17 Slide

Insurable Interest •

One of the key elements in determining whether or not a particular piece of property represents an exposure to loss is reflected by the concept of insurable interest.

•

The term is generally understood to mean any lawful economic interest in the safety or preservation of property from loss, destruction or pecuniary damage.

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Insurable Interest Although insurable interest generally follows title, insurable interest is not limited to owners. The variety of financial interests that can support an insurable interest include: 1. Owner. 2. Secured creditor (mortgagor, vendor, etc.). 3. Holder of a mechanic's or contractors lien. 4. A bailee or other representative of the owner. 5. A lessor or renter of property to the extent of a legal obligation. 17- 2

Insurable Interest 6. A tenant who makes improvements on real property owned by another. 7. A party with a contractual or legal expectation of ownership. 8. Usfruct interests Usfruct interest is defined as "the right to utilize and enjoy profits and advantages of something belonging to another so long as the property is not damaged or altered in any way." (easements, storage buildings, private roads, and similar interests 17- 3

Commercial Property Coverages 1.

Traditional fields of “fire” and “allied lines”

2.

Provides coverage for Direct and Indirect loss

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Building and Personal Property Coverage Form 1. Standard form for insuring most personal property 2. Used to provide direct damage coverage on buildings and contents or both A.

Building

B.

Business Personal Property - including improvements and betterments

C.

Personal Property of Others in the insured’s custody 17- 5

Tenants Improvements and Betterments Insurance forms generally contemplate three separate possibilities, with different amounts payable in the event of each: • If the improvements and betterments are repaired or replaced at the expense of the tenant within a reasonable time after the loss, the actual cash value or replacement cost of the improvements and betterments will be paid.

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Tenants Improvements and Betterments •

If the improvements and betterments are repaired or replaced by others for the use of the insured, there is no loss to the insured and therefore nothing is paid.

•

If the improvements and betterments are not repaired or replaced, the amount payable is the unamortized use value, computed according to a formula in the policy.

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Tenants Improvements and Betterments Original cost of tenants

Unexpired term of lease X

improvements and betterments

Period from date of installation to expiration of the current lease

$100,000 Original Cost 10 year lease, 6 years left: $100,000

X

6 10

=

$60,000 17- 8

Causes of Loss Forms 1.

Causes of Loss - Basic Form

2.

Causes of Loss - Broad Form

3.

Causes of Loss - Special Form

4.

Causes of Loss - Earthquake Form

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Causes of Loss Basic Form 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Fire Lightning Explosion Windstorm or Hail Smoke Aircraft or Vehicles Riot or Civil Commotion Vandalism Sprinkler Leakage Sinkhole Collapse Volcanic Action 17- 10

Causes of Loss Basic Form Exclusions 1. 2. 3. 4. 5. 6. 7. 8. 9.

building ordinance earth movement government action nuclear hazard power failure war and military flood and other types of water losses electrical apparatus leakage/discharge of water or steam except from sprinkler systems 10. rupture of water pipes 17- 11

Causes of Loss Broad Form Covers all perils of the Basic Form plus 1.

breakage of glass ($100 per plate)

2.

falling objects

3.

weight of ice, snow, or sleet

4.

water damage

5.

“collapse” covered as an additional coverage

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Causes of Loss Special Form 1.

Open peril coverage for risks of direct physical loss

2.

Provides coverage for Collapse as an Additional Coverage

3.

Property in Transit ($1,000 limit for certain named perils)

4.

Subject to standard open-peril exclusions including concurrent causation exclusions 17- 13

Causes of Loss Earthquake Form •

Earthquake

•

Volcanic eruption, explosion or effusion

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Need for Open-Peril Coverage • Although the named peril approach to insuring property is probably the most common practice, it is unsatisfactory from several points of view. • A property owner should be concerned about damage to property by any cause, not just by fire, tornado, riots or vandalism. • Business property should be insured against as wide a range of perils as possible, rather than for some arbitrary and historical group of perils. • The preferred approach is to insure owned buildings and contents on an open-peril basis. 17- 15

Mortgage Clause Mortgagee’s Rights • to receive payment for loss to the extent of its interest in the property, regardless of any fault of the property owner under the contract • to receive separate written notice of cancellation • to sue under the policy in its own name

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Mortgage Clause Mortgagor’s Obligations (conditional) • to notify insurer of any change in ownership, occupancy, or substantial change in risk of which mortgagee is aware • to render proof of loss if the insured fails to do so • to surrender to insurer any claim against the mortgagor to the extent that it receives payment when the insurer has ruled that no coverage exists for the owner 17- 17

Coinsurance Rationale for Coinsurance • Most fire losses are partial; they represent only a fraction of the total value insured. • Insurance to value is required for rate adequacy and equity. • Some concession must be made for those who insure property for a high percentage of its value. • The coinsurance clause, which provides a rate reduction if the insured agrees to carry insurance equal to a higher percentage of the value of the property, is designed as such a concession. 17- 18

Relationship of Insurance to Value to Rate 10,000 buildings valued at $10,000 each = $100,000,000 in values insured for 100% of value 2 30

total losses @$10,000 each = partial losses @ $ 1,000 each =

$20,000 30,000 50,000

$ 50,000 $100,000,000

= .05 per $100

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Relationship of Insurance to Value to Rate 10,000 buildings valued at $10,000 each = $100,000,000 in values insured for 50% of value 2 total losses @$ 5,000 each = 30 partial losses @ $1,000 each =

$10,000 30,000 40,000

$ 40,000 $50,000,000

= .08 per $100

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Operation of Coinsurance Clause 1. The coinsurance provision establishes a formula for the payment of losses based on the degree to which the insured has complied with the agreement to insure for a specified percentage of the property’s value. 2. Coinsurance clause may apply both to replacement cost losses and to ACV losses. 3. Payment is based on the ratio of insurance carried to insurance required. 17- 21

Coinsurance Clause Illustrated Coinsurance Formula Insurance Carried Insurance Required

X

Loss

=

Payment

X

$10,000

=

$10,000

X

$10,000

=

$7,500

$100,000 $100,000 $75,000 $100,000

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Optional Coverage 1.

Replacement Cost Coverage

2.

Agreed Value Coverage

3.

Inflation Guard Coverage

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Specialized Valuation Endorsements Ordinance or Law Coverage Endorsement Functional Building Valuation Endorsement Functional Personal Property Valuation Endorsement Manufacturer’s Selling Price Clause Endorsement

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Ordinance or Law Coverage Endorsement •

An Ordinance or Law Coverage endorsement is used to provide three types of coverage related to the enforcement of building codes.

•

Coverage is provided for three types of losses. Increased Cost of Construction Undamaged part of the building Demolition cost

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Functional Building Valuation Endorsement • Used when changes in technology or architecture make it possible to replace a structure at a lower cost than is required to duplicate the existing building. • Covers the cost of repairing with less costly materials but in the but in the architectural style that existed before the loss. • For total loss, payment is made for the cost of replacing the building with a less costly, but functionally equivalent building. • Coinsurance is not applicable. 17- 26

Functional Personal Property Valuation (Other Than Stock) • Applies to property which can be replaced with similar property that performs the same function as the original, when replacement with identical property is impossible or unnecessary. • If the property is repaired or replaced, payment is made for replacement with the most closely equivalent property available. • If the property is not repaired or replaced, coverage is limited to the lower or actual cash value or market value. 17- 27

Manufacturer's Selling Price Clause • A manufacturer with finished goods on hand faces a loss not covered under the standard BPP form, the loss of the expected profits on the goods destroyed. • The Manufacturer's Selling Price clause provides that the value of finished stock shall be the price at which it would have sold had no loss occurred. • The clause is applicable only to the finished stocks of manufacturers and is not available to wholesalers and retailers. 17- 28

Blanket Coverage 1.

Provides one amount of insurance on more than one type of property or property at more than one location.

2.

90% coinsurance is usually required.

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Reporting Form Coverage 1. Designed to meet the needs of firms whose stocks fluctuate over time 2. Written with a maximum limit, higher than anticipated values on hand 3. Coverage fluctuates with actual values on hand, subject to the maximum limit. 4. Premium based on periodic reports of values submitted by the insured - monthly, quarterly, or annually. 17- 30

Reporting Form Coverage (continued) Reporting Provisions • Insured must report 100% of the values of property on hand • In the event of a late report, insurance is limited to the values contained in the last previous filing. • Full-value reporting clause (also called the “honesty clause”) is, in effect, a 100% coinsurance clause. 17- 31

Builders Risk Coverage Form • Buildings under construction are normally covered under a specialized contract known as the Builders Risk Form. • The Builders Risk Form provides coverage on a “completed value” basis--the projected full value of the building when completed, but the premium is 55%of the cost for coverage on the final value. • Coverage continues during the process of construction but terminates automatically when the structure is completed and occupied. 17- 32

Plate Glass Insurance 1. 2. 3. 4. 5. 6.

Coverage on broad open-peril basis May be combined with other coverage forms or written alone. Accidental breakage, except by fire, war, or nuclear damage Damage caused by acids or chemicals Only glass panels specifically scheduled are insured. Lettering and ornamentation not covered unless specifically insured 17- 33

Boiler and Machinery Insurance 1. Originated from efforts of a group of engineers in Hartford, highly specialized field; requires trained engineers. 2. Insurance applies to many types of installations including boilers, machines, refrigerating systems and electronics. 3. A major benefit of the coverage is the inspection service that is provided by trained insurance company engineers. 17- 34

Boiler and Machinery Coverage Form 1. Used with Object Definition forms and time element forms. 2. Four Object Definition forms: • Pressure and Refrigeration Objects • Mechanical Objects • Electrical Objects • Turbine Objects 17- 35

Boiler and Machinery Coverage Form Provides one amount of insurance to cover several types of loss. Payment made on sequential basis A: Property of the Insured and Property Damage Liability B: Expediting Expenses

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Suspension • The boiler and machinery policy contains a provision permitting the insurance company to suspend coverage on any or all insured objects found to be in a dangerous condition. • The suspension becomes effective immediately on delivery without prior notice or waiting period. • When coverage has been suspended, it may be reinstated only by endorsement to the policy. 17- 37

Inland Marine Insurance • Inland marine insurance developed as an extension of ocean marine insurance when ocean marine insurers extended their policies to cover property being shipped from warehouse to warehouse. • In 1933, the National Association of Insurance Commissioners (NAIC) defined the scope of inland marine insurance in its Nationwide Marine Insurance Definition, specifically defining the types of insurance marine insurers were permitted to write. 17- 38

Nationwide Marine Definition The NAIC marine definition recognizes six broad classes of property that may be insured under marine contracts: 1. imports 2. exports 3. domestic shipments 4. instrumentalities of transportation and communications 5. personal property floater risks 6. commercial property floater risks. 17- 39

Nationwide Marine Definition • Imports and exports are ocean marine risks. • Domestic shipments consists of goods in transit. • Instrumentalities include bridges, tunnels, and pipelines. • Floater risks consist of personal property exposed to loss primarily away from the owner’s premises.

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Inland Marine Forms Classified For the purpose of our discussion, it is helpful to divide the NAIC's commercial property floater risks class into four subclasses Business floater policies Dealers' forms Bailee forms, and Miscellaneous policies

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Business Floater Policies Business floater policies include three types. 1. Equipment floaters. Cover business property not held for sale or on consignment that is in the hands of the owner for its intended purpose. 2. Processing and storage floaters. Cover property in temporary storage or undergoing processing outside the owner's premises. 3. Consignment and sales floaters. Covers goods being held for sale on consignment, being installed, or sold under an installment plan. 17- 42

Dealers Forms Covers a dealer’s stock of goods. Unlike most inland marine forms, the principal exposure is onpremises, although coverage applies both on- and off premises. Dealers forms include 1. Jewelers block 2. Furriers block 3. Musical instrument dealers, stamp and coin dealers 4. Equipment dealers 17- 43

Bailee Forms Bailee forms, designed to cover goods that are in the custody of someone other than the owner to whom the goods have been entrusted.

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Miscellaneous Inland Marine Forms Miscellaneous policies include unrelated and anomalous types of coverages such as 1. Accounts receivables 2. Valuable papers coverage 3. Electronic data processing policies 4. Manufacturers’ Output Policy 5. Difference-in-Conditions coverage

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Federal Flood Insurance Program 1. Housing and Urban Development Act of 1968 established federal flood insurance program. 2. Program makes flood insurance available in communities that pledge to adopt and enforce land control measures designed to guide future development away from flood prone areas. 3. Program is conducted as a partnership between federal government and private insurance industry. 17- 46

Federal Flood Insurance Program 4. Cities, counties and other government units qualify for the program by applying for the program and agreeing to enact and enforce the required legislation. 5. Once the community agrees to adopt the required controls, it becomes eligible for the Emergency program. 6. When the community actually implements the controls and actuarial studies are complete, it becomes eligible for the Regular program. 17- 47

Federal Flood Insurance Limits - Non-Residential Basic Additional Total EmergencyInsuranceInsurance Insurance Program Limits Limits Available

Nonresidential Buildings $35,000 $50,000 $200,000 $250,000 Small Business Buildings 100,000 250,000

50,000

200,000

Nonresidential Contents 100,000 250,000

135,000

115,000

Small Business Contents 100,000

15,000

85,000

10,000

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Flood Insurance Policy Coverage provided under three items A:

Building

B:

Contents

C:

Debris removal

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Flood Insurance Policy - Insuring Agreement Provides coverage for “direct physical loss from flood” as defined in the policy. Flood defined as: a general and temporary condition of partial or complete inundation of normally dry land areas, resulting from overflow of inland or tidal waters or the unusual and rapid accumulation or runoff of surface waters from any source. Includes mudslide caused by accumulations of water on or under the ground. 17- 50

Flood Insurance Policy - Inception 1. 30 day waiting period after application and payment of premium, subject to 2 exceptions 2. Waiting period does not apply • to the initial purchase of flood insurance in connection with making, increasing, extending or renewing a loan • in first 13 months after revision or update of a Flood Insurance Rate Map

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Flood Insurance Policy - Termination 1.

Insurer may cancel only for nonpayment of premium, 20 days

2.

Insured may cancel anytime, premium fully earned if insured retains title to the property

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Combining Transfer and Retention • Commercial property coverages are written with deductibles, allowing the insured to combine transfer and retention. • The ISO Commercial Lines Manual indicates rate credits for deductibles up to $75,000. Usually, the deductible applies on a per structure basis, but may be written subject to a per occurrence aggregate or an annual aggregate. • Higher deductibles are available, but the premium credits are determined by underwriters on a judgment basis. 17- 53

Combining Transfer and Retention • A second approach to retention in connection with commercial property insurance is to simply not insure some or all property. • Some companies, for example, do not insure structures with a value below some specific limit, such as $25,000. • While this can produce economies, consideration should be given to whether a number of uninsured structures could be destroyed in a single occurrence (such as a tornado). 17- 54

Combining Transfer and Retention • A final approach to retention of property exposures is underinsuring. • An insured with a $1 million building might purchase $900,000 in coverage with a 100 percent coinsurance requirement, thereby tacitly agreeing to bear 10 percent of every loss. • Under this arrangement, the coinsurance provision, in effect, acts as a sliding deductible. In the event of a $100,000 loss, the insured would bear $10,000; in a $200,000 loss, the insured would bear $20,000 of the loss. 17- 55