Chapter 19: Business Property and Liability Insurance

What are the key features of the businessowners policies commonly available?

A businessowners policy is designed to provide property and liability coverage for small-to medium-sized businesses and organizations that meet certain eligibility requirements. Two property forms are available-named-perils coverage and open perils coverage. Losses are paid on a replacement cost basis, and there is no coinsurance provision.

the removal of property from inside a premises by a person who enters or leaves the premises unlawfully as evidenced by marks of forcible entry or exit

buglary

insurance that covers business losses after the occurrence of a direct physical damage loss that results in the suspension of business operations. The three basic types of losses covered include net income, normal ongoing business expenses, and extra expenses. Formerly called business interruption insurance.

business income insurance

commercial insurance that provides coverage for expenses to avoid or minimize the suspension of operations following damage to property

business income> extra expense insurance

a common type of policy designed to meet most property and liability needs of certain small- and medium-size businesses

businessowners policy (BOP)

a liability insurance policy that covers only claims that are first reported during the policy period as long as the event that caused the claims occurred after a specified retroactive date in the policy

claims-made policy

For a client who is concerned about being held liable for the employees who drive her company's delivery trucks, which type of commercial liability coverage should you recommend?

commercial auto coverage (liability)

insurance designed to cover a wide variety of liability loss exposures that can face an organization, including premises, business operations, products, completed operations, contractual, and contingent liability

commercial general liability (CGL) insurance

The liability coverage of a BOP is essentially the same as that of the

commercial general liability (CGL) policy

For a client who is concerned about being sued by a person who is injured or whose property is damaged by the client's ongoing business activities at the person's home, which type of commercial liability coverage should you recommend?

commercial general liability insurance (business operations liability)

For a client who is concerned about being sued by a person who is injured or whose property is damaged by work the client already performed, which type of commercial liability coverage should you recommend?

commercial general liability insurance (completed operations liability)

For a general contractor who is concerned about being sued for poor work done by a subcontractor, which type of commercial liability coverage should you recommend?

commercial general liability insurance (contingent liability)

For a client who is concerned about being sued by a customer who is injured or whose property is damaged because of a condition in the client's store (such as a wet floor), which type of commercial liability coverage should you recommend?

commercial general liability insurance (premises liability)

For a client who is concerned with having to pay a judgment against the railroad if the railroad is sued by the parents of a child who is injured while playing on the side track on the client's business property, which type of commercial liability coverage should you recommend?

commercial general liability insurance (premises liability)

For a client who may be sued if a defective product is manufactured or sold, which type of commercial liability coverage should you recommend?

commercial general liability insurance (products liability)

coverage for losses to real and personal business property. As commonly used, the term applies to policies that cover losses from most perils other than those that relate to crime, transportation, and equipment breakdown. Numerous forms cover various classifications of property from specified perils or on an open-perils basis.

commerical property insurance

the use of a computer to fraudulently transfer property from its rightful owner to someone else

computer fraud

the removal of property from one person by someone else who has either caused harm or threatened to cause harm to the person. It also includes situations in which property is taken in an unlawful act that a person has witnessed.

robbery

an agreement in which a surety provides a guarantee of indemnity if a second party, the principal, fails to perform a specified act or fulfill an obligation to the obligee

surety bond

a broad term that encompasses robbery, burglary, shoplifting, and any other act of stealing

theft

For a client who is concerned about being sued by an injured employee not covered by the workers' compensation law, or by an employee's spouse or family member because of the employee's injury or death, which type of commercial liability coverage should you recommend?

workers compensation and employers liability policy (employers liability under Part Two)

what covered property does commercial property cover?

· Buildings · Business personal property · Personal property of others in insured's care, custody, control

Business Owners Policy

· Package policy designed to meet the property and liability needs of many eligible small and medium sized businesses · Covers: Property, Replacement cost, Insurance to value provision, Automatically seasonal increase on personal property, Business income and extra expense included o Liability -Very similar to CGL -Includes nonowned and hired auto liability coverage endorsement

3 types of policy forms for business income insurance coverage

• Business Income (and Extra Expense) Coverage Form • Business Income (without Extra Expense) Coverage Form • Extra Expense Coverage Form

business income forms (forms for business income insurance) covers what?

#1 The Business Income (without Extra Expense) Coverage Form covers the sum of (1) net profit or loss that would have been earned or incurred during a period of business suspension and (2) normal continuing business expenses, including payroll, during the suspension. #2 The Business Income (and Extra Expense) Coverage Form provides for the same expenses, as well as expenses incurred to avoid or minimize the suspension of operations, even if they do not otherwise reduce the business income loss. #3 The Extra Expense Coverage Form provides extra expense insurance for organizations that must remain in operation after a property loss and, therefore, are unlikely to have a significant decrease in revenue. However, the extra expenses of remaining open can be significant.

Losses under commercial property forms are settled on an (1). However, a (2) option is often elected. Losses are subject to a deductible that, depending upon available options, the policyowner can select

1. actual cash value basis 2. replacement cost coverage

What are the three broad classes of property covered alone or in various combinations by commercial crime insurance forms?

1. money, which includes currency, coins, bank notes, checks, and money orders. 2. securities, which include both negotiable and nonnegotiable instruments, contracts that represent money or other property, tokens, tickets, stamps, and charge slips. 3. tangible property other than money or securities; however, there are exclusions for certain types of property for which adequate coverage can be obtained under other types of insurance.

Commercial property can be insured against various perils on either a (1) or a more comprehensive (2). In all cases, these forms can be expanded with endorsements to cover losses that might arise, for example, from earthquake or the enforcement of ordinances or laws

1. named-perils basis 2. open-perils basis

Business Owners Policy (BOP)

A policy that combines property, liability and business interruption coverage for small- to medium-sized businesses.

What are the similarities and differences between excess liability insurance and commercial umbrella liability insurance?

Both excess liability insurance and commercial umbrella liability insurance provide additional liability limits for claims that are covered under specified underlying coverages. Under the excess liability policy, there is no drop-down coverage for claims excluded by the underlying coverages. Unlike excess policies, commercial umbrella liability insurance often covers claims excluded by the underlying policies.

forms for specific types of property for commercial property insurance

Builders Risk Coverage Form. This form provides protection for buildings under construction and covers the unique loss exposures and valuation issues associated with these structures. • Condominium Association Coverage Form. This form covers property for which a residential or commercial condominium association is responsible. It covers not only property owned by the association but also furniture, fixtures, alterations, and appliances of unit-owners if the association agreement requires the association to insure them. • Condominium Commercial Unit-Owners Coverage Form. This form covers the interest of the owner of a commercial condominium unit. Note that an owner of a residential condominium unit can protect his or her interest under an HO-6 policy.

Josef Beckmann owns a neighborhood bakery. An overheated oven started a fire that damaged several mixers and a portion of the bakery building. Beckmann's commercial property insurance will pay for the damage to the building, as well as the mixers and other personal property in the bakery. Beckmann will also face a serious cash flow problem, because the bakery will generate no income until the fire damage has been repaired. ____________________, if he has purchased the coverage, can provide the needed dough during the period of reconstruction.

Business income insurance

After his retirement, Edwin agreed to serve on the boards of directors of a bank and a for-profit hospital. He also agreed to serve on the board of trustees of a local not-forprofit charity. As an afterthought, he asks you, as his financial planner, whether this service involves any special risks to consider in his planning. How would you respond?

Edwin's major concern would involve any claim made directly against him in his role as a corporate director. This is a matter of increasing concern in view of the many financial scandals, accompanied by claims and suits, that have come to light in recent years. In addition to performing his duties diligently, Edwin should be sure the for-profit corporations have adequate directors and officers (D&O) liability insurance that would protect him against such claims. If adequate D&O coverage is not available, Edwin should seriously consider declining the positions. If the not-for-profit charity does not have D&O coverage, Edwin's personal umbrella policy might protect him if he receives no compensation for his service on the board. Umbrella policies vary, and he should check his policy carefully to determine what coverage it provides. If his current policy does not provide the necessary coverage, he might be able to obtain an umbrella from another insurer that includes this protection

· Protects an employer who gets sued because of injuries · Normally find this paired with workers comp

Employer Liability Insurance

(T/F) The CGL Coverage Form excludes coverage for advertising injury liability.

False. Advertising injury liability is covered under Coverage B of a CGL Coverage Form.

(T/F) Commercial property insurance can cover only buildings and business personal property of the insured.

False. Commercial property insurance can cover personal property of others in the care, custody, or control of the insured, as well as buildings and business personal property of the insured.

(T/F) Due to workers' compensation laws, employers are exempt from suits for injuries to employees.

False. Even with workers' compensation laws, employers can be sued for injuries to employees.

(T/F) Both excess liability policies and commercial umbrella policies include drop-down coverage for claims the underlying coverages exclude.

False. Excess liability policies do not include drop-down coverage for claims excluded by the underlying coverages, but commercial umbrella policies often do provide such coverage.

(T/F) Most commonly, CGL coverage is written on a claims-made basis.

False. Most commonly, CGL coverage is written on an occurrence basis.

(T/F) Most professional liability policies are written on an occurrence basis.

False. Most professional liability policies are written on a claims-made basis.

(T/F) Some BOPs automatically adjust the building coverage limit to allow for seasonal changes in building values.

False. Some BOPs automatically adjust personal property coverage to allow for seasonal changes in inventory values.

A client has just purchased a building and started a small parts manufacturing business. Without getting into too much detail about the specifics of his business, you recommend that he see an insurance agent who specializes in commercial property and liability coverages. He replies, "I know I need insurance on the building, the equipment, and my inventory, but what other coverages do I need to see an agent about?" What important coverages might he need?

In addition to commercial property insurance on the building, the equipment, and inventory, the client is likely to need, or at least should consider the need for, the following: • business income insurance to cover lost profits, continuing expenses, and/or extra expenses to minimize the suspension of business after the occurrence of a direct physical damage loss to property • crime insurance, especially to cover employee dishonesty • inland marine insurance to cover goods in transit • equipment breakdown insurance to cover repairs or replacement of machinery that breaks down • commercial general liability insurance to cover premises and operations liability and products liability • business auto insurance for company vehicles • workers' compensation and employers liability insurance to provide protection for injuries to employees • directors and officers liability insurance • employment practices liability insurance

a specialized type of insurance used for goods in transit, property held by bailees, mobile equipment and property, property of certain dealers, and instrumentalities of transportation and communication

inland marine insurance

Parties to a Surety Bond

There are 3 parties to a surety bond: 1. The principal is the party who buys the bond and agrees to perform certain acts or fulfill certain obligations. 2. The obligee is the party who is reimbursed if the principal fails to uphold the agreement. 3. The surety is the party who agrees to indemnify the obligee because of the principal's failure to uphold the agreement. This indemnity can be in the form of cash or the fulfillment of the principal's obligation. The surety can be any person or organization but is usually an insurance company.

(T/F) A businessowners policy (BOP) is designed for small- to medium-sized businesses in the sense that it can meet most of the needs of an average policyowner.

True

(T/F) A client can purchase crime insurance to cover the client's business against losses due to employee theft as well as burglary and robbery.

True

(T/F) Although a directors and officers (D&O) liability policy is purchased by a corporation, the insureds are generally the officers and directors and not the corporation.

True

(T/F) Commercial property insurance can be written on either a named-perils or open-perils basis.

True

(T/F) Inland marine insurance provides coverage against a variety of losses, including those to domestic goods in transit by truck, customers' clothes at a dry cleaner, fine art, and television towers.

True

(T/F) Loss of income, continuing expenses, and extra expenses, while a business is closed following a direct physical damage loss, can be covered under business income insurance.

True

(T/F) Surety bonds are three-party contracts in which a principal who defaults on a bond is liable to the surety to the extent of any expenditure the surety incurs.

True

(T/F) The CGL Coverage Form has two aggregate limits that apply for an annual policy period.

True

(T/F) The most common type of commercial auto insurance is the Business Auto Coverage Form, which is similar to the Personal Auto Policy with respect to the coverages that can be purchased.

True

(T/F) Although the Commercial General Liability (CGL) Coverage Form excludes coverage for most liability from pollution, numerous endorsements and other forms can cover the pollution loss exposure.

Trueq

a separate insurance policy that provides open-perils coverage to fill in the gaps left by the insured's other commercial property insurance policies

difference in conditions (DIC) insurance

insurance that covers directors and officers of a corporation and that is purchased by a corporation. The policy covers directors and officers for their personal liability as directors and officers that results from wrongful acts, and it also covers reimbursement to the policyowner for any sum that it is required or permitted by law to pay to the directors and officers as indemnification.

directors and officers (D&O) liability

For a client who is concerned about members of the board of directors of her corporation being sued for breaches of corporate duty, which type of commercial liability coverage should you recommend?

directors and officers liability insurance

when a client serves on the board of a corporation or a nonprofit organization, it is important to consider the extent to which he or she is protected by the organization's ____________________________

directors and officers liability insurance.

insurance that covers claims arising out of improper advice or other errors or omissions in the administration of employee benefit plans

employee benefit liability insurance

a type of liability insurance that protects an employer when it can be sued because of injuries to employees. Usually accompanies workers' compensation coverage.

employers liability insurance

For a client who is concerned about his business being sued for discrimination or sexual harassment, which type of commercial liability coverage should you recommend?

employment practices liability insurance

a liability policy that covers against specified employment practices, such as discrimination, sexual harassment, and wrongful termination

employment practices liability insurance

a policy written to provide additional liability limits for claims that are covered by specified underlying coverage

excess liability insurance

insurance that covers claims that result from the breach of fiduciary duties, such as pension plan losses because of improper investments

fiduciary liability insurance

insurance that protects against liability for the failure to use the degree of skill expected of a person in a particular occupation

professional liability insurance

For an insurance agent who is concerned about being sued by a client for bad advice about the appropriate coverages to purchase, which type of commercial liability coverage should you recommend?

professional liability insurance, also known as errors and omissions insurance

For a dentist who is concerned about being sued by one of his patients, which type of commercial liability coverage should you recommend?

professional liability insurance, also known as malpractice insurance

A financial planner may be asked to make specific recommendations about property and liability coverages for a business owner, but the task of implementing this coverage is usually left to a _________________________who works in the business market.

property and liability insurance agent or broker

What are the unique characteristics of surety bonds?

• liability of the principal. Unlike an insured under an insurance contract, a principal who defaults on a bond is liable to the surety to the extent of any expenditure the surety incurs. The surety can require the principal to post collateral to repay the surety if the principal defaults. • expected losses. A surety generally expects to pay few losses and underwrites in a strict manner to determine whether the principal is capable of meeting any obligations. • coverage period. The coverage period under most surety bonds is indefinite, and the premium for the bond is paid only once. In most cases, neither the surety nor the principal can cancel the bond. • bond limit. A surety bond is written for a dollar limit, and that is the maximum amount of the surety's obligation to the obligee. Some bonds, however, pay court costs and interest on judgments in addition to the bond limit. • statutory versus nonstatutory bonds. Governmental ordinances, regulations, or statutes require many bonds, and the provisions of these statutory bonds and the obligations of the parties are established by law. The obligation of the parties under nonstatutory bonds is established by contract between the obligee and the principal.

What policy provisions are common to many crime insurance forms?

• no coverage for losses caused by the named insured • Coverage is for direct losses only • policyowner must notify the police if there is a reason to believe that a loss results from a violation of law.

Business income insurance covers the following types of losses:

• reduction in net income—the difference between the net income the business would have earned had no loss occurred and the net income the business did earn while recovering from a loss. • extra expenses to minimize or avoid the suspension of operations—rent at a temporary location, for example, and the cost of obtaining services, such as data processing, that can no longer be handled in house