CPCU 551: Assignment 4

Insurance for Equipment Breakdown

"Boiler & Machinery Insurance" covers loss resulting from the accidental breakdown of covered equipment. BPP Coverage: The types of equipment that are covered for breakdown are covered under the BPP coverage form, but ONLY for the perils insured against by the causes of loss forms used with the BPP. It covers physical damage to both 1) covered equipment AND 2) other property of the insured that results from the accidental breakdown of covered equipment. Equipment breakdown insurance = small, specialized field - Many insurers include equipment breakdown coverage in their commercial package policies - then reinsure the equipment breakdown coverage with an insurer that specializes in that line - the specialized insurer assumes the financial consequences of the loss exposure and provides underwriting, risk control, and claims services.

Other Commercial Property Coverage Forms

1. Builders Risk Coverage Form 2. Legal Liability Coverage Form 3. Standard Property Policy

Equipment Breakdown Protection: Other Policy Provisions

1. Exclusions 2. Limits of Insurance 3. Deductibles 4. Conditions

Fired Pressure Vessel

A closed container that is heated by the direct fire of burning fuel and can withstand internal pressure. Other types of Fired Pressure Vessels: Economizers = Preheat water being fed into or returned to a boiler. Superheaters = Raise the temperature of steam after it leaves the boiler.

Boiler

A fired pressured vessel constructed of cast iron or steel in which water is heated to produce steam or hot water. These are most common type of Fired Pressure Vessel.

Brands & Labels Endorsement

After an insurer pays for loss to covered property, it has the right to take any salvage (i.e. smoke damaged merchandise) and sell it to a salvage firm that sells it to others. This can be a problem for an insured that bases its marketing appeal on a brand-name reputation for high quality. This endorsement permits the insured to stamp "Salvage" on the merchandise or its containers or remove the brands/labels. This endorsement also states that the insurer will cover (within the limits) the costs incurred by the insured in taking the measures above.

Equipment Breakdown Protection: Exclusions

Besides the exclusions within policy definitions, equipment breakdown policies contain other exclusions: Exclusions similar to those in commercial policies: - Ordinance or Law - Earth Movement - Water - Nuclear Hazard - War or Military Action - Wear/Tear or Gradual Deterioration (unless a breakdown occurs) - Failing to use all reasonable means to save covered property from further damage - Fungus, Wet Rot, and Dry Rot Exclusions that eliminate coverage for perils usually insured in other policies: - fire related to a breakdown - water used to extinguish a fire - certain perils if they're covered under another applicable policy - exclusions that duplicate exclusions or conditions applicable to the time element coverages in other policies Other Exclusions: - excludes certain types of testing that place above-normal stress on equipment - excludes damage to covered equipment while being subjected to pressure or electrical testing ** When such testing occurs in a newly constructed building, it is often covered by endorsement to the builders risk policy.

Boilers & Pressure Vessels

Boiler = A fired pressured vessel constructed of cast iron or steel in which water is heated to produce steam or hot water. Many buildings are heated by boilers, such as the commonly used fire tube Scotch marine boiler. ** Boilers are the most common type of fired pressure vessel. Fired Pressure Vessel = A closed container that is heated by the direct fire of burning fuel and can withstand internal pressure. Common types of breakdown losses to Fired Pressure Vessels: 1. Explosion = caused by excessive internal pressure of steam 2. Overheating = "dry-firing" - caused by continued firing when there is insufficient water in the vessel (usually because of the failure of the low-water cutoff). 3. Cracking = of cast iron sections - caused by expansion and contraction stresses, rust growth between sections, porous castings, and tie rods that are too tight. 4. Bulging = "bagging" - caused by improper heat transfer because of buildup of scale or sediment.

Legal Liability Coverage Form (LLCF)

Can be used to cover property of others in the insured's care, custody, or control -- ONLY if the insured is legally liable for the loss. This approach has coverage advantages and cost advantages over purchasing direct property insurance on property of others. NOT ALLOWED to be written for a contractor on a building under construction or any other types of property a contractor is working on.

Electrical Equipment

Common types: - power transformers - switchboards - distribution panels - circuit breakers - cables - motors - generators Ex. If a rectifier transformer winding at the premises of a manufacturer short-circuits because of loose lead connections.

BRCF: When Coverage Ceases

Coverage ceases 60 days AFTER an insured building is occupied, in whole or in part, or put to its intended use. Coverage ceases 90 days AFTER the construction is completed - even if the building is not occupied or put to use.

Expediting Expenses: Insuring Agreement

Expenses incurred to speed up the repair or replacement of covered property. The insurer agrees to pay such expenses that the insured necessarily incurs. Ex. the payment of overtime wages to make repairs, or use of overnight shipping to obtain needed parts. This coverage overlaps Extra Expense coverage to some degree. Expediting Expenses coverage is NOT as broad as Extra Expense coverage. Ex. The cost of renting substitute facilities to continue operations could be covered as extra expense but NOT as expediting expenses.

Manufacturer's Consequential Loss Assumption Endorsement

If stock in the process of manufacture is damaged/destroyed, the physical loss can decrease the value of other stock that is undamaged. Clothing manufacturers are particularly exposed to this type of loss. If part of an unassembled garment is destroyed/damaged, the remaining parts will have little more than scrap value unless the missing part can be replaced. This endorsement provides coverage for this type of situation. If damage to parts of stock in the process of manufacture at the described premises causes reduced value in the remaining parts, this endorsement covers the reduction in value - wherever the remaining undamaged parts may be located.

"Included" in Declarations: EBP Limits

If the word "included" is shown beside a coverage in the declarations, any limit shown for that coverage is part of, not in addition to, the limit per breakdown (overall limit). The insurer will NOT pay more under each coverage than the limit of insurance applicable to that coverage. Any payments for those losses REDUCE the Property Damage limit or the limit per breakdown. Unless a higher limit or "included" is shown, the most the insurer will pay for the following exposures is $25,000: - Spoilage Damage to covered property resulting from ammonia contamination. - The reduction in value of undamaged parts of a product that becomes unmarketable because of physical loss/damage to another part of the product. - The cost to research, replace, or restore damaged computer data or media, including the cost to reprogram instructions used in any computer equipment. - Additional Expenses the insured incurs to clean up, repair, replace, or dispose of covered property that is damaged/contaminated by a hazardous substance. - Damage to covered property by water. However, NO coverage applies to water damage resulting from leakage of a sprinkler system or domestic water piping.

Ordinance or Law Coverages: Insuring Agreement

Laws that regulate the repair or construction of buildings can cause the insured to have losses in addition to the direct loss resulting when breakdown to covered equipment damages covered property subject to such ordinances/laws. Ex. such as the cost of demolishing undamaged parts of a building or the increased cost of construction. This coverage provides a way to cover such losses.

Office Equipment & Systems

Losses can include: - circuit board failures - electrical arcing - distortion or breakage of parts - insulator, connector, or control failure - bearing failure - gear or coupling breakage Damage to a business's computers or phone systems can create problems.

Equipment Breakdown Loss Exposures

Losses often result from 1) operator error 2) faulty maintenance or 3) faulty design or installation Preventative risk management efforts should focus on 1) operator training 2) regular maintenance and 3) inspections 1. Boilers & Pressure Vessels 2. Electrical Equipment 3. Mechanical Equipment 4. Air Conditioning & Refrigeration Equipment 5. Office Equipment & Systems

EBP: Conditions

Most of the conditions in equipment breakdown policies are comparable to those in other property insurance policies. Several conditions of the EBP form distinguish this form from commercial property policies. 1. Valuation 2. Coinsurance 3. Policy Period, Coverage Territory 4. Suspension 5. Joint or Disputed Loss Agreement 6. Jurisdictional Inspections

Spoilage Coverage Endorsement

Power or equipment failure can cause spoilage of perishable stock (such as food or cut flowers). Spoilage losses can be covered by this endorsement. ** also by the Utility Services Endorsement This endorsement provides broader coverage than coverage under the Utility Services - Direct Damage Endorsement (which applies ONLY if the loss of power is caused by damage to power-supply services by an insured peril). This endorsement covers spoilage resulting from: - power outages - changes in temperature or humidity caused by mechanical breakdown

LLCF: Cost Advantage

Rates for the LLCF are lower than the rate for direct property insurance because the insurer pays losses only if the insured is liable for the property damage. The legal liability rate for real property (buildings/structures) is generally 25% of the 80% coinsurance building rate. The legal liability rate for personal property is generally 50% of the 80% coinsurance contents rate.

Standard Property Policy (SSP)

Residual Markets use special policy forms to write property insurance for commercial properties that don't meet the underwriting criteria of the standard insurance market. Most important components: 1. Property Covered 2. Covered Perils 3. Conditions The SSP is a self-contained monoline policy containing all necessary policy provisions in a single document. ONLY a completed declarations page is needed to complete the contract. The SSP cannot be a part of a package policy. Any additional coverages (i.e. GL coverage) must be obtained separately.

Manufacturer's Selling Price (Finished Stock ONLY) Endorsement

The BPP valuation provision values stock that has been sold but not delivered at Selling Price, minus any discounts/expenses. This endorsement applies the same approach to the value of finished stock manufactured by the insured - whether or not it has been sold. This endorsement pays the part of the business income loss that business income insurance excludes. Some insurers offer Selling Price valuation for retailers/wholesalers in addition to manufacturers.

BRCF: Additional Coverages & Coverage Extensions

The BRCF contains 4 of the 6 additional coverages of the BPP, and only 2 coverage extensions (which are unique to the BRCF). 4 Additional Coverages: 1. debris removal 2. preservation of property 3. fire department service charge 4. pollutant cleanup and removal 2 Coverage Extensions: 1. building materials and supplies of others 2. sod, trees, shrubs, plants

LLCF: Insuring Agreement

The LLCF covers monetary damages that the insured is legally obligated to pay because of direct physical loss (including loss of use) to covered property caused by accident and arising out of any covered cause of loss. The insurer will also pay for time element losses that the owner of the property incurs as a result of physical damage. - these include loss of income or extra expense for rental of replacement property. Advantage = coverage for loss of use The BPP can be arranged to cover direct damage to property of others regardless of fault, but it does NOT cover claims for loss of use of the damaged property.

LLCF: Insurance to Value

The LLCF has no coinsurance condition, because the insured frequently doesn't know the value of property of others. If the tenant occupies only part of the building and wishes to insure it under the LLCF, the limit should reflect the value of that part only (plus loss of use). Maximum Possible Loss = loss of all covered property of others in the insured's care, custody, or control -- including damages for loss of use -- that might be sustained in a single loss.

Time Element Coverages: Insuring Agreements

The breakdown of equipment or the resulting damage to covered property can interrupt operations and cause the insured to lose business income and incur extra expenses. Such time element losses are NOT covered under regular business income & extra expense forms UNLESS the applicable causes of loss form has been modified to include breakdown as a covered cause of loss.

Business Income: Time Element Insuring Agreement

The declarations will indicate whether this insuring agreement provides: - business income & extra expense coverage - ONLY extra expense coverage If business income coverage applies, the insurer agrees to pay the insured's actual loss of business income during the period of restoration resulting from breakdown to covered equipment "period of restoration" = continues for 5 consecutive days AFTER the damaged property is repaired or replaced with reasonable speed.

Example: Builders Risk An office building under construction is insured by its owner under the BRCF, Special Form. Although some finish carpentry still needed to be completed and the building has not be formally accepted by the owner, the owner occupied the new building on October 1. On October 2, the entire structure was destroyed by fire. Would the BRCF cover this loss?

The loss would be covered because the BRCF allows coverage to continue for up to 60 days after the building is occupied or put to its intended use.

LLCF: Causes of Loss & Exclusions

There is a special exclusion that applies ONLY to the LLCF -- eliminates coverage for damages that the insured is legally liable to pay solely by reason of the insured's assumption of liability in a contract. This special exclusion does NOT apply to a written lease agreement in which the insured has assumed liability for damage by burglary to covered building property. All of the other exclusions apply to the LLCF except: - Ordinance or Law - Governmental Action - Utility Services - War and Military Action

Joint or Disputed Loss Agreement: EBP Condition

This condition addresses claim situations in which the insured's Equipment Breakdown insurer and the insured's commercial property insurer disagree on which insurer covers a loss. Each insurer pays half of the loss to quickly indemnify the insured - insurers then resolve their differences. The agreement applies ONLY if the commercial property policy contains a similar provision with the same conditions.

Additional Covered Property Endorsement

This endorsement can be added to the BPP for many types of excluded property.

Increase in Rebuilding Expenses Following Disaster Endorsement

This endorsement covers the higher costs incurred as a result of labor/materials being in short supply after a widespread disaster and the total cost of repair/replacement exceeding the limit of insurance.

Functional Personal Property Valuation (Other than Stock) Endorsement

This endorsement is available for providing functional valuation on personal property (other than stock). It can be useful when insuring older machinery/equipment that is no longer available. Ex. An old computer system that cost more when purchased than a new system would now. This endorsement deletes the Coinsurance condition.

BRCF: Property NOT Covered

Types of property excluded: - land - water - lawn, trees, shrubs, plants (other than veggie roof) - antennas - signs not attached to the building

Valuation: EBP Condition

1. Replacement Cost The insurer will determine the value of covered property that has been lost/damaged based on the cost to repair/replace/rebuild the damaged property with property of like kind/quality on the same site or another site (whichever is cheaper). The insurer will NOT pay for property that is useless to the insured. By endorsement, the underwriter can amend the valuation for certain items, typically outdated equipment, to an ACV basis. 2. Property Held for Sale If manufactured by the insured, property held for sale by the insured is valued at its Selling Price (minus any discounts/expenses the insured would have had). Computer data/media that are mass produced and commercially available are valued at Replacement Cost. All other computer data/media are valued at the cost of blank materials. 3. Equipment Upgraded After Loss Insureds often upgrade their equipment after a loss. To cover the added expense, the policy says that the insurer will pay the additional cost to replace covered equipment with equipment that is better for the environment, safer, or more efficient than the equipment being replaced. The most the insurer will pay under this extension is an additional 25% of the property damage amount otherwise collectible. 4. Spoilage Coverage Raw materials = valued at Replacement Cost Property in process = valued at the sum of the Replacement Cost of raw materials, the labor expended, and the proper proportion of overhead charges. Finished products = valued at their Selling Price (minus any discounts the insured offered and expenses)

Unfired Pressure Vessel

A closed vessel that can withstand internal pressure or vacuum but is NOT heated by the direct fire of burning fuel.

Equipment Breakdown Risks

A common misconception is that ONLY large industrial accounts have equipment breakdown loss. In reality, most organizations rely on equipment & have such exposures. The causes of equipment breakdown losses can include: - heat - pressure - electrical energy - centrifugal force - reciprocating motion

Equipment Breakdown Protection Coverage Form: 10 Insuring Agreements

A policy might NOT include all 10 because the 1) insured doesn't want to purchase some or 2) the insurer is unwilling to provide some. "breakdown" to "covered equipment" = the covered cause of loss for ALL of the insuring agreements. "breakdown" = definition includes failure of pressure or vacuum equipment, mechanical failure, and electrical failure. Multiple exclusions apply when determining whether an event qualifies as a breakdown (ex. computer virus does NOT qualify). Exclusions apply to whether an object qualifies as covered equipment (ex. vehicles, aircraft, watercraft are excluded). A common misconception is that equipment breakdown insurance covers ONLY loss to the covered equipment itself. - In reality, breakdown to covered equipment that occurs during the policy period is the event that triggers the coverage. - Once equipment breakdown coverage is triggered, it covers ANY of the types of loss described in ANY of the insuring agreements that apply to the policy. Insuring Agreements: 1. Property Damage 2. Expediting Expenses 3. Spoilage Damage 4-6. Time Element Coverages 7. Newly Acquired Premises 8. Ordinance or Law Coverage 9. Errors & Omissions 10. Brands & Labels

Equipment Breakdown Protection: Limits of Insurance

An equipment breakdown policy can have several limits of insurance. Normally, every policy has ONE overall limit. The EBP form refers to this overall limit as the "limit per breakdown" which is the most the insurer will pay for loss or damage resulting from any one breakdown. "one breakdown" is defined to include all additional breakdowns that result from an initial breakdown at the same premises. Separate limits may also be shown for some of the insuring agreements.

Builders Risk Reporting Form

An infrequently used option is to write builders risk coverage on a Value Reporting Basis. This can be done by adding the endorsement, which requires the insured to report to the insurer the ACV of covered property as of a specified date each month during the policy period. The insurer charges an initial premium and adjusts the premium during the policy period.

Equipment Breakdown Protection: Deductibles

Application of Deductibles: The insurer will NOT pay for loss resulting from any one breakdown until the amount of loss exceeds the applicable deductible. After subtracting the deductible, the insurer will pay the remaining amount of loss up to the limit. The deductible does NOT reduce the applicable limit. If an equipment breakdown policy has insuring agreements with separate deductibles: - deductibles apply separately for each applicable coverage If the declarations show combined deductibles for 2 or more coverages: - the insurer will subtract the combined deductible only once from the aggregate amount of loss. If more than one item of covered property is involved in one breakdown: - ONLY the highest applicable deductible will apply for each of the coverages.

ADVANTAGE of combining 1) Equipment Breakdown Coverage and 2) Commercial Property Coverage in the SAME POLICY

Avoiding claims disputes that can arise when the two coverages are written by separate insurers.

Example: Equipment Breakdown Insuring Agreements A manufacturing company's boiler exploded. The explosion resulted in the following: - destruction of the boiler - damage to the building - damage to business personal property - bodily injury to some employees - damage to a neighboring building - the owner's loss of income while the building was being repaired Would the equipment breakdown insuring agreements cover the described losses?

Boiler, Building, and Personal Property: Because the explosion was "breakdown" to "covered equipment", the equipment breakdown insurance would cover the damage to the boiler, building, and personal property (under Property Damage). Bodily Injury to Employees: Equipment breakdown insurance would NOT cover bodily injury to employees -- that would fall under Workers Comp insurance. Damage to Neighboring Building: Equipment breakdown insurance would NOT cover damage to the neighboring building, because equipment breakdown insurance does not cover property of others unless it is in the insured's care, custody, or control at a described location. Insured's Loss of Income: The Business Income insuring agreement would cover the insured's loss of income.

Builders Risk Coverage Form (BRCF)

Buildings under construction have unique exposures. - insured property's value increases as work progresses - variety of interest involved (owners, contractors) - increased hazards (theft, fire, natural disasters) This form can be used to insure any building in the course of construction (including farm buildings and dwellings that will not be eligible for BPP when completed). Form's basic components: 1. Property Covered 2. Property NOT Covered 3. Additional Coverages & Coverage Extensions 4. Covered Causes of Loss 5. Valuation 6. When Coverage Ceases

Equipment Breakdown Protection Coverage Form

Commercial insureds' primary concern about equipment breakdown insurance is whether it covers a loss. Can be used in either a monoline equipment breakdown policy or a commercial package policy. Can also be included as an endorsement to a commercial property coverage form or as an optional coverage in a BOP. ADVANTAGE of combining equipment breakdown coverage and commercial property coverage in the SAME POLICY = avoiding claims disputes that can arise when the two coverages are written by separate insurers.

Scheduled Building Property - Tenant's Policy Endorsement

Commercial tenants often are contractually obligated by their leases to insure and pay for loss to certain elements of the buildings they occupy (such as heating and A/C equipment). This endorsement broadens the BPP's coverage to accommodate such situations by insuring "building glass, building fixtures, and permanently installed machinery/equipment" specified in the endorsement's schedule against direct physical loss. A similar endorsement applies on an unscheduled building property basis.

Mechanical Equipment

Common types: - compressors - pumps - blowers - fans - engines - turbines - gear sets Ex. At a milk processing plant, a spring broke on a check valve in a processing machine, causing raw milk to mix with processed milk. The resulting spoiled milk amounted to a $256,000 loss. Ex. The operator of a milling and boring machine failed to ensure that the cutting head was fully withdrawn before changing from vertical to horizontal drilling. The collision caused extensive damage to the cutting head spindle and the ceramic shaft bearings.

Spoilage Damage: Insuring Agreement

Covers spoilage damage to: - raw materials - property in process - finished products while in storage or in the course of being manufactured The spoilage damage must result from: - lack/excess of power, light, heat, steam, refrigeration - insured must own or be legally liable for the property Ex. The insured is a cold storage warehouse and its refrigeration system fails because of breakdown to covered equipment. The spoilage damage coverage would pay for loss resulting from the spoilage of food in the warehouse. The insurer also agrees to pay expenses the insured incurs to reduce the amount of spoilage loss, not to exceed the amount that would otherwise have been payable.

Commercial Property Endorsements

Endorsements that amend either the BPP or any of the three commercial property causes of loss forms perform one of these general functions: 1. Modifying covered property 2. Modifying covered causes of loss 3. Modifying valuation methods or amounts payable 4. Addressing fluctuating property values Endorsements can help customize commercial coverage in ways that provide the most protection for a particular business.

SSP: Covered Perils

Flexibility in limiting the covered perils is an important feature of the policy. ALL the perils covered by the Basic Form are available in the SSP, but the insurer can restrict the covered perils to 3 combinations: 1. fire, lightning, and explosion 2. windstorm, hail, smoke, aircraft, vehicles, riot/civil commotion, sinkhole collapse, and volcanic action 3. vandalism and sprinkler leakage

Air Conditioning & Refrigeration Equipment

Include components such as: - motors - compressors - fans - switchboards - coils - pipes - vessels Causes of loss: - control failure - vibration - lack of lubrication - improper control settings - electrical disturbance Ex. A hotel's compressor motor short-circuited, causing a partial loss of air conditioning during a July convention and resulting in 50% loss of occupancy. The hotel would suffer 1) physical damage and 2) significant business income loss.

Equipment Breakdown Cause of Loss Endorsement

Most commercial property coverage forms exclude equipment breakdown and related causes of loss. A simple option is the add this endorsement to a commercial property coverage part. This endorsement can only be used with the Special Form. This endorsement adds "breakdown" of "covered equipment" as a covered cause of loss under the Special Form.

Equipment Breakdown: Different Market Segments

Small Businesses - often thinly financed and vulnerable to business income/extra expense losses. Heating and A/C equipment are their principal exposures. Ex. Refrigerating equipment can be a significant exposure for grocery stores. Retail stores are highly dependent on integrated scanning/checkout/inventory control systems. Midsize Businesses - include food processors, printers, publishers, and manufacturers. Equipment breakdown exposures can become more complex, including production machinery and processing equipment (in addition to heating and A/C equipment). Large Industrial Organizations - include utilities, chemical companies, oil & natural gas companies, heavy manufacturers, and mining companies. Property values exposed to loss can be very high.

Coinsurance: EBP Condition

Some equipment breakdown policies include coinsurance, and others do not. Coinsurance generally applies ONLY to time element coverages. The EBP form contains a Coinsurance Condition that applies: - only to business income loss - then only if the insurer does not receive the insured's annual report of business income values within 3 months of the Business Income Report Date shown in the declarations. If the Coinsurance condition applies (because the report wasn't received on time), the insurer will NOT pay the full amount of any loss if the estimated annual business income value shown in the report is less than the actual annual business income value for the current period. Instead, the amount of recovery is reduced by the proportion that the estimated value bears to the actual value (multiplied by any applicable coinsurance % lower than 100%).

BRCF: Property Covered

The BRCF covers: - building/structure being built - building materials/supplies intended to become a permanent part of the building - temporary structures built on site (if not covered elsewhere) - personal property if intended to be permanently located in/on the building or within 100 ft of its premises When the Special Form is attached to the BRCF, the insured receives $5,000 in coverage for property in transit on the insured's own vehicles

BRCF: Covered Causes of Loss

The BRCF must be combined with a causes of loss form to be a complete policy. The BRCF amends the Additional Coverage - Collapse provisions of the Broad/Special forms to eliminate coverage for collapse resulting from defective construction materials or methods. A BRCF Endorsement is available to reinstate and extend this aspect of collapse coverage to include collapse caused by defective material/methods as well as faulty design, plans, specifications, or workmanship. Theft coverage can be added by endorsement.

LLCF vs CGL Coverage

The CGL form provides limited coverage for liability arising out of damage to that part of a building rented to or temporarily used by the insured. "fire legal liability" or "damage to premises rented to you" Minimum limit of $100,000 for this coverage (can be increased for additional premium). The CGL form also provides coverage for damage by perils other than fire to premises rented to the named insured for no longer than 7 consecutive days and the limit is the same amount as fire legal liability coverage. Advantage of the LLCF = the broader range of perils that can be insured when the property is rented for longer than 7 consecutive days.

Fungus, Wet Rot, and Dry Rot: EBP Limits

The Limits section contains: Limited Coverage for Fungus, Wet Rot, and Dry Rot provision. This limited coverage is subject to a $15,000 aggregate limit UNLESS the declarations show a higher limit or indicates that the limit applies separately to each covered location. This coverage applies to the cost of removing fungus, wet rot, or dry rot that results directly from a breakdown to covered equipment.

SSP: Property Covered

The SSP covers buildings & business personal property on restricted terms and is designed for insuring "distressed risks" - properties with unfavorable attributes that make them unacceptable in the standard insurance market. The SSP could be used by Fair Access to Insurance Requirements (FAIR) plans, which function as the residual markets for property insurance in many states, or by insurers that specialize in insuring distressed property risks. The SSP could be endorsed to cover: - condo associations - condo unit owners - builders risk

SSP: Conditions

The SSP has 3 conditions that result in more restrictive coverage than under the BPP: 1. Vacancy & Unoccupancy The insurer will NOT pay for loss/damage by any peril if the building has been vacant/unoccupied for more than 60 days. Coverage for Vandalism ceases after 30 days of vacancy. "Vacancy" = the building contains no contents pertaining to the operations/activities customary to the building's occupancy. 2. Increase in Hazard Coverage is suspended during any period in which the hazard has been increased by means within the named insured's knowledge and control. This clause is NOT included in the BPP. 3. Cancellation

Example: Multiple of Daily Value Deductible An insured's business was interrupted for 6 days because of a breakdown to covered equipment. If the breakdown had not occurred, the business income for those 6 days would have been $30,000. If the business income and extra expense deductible is 3x the daily value, what is the amount of the deductible?

The amount of the deductible can be calculated in these 2 steps: 6 = working days $30,000 = lost business income 3 = multiple Deductible = (multiple) x (daily value) Daily Value = (lost income) / (# days interrupted) $30,000 / 6 days = $5,000 daily value 3 x $5,000 = $15,000 deductible

Example: A dental practice, organized as a professional corporation named FDPC, occupies all of a leased building. The lease doesn't require FDPC to purchase direct insurance on the building, but FDPC's insurance advisor suggests that the dentist-owners of the practice should add the LLCF to their commercial package policy to cover the practice's potential liability for damage to the building. There is no personal property of the building owner in the leased building. What should the owners consider when setting the appropriate limit of insurance for their LLCF?

The building is the only property that will be insured. The maximum possible loss that could be sustained under the LLCF would include the building's current Replacement Cost plus estimated damages for loss of use that could be sustained in a single loss. The building owner can provide a recent appraisal of the building's replacement cost value. The worst-case scenario for loss of use might be the monthly rent payment x the # of months it would take the owner to replace the building. Because the LLCF contains no coinsurance provision and total building losses are not as probable as smaller losses, the limit could be set for a lower amount than the worst-case scenario.

Property Damage: Insuring Agreement

The insurer agrees to pay for direct damage to covered property. The policy definition of "covered property" is distinct from and much broader than the policy definition for "covered equipment". Covered property can be one or both of these: 1. Property that the named insured owns 2. Property that is in the named insured's care, custody, or control and for which the named insured is legally liable. In either case, the property must be located at a location described in the declarations. ISO coverage form contains a loss condition: Defense = gives the insurer the right (not the duty) to defend the insured against (and cover expenses for) suits arising from claims of property owners (such as the owner of property in the insured's care, custody, or control).

EBP: Determination of Deductibles

There are 4 possible deductibles: 1. Dollar Deductible = the dollar amount shown in the declarations 2. Time Deductible = used for Business Income and Extra Expense coverages - shown as a specified number of hours/days immediately following a breakdown 3. Multiple of Daily Value Deductible = shown in the declarations as a (number) x (the insured's daily value) - Daily Value = (lost BI) / (# days interrupted) 4. Percentage of Loss Deductible = most frequently used with Spoilage Damage coverage - the dollar amount of the deductible is calculated by (specified %) x (gross amount of loss) before applying ded or coins penalty ** the Multiple of Daily Value and the Percentage of Loss deductibles can be subject to a minimum and/or maximum deductible at the underwriter's discretion.

Suspension: EBP Condition

This condition allows the insurer to immediately suspend equipment breakdown insurance on an item of equipment that the insurer determines to be in a dangerous condition. The insurer will deliver a written notice of suspension to the named insured. Once suspended, the coverage can be reinstated only by endorsing the policy.

BRCF: Valuation

This condition calls for settlement of covered losses at ACV. The BRCF does NOT contain optional replacement cost coverage provisions.

BRCF: Need for Adequate Insurance

This condition is a 100% coinsurance clause where the amount of insurance that should be carried is based on the value of the building on the date it will be completed.

Jurisdictional Inspections: EBP Condition

This condition provides the insurer will perform required inspections of boilers and other equipment on the insured's behalf. The EBP form does NOT contain this condition, but many equipment breakdown policies do. Major reason for purchasing equipment breakdown insurance = obtaining inspection service

Errors & Omissions: Insuring Agreement

This coverage says the insurer will pay for loss or damage not otherwise covered under this form for certain reasons: - any error or unintentional omission in the description or location of insured property - any failure through error to include premises owned or occupied by the insured when coverage begins - any error or unintentional omission by the insured that results in cancellation of insurance for the premises An error or omission must be reported & corrected when discovered. The premium will be adjusted to reflect the date the premises should have been added to the policy. NO coverage is provided as a result of any error in the reporting of values or the coverage that the insured requested. ** many equipment breakdown forms do NOT contain an Errors or Omissions provision. This is a broadening coverage that insureds often ask insurers to add to their property insurance policies.

Functional Building Valuation Endorsement

This endorsement addressed the problem below by providing modified replacement cost coverage. Ex. An older building constructed using designs/materials/techniques that are now very expensive. Insuring such buildings on either an ACV or replacement cost basis can be a problem if they can be repaired/replaced for much less using contemporary building techniques/materials. For a total loss, this endorsement covers the cost to repair/replace the building with a less costly building that is functionally equivalent to the original one. For a partial loss, the insurer's payment for the damaged portion's repair/replacement is calculated on the basis of using less costly material in the style that existed before the loss. This endorsement deletes the BPP Coinsurance condition.

Limited Coverage for Unmanned Aircraft Endorsement

This endorsement can be added to the BPP and a few other commercial property coverage forms to cover physical loss to covered drones. Coverage can be arranged on: - a Scheduled Basis with an individual limit for EACH drone - a Blanket Basis with one limit for ALL covered drones - a combination of scheduled and blanket limits This endorsement can also be added to Business Income and Extra Expense coverage forms to cover time element losses resulting from physical loss to covered drones.

Utility Services - Direct Damage Endorsement

This endorsement can be used to cover physical losses excluded by the Utility Services Exclusion. It extends coverage to include damage to property described in the endorsement schedule, caused by the interruption of service to the described premises. The interruption must result from damage by a covered peril to: - water-supply property - communication-supply property, including overhead transmission lines - communication-supply property, not including overhead transmission lines - power-supply property, including overhead transmission lines - power-supply property, not including overhead transmission lines This endorsement EXCLUDES loss to electronic data.

Discharge from Sewer, Drain, or Sump (NOT flood-related) Endorsement

This endorsement covers direct physical loss to covered property caused by the discharge of water or waterborne material from a sewer, drain, or sump on the described premises. The discharge is NOT covered if it results from flood. "Flood" in this endorsement = surface water, waves, tidal water, and overflow of any body of water (including storm surge). Discharge Limit for Property Damage is shown in the schedule = the most the insurer will pay under this endorsement for the total of all covered loss/expense. Discharge Limit for Business Interruption is shown in the schedule = the endorsement will also cover business income loss and/or extra expenses.

Increased Cost of Loss & Related Expenses for Green Updates Endorsement

This endorsement includes three coverage: 1. provides an additional limit to cover the increased cost of replacing damaged property with more environmentally sound materials. 2. provides an additional amount for expenses related to green updates. Including: - waste reduction & recycling expenses - design/engineering fees - certification fees - equipment testing costs - expenses for building air-out 3. extends the period of restoration for any increased construction time resulting from the use of green updates. - third coverage applies ONLY if business income/extra expense coverage is included in the policy.

Value Reporting Form Endorsement

This endorsement provides another way to avoid the costs of overinsuring or underinsuring business personal property. It sets a limit high enough to cover the insured's maximum expected values at any time during the policy period. The insured reports values to the insurer at periodic intervals specified in the endorsement. As long as the insured reports property values accurately and on time, the insurer will pay the full amount of any loss that occurs (subject to limits) even if the values on hand at the time of the loss are greater than those last reported to the insurer. At the end of the policy period, the insurer computes the average values that were exposed to loss and uses it to determine the premium. The final premium is based NOT on the policy limit, but on the values reported by the insured.

Peak Season Limit of Insurance Endorsement

This endorsement provides differing amounts of insurance for selected time periods during the policy term, dates shown in the endorsement schedule.

Ordinance or Law Coverage Endorsement

This endorsement provides three coverages: Coverage A = covers the reduction in value of the undamaged portion of the building that must be demolished to comply with an ordinance/law. Coverage B = covers the cost to demolish the undamaged portion of the structure and remove its debris. Coverage C = covers the increased cost to repair/reconstruct damaged property, or to reconstruct/remodel undamaged portions of the property, to confirm with the minimum requirements of an ordinance/law.

Newly Acquired Premises: Insuring Agreement

This extends the other coverages provided by the policy to apply at newly acquired premises the insured buys or leases. Coverage begins when the insured acquires the property. Coverage continues for the # of days shown in the declarations. An insured must inform the insurer in writing of the newly acquired premises as soon as practicable and agree to pay additional premium determined by the insurer.

Contingent Business Income: Time Element Insuring Agreement

This insuring agreement (like dependent properties coverage) covers business income & extra expense (or only extra expense) arising from breakdown of covered equipment at the location shown in the declarations that is NOT owned or operated by the insured. The breakdown must either: 1. wholly or partially prevent the delivery of services or materials to the insured or from the insured to others for the insured's account 2. result in the loss of sales at the named insured's premises shown in the declarations

Utility Interruption: Time Element Insuring Agreement

This insuring agreement extends any business income, extra expense, or spoilage damage coverage provided by the policy to include loss resulting from breakdown of covered equipment owned, operated, or controlled by the local private or public utility or distributor who supplies the insured: - electrical power - communication services - air conditioning - heating/gas - sewer/water/steam Ex. A utility's electrical transformer is destroyed by a breakdown, shutting off all electrical power to the insured's premises for several days. Utility interruption coverage will cover the resulting loss of business income following the waiting period shown in the declarations.

Brands & Labels: Insuring Agreement

This is similar to the Brands & Labels endorsement available for commercial property policies. The insurer agrees to pay reasonable costs the insured incurs in stamping merchandise with the word "Salvage" or removing brands & labels. The total the insurer will pay for such costs and the value of the damaged property CANNOT exceed the applicable limit on such property.

Limitations on Coverage for Roof Surfacing Endorsement

When a building is insured with the Replacement Cost optional coverage, replacement cost is applicable to all covered building property, including the building's roof surfacing. The insurer's payment can be far in excess of the roof's ACV, and giving the insured a substantial betterment. This endorsement enables the insurer to change the valuation of roof surfacing from Replacement Cost to ACV for any building in the schedule. The insurer will be able to deduct accumulated depreciation of the roof surfacing when determining the amount of loss payable for roof damage resulting from a covered cause of loss. The insurer can also exclude cosmetic damage to roof surfacing caused by wind/hail.

Commercial Property Policies & Equipment Breakdown Coverage

While equipment breakdown coverage is often needed to cover equipment breakdown losses, Commercial Property Policies offer coverage for some of the common perils that affect equipment. 1. Boilers & Pressure Vessels - Commercial Property Policies EXCLUDE loss (other than resulting fire) caused by the explosion of steam boilers that are owned or leased by the insured or operated under the insured's control. - Commercial Property Forms DO COVER the explosion of unfired pressure vessels, so these are usually excluded under equipment breakdown policies. - Commercial Property Policies DO COVER combustion explosion "furnace explosion", so these are usually excluded under equipment breakdown policies (unless added by endorsement). 2. Electrical Equipment - Commercial Property Policies EXCLUDE damage caused by artificially generated electrical current to electrical devices, appliances, or wires. - Commercial Property Policies EXCLUDE electrical breakdown of motors, generators, transformers caused by short circuits or line surge (UNLESS as a result of lightning) - Commercial Property Policies DO COVER damage resulting from lightning, including damage to electrical components that are covered property. - Commercial Property Policies DO COVER fire damage that results from any electrical breakdown. 3. Mechanical Equipment - Commercial Property Policies EXCLUDE loss resulting from mechanical breakdown. 4. Air Conditioning & Refrigeration Equipment - Commercial Property Policies EXCLUDE most breakdown losses to A/C and refrigeration equipment. 5. Office Equipment & Supplies - Commercial Property Policies DO COVER damage to office equipment from certain causes of loss