Fundamentals Chapter 7.pptx

 CHAPTER 7 - COMMERCIAL PROPERTY INSURANCE COMMERCIAL PROPERTY DEFINED DEFINITION COMMERCIAL PROPERTY ○ Any property owned/used in conjunction with a business and includes building, stock, and equipment DEFINITION OF “ALL PROPERTY” can include building, stock, and eq...

 CHAPTER 7 - COMMERCIAL PROPERTY INSURANCE COMMERCIAL PROPERTY DEFINED DEFINITION COMMERCIAL PROPERTY ○ Any property owned/used in conjunction with a business and includes building, stock, and equipment DEFINITION OF “ALL PROPERTY” can include building, stock, and equipment DEFINITION OF “CONTENTS” can include stock and equipment  COMMON POLICY FORMS NAMED PERILS FORM - 8 Perils 1. Fire, lightening (including loss/damage to electrical devices), explosion (limited), 2. impact by aircraft, spacecraft, or land vehicle, 3. Riot, 4. vandalism, OR malicious acts, 5. Smoke due to sudden, unusual, faulty operation of ANY stationary furnace, 6. Leakage from fire protective equipment, 7. Windstorm OR 8. Hail  BROAD FORM (IBC 4037) Insures “all risks of direct physical loss or damage” SUBJECT TO policy conditions/exclusions COVERAGE ADVANTAGES i) Vehicle impact damage to insured’s buildings EVEN WHEN CAUSED by insured/their employees Businesses where there are vehicles used on premises ii) All sources of smoke damage, EXCLUDING agricultural smudging OR industrial operations ○ DEFINITION AGRICULTURAL SMUDGING Lighting smoke pots to reduce potential of frost damage to fruit or plants When smoke has a high density OR is moved by wind, there may be smoke damage This is a trade risk that insureds are SOLELY RESPONSIBLE FOR  BROAD FORM (IBC 4037) iii) Water damage because of freezing OR rupture of water lines EXCLUDED water losses ○ Flooding, Overflow of ANY body of water, Seepage through basement walls and floors, Sewer backup iv) Theft v) Collapse Areas where there can be large accumulations of snow over a short period of time EXCLUDES ○ Earthquake, cost to make good faulty OR improper material, workmanship, OR design vi) All other perils NOT SPECIFICALLY EXCLUDED  COMMON POLICY FORMS PREMIUMS ARE HIGHER FOR BROAD FORM VS. NAMED PERILS POLICIES Determination of Premium Insurer determines basic fire rate (the rate the insurer thinks is needed to insure perils covered under named perils form) ○ Calculated → basis of cost per $100 of insurance EXAMPLE Basic fire rate 0.70 means insurer is charging $0.70 for every $100 of insurance purchased TO INSURE AGAINST fire loss  COMMON POLICY FORMS PREMIUMS ARE HIGHER FOR BROAD FORM VS. NAMED PERILS POLICIES To determine basic fire rate, insurer must consider: 1. Construction (is it made of wood?) 2. Protection (availability AND type of fire protection) ○ Public Protection → the protection for insured property from outside sources Some communities spend more on fire protection (lower rate) Proximity to fire halls/hydrants Established fire department with FULL TIME PAID staff Sufficient water supply Year-round accessibility to water supply ○ Private Protection → What has the applicant done to prevent or reduce loss Fire extinguishers Fire detection system (smoke/heat alarms) Automatic sprinkler system  COMMON POLICY FORMS 3. Occupancy What are people doing in the building → garage, restaurant, night club, bookstore 4. Location Distance from other buildings Construction/occupancy of nearby buildings Character of neighbourhood 5. Claims History Review claims history → usually 5 years Categories of businesses with the greatest number AND severity of fire losses will get a higher fire rate  COMMON POLICY FORMS WHEN BASIC FIRE RATE IS ESTABLISHED → A loading is applied to pay for additional perils insured by broad form policy EXAMPLE: insurer may charge additional loading of 0.05/$100 to insure all other perils covered by broad form EXAMPLE: basic fire rate + loading (0.70+0.05 = 0.75/$100  CLAUSES COMMON TO COMMERCIAL PROPERTY INSURANCE FORM 1. Description of Property Insured Named Perils Form and Broad Form insures the building(s), stock, and equipment of a business - specifically described in the policy 1. DEFINITION BUILDING ○ Buildings described on Declarations Page INCLUDES i) Fixed structures PERTAINING TO building(s) located on premises Permanently installed or affixed to land and have a use of their own: metal perimeter fencing, pole sign, yard lights ii) Additions AND extensions communicating AND in contact with buildings Value of attached lean-to OR addition to insured building WOULD BE INCLUDED in limit of insurance  CLAUSES COMMON TO COMMERCIAL PROPERTY INSURANCE FORM 1. Description of Property Insured 1. DEFINITION BUILDING ○ Buildings described on Declarations Page INCLUDES iv) Materials, equipment, supplies on premises FOR maintenance, normal repairs AND minor alterations to building OR FOR building services Janitorial supplies, carpentry tools, bolts and nails, paint supplies, carpeting v) Growing plants, trees, shrubs, flowers inside building for decorative purposes when insured is owner of building Applicants have to make sure that limit of insurance they choose is enough to include the value of all items falling in within definition of building  CLAUSES COMMON TO COMMERCIAL PROPERTY INSURANCE FORM 2. DEFINITION OF STOCK i) Merchandise (every description) usual to insured’s business ○ Business description must be on the Declarations Page, and when stock insurance is purchase, there is coverage for all merchandise or things sold USUAL TO THE BUSINESS ii) Packing, wrapping, advertising materials iii) Similar property belonging to others that insured is obligated to keep insured OR that he is legally liable ○ Law holds employers legally liable for damage caused by employees to property of others Brokers have to make sure that insurance limit selected is enough to include value of ALL items under the definition of stock  CLAUSES COMMON TO COMMERCIAL PROPERTY INSURANCE FORM 3. DEFINITION OF EQUIPMENT i) GENERALLY, all contents usual to insured’s business (furniture, furnishings, fittings, fixtures, machinery, tools, utensils, appliances OTHER THAN building OR stock as defined below ○ Office furniture, staff room furnishings, photocopiers, forklift, tractor ii) Similar property that belongs to others that insured is obligated to keep insured OR insured is legally liable for iii) Tenant’s improvements (defined as building improvements, alterations, betterments) made at expense of insured to a “building” occupied by insured AND WHICH isn’t otherwise insured PROVIDED insured isn’t the owner of the “building”  CLAUSES COMMON TO COMMERCIAL PROPERTY INSURANCE FORM...IF insured purchased for use the interest in tenant’s improvements made by the previous tenant, the Form applies as though the tenant’s improvements had been made AT THE INSURED’S EXPENSE Not all insureds run their business out of buildings they own Some insureds rent a space that is unfinished and needs improvements before they can open for business Tenants don’t own or have insurable interest in the building AND SO aren’t entitled to put insurance on it APPLICANTS must make sure to select an insurance limit enough to include value of all items defined as equipment  2. Co-Insurance Clause Insured will maintain insurance concurrent with this Form on the property insured TO THE EXTENT OF AT LEAST the co-insurance percentage (on Declarations Page) of the ACV thereof....failing to maintain this insurance percentage, the insured is only entitled to recover the portion of a loss that the insurance amount in force AT TIME OF LOSS bears to the amount of insurance REQUIRED TO BE MAINTAINED by the clause ○ Co-Insurance clause provisions apply to partial losses only  2. Co-Insurance Clause WHY A CO-INSURANCE CLAUSE? Most losses are partial losses, SO people sometimes under insure on purpose to save money BEFORE CO-INSURANCE, insureds would collect the total amount of a partial loss by showing they had enough insurance to cover the loss PAYING ALL PARTIAL LOSSES FULLY WAS NOT FAIR TO: ○ i) Insurers who were usually paying fully for losses they were collecting only a portion of the premium Insurer takes the majority of the risk ○ ii) Insureds - when parties don’t buy enough insurance, rates increase in order to pay losses  2. Co-Insurance Clause THE SOLUTION Co-Insurance Clause applies a penalty for ALL partial losses MIN limits of insurance to be purchased is normally set by insurer NO LESS than 80% of ACV of property insured Encourages insureds to buy insurance equivalent to the FULL value of their property to ensure full indemnity if there is a total loss IF the percentage requirement IS NOT MET, insureds are then paid LESS than the amount of the loss  2. Co-Insurance Clause DETERMINING THE AMOUNT OF SETTLEMENT FOR A PARTIAL LOSS Partial Loss → adjuster always tries to decide if the insured has bought enough insurance to comply with the co-insurance clause FORMULA APPLIED TO ALL PARTIAL LOSSES ○ (Did/Should) x (Amount of Loss) = Settlement ○ Did → Amount of insurance purchased ○ Should → % of Insurance required x ACV (usually 80%) When insureds share in the loss, they BECOME “co-insurers” NOTE: if property coverage is bought on a REPLACEMENT COST BASIS, then calculations of co-insurance use replacement cost NOT ACV  2. Co-Insurance Clause CO-INSURANCE AND WAIVER OF CO-INSURANCE Co-Insurance clause applies SEPARATELY to EACH item that has a co-insurance percentage (specified on Declarations Page) and ONLY WHERE the total loss exceeds LESSER of 2% of the applicable insurance amount OR $5,000 ○ IF A LOSS OCCURS for building, stock, or equipment, and there is a co-insurance percentage for each, then the co- insurance percentage will apply SEPARATELY to EACH coverage limit ○ The Co-insurance clause applies ONLY WHERE amount of loss EXCEEDS 2% of applicable insurance amount OR $5,000 ○ PURPOSE OF THIS CLAUSE: facilitates adjustment of SMALL losses  2. Co-Insurance Clause CO-INSURANCE AND WAIVER OF CO-INSURANCE Co-Insurance clause applies SEPARATELY to EACH item that has a co-insurance percentage (specified on Declarations Page) and ONLY WHERE the total loss exceeds LESSER of 2% of the applicable insurance amount OR $5,000 IMPORTANT: For any loss, the insurer will pay the LEAST OF ○ a) amount calculated using the co-insurance formula ○ b) limit of insurance ○ c) amount of loss  3. Debris Removal Insurer INDEMNIFIES INSURED for expenses incurred ○...for removing the debris of property insured, OCCASIONED BY loss or damage to property FOR WHICH loss or damage insurance is afforded (under this form) ○...when removing debris or other property WHICH IS NOT INSURED by this form BUT HAS BEEN BLOWN (windstorm) on to location on the Declarations Page Debris removal expense → NOT CONSIDERED when determining the ACV (purpose of applying co-insurance) WHAT DOES THIS MEAN ○ Insurance is to repair, rebuild, replace property after a loss BUT if there is a big loss, insureds would have the added expense of removing debris from premises ○ If insurance limits aren’t fully used to pay for insured damage, the insurer AGREES to let insureds use remaining amounts to cover debris removal costs  3. Debris Removal COVERAGE IS NOT PROVIDED WHEN ○ All limits are used to pay claims NON-INSURED PROPERTY IS BLOWN ONTO PREMISES ○ Windstorm or tornado causes uprooting of trees, buildings moved off their foundations,  4. REINSTATEMENT CLAUSE Loss under ANY items (this form) WILL NOT REDUCE the applicable insurance amount WHAT DOES THIS MEAN ○ CONTRACT LAW → insurer’s financial obligation to insured is OVER when insurance limits are fully used (to pay claims) ○ The reinstatement clause → insureds will have as much insurance on property AFTER insured loss as immediately before it WHAT DOES THIS MEAN → limits of insurance provided by policy are UNCHANGED for ENTIRE policy period REGARDLESS of how many and amounts of claims paid  5. SUBROGATION CLAUSE INSURER (upon making ANY payment or assuming liability under this form) will be SUBROGATED to ALL RIGHTS OF RECOVERY of insured against others AND MAY BRING ACTION to enforce the rights ○ All rights of subrogation are HEREBY WAIVED against any corporation, firm, individual, other interest WITH RESPECT TO which insurance is provided by the policy IF the net amount is recovered (after deducting cost of recovery)ISN’T ENOUGH for complete indemnity for the loss or damage, THAT AMOUNT will be divided between the insurer and insured IN PROPORTION in which the loss or damage bears to each respectively  5. SUBROGATION CLAUSE ANY RELEASE FROM LIABILITY that insured enters into before loss WILL NOT AFFECT the right of insured to recover WHAT DOES THIS MEAN ○ When insurer pays a claim for damage caused to insured’s property by others, it can seek to recover from the responsible party ○ Insurer AGREES not to exercise the RIGHT OF SUBROGATION against any party with insurable interest in property insured Payees, business partners, subsidiary firms  6. Property Protection Systems SYSTEMS: a) Sprinkler OR OTHER fire extinguishing system b) Fire detection system c) Intrusion detection system PURPOSE of property protection systems → to prevent loss OR reduce severity RATE CREDITS Provided by insurers to encourage businesses to get these protection systems OR they won’t provide coverage until some systems are installed  6. Property Protection Systems Property protection systems must be properly maintained otherwise they won’t be able to prevent or reduce loss (as they are supposed to) Insureds with property protecting systems MUST NOTIFY INSURER IMMEDIATELY WHEN They know there’s an interruption to, flaw, OR defect in the system Any contract that provides monitoring OR maintenance services to protection systems have been cancelled or not renewed They have been given notice of the suspension of police service in response to any such system IF THE ABOVE SITUATIONS EXIST, THE INSURER CAN ○ Reduce coverage ○ Charge additional premium(s) ○ Cancel the policy  OTHER COMMERCIAL PROPERTY INSURANCE COVERAGES OR FORMS All property insurance policies have two types of exclusions: Property excluded AND Perils excluded Additional coverages can be bought (separately) 1. Property Away from the Insured Premises Coverage by the commercial property insurance policies apply ONLY WHEN property is at the locations on the Declarations PAge ADDITIONAL PREMIUM → coverage for off-premises location(s) i) Property In Transit (premises coverage) ○ Extends to cover stock and equipment OR contents in transit (in Canada or Continental United States)  OTHER COMMERCIAL PROPERTY INSURANCE COVERAGES OR FORMS Locked Vehicle Warranty applies ○ Clause DOES NOT APPLY TO PROPERTY under the control of a common carrier ○ Any vehicle in which the insured property is carried is equipped with a fully enclosed body OR compartment AND insurer is liable if there is a loss by theft from an unattended vehicle ONLY AS A DIRECT RESULT of forcible entry (visible entrance) into the body OR compartment, the doors MUST BE securely locked and windows closed ii) Temporary locations (premises coverage) DEFINITION TEMPORARY LOCATION → one that is not owned, rented or controlled by insured  2. Glass Insurance Commercial property insurance policies give limited coverage for exterior glass EXCLUDING ○ Accidentally caused by insureds or others ○ Due to earth movement ○ Caused by thieves Insuring agreement for glass is broad and most insurers have (as few as) three exclusions: ○ i) Fire ○ ii) War ○ iii) Nuclear energy hazard  3. Valuable Papers and Records Insurance DEFINITION VALUABLE PAPERS ○ Written, printed, OR otherwise inscribed documents AND records (books, maps, films, drawings, abstracts, deeds, mortgages, manuscripts) BUT NOT money or securities WHAT DOES THIS MEAN ○ Commercial property insurance policies restricts payments for records to BLANK VALUE ONLY ○ If this insurance is purchased, coverage extends to all costs of reproducing lost or damaged documents ○ Businesses - insurance brokers, lawyers, architexts, doctors, schools often need to restore documents OR records after loss When premises is closed, records OR documents must be in a receptacle noted on the coverage form  4. Crime Insurance ○ Commercial property insurance usually covers vandalism and malicious acts AND riot ○ If insurance is provided on BROAD FORM, there is theft coverage for stock and equipment BUT EXCLUDES money, securities, jewellery, furs, valuable property due to ANY criminal act ○ ADD CRIME INSURANCE COVERAGES i) Burglary Insurance - two main types of burglary insurance for business owners Burglary insurance policies only pay if there is evidence that force was used a) Mercantile Stock Burglary ○ Claim is successful IF insured can prove ALL THREE: 1. Insured property was UNLAWFULLY taken from within premises 2. Premises was UNLAWFULLY entered OR exited 3. There are visible signs of force at point of entry OR exit  4. Crime Insurance ○ ADD CRIME INSURANCE COVERAGES i) Burglary Insurance - two main types of burglary insurance for business owners b) Safe Burglary ○ Insured must provide insurer with EVIDENCE force was used to get access into the safe ○ Coverage when entire safe is removed from premises  4. Crime Insurance ii) Robbery Insurance Usually to cover loss of money, securities, other valuable property ○ WILL PAY WHEN Actual OR threatened force is used to take insured property from a party who has control of it Insured property is taken from a CUSTODIAN who is made unconscious or is killed Custodian witnessed the taking of insured property but an UNAUTHORIZED person BOTH ON AND OFF PREMISES ROBBERY EXPOSURES can be insured by Inside/Outside Robbery rider  4. Crime Insurance iii) Theft Broadest crime coverage INSURES property take without owner’s consent If Theft coverage is purchased, it is not necessary to purchase burglary or robbery coverages QUALIFY FOR COVERAGE - insureds must show that insured property was taken without consent  4. Crime Insurance POLICIES INSURING THEFT ○ a) Broad Form (IBC 4037) Stock and equipment are insured whenever they are unlawfully taken by outsiders Do not have to show force was used to take property from insured’s premises OR that authorized people have control over it  4. Crime Insurance POLICIES INSURING THEFT ○ b) Money and Securities (Broad Form) Property insurance doesn’t insure loss of money and securities If you buy the Broad Form, you still need to buy this coverage COVERS Actual destruction - improper use of torches to gain access of a safe and may lead to the destruction of money and securities by fire Disappearance - If the money or securities were not in the spot where they were left and there are no signs of theft, they have “disappeared.” Wrongful abstraction - Any wrongful taking of money and securities, coverages include safe burglary, robbery, theft  5. Boiler and Machinery Policy Commercial property insurance policies EXCLUSIONS: ○ i) Loss/damage to buildings from explosion of these objects that are owned, operated, or controlled by insured: boilers AND pressure vessels operating in excess of 15 pounds/sq inch Boiler and Machinery Policy covers ○ ii) Electrical or mechanical breakdown Covers boilers and pressure vessels, air conditioning units, misc. Electrical apparatus (including electrical panels and switchgear), electric motors, compressors and pumps BEFORE PROVIDING boiler and machinery insurance, there is a request for an inspection of objects insured and may be done before policy is issued If the object is inspected and deemed to be in a dangerous condition, coverage can be SUSPENDED IMMEDIATELY and WITHOUT NOTICE to mortgagee  6. Contractor’s Insurance 1. Builder’s Risk - Broad Form (IBC 4042) Commercial property insurance DOES NOT INSURE buildings during construction This form can be purchased by the future owner of building OR by the contractor ○ Terms of contract will indicate whose responsibility it is to buy this insurance IMPORTANT INFO ABOUT FORM FOR INSURED ○ i) Property insured/excluded Policy insures value of all materials owned by insured OR others that enter into/form part of completed project  6. Contractor’s Insurance 1. Builder’s Risk - Broad Form (IBC 4042) IMPORTANT INFO ABOUT FORM FOR INSURED ○ i) Property insured/excluded Value of landscaping, temporary buildings, forms, boardings, scaffolding can be included NO COVERAGE FOR Contractor’s tools/equipment Cost of making good faulty OR improper material, workmanship OR design EXCEPT resultant damage to other completed work Can add coverage for materials (a) in transit or (b) at other location  6. Contractor’s Insurance 1. Builder’s Risk - Broad Form (IBC 4042) IMPORTANT INFO ABOUT FORM FOR INSURED ii) Policy Period ○ Covers the project while it is in the course of construction ○ Brokers call this the COC policy - Coverage of Construction ○ Coverage stops when the project is left unaltered OR there is no construction for more than 30 consecutive days ○ OTHERWISE coverage stops when building becomes occupied iii) Limit of insurance ○ Even though project may still take months to complete, insureds MUST PURCHASE insurance amount that is equivalent to its completed value Helps avoid endless flow of paper if insureds were to request changes in insurance amount throughout the project Rate charged by insurer reflects GRADUAL INCREASE in value during construction period  6. Contractor’s Insurance 2. Contractor’s Equipment Floater Floater insures all types of moveable equipment owned, rented, leased by contractors (road construction, logging, excavating equipment) Misc. contractor’s tools can be insured  6. Contractor’s Insurance 3. Installation Floater For contractors specializing in installation of machinery and equipment (plumbing, heading, air conditioning contractors) PROPERTY IS INSURED WHEN ○ In transit to job site ○ Awaiting installation at job site ○ During installation until accepted OR interest of insured ceases (whichever is first)  7. Business Interruption Insurance Commercial property insurance policies insure ONLY direct damage to building, stock, equipment If there is a large loss to property THEN ○ Business may have to close for a long period of time (even a few days will reduce income) ○ Business can resume partial operations only at insured location or other location Business Interruption Insurance Endorsement can be added  7. Business Interruption Insurance WHAT DOES BUSINESS INTERRUPTION DO? i) A contract of indemnity ○ BI Insurance restores lost income after a loss to what it would have been had the loss not occurred ○ Income insured pays expenses (ongoing expenses that must be paid like salaries of key management, taxes, and mortgage payments) AND pays a profit ii) Insures same perils as Property Policy ○ Before payment, must show that actual damage was caused to insured property by peril covered by business’s commercial property insurance policy ○ NO COVERAGE WHEN BUSINESS IS INTERRUPTED BY PERIL NOT INSURED BY PROPERTY POLICY ○ EXCEPTION: Businesses may lose income even if there is no physical damage to insured property - local authorities restrict access to the property  7. Business Interruption Insurance WHAT DOES BUSINESS INTERRUPTION DO? iii) Coverage not limited to policy period ○ BI coverages start on day of loss to property AND CAN CONTINUE for a period (usually 12 months) ○ Payment continues even if insured’s commercial property insurance policy expires during interruption period iv) Pay expenses when they reduce amount of loss ○ After loss, insureds try to resume operations ASAP and may involve expenditures to speedup repairs or rent another location ○ Expenses are paid when it can be shown they REDUCE the amount of loss the insurer would OTHERWISE HAVE HAD TO PAY  7. Business Interruption Insurance TYPES OF BUSINESS INTERRUPTION INSURANCE 1. Earnings Form ○ Coverage starts at time of loss and continues until property is rebuilt, repaired OR replaced ○ Coverage stops when property is rebuilt, repaired OR replaced 2. Profits Form ○ Coverage starts at time of loss and stops when income is restored to level it would have been if the loss hadn’t occurred ○ Coverage stops when income is restored to expected level ○ Recommended when there is a potential for lost customers - they may change their buying patterns by going to another store BOTH FORMS insure loss of income for 12 month period (can be increased for additional premium)  7. Business Interruption Insurance 2. Extra Expense Insurance Endorsement Form (IBC 4027) insures ALL NECESSARY EXTRA EXPENSES incurred by insured in continuing normal business operations For businesses that could (or needs to ) be back in business after a SHORT INTERRUPTION (insurance brokers, travel agents, doctors, newspapers, banks) Coverage is LIMITED TO expenses that are over/above normal EXTRA COSTS ○ Rent to temporary premises, rent to temporary equipment, install telephones, pay overtime salaries, pay bonuses for quick service DIFFERENT FROM EXPENSES TO REDUCE LOSS COVERAGE ○ No requirement to prove that expenditures reduced the amount of claim before they will be paid  TEXTBOOK REFERENCE SELF EXAMINATION QUESTIONS ○ Textbook 7-37 Commercial Property - Named Perils Forms (after 7-40) Commercial Property - Broad Form ○ Good to check for definitions