CAIB 2 Ch 1 - Sept 2024.pptx

CAIB 2: Chapter 1 Introduction to Commercial Property Insurance CAIB Introduction to Commercial Property Insurance Overview of commercial property. Categories of building use: Residential Non-mercantile...

CAIB 2: Chapter 1 Introduction to Commercial Property Insurance CAIB Introduction to Commercial Property Insurance Overview of commercial property. Categories of building use: Residential Non-mercantile Mercantile Manufacturing/ Industrial Focus of commercial property insurance CAIB Understanding Commercial Risks Higher likelihood of loss in commercial properties. Examples of increased risks in commercial environments: Use of fire/heat in manufacturing. Chemical processes in industrial settings. High foot traffic in retail establishments. Importance of tailored insurance coverage. CAIB Public and Institutional Risks Public service buildings: Churches, halls, libraries. Institutional buildings: Hospitals, schools, government offices. Non-mercantile exposures and their insurance considerations. CAIB Types of Property Insured in Commercial Property Insurance Categories of insured property: Building Equipment Stock Scheduled vs. All Property basis. Example of scheduled coverage. Scheduled Coverage: Only specific items listed on the policy are insured. $1,500,000 for a one-story grocery store building in Vancouver. $400,000 for stock within the building. $125,000 for equipment. All Property Basis: A single limit of insurance applies to all property owned by the insured, simplifying coverage but requiring careful attention to ensure adequate coverage limits. CAIB Defining Building in Commercial Property Insurance Components included in the definition of a building: Fixed structures on the premises. Additions and extensions. Permanent fittings and fixtures. Maintenance materials and supplies. Indoor growing plants used for decoration. CAIB Defining Stock in Commercial Property Insurance Stock includes: Merchandise usual to the business. Packing, wrapping, and advertising materials. Similar property of others under the insured's care. CAIB Defining Equipment in Commercial Property Insurance Equipment includes: Business contents like furniture, machinery, and appliances. Similar property of others under the insured’s care. Tenant’s improvements and betterments. CAIB Introduction to Determining Insurance Values Overview of the importance of determining accurate insurance values Role of brokers in advising insureds on property value determination Key methods for determining property value in insurance Different valuation approaches used in insurance CAIB Actual Cash Value (ACV) Overview Definition and interpretation of ACV Represents the cost to repair or replace lost or damaged property, less depreciation. Methods used to determine ACV: Formula/Cost Approach Market Value/Direct Sales Approach Income Approach True Value to the Owner Broad Evidence Rule CAIB  Definition of replacement value Replacement The cost to repair, replace, or rebuild lost or damaged property Value and Its without deducting for depreciation. Key considerations in Importance determining replacement value Importance of appraisals for insurance on this basis CAIB Book Value in Insurance Definition of book value original purchase price of an item, reduced by depreciation or other write-offs. It represents the value of an asset as recorded in the company's financial books. How book value is calculated Why book value is not suitable for insurance purposes CAIB Commercial Property Insurance Policies Overview of types of commercial property policies Differences between standard, manuscript, and package policies Reinsurance and subscription policies CAIB Common Clauses in Commercial Property Insurance Indemnity Deductible Clauses Minimum Premiums Agreement and Retained Premiums CAIB Reinsurance and Subscription Policies Definition and purpose of reinsurance Insurance for insurers How subscription policies function Comparison of reinsurance and subscription policies from the broker and insured's perspective CAIB Importance of Accurate Valuation in Commercial Property Insurance Impact of underinsurance and over insurance The broker's responsibility in guiding insureds Tools and resources for accurate property valuation CAIB Understanding Co-Insurance Definition: Co-insurance is a clause that applies separately to each item as specified on the "Declarations Page." Applicability: It only comes into play if the amount of loss or damage exceeds the lesser of 2% of the applicable amount of insurance or $5,000. Requirement: The Insured must maintain insurance coverage equal to at least the value of the property multiplied by the co- insurance percentage stated. CAIB Historical Background Marine Insurance Origins: The co- insurance principle was utilized in marine insurance from its inception. It helped manage the distribution of loss among various insurers. 20th Century Adoption: Co- insurance clauses became a common feature in fire insurance policies during the 20th century. CAIB  Waiver of Co-Insurance Purpose: To simplify the process for Application: The co-insurance handling small claims where co- clause is waived if the total loss is insurance compliance might be costly less than either 2% of the insurance or impractical. amount or $5,000, whichever is lower. CAIB Claims Example: Pete Moss Scenario: Pete Moss experienced a $1,200 fire loss. His insurance covered $72,000 with an 80% co-insurance requirement. Insurance Details: Did: $72,000 (Insurance coverage). Should: 80% of $120,000 (Value of stock) = $96,000. Outcome: Since the loss was less than 2% of the coverage ($1,440) and below $5,000, the co- insurance clause was waived, allowing Pete to recover the full $1,200. CAIB Stated Amount Co- Insurance Clause Definition: This clause replaces the standard co- insurance clause when specified on the Declarations Page. Requirements: Insured must file a Statement of Values indicating 100% of the value of insured property. The policy will revert to a 100% co-insurance basis if insurance is not maintained at the stated amount. CAIB  Exclusions in Insurance Policies Types of Exclusions: Reasons for Exclusions: Property Excluded: Specific types Uninsurable Risks: Deliberate of property that are not covered. acts of violence, nuclear hazards. Perils Excluded: Certain risks or Catastrophic Risks: Earthquake, events that are not covered. floods. Specialized Coverage: Automobiles, business records. Controlled Risks: Wear and tear, marring. Increased Risk: Communication towers, construction sites. Illegal Activities: Losses related to illegal substances. CAIB Permissio n Clauses Permission for Other Insurance: Allows concurrent insurance policies as long as they are similar in coverage. Additions and Alterations: Insureds can make changes without prior insurer permission. Usual Business Practices: Materials and processes typical to the business are permitted. CAIB Breach of Conditions General Rule: Non-compliance with policy conditions can lead to denial of claims. Exceptions: If the breach did not cause or worsen the loss. Breaches in areas the Insured cannot control. CAIB Reinstatement Clause Definition: Ensures that insurance amounts are automatically reinstated after a loss. Historical Practice: Previously, insurance amounts were reduced after a claim, requiring the Insured to request an increase. Modern Practice: Automatic reinstatement avoids administrative costs and simplifies coverage management. CAIB  Definition: The Insurer’s right to pursue recovery from third parties after compensating the Insured. Subrogat Key Points: ion Insurer can initiate legal action in the Insured’s name. Recovery is shared if it doesn’t fully cover the loss. Certain parties are protected from subrogation. CAIB Property Protection Systems Overview Property protection systems include fire Purpose: To prevent and mitigate losses extinguishing systems, fire detection through proactive measures. systems, and intrusion detection systems. CAIB Notification of System Issues Immediate Notification: Notify the Insurer immediately of any issues with: Sprinkler Systems: Any interruptions, flaws, or defects. Fire Detection Systems: Any malfunctions or defects. Intrusion Detection Systems: Any faults or defects. CAIB Cancellation of Monitoring or Maintenance Contracts Notification Requirement: Inform the Insurer immediately if: Monitoring Contracts: Any contract for monitoring services is canceled or not renewed. Maintenance Contracts: Any maintenance service contract is terminated. CAIB Suspension of Police Service Notification Requirement: Inform the Insurer immediately if: Police Service Suspension: Notification is received about the suspension of police response due to system malfunctions. CAIB Premium Adjustment Clause Overview Purpose: Adjust premiums based on actual stock values reported. Process: Submit Premium Adjustment Application: Within six months after policy expiry. Report Stock Values: For each month of the policy period. CAIB Refunds and Exclusions Excess Premium Refund: Refund up to 50% of excess premiums if the actual premium is less than paid premiums. Exclusions: Excess values above the insured amount are not included in refund calculations. CAIB Verification of Values Clause INSURER’S RIGHTS: INSPECT THE INSPECTION PERIOD: UP TO ONE INSURED PROPERTY AND RECORDS YEAR AFTER POLICY TERMINATION AT REASONABLE TIMES. OR EXPIRATION. CAIB Basis of Valuation: Stock Unsold Stock: Actual cash Sold Stock: Selling price Special Valuations: For value or cost to repair/replace minus discounts. tenant improvements, with similar material. business records, and property of others. CAIB Tenant's Improvements Valuation Repaired or Replaced: Not Repaired or Cost of repair or Replaced: Pro-rata value replacement with due based on lease term diligence. remaining. CAIB Business Records Valuation Manually Maintained Records: Cost of blank materials and labor to reproduce records. Automated Records: Costs for reproducing data from duplicates or originals. CAIB Property of Others Insurer’s Option: Loss may be paid to the Insured or directly to the property owner. Purpose: Simplify claims processing and ensure fair settlement. CAIB Locked Vehicle Warranty - Overview Definition: A clause in insurance policies covering theft from vehicles. Description: The warranty outlines specific conditions under which theft coverage applies for property stored in vehicles. Application: Applies only when the property is stolen from an unattended vehicle, not under the control of a common carrier (e.g., a shipping company). Key Terms and Conditions: Vehicle must have a fully enclosed compartment. Doors must be securely locked, and windows closed. Theft must result from forcible entry with visible evidence. CAIB Locked Vehicle Warranty - Terms of the Warranty Fully Enclosed Body or Compartment: Definition: A vehicle must have a securely enclosed area to store property. Example: Theft coverage does not apply to property in an open truck bed or a non-metal enclosure. Securely Locked Doors and Closed Windows: Definition: All doors and windows must be locked and closed to qualify for coverage. Forcible Entry with Visible Evidence: Definition: Entry into the vehicle must show visible signs of force. Example: Thieves using advanced tools that leave no visible damage may result in denial of coverage. CAIB Statutory Conditions and Commercial Property Policy Conditions Statutory Conditions Overview: Definition: Standard rules mandated by provincial insurance acts for fire insurance contracts. Inclusion: Required to be printed on every fire insurance policy. Evolution to Commercial Property Policy Conditions: Definition: Updated conditions adopted by insurers for clarity and broader application beyond fire policies. Variation: Conditions may differ slightly between insurers, though they closely follow statutory conditions. CAIB Misrepresentati on in Insurance Contracts Definition of Misrepresentation: Providing false information or omitting crucial facts that affect the insurer's decision. CAIB Misrepresentation in Insurance Contracts Types of Misrepresentation: False Description of Property: Definition: Misleading statements about the property’s characteristics. Example: Incorrectly describing the quality or condition of a building to lower premiums. Misrepresentation of Material Facts: Definition: Providing incorrect details about facts that influence the insurer’s risk assessment. Example: Failing to disclose the presence of hazardous materials on the premises. Fraudulent Omission: Definition: Deliberately withholding significant information with the intent to deceive. Example: Hiding knowledge about a faulty safety system. CAIB  Impact on Insurer’s Risk Assessment: Definition: The insurer's evaluation of risk is altered by inaccurate property False descriptions. Intentional vs. Unintentional Descriptio Misstatements: Intentional: Deliberately providing false n of information to reduce insurance costs. Unintentional: Providing incorrect details without realizing the inaccuracy. Property Example: Incorrectly stating the building’s construction type to lower premiums. CAIB Misrepresentation of Material Facts Definition of Material Fact: Description: Information that, if known, would influence the insurer’s decision to provide coverage or set premiums. Examples of Material Facts: Building Construction: Information about the structure and safety features. Hazardous Materials: Storage or use of dangerous substances. Previous Claims: History of insurance claims that may affect risk. Financial Status: Details about the insured’s financial stability and mortgages. CAIB Fraudulent Omission of Material Facts Definition of Fraudulent Omission: Description: Willful intent to deceive the insurer by hiding significant information. Example: Deliberately omitting knowledge of a malfunctioning fire suppression system. Impact on Coverage: Consequences: Can lead to denial of coverage or voiding of the insurance contract. CAIB Effect of Misrepresentation Proof Required by Insurer: Description: The insurer must demonstrate that misrepresentation caused or contributed to the loss. Impact on Coverage: Voiding the Contract: If misrepresentation is proven, the contract can be deemed void and unenforceable. CAIB Duration of the Duty Ongoing Duty of Disclosure: Description: The requirement to disclose material facts continues throughout the contract’s duration. Material Change (Statutory Condition #4): Definition: Obligation to inform the insurer of any significant changes that increase risk. Insurer’s Options: Cancel Policy: Return unearned premium. Adjust Premium: Continue coverage with an additional premium. Void Coverage: If changes are not reported, coverage is voided. CAIB Additional Notice to Authorities: Definition: Immediate reporting of theft, malicious Conditions acts, or suspected crimes to relevant authorities. Purpose: Ensures credibility and compliance with legal requirements. in Sue and Labour: Definition: Obligation to make reasonable efforts Commercial to recover lost property and share recovery costs. Example: Insureds must pursue recovery of stolen items, with costs shared between Property insurer and insured. No Benefit to Bailee: Policies Definition: Insurance does not cover losses while property is in the custody of a bailee (e.g., carrier). Purpose: Ensures bailees remain responsible for property. CAIB Additional Conditions in Commercial Property Policies Pair and Set: Definition: Loss or damage to one item in a set is compensated proportionally, not as a total loss of the set. Example: Damage to one piece of a matching set of furniture does not warrant full replacement of the set. Parts: Definition: Coverage for loss or damage to individual parts of property is limited to the value of the damaged part, including installation costs. Example: Damaged carpet in one room is covered based on the value of the affected area, not the entire carpet. CAIB