Commercial Property Insurance, Part 2

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 refunding 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.

Common Policy Conditions

The Insurance Services Office INC (ISO) Commercial Lines Manual (CLM) requires that a common policy conditions form be attached to every Commercial Package Policy (CPP) or monoline policy. The Common Policy Conditions (IL 00 17) form contains six conditions, which apply to all coverage parts in the policy unless a particular coverage part states otherwise. This approach avoids the need to repeat these common conditions in each coverage part. These are the six conditions contained in the firm: - Cancellation - Changes - Examination of books and records - Inspections and surveys - Premiums - Transfer of rights and duties under this policy

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 declaration page. Agreed Value, Inflation Guard, and Replacement Cost may be used for buildings only, personal property only, or both building and personal property.

Examination of Books and Records

The insurer reserves the right to examine and audit the insured's books and records related to the policy at any time during the policy period and for up to three years after the policy's termination. This provision is included because many commercial insurance policy's are issued with estimated premiums. The final premium is determined after the policy expires, based on reported values of the insured property, the amount of the insured's sales or payroll,. or some other variable premium base. The insured is required to report the final figures to the insurer, and the insurer may accept the insured's reports without verification. However, if the insurer prefers to verify the reports by making an on-site inspection of the insured's books and records, the condition permits the insurer to do that. An insurer may also choose to exercise its rights under that condition in the process of investigatin a laimed loss.

Legal Action Against Us

This condition spells out two requirements the insured must meet before legal action can be brought against the insurer ("US") to enforce the policy. First, the insured must have complied with all conditions of the policy, including those in the coverage part and the Common Policy Conditions, as well as the applicable Loss Conditions. Second the action must be brought within two years after the date on which the direct physical loss occurred.

agree 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

Other Insurance

An insured may have more than one policy covering a given loss. In keeping with the principle of indemnity, the Other Insurance condition limits the total recovery from all applicable insurance to an amount not in excess of the actual loss sustained. If the other insurance is provided by an additional policy subject to the same plan, terms, and conditions, then each policy pays in relation to all applicable policies. If the other insurance is not subject to all of the conditions of the commercial property coverage part, then the policy subject to the commercial property coverage part is considered excess coverage and pays only the covered loss amount that exceeds what is due from the other policy.

Aspects of Coverage Affecting Premiums

Certain aspects of the coverage provided affect premiums. For example higher limits result in higher premiums and Special Form coverage involves a higher rate than Broad Form coverage which in turn is higher than Basic Form coverage. Likewise the applicable coinsurance percentage the amount of the deductible and any optional coverages that apply to the commercial property coverage part all affect the amount of the premium.

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.

Spoilage Coverage

The Spoilage Coverage endorsement covers damage to perishable stock resulting from power outages, on premises breakdown or contamination of the insured's refrigerating cooling or humidity control equipment. The power outage must by caused by conditions beyond the insured's control. The coverage is not subject to coinsurance and cannot be provided under a blanket limit.

Deductible Amount

Commercial Property rate are developed with the assumption that the policy will be subject to a $500 deductible. Many policyholders are willing and able to retain a larger deductible that may make the risk more desirable to underwriters ( small claims are disproportionately expensive for insurers to handle) Rates are reduced in return for the insured's acceptance of a higher deductible because raising the deductible reduces the insurer's loss payment. If the deductible is reduced to $250 rates are increased.

Earthquake and Volcanic Eruption Coverage

Earthquake and volcanic eruption, like flooding, present potentially catastrophic loss exposures. Consequently earthquake insurance is expensive and limited in availability in areas with a high probability of severe earthquake damage principally in parts of CA and Locations near the New Madrid Fault, which extends into portions of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. In other areas, earthquake insurance is generally available but is often overlooked. Overlooking the earthquake exposure can be a costly mistake. In the past 100 years earthquakes have occurred in thirty nine of the fifty states. One of the most severe earthquakes in US History was centered in Charleston South Carolina. Insurers can use either of two ISO endorsements to add earthquake and volcanic eruption as covered perils under a commercial property coverage part. Independently filed earthquake endorsements are also available from some insurers. The two ISO endorsements are these: - Earthquake and Volcanic Eruption (CP 10 40) - Earthquake and Volcanic Eruption Endorsement (Sub limit form) (CP 10 45) Both endorsements extend commercial property coverage to include earthquake and volcanic eruption. The first endorsement includes coverage for the full policy limit and contains a coinsurance condition. The second endorsement includes earthquake and volcanic eruption coverage subject to sublimit that is lower than the regular policy limit, and it does not contain a coinsurance condition.

Liberalization

If the insurer adopts any revision that would broaden coverage under the commercial property coverage part and for which there is no additional premium charge, the broader coverage is extended automatically to policies already in effect. This automatic coverage applies only if the broadening amendment is adopted during the policy term or within forty five days before the effective date of the policy. Liberalization applies only to amendments that broaden coverage, not to those that restrict coverage.

Appraisal

The Appraisal condition establishes a method for the insurer and the insured to 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.

Commercial Property Conditions

Even if an insurance policy would otherwirse cover an insured's loss and 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 adition, 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: - Concealment, Misrepresentation or Fraud - Control of Property - Insurance Under Two or More Coverages - Legal Action Against Us - Liberalization - Transfer of Rights of Recovery Against Others to Us - No Benefit to Bailee - Other Insurance - Policy Period Coverage Territory.

Extenson 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 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.

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 repaired or replaced, 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 at the time of loss. The insured may make a claim on the basis of ACV, with 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 onw 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 ABCV bases 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 goods in process and finished goods.

Changes

The changes condition states that the policy constitutes the entire contract between the insurer and the named insured, and that the policy can be changed only by a written endorsement issued by the insurer. In practice, changes are often first made by verbal communication and confirmed afterwards in writing. In most states, such verbal changes are binding because an authorized agent of the insurer is viewed as having the power to waive the written endorsement requirement. Such changes may be made, with the insurer's consent. upon the request of the first named insured. Only the first named insured has the authority to request a policy changes, and the insurer is authorized to make changes upon the request of the first named insured without specific permission of any other insured.

Flood Coverage

In the US losses from flooding accompany hurricanes heavy rains and melting snow. Collapsing dams can also cause floods. Any of these events can cause catastrophic losses. Because of the movable nature of the property they insure, auto physical damage insurance and many inland marine forms include flood as an insured peril. However, insurers are reluctant to write flood insurance on property at fixed locations, such as buildings and their contents. Therefore, all three of the causes of loss forms exclude flood. However, flood insurance for buildings and their contents is available from two main sources. The National Flood Insurance Program (NFIP) is a federal government resource that provides insurance for properties located in eligible communities. The NFIP is administered by the Federal Insurance Administration, part of the Federal Emergency Management Agency (FEMA) For commercial properties, the maximum NFIP limit is $500,000 per building and $500,000 for the contents of a building,. Although the demand for flood insurance is greatest from insureds in the most hazardous flood zones, NFIP provides coverage in all areas of eligible communities. National flood insurance is sold through private insurers and agents and is backed by the US government. The other source for flood insurance on buildings and contents is private insurers without federal participation. Most private insurers are unwilling to provide flood coverage for commercial properties located in zones that have more than a one in 100 years flooding probability risk (Shown in NFIP flood maps as Zone A) For properties located outside the high hazard flood zones private insurers often write flood coverage by endorsement to the insured's commercial property policy, subject to a substantial deductible (often $25,000 or more) The ISO commercial property program incudes a Flood Coverage Endorsement (CP 10 65) for use with the ISO commercial property coverage forms. In some cases insurers will provide only excess flood coverage that applies in addition to the maximum limit available from NFIP

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 must take several actions: - Notify the police if the loss appears to have resulted from a violation of law such as vandalism arson or theft. - Give the insurer notice of the loss including a description of the property damaged. Prompt notice is generally held to mean as soon as feasible under the circumstances - Provide information as to how when and where the loss occurred. - Take all reasonable steps to protect the property from further loss. - At the insurer's request, furnish the insurer with inventories of the damaged and undamaged property and permit the insurer to inspect the property and records. - Submit to examination under oath regarding any matter related to the loss. - Cooperate with the insurer in the adjustment of the loss. - Send a signed, sworn proof of loss to the insurer within sixty days after the insurer's request for one.

concealement, misrepresentation or Fraud

The commercial property coverage part is void 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 r 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. This misstatement would have no bearing on the insurance and is therefore not material.

Transfer of Rights and Duties Under This Policy

The insurer cannot transfer any rights or duties under the policy to any other person or organization without the insurer's written consent. For example, if the insured sells a building covered by the policy the insurance cannot be transferred to the new owner of the property without the insurer's written consent. Such a transfer of insurance is generally referred to as assignment of the policy. The condition also provides specifically for the automatic transfer of coverage if an individual named insured dies. (An individual named insured is a person whose name is listed on the :Named Insured" line in the policy declarations) In that case the insured's rights and duties under the policy are automatically transferred to the insured's legal representatives or if the insured's legal representatives have not yet been appointed to any person having proper temporary custody of the insured property.

Value Reporting Form

Unlike the peak season endorsement which actually modifies the limit of insurance the Value Reporting Form covers the fluctuating value of business person property by providing insurance for the insured's maximum expected calculates 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. In this way, the insured has an adequate limit to cover maximum personal property values but pays a premium based on the reported property values. Unlike the Value Reporting Form (CP 13 10 ) the insured is required to report the value of the insured business personal property to the insurer periodically during the policy period. The frequency of reporting is indicated by a symbol entered in the declarations. For example MR the most common choice calls for reporting values on hand on the last day of the month with the report due within thirty days after the end of the month. Daily weekly quarterly and annual periods can also be selected as a basis for reports by entering other codes in the declarations. As long as the insured reports values accurately and on time the insurer will pay the full amount of any loss that occurs ( but not more than the policy limit) even if the values on hand at the times of the loss are greater than those last reported to the insurer. To encourage accurate and timely reports the Value Reporting Form specifies penalties for failure to comply with its reporting requirements. Separate rules apply when no report is made (loss payment is reduced to 75 percent of the otherwise collectible loss) one or more reports are past due after the initial report(the loss is reduced by the proportion that the value reported bears to the correct value) The insured pays an advance premium at the inception of the policy. The advance premium is based on 75 percent of the limit of insurance. The final premium is determined after the policy anniversary based on the reported values. The premium is based on the values reported even if the values reported exceed the policy limit. However, the insurer is not obligated to pay more than the policy limit even if the event of loss, even if the reported values are higher. Thus care should be taken to set the limit high enough to cover any possible increase in value. Although the Value Reporting Form can more effectively match coverage to exposures than the Peak Season Limit of insurance endorsement, many smaller firms do not have accounting systems of sufficient sophistication to generate the required reports accurately and on time. Furthermore many insurers would decline to issue a Value Reporting For for smaller insured because the premium may not be large enough to warrant the added expense of processing the reports and calculating the final premium.

Additional Covered Property

Almost all the types of property that are excluded in the BPP can be insured. More specialized coverage are the best alternative for certain types of property, such as crime coverage forms for money and securities. However, coverage for many types of property excluded under the BPP's Property Not Covered section can easuly be added to the BPP using the Additional Covered Property endorsement (CP 14 10) The current edition of the endorsement provides a blank space for inserting the additional covered property. Examples of items that can be inserted in the endorsement include underground pipes, foundations below the lowest basement floor fences and retaining walls that are not part of the building. For the most part, requests to add excluded items should pose no problem for insurers; in many cases, the excluded items present a lower risk of loss than the other property insured. The amount of insurance carried should be increased to reflect the value of the additional items covered. Sometimes the excluded property's of a type that requires more specialized underwriting and loss control for example bridges piers and wharves.

Mortgageholder

If a mortgage holder (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 mortgageholder 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 the 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 mortgagegolder 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 pay 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 five thirty days' advance notice to the mortgageholder. If the insurer fails to five 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.

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 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 to 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 causes the loss, loss payment will be reduced by 15 percent. 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 sublease 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 percent of its total square footage is rented to a lessee or sublessee and is used by that party to conduct 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 meet the 31 percent 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 the 31 percent standard, the building owner may have full coverage but a tenant may be penalized when its premises do not contain enough business personal property to conduct the tenant's customary operations.

Peak Season Limit of Insurance

Many organizations experience wide fluctuations (increases and decreases) in personal property values especially the value goods held for sale. The BPP does not provide a totally satisfactory method to cover fluctuating values. If the insured organization carries high enough limits to cover the maximum value, it is over insured for much of the year and pays too much in premiums. If it carries less than the maximum value, it is underinsured during its peak inventory period. Continually amending the amount of insurance to correspond to changes in value would be an administrative burden on the insured and the insurer. The Peak Season Limit of Insurance endorsement (CP 12 30 ) covers the fluctuating values of business personal property by providing different amounts of insurance for certain time frames during the policy period. For example, a toy store may have a policy providing $100,000 of coverage on personal property with a peak season endorsement increasing coverage to $200,000 from October 1 to December 31 when the store expects to have higher inventory values. Using this endorsement would have exactly the same effect as endorsing the policy on October 1 to increase the coverage and endorsing it again on December 31 to reduce the coverage. The peak season endorsement eliminates the need for these extra transactions and the possibility that they may be overlooked. The Peak Season endorsement is usually attached when the policy is issued (although it may be added midterm) and a pro rata premium is charged for the period during which the limit is increased.

BPP Valuation Provisions

Property Type Valuation Basis Property other than that specifically listed - Actual Cash Value 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 - Actual Cash Value (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 been destroyed or corrupted by a covered cause of loss If not replaced - Cost to replace the media with blank media of substantially identical type.

Rating Formulas

Rating if the process of applying a rate to a particular exposure and performing any other necessary calculations to determine an appropriate policy premium. As a simplified example if the applicable rate for commercial property coverage on a building is $0.50 per $100 of insurance and the amount of insurance is $100,000 the premium for the coverage can be calculated in this manner: $0.50/$100 x $100,000 = $500 Another way to rach the same result is to establish the number of exposure units by dividing the amount of insurance by the unit amount and them multiplying the number of units by the rate: $100,000/$100 x $0.50 = $500 In reality rating is usually more complicated additional calculations are often needed. For example the rate or the premium must often be multiplied by the additional factors to account for territorial differences, to reduce the premium when the insured has selected a hgher deductible to increase the premiums when a coverage option has been added and so forth. In the past every commercial building as inspected individually and building and contents rates reflecting the exposure to loss of a particular business were published by rating bureaus. This approach to developing rates is known as specific rating which bases a building's property insurance rate on inspecting and evaluating that particular building. As the methods used to collect loss statistics became more sophisticated insurers were better able to generalize about the probabilities of loss within large groups of similar risks and to formulate rates that reflected the average probability of loss for businesses within these groups. Class rating is a rating approach that uses rates reflecting the average probability of loss for businesses within large groups of similar risks. Class rating allows a building and its contents to be rated without inspecting the building and developing a specific rate. Large businesses as well certain other businesses with operations involving unusual or increased exposures to loss are still specifically rated. However class rated is used to rate the majority of commercual insureds.

Coinsurance

The Coinsurance conditions 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 proportionally. If the amount of insurance carried does not meet the coinsurance requirement the amount the insurer will pay ( subject always to the limit of insurance) is calculated by this formula: Loss payment = (Amount of insurance carried / Amount of insurance required x Loss) - deductible 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.

Limited Coverage for Unmanned Aircraft

The aviation insurance market has developed its own forms for insuring unmanned aircraft, commonly referred to as drones. To accommodate insurers outside the aviation insurance market that want to provide coverage for customers that is small drones for commercial purposes, ISO Developed endorsements that can be attached to various ISO Commercial property and liability coverage forms. The Limited Coverage for Unmanned Aircraft (Scheduled and or Blanket Coverage) Endorsement (CP 04 14) can be added to the BPP and a few other commercial property coverage forms to cover physical loss to covered drones. Coverage under the endorsement can be arranged on a scheduled basis with an individual limit of insurance for each drone, on a blanket basis with one limit for all covered drones, or with a combination of scheduled and blanket limits. For example some drones could be scheduled for specified limits and unscheduled drones could be covered subject to a single blanket limit for all loss in any one occurrence. Coverage applies on and off the described premises throughout the policy's coverage territory, whether a covered drone is in flight or not. Coverage can be extended to apply to flight "between points in the Coverage Territory" which means that if a flight between points in the coverage territory took a drone out of the coverage territory's airspace, the aircraft would be covered even while located outside the coverage territory. Coverage for loss or damage that occurs while the drone is in flight or in preparation for flight applies only if the drone is being used in operations specified in the endorsement's schedule such as aerial photography or inspection of buildings and structures. If a business manufactures, stores or sells drones the endorsement provides coverage only while the drones are in flight. This restriction does not cause a coverage gap however as the BPP covers aircraft manufactured stored or sold by the insured by way of exceptions to the exclusion of vehicles or self propelled machines including aircraft in the BPP's property Not Covered section. The scope of the endorsement depends on the policy. If the policy includes business interruption coverage then business interruption coverage can be selected to apply to unmanned aircraft operations away from the described premises. The causes of loss ( other than equipment breakdown) and exclusions that apply to the policy also apply to the endorsement. The endorsement is designed for use with the Cause of Loss - Special Form. If the underlying policy covers Your Business Personal Property then the endorsement will cover such property when in the air as part of unmanned aircraft operations. Coverage for physical damage to the drone or related covered property is excluded if the drone is carrying or delivering goods or merchandise to others. This and other exclusions help keep the endorsement appropriate for limited commercial drone use. Coverage does not apply when drones are used for racing, when drones are rented or loaned to others or to damage to the drone cause by merchandise breakdown. Coverage can be written on an actual cash value or a replacement cost basis.

Commercial Property Endorsement

The building and personal property coverage formalso referred to as the BPP, can be modified by a variety of endorsements: The BPP's endorsements are useful for these tasks: - Providing coverage enhancements that some insureds may want but that others either do not believe they need or cannot afford. -Eliminating coverage for certain exposures enabling underwriters to accept applications that they would otherwise decline. - Changing policy provisions to match the specific characteristics of certain industries or insureds - Amending the policy to comply with state insurance regulations. The Insurance Services Office INC (ISO) portfolio of commercial property forms contains more than 100 multistate forms and endorsements and an even greater number of state specific endorsements. In addition many insurers use independently developed endorsements or draft manuscript endorsements to accommodate special requirements. These examples of ISO commercial property endorsements illustrate the diversity of the endorsements available: - Additional Covered Property -Ordinance or Law Coverage - Spoilage Coverage - Flood Coverage - Earthquake and Volcanic Eruption Coverage - Limited Coverage for Unmanned Aircraft - Peak Season Limit of Insurance - Value Reporting Form

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 stores' 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 art 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 property 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.

Factors Affecting Commercial Property Premiums

The factors that affect commercial property premiums are information that the producer often needs to transmit to the underwriter. Understanding these factors is also fundamental to reducing the cost of insurance since many of the factors are within the insured's control. Commercial property rating procedures are numerous and complex. Therefore, this discussion focuses on the rating factors that principally affect the premiums for commercial property coverage on buildings and business personal property, not on the actual mechanics of rating. Some of the factors affecting commercial property premiums are certain aspect of coverage provided by the commercial property coverage part. Other Factors- such as type of building construction and type of business occupying the building exist independently of the coverage being provided.

Cancellation

The insured may cancel the policy at any time by mailing or delivering written notice of cancellation to the insurer. If two or more insureds are listed in the declarations, only the owner listed first (called the first named insured) can request cancellation. The insurer can cancel the policy by mailing or delivering written notice of cancellation to the first named insured. To provide time for the insured to obtain other insurance, the insurer is required to give advance notice of cancellation. The notice must be mailed or delivered to the insured at least ten days before the date of cancellation if the cancellation is for nonpayment or premium. The notice must be mailed at least thirty days before the date of cancellation for any other reason. If the cancellation results in a return premium, the insurer will send the refund to the first named insured. In almost every state, the cancellation condition is superseded by state law and an endorsement is added to the policy. The endorsement modifies the cancellation provisions to conform with the applicable law. The state laws commonly address permissible reason for cancellation and a longer advance notification period if the cancellation occurs for a reason other than nonpayment of premium.

Inspection and Surveys

The insurer has the right but not the obligation to inspect the insured's premises and operations at any reasonable time during the policy period. The inspections may be made by the insurer's own personnel or by another organization acting on the insurer's behalf. Such inspections are important in determining the insurability of the insured's property and operations, in setting proper insurance rates, and in making risk control recommendations. The insurer may inform the insured of the results of such inspections and may recommend changes. However, it does not have a duty to do either. The condition makes it clear that the insurer does not make safety inspections, does not guarantee that conditions are safe or healthful, and does not guarantee that the insured is in compliance with safety or health regulations. Those disclaimer clauses have been included in the policy to protect the insurer against suits made by persons who allege that their injuries would not have occurred but for the insurer's failure to detect a hazardous condition or a violation of laws or regulations, and that the insurer is therefore responsible for the resulting damages, fines, or penalties assessed against the insured.

Agreed Value

To activate Agreed Value optional 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 roof of value before providing agreed value coverage. A 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 other 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 onb 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 th 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.

subrogation

The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.

Covered Cause of Loss.

The rate of the Causes of Loss 1 Basic Form consists of a Group 1 rate (for fire lightning explosion vandalism and sprinkler leakage) and a Group 2 rate (for all other causes of loss covered under the Basic Form) If the policy provides Broad Form coverage an additional rate is added to the Basic Form rate (Group 1 and Group 2) for the cost of covering the additional perils of the Broad Form. The same approach is used with the Special Form except that the additional rate is higher than the Broad Form additional rate. The premium is determined by multiplying the applicable rate times the amount of insurance.

No benefit to Bailee

A bailee is a person or business organization that has temporary custody of the property of another. Examples are dry cleaners, television repair shops, laundries, and fur-storage firms. Bailees become legally liable to bailors ( the owner of the property) for damage to the property they hold. Bailees sometimes try to limit their liability with contractual provisions starting that the bailee is not liable for damage if the damage is recoverable under insurance carried by the bailor. The No Benefit to Bailee condition is intended to defeat such provisions in the bailment contract and the reinforce the insurer's right of subrogation against the bailee.

Coinsurance Example

ACV covered building at time of loss - $200,000 Limit of insurance - $140,000 Coinsurance percentage - 80% Amount of Loss - $40,000 Deductible - $500 Amount of insurance required = 0.80 x $200,000 = $160,000 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

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.

Transfer of Rights of Recovery Against Others to US

Subrogation is a term commonly used by insurance practitioners but not used in Insurance Services Office INC (ISO) commercial property forms. If the insured takes any action that eliminates the insurer's right of recovery (other than one specifically authorized by this condition) the insurer may not be required to pay the loss. This condition specifically permits the insured to waive the right of recovery against any other arty, provided the waiver is made in writing and before the loss occurs. A waiver of recovery may be given by the insured after loss only to another part insured under the same policy, a parent or subsidiary company, or tenant of the insured property. Any other waiver given by the insured after loss has occurred may impair the insured's right to collect from the insurer for the loss.

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.

Ordinance or Law Coverage

The Ordinance or Law Coverage endorsement (CP 04 05 ) provides three coverages for losses resulting from the enforcement of building ordinances or laws: - Coverage A covers the value of the undamaged portion of a building that must be demolished. For example. an entire structure may have to be totally demolished if it is a frame building in an area where only fire resistive construction is currently permitted. Demolishing the undamaged parts of the building changes what would have been a partial loss to a total loss. - Coverage B covers the cost to demolish the undamaged portion of a building and remove its debris when demolition is required by the building code. - Coverage C covers the increased cost to repair or rebuild the property resulting from the enforcement of a building, zoning, or land use law. Building codes may require that reconstruction of damaged property meet higher standards such as heavier electrical service. elevators to upper floors, and fire resistive stairwells. Coverage C pay the added expense for these improvements. Coverage B and C can be provided under one blanket limit. The unendorsed commercial property coverage forms exclude these losses except for the additional coverage for increased cost of construction which adds a small amount of coverage fort the types of loss insured by Coverage C of the endorsement.

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 Condition 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)

Premiums

The first named incurred is responsible for paying the policy premium. If the insurer owes a return premium, it will make payment only to the first named insured.

Limit of Insurance

The limit of insurance applicable to the 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. In addition many insurers use a rating system for commercial property that varies the rate depending on the amount of insurance selected. This approach called limit of Insurance (LOI) rating is based on the observation that most commercial property losses are partial as opposed to total and property losses do not increase proportionately with the value of the insured property. LOI rating recognizes this observation by using rates that decreases as the insured value increases. Thus even though the owner of a high value property still pays a higher premium than the owner of a low value property of the same type, the high value owner is charged a lower property rate ( cost of insurance per each $100 of coverage.)

Coinsurance Percentage

The rates ordinarily used for insuring buildings and personal property are calculated with the assumption that they will be used with an 80 percent coinsurance clause in the policy. These rates therefore called the "80 percent coinsurance rates" When a policy requires a higher coinsurance percentage, the 80 percent coinsurance rate is reduced both to reflect the reduced likelihood that a loss will reach the insured amount and also to encourage the purchase of higher limits. This with 90 or 100 percent coinsurance the insured must buy a greater amount of insurance to comply with the coinsurance requirement but the rate is reduced. When the coinsurance requirement is less than 80 percent the rate is increased.

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 BPP's optional coverages for replacement cost which are printed in the BPP

Policy Period, Coverage Territory

This condition states that coverage begins on the effective date and ends on the expiration date shown in the declarations page. The declarations state that the beginning and ending time is 12:01 am determined by standard time at the insured's ,ailing address as shown in the declarations, even though some or all of the insured property may be located in a different time zone. The insured property is covered only while it is located within the US (including its territories and possessions) Puerto Rico and Canada

Insurance Under Two or More Coverages

This policy condition is necessary because some property might be covered under two or more coverage parts that can be included in a single commercial package policy ( such as commercuial property and commercial inland marine) The Insured Under Two or More Coverages condition prevents double recovery by the insured in such instances. The total payment under all applicable coverage parts is limited to the actual amount of the loss. Duplication, or "stacking" of the limits is avoided.