Assignment 10 - Commercial Property Insurance Part 2

Cameron has a Commercial Package Policy (CPP) that has a Building and Personal Property Coverage Form (BPP) with a Causes of Loss - Broad Form covering his building with a $750,000 limit. A tropical storm struck Cameron's building and the strong winds tore most of the shingles from the building's roof and shattered multiple windows with flying debris. The total amount of damages was $20,000 for the windows and $20,000 for the shingles. How much will Cameron's insurer pay for damage to his windows and shingles?

$40,000 Cameron's insurer will pay $40,000. Windstorm is a covered cause of loss for building damage, which includes the roof and windows. No exclusions apply.

Taunton Company (Taunton) has a Commercial Package Policy (CPP) that has a Building and Personal Property Coverage Form (BPP) with a Causes of Loss—Broad Form. Because the building is older and has unique architectural features, Taunton decided to insure the building on a replacement cost basis. There is a $2 million coverage limit on the building, with a 90 percent coinsurance clause and $2,000 deductible. The building was struck by lightning and a resulting fire caused substantial damage to the building. The cost to repair the damaged portion of the building with materials of like kind and quality was $500,000. At the time of the loss, the replacement cost value of the building was determined to be $2.2 million. How much would the insurer pay when the repairs are completed if the replacement cost option is activated?

$498,000 $498,000 Fire and lightning would be covered under the Causes of Loss—Broad Form. Once the repairs have been completed, Taunton's insurer will pay the replacement cost of $500,000 minus the $2,000 deductible. No coinsurance penalty will apply because the building was insured at a value above $1,980,000 ($2.2 million x .9).

what is the deductible related assumption under which the rates ordinarily used for insuring buildings and personal property are calculated?

$500

Omega Holdings owns a building with an actual cash value of $200,000. The property is insured under a Building and Personal Property Coverage Form (BPP) with a building limit of $140,000, an 80 percent coinsurance clause, and a $1,000 deductible. The policy includes a Causes of Loss—Broad Form covering the building. The building suffers $80,000 in fire damage. Which one of the following amounts will Omega's insurer pay?

$69,000 The insured should have carried 80% of $200,000 or $160,000. Instead the insured carried only $140,000. [($140,000/$160,000) x $80,000] - $1,000 = $69,000.

Blithe Manufacturing has a Commercial Package Policy (CPP) that has a Building and Personal Property Coverage Form (BPP) with a Causes of Loss—Broad Form. The building has a $1.5 million limit and the business personal property is insured under a Value Reporting Form subject to a $1million limit. When a fire destroyed the building and personal property, the value of the covered personal property was $850,000. The last monthly report of value was made on time and accurately showed the value of personal property to be $765,000 at the time of the report. Ignoring any deductibles that may apply, how much would Blithe's insurer pay for the business personal property loss?

$850,000 Blithe's insurer would pay the full $850,000 for the business personal property loss. Even though the value of the covered personal property increased by $85,000 since the last report, the loss would be covered in full because the last report was on time and accurate.

coinsurance formula if amount carried doesn't meet coinsurance requirement

((amount of insurance carried/amount of insurance required)*loss)-deductible

what is formula for agreed value if limit of insurance is less than agreed value?

((limit of insurance/agreed value)*loss) - deductible

an office building with an actual cash value of 300000 is covered under a BPP subject to an 80% coinsurance provision. assume that the owner purchased 180000 coverage on the building. What amount would the owner be paid in the event of a 100000 covered ACV loss to the building?

(180000/240000) * 100000 = 75000

Coinsurance Formula

(amount of insurance carried/amount of insurance required) x loss - deductible amount of insurance required = coinsurance % * ACV

Agreed Value Formula

(limit of insurance/agreed value * loss) - deductible

an office building with an actual cash value of 300000 is covered under a BPP subject to an 80% coinsurance provision. What is the minimum amount of insurance that must be purchased on this building on an ACV basis to avoid a coinsurance penalty?

.8 * 300000 = 240000

A two-story antique store owned by Chris was damaged by fire. The building is a restored Victorian mansion insured on an actual cash value (ACV) basis under the Building and Personal Property Coverage Form. The features of the building include original hardwood floors, hand-carved woodwork, and a slate roof. The limit of insurance is $280,000. The policy has an 80 percent coinsurance requirement and a $1,000 deductible that applies to all covered losses. The fire caused $72,000 in damages (ACV) to Chris's building. At the time of the fire, the building had an ACV of $400,000, a market value of $500,000, and a functional replacement cost of $250,000. Calculate the dollar amount Chris will be paid for this loss.

.8 * 400000 = 320000 (280000/320000 * 72000) - 1000 = 62000

An insured chooses the "Agreed Value" option for its Building and Personal Property Coverage Form (BPP). The agreed value for the property is $100,000 and the limit of insurance is $120,000. The building is totally destroyed by a covered cause of loss. At the time of the loss, the value of the building was $130,000. Ignoring any deductible and rounded to the nearest $1,000, the insurer would pay

120000

external exposure

A property outside the area owned or controlled by the insured that increases the probability of loss to the insured's building and its contents.

what is class rating?

A rating approach that uses rates reflecting the average probability of loss for businesses within large groups of similar risks.

The policy valuation approach that determines the basis for using new property of like kind and quality and adjusts for depreciation to determine the amount to be paid at the time of a loss is called

ACV

Although buildings can be classified in many ways, the system used to classify buildings for purposes of rating commercial property insurance is based on their

Ability to resist fire.

Agreed Value optional coverage is often elected by risk averse firms in order to

Alleviate the risk of not complying with the Coinsurance condition.

Which one of the following is correct with respect to the Transfer of Rights of Recovery Against Others to Us condition of the Commercial Property Conditions Form? A. Any waiver given by the insured, either before or after the loss, impairs the insured's right to collect from the insurer for the loss. B. Waiver of recovery against any other party may be given by the insured, provided the waiver is made in writing before the loss occurs. C. Waiver of recovery against any other party may be given by the insured before or after the loss, provided the waiver is made in writing. D. The insured is prohibited from waiving recovery against any other party.

B

Insurers underwrite Agreed Value optional coverage carefully for which one of the following reasons?

Because most losses are partial, insureds are often tempted to underinsure, knowing they will not suffer a coinsurance penalty when the agreed value option is in effect. Therefore, insurers underwrite agreed value carefully.

When the insured chooses the Replacement Cost option under the BPP, how is the Coinsurance condition affected?

Coinsurance continues to apply but the amount of insurance required is calculated by multiplying replacement cost by coinsurance percentage if claim is made on replacement cost basis

replacement cost optional coverage

Coverage for losses to most types of property on a replacement cost basis (with no deduction for depreciation or obsolescence) instead of on an actual cash value basis.

Inflation Guard optional coverage

Coverage for the effects of inflation that automatically increases the limit of insurance by the percentage of annual increase shown in the declarations.

Which one of the following is correct with respect to the Inspections and Surveys common condition of the Insurance Services Office (ISO) Commercial Package Policy? A. The insurer must inform the insured of the results of such inspections. B. The inspections must be made by the insurer's own personnel. C. The insurer has an obligation to inspect the insured's premises and operations throughout the policy period. D. The insurer does not make safety inspections, and does not guarantee that conditions are safe or healthful.

D

Which one of the following statements is correct with respect to the Valuation condition of the Building and Personal Property Coverage Form (BPP)? A. Improvements and betterments that are not replaced are covered for up to $2,500. B. Stock sold but not delivered is valued at replacement cost. C. The valuation condition cannot be modified. D. Subject to certain exceptions, insured property is valued at its actual cash value (ACV).

D

When an insured is choosing between replacement cost and actual cash value on a policy, the insured should

Determine if the policy limits are adequate for replacement cost.

Which one of the following statements is correct with respect to earthquake coverage?

Earthquake insurance is expensive and limited in availability in areas with a high probability of severe earthquake damage.

what are the components of rate for the Causes of Loss Basic Form?

Group 1 rate (fire, lightning, explosion, vandalism, and sprinkler leakage) Group 2 rate (all other causes of loss covered under Basic Form)

Which one of the following statements is correct with respect to the ISO Earthquake and Volcanic Eruption Endorsement?

It includes coverage for the full policy limit and contains a coinsurance clause.

Which one of the following statements about Inflation Guard optional coverage of the Building and Personal Property Coverage Form (BPP) is true?

It is automatically increases the limit of insurance by the percentage of annual increase shown in the declarations.

Which one of the following statements is the purpose of the No Benefit to Bailee condition of the Commercial Property Conditions Form?

It reinforces the insurer's right of subrogation against the bailee.

The limit of insurance applicable to commercial property coverage is an important component of the final premium because

It represents the exposure against which the applicable rate is multiplied to calculate the premium.

what are the 2 sources of flood insurance for buildings and their contents?

National Flood Insurance and private insurers

Which one of the following statements is correct with respect to deductibles used in commercial property policies?

Rates are reduced in return for the insured's acceptance of a higher deductible.

Which one of the following optional coverages would obligate the insurer to pay for new property of like kind and quality, without any deduction for depreciation?

Replacement Cost

One Common Policy Condition in the Commercial Package Policy (CPP) is the examination of books and records. The intent of this policy condition is to

Reserve the right of an insurer to inspect and audit the insured's books and records.

Which one of the following is an endorsement to a Building and Personal Property (BPP) Coverage Form that covers damage to perishable stock due to power outages; on-premises breakdown; or contamination of the insured's refrigerating, cooling, or humidity control equipment?

Spoilage Coverage

Under the Spoilage Coverage endorsement, what must cause the spoilage of perishable stock in order for the spoilage to be covered?

Spoilage Coverage endorsement covers spoilage resulting from a power outage or an on premises breakdown or contamination of the insured's refrigerating, cooling, or humidity control equipment

The cancellation provisions in the ISO Common Policy Conditions form are nearly always

Superseded by state law

Which one of the following statements is correct with respect to coinsurance used with commercial property policies?

The 80 percent coinsurance rate is reduced when a policy requires a higher coinsurance percentage.

Which one of the following is an endorsement to the Building and Personal Property Coverage Form (BPP) that provides coverage for (1) the value of the undamaged portion of a building that must be demolished, (2) the cost to demolish the building's undamaged portion and remove its debris, and (3) the increased cost to rebuild the property?

The Ordinance or Law Coverage endorsement

Which one of the following statements is true if the Replacement Cost optional coverage of the Building and Personal Property Coverage Form (BPP) is activated?

The amount of insurance required by the Coinsurance condition is calculated by multiplying replacement cost by the coinsurance percentage.

Which one of the following statements is correct with regard to Loss Payment of the Building and Personal Property Coverage Form (BPP)?

The condition states that regardless of the value of the loss, the insurer will pay no more than the insured's financial interest in the covered property.

Which one of the following statements is correct with respect to the Recovered Property condition of the Building and Personal Property Coverage Form (BPP)?

The insured has the option of taking the recovered property and refunding the loss payment to the insurer.

Which one of the following statements is correct with respect to the Mortgageholder condition of the Building and Personal Property Coverage Form (BPP)?

The insurer is sometimes obligated to make a loss payment to the mortgageholder even though it has denied coverage, for example, to an insured who has committed arson.

Which one of the following statements is correct with respect to the Spoilage Coverage endorsement to a commercial property policy?

The power outage must be caused by conditions beyond the insured's control.

Justin has a Commercial Package Policy (CPP) that has a Building and Personal Property Coverage Form (BPP) with a Causes of Loss—Broad Form covering his building with a $750,000 limit. A tropical storm struck Justin's building and the strong winds tore most of the shingles from the building's roof and shattered multiple windows on the 5th floor of the building. The rain from the storm caused water to enter Justin's building through the foundation, which caused significant damage to the first and second floors. Justin had equipment stored in closets on the first and second floors which were rendered inoperable due to the water damage. The total amount of damages was $40,000 for the windows and shingles; $110,000 for water damage to the first and second floors; $9,000 for the equipment on the second floor; and $7,000 for the equipment on the first floor.How much will Justin's insurer pay for damage to the first and second floors, including the equipment?

The water damage losses to the first and second floors are not covered due to the water exclusion.

Under the Legal Action Against Us condition of the Commercial Property Conditions Form, if the insured wishes to bring legal action against the insurer, he or she must do so within which one of the following timeframes?

Two years after the date on which the direct physical loss occurred

what is mispresentation?

active deliberate misstatement of fact

what are the 4 optional coverages available in the BPP?

agreed value inflation guard replacement cost extension of replacement cost to personal property of others

according to the common policy conditions over what time period is the insurer permitted to examine and audit the insured's books and records related to the policy?

at any time during policy period and for up to 3 years after the policy's termination

Notice of cancellation for nonpayment of premium must be mailed to the insured when?

at least ten days before the date of cancellation.

Etchley Clothing owns a red brick building that it occupies as a retail clothing store. Etchley is purchasing a commercial property policy from Radley Insurance Company with a Causes of Loss - Broad Form for this building. Etchley has selected a policy with a limit of $500,000 on the building on a replacement cost basis with a 90 percent coinsurance clause and a $1,000 deductible. Because Etchley's building is located fifteen miles from the nearest fire department and twenty miles from a police station, it has installed a sprinkler system and a burglar alarm. How will the factors you identified affect the premium for this policy?

brick masonry construction will carry a lower rate than a frame building but a higher one than a fire resistive building occupancy would not be particularly hazardous and would carry an average rate Broad Form would have a higher premium than basic form but lower than special form building limit calculated as 5000 * rate = premium premium would be reduced bc of coinsurance % higher than 80% although a high rate would apply because of the building is many miles from nearest fire station, a credit would be given for sprinkler system

Etchley Clothing owns a red brick building that it occupies as a retail clothing store. Etchley is purchasing a commercial property policy from Radley Insurance Company with a Causes of Loss - Broad Form for this building. Etchley has selected a policy with a limit of $500,000 on the building on a replacement cost basis with a 90 percent coinsurance clause and a $1,000 deductible. Because Etchley's building is located fifteen miles from the nearest fire department and twenty miles from a police station, it has installed a sprinkler system and a burglar alarm. In rating Etchley's commercial property policy, what factors will Radley consider?

construction (brick) occupancy (retail clothing store) causes of loss form (broad) building limit ($500000) coinsurance (90%) deductible ($1000) location (territory) fire protection (15 miles from fire station)

what are the 2 parts of the BPP's Control of Property Condition?

coverage under the policy will not be affect by acts or omissions of persons other than the insured if those persons are not acting under direction or control of insured violation of a policy condition at one location will not affect coverage at another location

class rating

develops rates that reflect the average probability of loss for businesses within a large group of similar risks by generalizing about the probabilities of loss within these groups

specific rating

develops rates that reflect the exposure to loss of a particular business

what happens to premium when adding optional coverages?

increases

what happens to limit of insurance when adding optional coverages?

increases to cover additional property

what are the 2 requirements an insured must meet before legal action can be brought against an insurer to enforce a commercial property policy?

insured must comply with all conditions of the policy action must be brought within 2 years after the date on which direct physical loss occurred

according to the common policy conditions under what circumstances can the insured transfer rights or duties under a policy?

insured must have written consent to transfer rights or duties under a policy.

According to the BPP's Abandonment condition, who is responsible for making arrangements for the repair or disposal of covered property?

insured's responsibility unless insurer choose to exercise its option under Loss payment conditions

how can a policy be canceled by an insurer or an insured according to the Common Policy Conditions for nonpayment?

insurer can cancel a policy by mailing or delivering written notice to first named insured at least 10 days before cancellation date if cancellation for nonpayment of premium

how can a policy be canceled by an insurer or an insured according to the Common Policy Conditions for something other than nonpayment?

insurer can cancel a policy by mailing or delivering written notice to first named insured at least 30 days before cancellation date if cancellation for other than nonpayment of premium

what is concealment?

intentional failure to disclose a material fact

why is the limit of insurance applicable to the coverage is an important component of the final premium?

it represents the exposure against which the applicable rate is multiplied to calculate the premium

only what kind of misrepresentation voids coverage?

material

what is the difference between ISO earthquake and volcanic eruptions endorsements?

one is written for full policy limit contains a contains a coinsurance requirement the other is written subject to a sublimit that is lower than the regular policy limit and doesn't contain a coinsurance requirement

what is the insurer's options in loss payment as established in the BPP?

pay amount of loss or damage pay cost of repair or replace take over all or any part of the property and pay its agreed or appraisal value repair, rebuild, or replace damaged property with other property of like kind

what are the rights granted to a mortgage holder that is named on the declarations page of a commercial property policy?

payment for any claim for loss on covered mortgaged property notification of cancellation or nonrenewal

why do many insurers decline to issue a Value Reporting Form for a smaller insured?

premium may not be large enough to warrant the added expense of processing the reports and calculating final premium

what are examples of tasks for which the BPP's endorsements are useful?

providing coverage enhancements that some insured may want but that others either do not believe they need eliminate coverage for certain exposures enable UW to accept applications that they would otherwise decline change policy provisions amend policy

how does the Peak Season Limit of Insurance endorsement covers the fluctuating values of business personal property?

providing different amounts of insurance for certain time frames during the policy period

how does the Value Reporting Form cover the fluctuating values of business personal property?

providing insurance for the insured's maximum expected values and requiring the insured to periodically report property values to the insurer. The insurer calculates the final policy premium based on the reported values instead of the limit of insurance

what is the purpose and operations of the Agreed Value optional coverage in BPP?

remove uncertainty as to whether the amount of insurance carried complies with Coinsurance condition. The option suspends Coinsurance condition if insured carries the amount of insurance that the insurer and insured agreed to be property's full value

The insurer must be notified within 180 days after the occurrence of loss that a claim will be made for what?

replacement cost

Sadie owns a call center business in Rochester, NY and insures her building and personal property under a BPP. Because communications tech changes so rapidly, she leases all of her phone equipment. According to the lease agreement, she is responsible for the replacement cost of the leased phone equipment in the event it is damaged. What should Sadie do to ensure that she has insurance coverage sufficient to meet the obligations of her lease agreement?

sadie should select Replacement Cost optional coverage and she should further elect to have personal property of others valued at replacement cost. In that way the amount of the loss to the leased phone equipment is calculated according to terms of lease

Define rating

the process of applying a rate to a particular exposure and performing any other necessary calculations to determine an appropriate policy premium

what is coinsurance related assumption under which the rates ordinarily used for insuring buildings and personal property are calculated?

used with an 80% coinsurance clause in the policy. These rates are called "80% coinsurance rates"