Commercial Property Insurance Part 2
Actual Cash Value
Cost to replace property with new property of like kind and quality less depreciation.
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.
Commercial Property Conditions
Even if an insurance policy would otherwise cover an insured's loss, an insurer may deny coverage if the policy's conditions have not been met. The building and Personal Property Coverage Form and the other coverage forms that can be included in a commercial property coverage part each contain several conditions specific to those forms.In addition, the Commercial Property Conditions Form contains nine conditions that apply to any of the Commercial Property Coverage Forms to which they are attached. These nine conditions are titled as shown: 1. Concealment, Misrepresentation or Fraud 2. Control of Property 3. Insurance Under Two or More Coverages 4. Legal Action Against Us 5. Liberalization 6. Transfer of Rights of Recovery Against others to Us 7. No Benefit to Bailee 8. Other Insurance 9. Policy Period, Coverage Territory.
Mortgageholder
If a mortgageholder (such as a bank that has made a mortgage loan to the named insured) is shown in the declarations, the insurer is obligated to include the mortgage holder in any payment for loss to the mortgaged property. In practice, the loss payment check or draft is usually made payable jointly to the insured and all mortgageholders so that they can agree on the division of payment. In most cases, the loss payment is used to repair or rebuild the mortgaged property, and the mortgages continue in force as before. Any act or default of the insured does not impair the rights of the mortgageholder, provided the mortgageholder pays any premium due that the insured has not paid, submits a proof of loss if requested, and has notified the insurer of any change in ownership, occupancy, or substantial increase in risk of which the mortgageholder is aware. Consequently 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. In such cases the insurer at its option can take either of these actions: - Take over the rights of the mortgageholder to the extent of such payment and collect the amount of payment from the insured. - Pay off the outstanding balance of the mortgage and take over all of the rights of the mortgageholder. If the insurer cancels the policy because the insured failed to pa the premium or if the insurer does not renew the policy for any reason, it must notify the mortgageholder ten days before the termination of coverage. If the insurer cancels the policy for any reason other than nonpayment of premium, it must give thirty days' advance notice to the mortgageholder. If the insurer fails to give the required notice to the mortgageholder, the policy remains in force for the protection of the mortgageholder even though it may not provide any protection for the insured.
Recovered Property
If either the insurer or the insured recovers property, such as stolen merchandise, for which the insurer has paid a loss, the party that makes the recovery is obligated to promptly notify the other party. The insured has the option of taking the recovered property and refining the loss payment to the insurer. The insurer would then pay the cost of recovering the property and the cost, if any, of repairing it. If the insured elects not to take the recovered property, the insurer may dispose of the property as it sees fit.
Loss Payment
If loss or damage is covered, the insurer has four loss payment options. - Pay the amount of the loss or damage - Pay the cost of repairing or replacing the damaged property (does not include any increased cost attributable to enforcement of ordinances or laws regulating the construction, use, or repair of the property) - Take over all or any part of the property and pay its agreed or appraised value - Repair, rebuild, or replace the damaged property with other property of like kind and quality Insurers seldom exercise the last option because it may cause the insurer to become a guarantor of the repaired or replaced property. If the repaired or replaced property proves to be unsatisfactory, the insurer might be required to make it satisfactory, even if the cost of doing so exceeds the applicable limit of insurance. The Loss Payment clause also 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. The insurer is required to notify the insured of its intent either to pay the claim or deny payment within thirty days after receipt of a satisfactory proof of loss. The insurer may, for example, deny payment because of lack of coverage under the policy or failure of the insured to comply with one or more of the policy conditions. Actual payment is due within thirty days after the parties have agreed on the amount of loss or an appraisal has been completed.
Vacancy
If the building where a loss occurs has been vacant for more than sixty consecutive days before the loss occurs, the insurer will not pay if the loss is caused by vandalism, sprinkler leakage (unless the sprinkler system was protected against freezing) breakage of building glass, water damage, theft, or attempted theft. If any other covered peril cases the loss, loss payment will be reduced by 15% The vacancy conditions apply differently for a building's tenant than for its owner or general lessee. A general lessee is an entity that leases the entire building and subleases portions of the building to others. In the case of a tenant, a vacant "building" means the unit or suite rented or leased to the tenant. A building is vacant when it does not contain enough business personal property to conduct customary operations. If the policy covers a building owner or general lessee, "building" means the entire building and it is considered vacant unless at least 31 % of its total square footage is rented to a lessee or sublessee and is used by that party to conduct its customary operations or by the building owner to conduct its customary operations. Buildings under construction or renovation are not considered to be vacant. Because of the different definitions for tenants and building owners, when the building does not see the 31% standard, the loss payment to the building owner may be reduced or eliminated, but a tenant may be able to collect in full. Similarly, if the building meets 31% standard, the building owner may have full coverage, but a tenant may be penalized when its premises do not contain enough business personal property when its premises do not contain enough business personal property to conduct the tenant's customary operations.
Inflation Guard
Inflation Guard optional coverage is coverage for the effects of inflation that automatically increases the limit of insurance by the percentage of annual increase shown in the declarations. This percentage is applied on a pro rata basis from the date the limit of insurance became effective to the date of the loss before the loss payment is computed. The percentage of annual increase is shown separately for buildings and personal property
Extension of replacement cost to personal property of others
Insureds frequently lease photocopiers, computers, phone systems and other equipment. These leases or agreements may make the insured responsible for the replacement of cost of these items in the event they are damaged. To cover this loss exposure, insureds who have selected the replacement cost option may also elect to have the personal property of others valued at replacement cost. In such cases, the amount of the loss is calculated according to the written agreement between the insured and the owner of the property, but it cannot exceed the replacement cost of the property or the applicable limit of insurance.
BPP Valuation Provisions
PROPERTY TYPE - VALUATION BASIS Property other than that specifically listed - ACV Building damage of $2,500 or less - Replacement cost except for awnings, floor coverings, appliances, and outdoor equipment or furniture. Stock sold but not delivered - Selling price less discounts and unincurred costs Glass - Replacement cost for safety glazing if required by law Improvements and betterments: (A) replaced by other than the insured - not covered (B) replaced by insured - AVC (C) not replaced - Percentage of cost based on remaining life of lease Valuable papers and records (excluding electronic data) - Cost of blank media and cost of transcription or copying ($2,500 coverage extension to replace or restore lost information) Electronic data - (Covered only under additional coverage with a $2,500 annual aggregate limit) If replaced - Cost to replace or restore electronic data that have bee destroyed or corrupted by a covered cause of loss If not replaced - Cost to replace the media with blank media of substantially identical type
Abandonment
The Abandonment condition prohibits the insured from abandoning damaged property to the insurer for repair or disposal. Although the Loss Payment condition permits the insurer, at its option, to take all or any part of damaged property at an agreed or appraised value, the Abandonment condition clarifies that making arrangements for the repair or disposal of covered property is the insured's responsibility, unless the insurer chooses to exercise its option under the Loss Payment condition.
Appraisal
The Appraisal condition establishes a method for the insurer and the insured resolve disputes about the insured property's value or amount of loss. It does not apply to policy coverage disputes. If the insured and the insurer cannot agree on the value of the property or the amount of loss, either party may issue a written demand for an appraisal. When either party demands an appraisal, the appraisal process described in the bPP must be followed.
Duties in the Event of Loss or Damage
The BPP imposes several duties on the insured when a loss occurs. If the insured fails to perform any of them, the insurer may not have to pay for the loss. When a loss occurs, the insured myst take several actions: 1- Notify the police if the loss appears to have resulted from a violation of law, such as vandalism, arson or theft 2- Give the insurer prompt notice of the loss, including a description of the property damaged. Prompt notices generally held to mean as soon as feasible under the circumstances. 3- Provide information as to how, when and where the loss occurred. 4- Take all reasonable steps to protect the property from further loss. 5- At the insurer's request, furnish the insurer with inventories of the damaged and undamaged property and perm the insurer to inspect the property and records. 6- Submit to examination under oath regarding any matter related to the loss 7- Cooperate with the insurer in the adjustment of the loss. 8- Send a signed, sworn proof of loss to the insurer within sixty days after the insurer's request for one.
BPP Loss Conditions and Additional Conditions
The Building and Personal Property Coverage Form, also referred to as the BPP, requires both the insurer and the insured to perform certain duties and follow certain procedures in connection with any claim made under the BPP. The Loss Conditions section of the BPP stipulates the duties of the insured and the insurer after a loss has occurred and establishes procedures for adjusting claims. It also includes an explanation of methods for establishing the value of damaged property. The BPP's Additional Conditions deal with coinsurance and the interests of a mortgage holder (mortgagee)
Coinsurance
The Coinsurance condition requires the insured to carry insurance equal to at least a specified percentage of the covered property's ACV ( or replacement cost, if that optional valuation approach is in effect). The coinsurance percentage is shown in the declarations. If the amount of insurance carried is equal to or greater than the required percentage, the insurer will pay covered losses in full (subject to any applicable deductible) up to the limit of insurance. If the amount of insurance carried is less than the required percentage, loss payments are reduced proportionately. Loss Payment = (Amount of insurance/Amount of insurance required x loss) - deductible If the amount of insurance required is the property's ACV (or replacement cost, if that option has been chosen) immediately before the loss occurred multiplied by the coinsurance percentage. The deductible is subtracted after the coinsurance penalty has been calculated. The example in the exhibit illustrates this calculation.
Control of Property
The Control of Property condition consists of two parts. The first part states that coverage under the policy will not be affected by acts or omissions of persons other than the insured if those persons are not acting under the direction or control of the insured. The second part of the condition states that violation of a policy condition at one location will not affect coverage at any other location. To illustrate how this clause might apply, assume that a liquor store's policy is endorsed, requiring the store's burglar alarm system to be maintained in working order at all insured locations. Assume also that the insured leases these locations from other parties. The first part of the clause would protect the insured if the alarm system was disconnected by a building owner, provided that the owner was not under the insured's control. The second part of the Control of Property condition would be important in this example if the liquor store's policy provides coverage at more than one location. In the absence of this part of the condition, the insured's failure to maintain the alarm system at one location might suspend coverage at all locations, even if the alarm systems are properly maintained at the other locations. Under the second part of the condition, only coverage at the location with the deficient alarm system would be affected.
BPP: Optional Coverages
The Optional Coverages section of the BPP contains provisions for four optional coverages: - Agreed value - Inflation Guard - Replacement Cost - Extension of Replacement Cost to Personal Property of Others The optional coverages apply only when an appropriate notation is made on the declarations page. Agreed Value, Inflation Guard, and Replacement Cost may be used for buildings only, personal property only, or both buildings and personal property.
Replacement Cost
The Replacement Cost optional coverage replaces the phrase "actual cash value" with "replacement Cost" in the BPP Valuation condition. As a result the insurer is obligated to pay the cost to replace the damaged or destroyed property with new property of like kind and quality without any deduction for depreciation or obsolescence. The insurer is not obligated to pay replacement cost until the property has been replaced or repaired and then only if such repair or replacement is completed in a reasonable time. If repair or replacement is not completed in a reasonable time, the loss payment is based on the actual cash value (ACV) at the time of loss. The insured may make a claim on the basis of ACV, with the difference between ACV and replacement cost to be paid upon completion of repair or reconstruction. The insurer must be notified within 180 days after the occurrence of loss that a claim will be made for replacement cost. If the replacement cost option is activated the Coinsurance condition continues to apply but with one important difference. The amount of insurance required by the Coinsurance condition is calculated by multiplying replacement cost by the coinsurance percentage if the claim is made on a replacement cost basis. If the insured makes a claim on an ACV basis coinsurance is also calculated on an ACV basis. If the replacement cost option is selected tenants' improvements and betterments are also valued at replacement cost if the tenant actually repairs or replaces them at its own cost as soon as reasonably possible after the loss. The replacement cost option does not apply to property of others; contents of a residence; manuscripts; or works of art, antiques or rare articles. It also does not apply to "stock" unless the declarations indicate that the replacement cost option includes stock. The BPP defines stock to mean merchandise raw materials foods in process and finished goods.
Concealment, Misrepresentation or Fraud
The commercial property coverage part is voiced if the insured commits any fraudulent act related to the coverage or conceals or misrepresents any material fact pertaining to the coverage part, the covered property, or the insured's interest in the covered property. Concealment and misrepresentation are related but distinct acts: - A misrepresentation is an active, deliberate misstatement of fact. For example, assume that John Doe who has previously been convicted of arson, applies for fire insurance. If the application asks whether the applicant has ever been convicted of arson, and Doe responds that he has not, his answer is a misrepresentation - Concealment does not involve a misstatement of fact, but instead is an intentional failure to disclose a material fact. In the John Doe example, if the application does not ask about past convictions for arson, and Doe does not offer information about his conviction, some courts might consider Doe's action to be concealment. Misrepresentation or concealment does not always void coverage: only material misrepresentation or concealment voids coverage. A fact is material if knowledge of it would cause the insurer to charge a higher premium or decline to write the coverage. For example, an insured might state that his or her building is painted red when in fact it is painted yellow. The misstatement would have no bering on the insurance and is therefore not material.
Valuation
The valuation condition sets forth rules for establishing the value of insured property. Subject to the exceptions summarized in the exhibit, the insured property is valued at its actual cash value (ACV). ACV valuation can be changed to replacement cost valuation by activating the the BPP's optional coverage for replacement cost, which are printed in the BPP.
Agreed Value
To activate the Agreed Value option coverage, an amount is entered under the Agreed Value heading in the declarations for each category of property (building, personal property, or both) to which the option applies. This option enables the insured to remove the uncertainty as to whether the amount of insurance carried complies with the Coinsurance condition. With the option in force, the insurer and the insured have agreed in advance that the amount stated in the declarations - the agreed value - is adequate for coinsurance purposes. 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, requiring proof of value before providing agreed value coverage. At the very least, the insured ordinarily must submit a signed statement of values. Insurance Services Office INC (ISO) Form CP 16 15 Statement of Values can be used for this purpose. The BPP Coinsurance condition does not apply to property insured under the agreed value option. However, it is replaced by a provision that while not called coinsurance is the practical equivalent of 100 percent coinsurance based on the agreed value. The agreed value option provides that if the limit of insurance equals or exceeds the agreed value stated in the declarations, losses will be paid in full up to the limit of insurance. If the limit of insurance is less than the agreed value the amount of loss payment is calculated by this equation: Loss Payment = (Limit of insurance/Agreed Value x Loss) - Deductible Coverage under this option extends until the agreed value expiration date shown on the declarations or the expiration date of the policy whichever occurs first. If the coverage option is not renewed the Coinsurance condition is reinstated.
Agreed Value optional coverage
optional coverage that suspends the coinsurance condition if the insured carries the amount of insurance agreed to by the insurer and insured
proof of loss
A statement of facts about a loss for which the insured is making a claim.
Coinsurance Example
ACV of covered building at time of loss - $200k Limit of insurance - $140k Coinsurance percentage - 80% Amount of Loss - $40k Deductible - $5k Amount of insurance required = 0.80 x $200k = $160k Loss Payment = (140,000/160,000 x 40,000) - 500 (0.875 x 40,000) - 500 35,000 - 500 =34,500 If the amount of insurance carried had been 160,000 or more, the insurer would have paid $39,500 the amount of loss less the deductible.
