty. The endorsement covers building materials and supplies, fixtures, machinery, and building service equipment that are intended to be permanently used or installed in the building or structure or within 100 feet of the premises. The endorsement contains space to allow the insurer to insert a sublimit and separate deductible.

Explain the maximum amount of insurance that is available under the Spoilage Coverage endorsement according to the Commercial Lines Manual (CLM).

There is no CLM-imposed maximum limit of insurance under the Spoilage Coverage endorsement.

Describe the purpose of the "insurance under two or more coverage parts" commercial property condition.

This clause prevents double recovery by the insured when two or more parts of the commercial property policy cover the same property. The total payment under all applicable coverage parts is limited to the actual amount of the loss, avoiding duplication, or "stacking" of the limits.

Describe the importance to the underwriter of the information in the Date Business Started field in the ACORD application.

This information can help the underwriter determine the applicant's level of experience, expertise, and past business success. Additionally, an applicant's time spent in business can affect the eligibility of that applicant for one or more of an insurer's programs.

Describe the characteristics of property that qualifies as Property in Transit under the BPP.

To qualify as Property in Transit under the BPP, property must be in or on a motor vehicle owned, leased, or operated by the insured and cannot be in the custody of the insureds sales personnel.

Describe the requirements for an act of terrorism to qualify for coverage under the Terrorism Risk Insurance Act (TRIA).

To qualify for coverage under TRIA, an act of terrorism must be certified by the Secretary of the Treasury, in concurrence with the Secretary of State and the U.S. Attorney General.

Describe the ISO rules for composing a commercial package policy (CPP).

Under ISO CPP policywriting rules, one of the coverage parts must cover buildings and/or business personal property, and another must cover commercial general liability.

Describe the bare walls concept of condominium insurance coverage.

Under bare walls coverage, the association has no ownership interest in property within a unit. Accordingly, bare walls coverage does not insure any of the property contained within the bare walls. This means that all interior property, fixtures, and even the paint or wallpaper are the unite owner's responsibility.

Describe the single entity concept of condominium insurance coverage.

Under the single entity concept, the association is considered the owner of all property contained in the unit as sold to the original purchaser or replacements of such property if replacements are of like kind and quality. This includes items such as fixtures; wall, floor, and ceiling coverings; refrigerating, heating, and cooling systems; cooking ranges and ovens; dishwashers; clothes washers; and fire protection and security systems.

Coverage for Jones's building and business personal property is currently subject to a Causes of Loss - Broad Form. When Jones renews his property insurance, he will purchase coverage subject to a Causes of Loss - Special Form, rather than a Broad Form. Briefly explain how the coverage for Jones's building and business personal property will be affected by this change in the causes of loss form.

With the Special Form, Jones's building and business personal property form will have coverage for accidental and unforeseen risks of direct physical loss subject to exclusions and limitations expressed in the form. With the Broad Form, Jones's building and personal property form had coverage for the listed perils.

A commercial building valued at $3,000,000 was insured on a specific basis under the ISO Earthquake and Volcanic Eruption Endorsement (Sub-Limit Form) for a limit of $1,000,000 with a 5 percent deductible? a. An earthquake caused damage valued at $600,000. How much should the insured be able to recover for this damage? b. Forty-eight hours later, an aftershock caused additional damage valued at $50,000. How much should the insured be able to recover for this damage?

a. Amount of deductible = 0.05 x $3,000,000 (building value) = $150,000. b. The insured should recover $50,000. The deductible does not apply again because the after-shock occurred within 168 hours of the first earthquake.

Gary is designated as the first named insured on an organization's commercial property insurance policy. a. How does the Cancellation policy condition apply to Gary? b. What other common policy conditions apply to the first named insured?

a. As first named insured, Gary is the only individual who has the power to cancel the policy, Refunds of any premiums will be sent to Gary. b. The first named insured is authorized to request changes to the policy subject to the consent of the insurer. Gary, as first named insured, is also responsible for paying the policy premium and any return premiums due from the insurer will be paid to the first named insured. The first named insured will receive written notice of cancellation if the insurer cancels the policy.

Harvey owns an older building that was constructed using materials and techniques not in use today. Because the building could be repaired or replaced for much less by using contemporary building techniques and materials, his insurer insisted the Functional Building Valuation endorsement be added to his commercial property coverage. Harvey's building was damaged in a fire 200 days ago. He has been unsuccessfully searching for a craftsman who can repair his building using the original techniques. Harvey did not make a claim based on the cost to repair or replace. a. Explain what Harvey's loss settlement options are. b. Explain what Harvey's insurer's loss settlement options are. c. Harvey's insurer is investigating whether to choose the market value settlement option. Explain what the term means.

a. Harvey's options are limited by the Functional Building Valuation endorsement, which grants the insurer several options, but not the insured. b. Since Harvey failed to contract for repairs within 180 days after the fire occurred or otherwise make a claim based on the cost to repair or replace, the endorsement sets the maximum that the insured can collect at the lowest of these amounts: -The limit of insurance shown in the endorsement -The market value of the damaged building, exclusive of the land value, at the time of the loss -The cost to repair or replace the building on the same site with less costly material in the same architectural style, less an allowance for physical deterioration and depreciation c. The endorsement defines "market value" as "the price which the property might be expected to realize if offered for sale in a fair market

Under the Value Reporting Form, how is recovery affected if at the time of loss: a. The first report was overdue. b. The first report had been made, but the second report was overdue. c. The last report of values showed less than the full value of covered property on the report date.

a. If the report was overdue at the time of loss, the insurer would pay only 75 percent of the amount that would have otherwise have been paid. b. If the report had been made but the second report was overdue, the insurer would pay no more than the values last reported for the location at which the loss is occurred. c. If the last report of values showed less than the full value of covered property on the report date, the insurer would pay claims according to this formula Insurer's repayment (not to exceed limit) = ((Value reported/actual value) X Loss) - Deductible

The BPP includes several coverage extension that provides additional amounts of insurance that are not subject to the limit of insurance stated in the declarations. These coverage extensions provide important advantages to the insured. a. Describe the coverage provided by the Newly Acquired or Constructed Property coverage extension. b. Describe the limits for the Newly Acquired or Constructed Property coverage extension. c. Describe the time period for the Newly Acquired or Constructed Property coverage extension. d. Describe the coverage provided by the Property Off-Premises coverage extension. e. Describe what property is not covered by the Property Off-Premises coverage extension.

a. The Newly Acquired or Constructed Property extension provides automatic coverage for new buildings at the premises or newly acquired buildings at other locations if they are used for a similar purpose. This coverage extension also provides automatic coverage for business personal property at a new location, other than at a fair or exhibition. b. Unless a higher limit is shown in the declarations, the limit is $250,000 for each building and $100,000 for business personal property at each building. c. Coverage under the Newly Acquired or Constructed Property coverage extension terminates at the earliest of these: the policy expiration date, thirty days after acquisition or start of construction, or the date the insured notifies the insurer of the new location or building. d. The Property Off-Premises coverage extension covers property that is temporarily at a location not owned, leased, or operated by the insured. It also covers property in a leased storage location if the lease was executed after the beginning of the current policy term and property at any fair, trade show, or exhibition. e. The Property Off-Premises coverage extension does not provide coverage for property that is in or on a vehicle or in the care, custody, or control of salespersons (other than at a fair, trade show, or exhibition).

Describe the appropriate ISO commercial property endorsement for each of these coverage requests. a. The insured is a foundry that is seeking coverage for damage to its equipment that would result from an off-premises power interruption. (The damage would result from molten metals cooling and hardening in the foundry's receptacles before being poured or formed.) b. A wholesale florist wants to cover spoilage of his cut flowers in the event of either an off-premises power interruption or a breakdown of his refrigeration equipment. c. A university research facility wants to cover contamination of its property that could result from the escape of radioactive materials used in the facility's research activities.

a. Utility Services - Direct Damage endorsement b. Spoilage Coverage endorsement c. Radioactive Contamination endorsement

The Murphy Corporation has a commercial property policy with a Causes of Loss - Basic Form covering its building. Explain whether each of the following losses would be covered under Murphy's policy. For those that would not be covered, identify a causes of loss form, if any, that would cover the loss. a. A windstorm damaged Murphy's roof. b. During a major storm, the river that runs near Murphy's property overflowed its banks. The rising water seeped into Murphy's building, damaging the hardwood floors. c. Vandals broke several windows in Murphy's building. d. Heavy earthquake shocks caused structural damage to Murphy's building.

a. Windstorm damage would be covered because windstorm is a covered peril under the Basic Form b. Damage from rising water would not be covered because of the flood exclusion. Flood is not a covered peril under any of the causes of loss forms. (Murphy needs to purchase coverage through the National Flood Insurance Program or by endorsement to its commercial property policy.) c. Broken windows would be covered because vandalism is a covered cause of loss. (Although the vandalism peril once excluded glass breakage, that exclusions was eliminated in the 2000 revision.) d. The structural damage would not be covered because of the earthquake exclusion. Murphy needs of the earthquake endorsements.

Too Cool's commercial property coverage form has an Increased Cost of Loss and Related Expenses for Green Upgrades endorsement. In a wind microburst, Tool Cool's roof was heavily damaged and required replacement. Too Cool's owners opted for a "green" roof component. However, the Number of Days for Extended Period of Restoration shown in the schedule of the endorsement was negotiated to forty-five days. The roofing materials are back-ordered because the sole manufacturer in the western United States use just-in-time inventory methods. Materials will not be available for at least thirty-five days, and the repair may take as long as seven to ten days, depending on the weather. a. Will coverage for business interruption be available for a wind loss? If so, how long is coverage available? b. Can Too Cool request recycling of the damaged roofing materials? c. Too Cool's owners will receive approximately $900 for the tin recycled from the damaged roof. Can they keep this money?

a. Yes, business interruption coverage will be available for a wind loss; however, coverage is limited to forty-five days even if the repair takes longer. b. Yes, the cost to remove and transport recycling material is available under the policy endorsement. c. No, Too Cool cannot keep the money. The carrier will reduce the loss payment by the $900 received for the recycled roofing material.