Commercial Property Insurance

When an ordinance or law coverage endorsement is added to a property policy, all the following consequential losses are covered EXCEPT: A) direct damage caused by an interruption of utility services. B) increased cost of construction because of stricter building codes. C) demolition costs for the undamaged portions of the building. D) cost to remove the building debris.

Answer: A Most property insurance policies contain an ordinance or law exclusion for a loss or part of a loss caused by enforcing an ordinance or law regulating the construction, use or repair of any property or requiring the demolition of property, including the cost of removing debris. An ordinance or law coverage endorsement can be added to a property policy written on a replacement cost basis.

A therapist owns office space in a commercial office building that is legally organized as a condominium. Which of the following best protects the therapist's business personal property? A) Condominium commercial unit owners form. B) Condominium association coverage form. C) Commercial package policy (CPP). D) Unit owners form (HO-6).

Answer: A The condominium commercial unit owners form is a commercial property form designed to cover the individual needs of commercial (not residential) condominium unit owners. The form is designed to protect the owner of a business or commercial condominium unit against loss or damage to furniture, fixtures, stock, improvements, and alterations owned by the insured. It also protects personal property of others in the care, custody, or control of the insured.

If the policy limits of the building and personal property form have been exhausted, how much additional coverage is available for debris removal? A) $10,000.00 B) 25% of the policy limit. C) 25% of the amount of the actual loss. D) $25,000.00

Answer: A The insurer will pay up to an additional $10,000 if the total of debris removal expenses plus the amount paid for direct physical loss exceeds the limit of insurance for the covered property, or if the actual debris removal expenses exceeds 25% of the deductible plus the amount paid for direct physical loss. The total payment will never exceed the limit of Insurance on covered property, plus $10,000.

Building coverage of the building and personal property form insures all of the following things EXCEPT: A) desks and office equipment. B) personal property used to service the premises. C) floor coverings. D) permanently installed fixtures.

Answer: A The insuring agreement for building coverage in the building and personal property form includes coverage for personal property used to maintain or service the premises, floor coverings, and permanently installed fixtures (because they are all part of the building). Desks and office equipment come under the heading of personal property and although they are covered under the form, they are subject to a separate insuring agreement.

The insured is a tenant in a shopping mall. A fire starts in the insured's store, resulting in the following damages: business personal property, $15,000; damage to fixtures installed by the insured, $2,000; damage to property belonging to customers, $1,000; and smoke damage to the ceiling and walls, $8,000. How much will the insured's building and personal property coverage form pay for this loss? A) $18,000.00 B) $15,000.00 C) $17,000.00 D) $26,000.00

Answer: A The tenant's policy will pay for all of the loss except for the damage to the ceiling and walls, which are part of the building owned by the landlord.

The condominium association coverage form may include all of the following property EXCEPT: A) refrigerators, dishwashers, or stoves that are within the individual units. B) unit owners' personal property. C) owners' business personal property. D) alterations that are part of the building.

Answer: B A condominium association coverage form is a commercial property form designed to cover the joint insurance needs of members of a condominium association who collectively own commercial property. The form provides insurance for the building and equipment to maintain or service the building. If required by the condominium association agreement, appliances within the individual units may be covered. Unit owners' personal property (such as furniture, clothing, and other household item) is specifically excluded.

Builders risk coverage that is written with the basic causes of loss form will cover loss caused by: A) earthquake. B) hail. C) falling objects. D) collapse.

Answer: B Damage by hail is one of the listed perils covered in the basic form. Falling objects and collapse are covered in the broad and special forms. None of the causes of loss forms include coverage for earthquake.

The Building and Personal Property Coverage Form can be used to insure each of the following types of property EXCEPT: A) outdoor fixtures. B) money. C) property belonging to others. D) plants and shrubs held for sale.

Answer: B Money is excluded from the building and personal property form. It must be insured under a Crime Coverage Form.

All of the following items are excluded from the building and personal property form EXCEPT: A) personal property while airborne. B) air conditioning units. C) power boats. D) currency.

Answer: B Permanently installed machinery and equipment such as air conditioning units are covered under the building coverage of the building and personal property form.

Which of the following items would be covered under the building and personal property coverage form? A) Retaining wall separating the insured's building from an adjacent alley. B) Sign attached to the building. C) Land surrounding the business. D) Underground sewer pipes.

Answer: B Signs that are attached to the building are covered.

High winds and severe storms caused power outages and food spoilage totaling $50,000 in a large grocery store. Utility substations serving the store caused the outages. The store had a businessowners special property form policy with a $1,000 deductible. How much of the spoilage loss will the policy pay? A) $50,000.00 B) $0 because the loss is excluded. C) $0 because the utility company must pay for the loss. D) $49,000.00

Answer: B Spoilage is excluded under the policy. A spoilage coverage endorsement must be added to cover perishable stock for damage resulting from a mechanical breakdown, a power outage, or a refrigerant contamination. The spoilage coverage endorsement provides coverage for breakdown or contamination and power outage.

Under a Business Income Coverage form, business income is: A) net income plus continuing expenses, excluding payroll. B) net income plus continuing expenses, including payroll. C) gross income. D) net income after taxes.

Answer: B The amount of business income loss is based on: (1) the net income of the business before the direct loss or damage; (2) the likely net income of the business if no loss or damage occurred; (3) the operating expenses, including payroll; and (4) any other relevant financial records.

All of the following losses or damages would be covered under the commercial property broad causes of loss form EXCEPT: A) weight of snow or ice. B) earth movement. C) glass breakage. D) falling objects.

Answer: B The broad form cause of loss includes all the perils the basic form contains plus others including falling objects, water damage, and weight of snow, ice, or sleet. Earth movement is not a covered peril.

Extensions of coverage are available under the business and personal property form if the: A) insured carries both building and personal property insurance. B) policy indicates that 80% or higher coinsurance applies or the insured has purchased a reporting form. C) insured has declared an amount of insurance applicable to each extension. D) amount of building insurance is $100,000 or greater.

Answer: B The extensions of coverage are activated if the insured has agreed to meet an 80% or higher coinsurance requirement or has purchased a reporting form.

A fire destroys the new clothes an employee has brought in to work to show her friends. Coverage applies under the insured's building and personal property coverage form because the clothes are an employee's personal property. When the insurance company settles, who will receive the payment? A) Store where the clothes were charged with a credit card. B) Payroll department. C) Employee. D) Insured business owner.

Answer: C Coverage that applies to business personal property can be extended to apply to personal effects owned by the insured or the insured's officers, partners, or employees. When the personal property of others is lost or destroyed, the insurer pays the property owner directly.

Which one of the following forms would be most appropriate to protect against a suspension of business operations for an insured that CANNOT afford to have its operations interrupted? A) Business income with the agreed value option. B) Extended business income insurance. C) Extra expense insurance. D) Business income with a monthly limit of indemnity.

Answer: C Extra expense insurance pays for the necessary additional expenses the insured incurs following a loss to maintain operations at the level they were before the loss. Put another way, extra expense insurance is designed for businesses that cannot afford to have their operations interrupted.

Orc manufacturing has several long-term contracts with customers. These contracts run for 5 years and uniformly provide that they are automatically cancelled if Orc is unable to meet supply dates. If Orc's building is destroyed, it can be rebuilt in 9 months. What form of time element coverage is best suited to protect Orc against the potential loss of income from the long-term contracts? A) Business Income without extra expense. B) Leasehold interest coverage. C) Extra expense coverage. D) Business income with extra expense.

Answer: C Orc cannot afford to have its operation interrupted. Therefore, it should purchase extra expense insurance to be able to continue operations. With the extra expense coverage form, the insurer pays for any necessary extra expenses the business incurs during a period of interruption that follows a direct physical loss to property by a covered cause of loss.

An insured has a commercial property policy with a Causes of Loss broad form with a $250 deductible. During a snowstorm, a $750 rooftop sign is destroyed. How much will the policy pay for the sign? A) $750.00 B) $1,000.00 C) $500.00 D) $0.00

Answer: C Signs attached to the building are covered to $1,000. After the deductible is applied, the policy will pay the remaining $500. The Causes of Loss broad form includes the 11 perils covered under the basic form and adds breakage of glass; falling objects; weight of snow, ice, or sleet; and water damage.

An insured buys a business income policy with a maximum policy limit of $100,000 and a 25% monthly limit of indemnity. How much can the insured collect if the lost income is $40,000 in the first month and $10,000 in the second month? A) $50,000.00 B) $65,000.00 C) $35,000.00 D) $25,000.00

Answer: C The monthly limit of indemnity restricts how much the insured can collect in a single month to a specified percentage of the policy limit. The insured will collect $25,000 for the first month and $10,000 for the second month.

Assume that a toy store has a fairly stable inventory except in November and December, when its inventory triples. What is the best way to insure the increase in the amount of coverage needed? A) Business income and extra expense endorsement. B) Blanket policy. C) Value reporting form. D) Peak season endorsement.

Answer: D A peak season endorsement provides coverage for businesses that are dependent on certain times of the year (peak seasons) for their primary income. In the toy store example, the majority of its business is done in November and December, so the policy can have one limit of inventory coverage for the whole year and a peak season endorsement that puts a higher limit of coverage into effect during the peak season only. The inventory coverage throughout most of the year might be $100,000, but the peak season endorsement would raise the limit to $300,000 from November 1 through December 31.

Actual loss of business income payments by an insurer may include the following EXCEPT: A) net income that would have been earned. B) continuing normal operation expenses. C) payroll expenses. D) amount required to repair property damage that caused suspension of business.

Answer: D Business income coverage includes net income that would have been earned and continuing normal operations expenses, including payroll. Although there must have been a covered physical damage loss for business income coverage to apply, the damage would be paid under a different commercial property coverage form.

If a building has been vacant for more than 60 consecutive days before a loss occurs, which one of the following types of damages will be covered under a building and personal property coverage form? A) Vandalism. B) Building glass breakage. C) Attempted theft. D) Weight of snow, ice or sleet.

Answer: D If the building has been vacant for more than 60 consecutive days, the insurer does not pay for any loss or damage caused by vandalism, sprinkler leakage (unless the insured has protected the system against freezing), building glass breakage, water damage, theft or attempted theft, even if the cause of loss would normally be covered. Any amount that would otherwise be paid for a covered loss will be reduced 15%.

When a loss occurs, the Causes of Loss special form requires the insurance company to: A) pay for all losses to the insured property. B) pay for decay or deterioration losses. C) prove that the insured used defective materials if a collapse occurs during construction. D) pay for all losses not specifically excluded or limited by the policy.

Answer: D Instead of listing the perils covered under the form, the Causes of Loss special form covers risks of direct physical loss, subject to the exclusions and limitations expressed in the form.

The commercial property conditions form contains circumstances that apply to all commercial property coverage forms, unless a coverage form contains a condition to the contrary. Commercial endorsements that apply to more than one part of a commercial package policy (CPP) are called: A) inclusion. B) provisional. C) interpolicy. D) interline.

Answer: D Interline endorsements are commercial endorsements that apply (or could apply) to more than one coverage as part of a package policy (e.g., the commercial property condition form in an interline form that contains circumstances that apply to all commercial property coverage forms, unless a coverage form contains a condition to the contrary).

A commercial property policy with a Causes of Loss basic form covers all of the following perils EXCEPT: A) sprinkler leakage. B) volcanic action. C) sinkhole. D) earthquake.

Answer: D The basic form covers fire, lightning, explosion, windstorm and hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism and malicious mischief, sprinkler leakage, sinkhole, and volcanic action. Damage from earthquakes can be added with a Causes of Loss earthquake form.

Which one of the following types of property is NOT covered under the building and personal property form? A) Property that is 75 feet from the insured premises. B) Improvements made by a tenant to the building. C) The cost of labor for work done on customer's property in the insured's possession. D) Patios and walkways.

Answer: D The business and personal property form excludes coverage for bridges, roadways, walks, patios, or other paved surfaces.

If the monthly limit of indemnity option has been selected under the Business Income form, how much will an insurer pay for loss of business income for each month of loss? (Assume the declarations page shows a limit of insurance of $150,000 and a fraction of 1/3.) A) $100,000.00 B) Lesser of $100,000 or the actual loss for each month. C) $50,000.00 D) Lesser of $50,000 or the actual loss for each month.

Answer: D The insurer pays for loss of income in each period of 30 consecutive days following a loss. The limit of insurance is multiplied by the fraction shown in the declarations. The insurer pays this resulting amount or the actual loss amount for each month of loss, whichever is less, until the limit of insurance is reached.

An insured has a value reporting form that requires monthly reporting. A standard penalty applies for late or underreporting. On June 30, the insured reports that the values as of May 31 were $300,000. When the insured files a claim for a loss that occurred on May 20 in the amount of $60,000, the insurance company checks the actual inventory as of May 31 and finds that it was $500,000. What amount will the insurance company pay? A) $60,000.00 B) $300,000.00 C) $500,000.00 D) $36,000.00

Answer: D The insurer will pay $36,000. A penalty similar to a coinsurance penalty applies when the values on the last report date are lower than the actual inventory values. The value reported is divided by the actual value on the reporting date, and the resulting fraction is multiplied by the amount of the loss to determine the amount of loss to be paid ($300,000 ÷ $500,000 = .60 × $60,000 = $36,000). The insured suffers a $24,000 penalty.

An insured purchases a commercial property policy with a Causes of Loss special form that covers risks of direct physical loss. The policy has a $5,000 deductible. An earthquake causes $150,000 in damages to the property. What amount will the policy pay? A) $100,000.00 B) $145,000.00 C) $150,000.00 D) $0.00

Answer: D The three Causes of Loss forms (basic, broad, and special forms) exclude earthquake. The Causes of Loss earthquake form may be used only in conjunction with one of the three causes of loss forms. Under the earthquake form, all earthquake shocks and volcanic eruptions that occur within a 168-hour period (one week) are considered to be a single occurrence. The deductible is stated as a percentage of the value of the insured property (typically 2 to 10%).

All of the following items are excluded from coverage under a building and personal property coverage form EXCEPT: A) currency or securities. B) automobiles held for sale. C) patios or other paved surfaces. D) outdoor furniture.

Answer: D Under a building and personal property coverage form, outdoor furniture is covered under the form's building coverage. Accounts, bills, currency, deeds, evidences of debt, money, notes or securities, automobiles held for sale, and bridges, roadways, walks, patios, or other paved surfaces are some of the items excluded from coverage.

Under the building and personal property coverage form, how much will an insurer pay for fire department service charges? A) Up to $500. B) Up to $2,000. C) Actual charges. D) Up to $1,000.

Answer: D When the fire department is called to protect covered property, the insurer pays up to $1,000 for the department's service charges.