Chapter Three

Commercial Property Coverage,

Part II
 Outlines
• Causes-of-loss Forms
• Other Commercial Property Coverage
Forms
• Endorsement
• Commercial Property Conditions
• Commercial Property Ratings
 I Cause-of-Loss Forms
• Development of covered perils
– Fire
– Fire + lightning and others
– Fire and Extended coverages(fire + additional
coverages)( 1930’s)
– Basic Form
Named Perils Form
– Broad Form
– Special Form Open perils or All Risks Form
 1. Cause-of-loss – Basic Form
• Section A: Covered Perils
• Section B: Exclusions
• A and B are of same importance.
 Cont’d
• Fire • VandalismΘ
• Lightning • Sprinkler leakage Θ
• Explosion • Sinkhole collapse
• Windstorm or hail • Volcanic action
• Smoke
• Aircraft or vehicle
• Riot or civil commotio
n
 Covered Causes of Loss
• Fire
– Hostile fire(that is not in a place where fire is intended
to be)—insured
– Friendly fire– not insured
• Lightning
– Major cause of fire
• Explosion
– Rupture of pressure relief valves
– Rupture of building caused by water absorption Excl.
– Steam boiler explosions
 Cont’d
• Windstorm or hail
– Exterior damage and interior damage
• Smoke
– Sudden and accidental smoke damage from
any source – covered
– Agriculture smudging
certainty
– Industrial operation Exclude

– Smoke from fireplace

 Cont’d
• Aircraft and Vehicle
– Actual physical contact
– Object falling from or thrown by aircraft or vehicle
– Damage caused by vehicles owned by the insured or
operated in the insured’s business
• Riot or Commotion
– Striking worker occupying insured premises
– Looting or theft by looting
• Vandalism
– Theft excluded
– Burglars covered
 Cont’d
• Sprinkler Leakage
– Including automatic and unautomatic sprinkler leakage
– Cost of repairing damage to the system
– Cost of tearing out the damaged system
• Sinkholes
– Surface collapses causing damage to buildings and other proper
ty
– Cost of filling the sinkhole
Excluded
– Collapse into other underground openings
• Volcanic Action
– Earthquake excluded
– 168-hours period – loss occurrence
 Exclusions
• Ordinance or Law
• Earth Movement
• Governmental Action
• Nuclear Hazard
• Utility Service
• War and Military Action
• Water
• Other Exclusions
Utility Service
 Cont’d
• Ordinance or law
– Building code and Old buildings
– When damaged
• Damaged part
• Undamaged part
– Coverage or Endorsement
• AC: Increased Cost of Construction
• Ordinance or law Endorsment
 Cont’d
• Earth Movement
– Fire or explosion caused by earthquake
– Earthquake coverage can be added for additonal pre
mium
• Governmental Action
• Nuclear Hazard
• Utility Service
• War and Military Action
• Water(from outside of covered property)
– Flood, surface water, mudslide,
– sewers,underground water
 Cont’d
• Other Exclusions
– Artificially generated electric current
– Rupture of water pipes
– Leakage of water or steam
– Explosion of steam boilers(things)
– Mechanical breakdown
– Failure of insured’s duty
 Cont’d
• Fire
– Generally covered
– Fire caused by exclusions
• Earthquake
• Nuclear
• Artificially generated electric currents,
• explosion of steam boilers
• Water
– Exclusions caused by Fire
• Governmental actions
 2. Cause-of-loss – Broad Form
• Basic form (11 items) +
• Falling Objects +
• Weight of snow, ice or sleet +
• Water damage +
 Cont’d
• Falling Objects
– Property in the open
– Personal property inside the buidling
• Weight of Snow
– Personal property in the open
• Water Damage
– Damaged property
– Cost of tearing out in order to repair the system
– Damaged system be contained in covered property
– Damaged property is not necessarily required
– Gradual damage, leakage from roof drain, cost to repa
ir defect excluded
 Additional Coverage
• Collapse
– Caused by
• Covered cause-of-loss
• Hidden decay
• Hidden insects or vermin
• Weight of people or personal property
• Weight of rain collecting on roof
• Use of defective materials
– Collapse of personal property inside the building
– Damage to outdoor property
– Payments for collapse are within limit of insurance for
covered property
 Cont’d
• Glass Breakage
– Covered for any peril not listed as a named pe
ril
– Coverage limit of $500 per occurrence, subjec
t to limit of insurance and deductible
 3. Cause-of-loss Special Form
• Advantages of special form
– Covering exclusions under broader form
– Covering losses insured had never expected
– Burdon of proof
• Structures of Special Form
– A. Covered causes-of-loss
– B. Exclusions
– C. Limitations
– D-E. Additional coverage
– F. Additional coverage extentions
– G. Definitions
 Exclusions
 Similarities to Named Perils Form(B1a - g)
 Open Perils Exclusions (B2a-l)
 Loss that happens over time
 Other Exclusions
 Concurrent Causation Exclusions(B3a-c)
 Special Exclusions
 Cont’d
• Similarity to Broad Form
– Ordinance or law
– Earth movement*
– Governmental action*
– Nuclear hazard
– Utility services*
– War and military action
– Water*
– Fungus
• Notes*
– Cf : CPCU handbook of insurance policies pp142-143
 Cont’d
• Open Peril Exclusions(B2a-d)
– Artificially generated electrical current
– Delay, loss of use or market
– smoke from agriculture smudging or industrial
operation
– Loss that happen over time
• Wear and tear
• Rust or other corrosion
• Smog
• Settling cracking shrinking or expansion
• Nesting or infestation
 Cont’d
• Other exclusions in section B
– Explosions of steam boilers
– Continuous or repeated leakage of water*
– Damage by water etc. due to freezing*
– Dishonest or criminal act
– Voluntary entrustment of property
– Rain, snow to personal property in the open
– Collapse
– Release of pollutant
– Failure of insured’s duties
 Cont’d
• Concurrent Causation Doctrine
– Example: pp63-64 of CP coverage guide
• Concurrent Causation Exclusions
– Whether conditions
– Acts of decisions of a person or organization
or governmental body
– Faulty or defective planning or design
 Cont’d
• Special exclusions(covered elsewhere)
– Business income coverage
– Leasehold interest coverage
– Legal liability coverage
 Cont’d
• Theft related exclusions
– Dishonest acts of the insured or its managers
or employees
– Voluntary surrendering of possession of
property as the result of a fraudulent scheme
– Construction materials not attached as part of
the building
– Theft of money
 Additional Coverage
• Collapse
• Property in Transit
• Cost of Tearing out and Replacing
 Limitations
• Places dollar limits on certain types of pro
perty
• Limits coverage on other types to the “spe
cified causes of loss”
 II Other Commercial Property
Coverage Forms
• Builder’s Risk Coverage Form
• Condominium Coverage Form
– Condominium Association Coverage Form
– Condominium Commercial Unit-Owners Cove
rage Form
1. Builders Risk Coverage Form
• BPP’s coverage for buildings under construction –Newly
acquired or constructed property (p31)
• Eligible property and insured
– Building in the course of construction
– Building not eligible for coverage under the BPP
– Building owner, building contractor or subcontractor
• Covered property
– Foundation
– Temporary structures built on site
– Fixtures and machinery
– Equipment used to service the building
– Property intended to be part of the building
 Cont’d
• Property NOT covered
– Land and water
– Property of others
– Outdoor property as trees, shrubs, antennas detached signs
• Additional Coverage
– Debris removal
– Preservation of property
– Fire department service charge
– Pollutant clean up and removal
– Without increase cost of construction
• Coverage Extension
– Building materials or supplies of others, $5000
– Trees, shrubs and plants –limited to five perils, $250/$1000
 Cont’d
• Causes-of-loss
– Three forms
– Collapse during construction 
by Endorsement
– Theft of building material
• Need for adequate insurance
– Insure in an amount that is at least equal to the actual cash value
of the building on completion
– Loss payment =  limit of insurance 
 Loss   Deductible
 ACV of building on completion 
 

• Cease of coverage
– Expiration of policy, cancellation of policy
– Accepted or abandoned
– 90 days after completion or 60 days after put to use
2.Condominium Coverage Form
• Condo
– Condo unit and common element of the building
• Condominium Association
– Formed by unit owners
– Own the common elements
• Condominium Coverage Form
– Condominium Association Coverage Form
– Condominium Commercial Unit-owners Coverage For
m
 Cont’d
• Condo Association Coverage Form
– Buildings
• Fixtures and appliances – if the association is
required to insure
– Business personal property of the association
• Owned by association or all unit owners
• Owned by individual owner
– Personal property of others
• Condo association policy is primary over
unit owner’s policy
 Cont’d
• Condominium Commercial Unit-owners Coverag
e Form
– Condo unit used for business
– HO-6
• Covered Property
– Your business personal property(including fixtures or i
mprovements)
– Personal propterty of others
• Optional coverage
– Loss assessment coverage
– Miscellaneous real property coverage
 III Endorsements
• Functions of endorsements
– Enhance or eliminate coverages
– Change policy provisions
– Comply with regulations
• Types of endorsements discussed
– Ordinance or law coverage
– Spoilage coverage
– Manufacturers consequential loss assumption
– Brands and labels
– Flood coverage
– Earthquake and volcanic eruption coverage
 1.Ordinance or Law Coverage
• Additional Coverage of BPP
– Increased cost of Construction10000 or 5%of
limit of insurance
• Coverage of Endorsement
– Value of undamaged portion of the building
that must be demolished
– Cost to demolish and debris removal
– Increased cost of construction of damaged
part
 2. Spoilage Coverage
• Utility Service Exclusion of BPP p54
• Endorsement
– Power breakdown out of or in premise
– Contamination of the insured’s refrigerating co
oling system
– Limit of coverage $50 000
– No coinsurance requirement
– Can not be blanket
• Equipment Breakdown Insurance
 3. Manufacturers’ Consequential
Loss Assumption
• Consequential loss– reduction in value of
undamaged property due to physical loss
to other property
• Endorsement
– Damaged property in the process of
manufacture
– Damaged property at the described premise
– Undamaged property may locate elsewhere
 4. Brands and Labels
• Insurer’s right over salvaged property and
reputation of the insured goods
• Endorsement covers the cost of
– Stamping “salvage”
– Removing brands or label
– Payment subject to limit of insurance
 5. Flood Coverage
• Exclusion of Water in BPP
• NFIP – national flood insurance program
– Limit :
• $500 000 per building
• $500 000 for contents of the building
• Endorsement
– Non-high-hazard flood zones
– Deductible -- $25 000
– Excess coverage in addition to NFIP
 6. Earthquake and Volcanic
Eruption Coverage
• Exclusion of Earth movement in BPP
• Earthquake and Volcanic Eruption
Endorsement
– Subject to original limit of insurance
– Requirement for coinsurance
• Earthquake and Volcanic Eruption
Endorsement (Sub-Limit Form)
– Subject to sub-limit
– No coinsurance requirement
IV Commercial Property Conditions
• Insurance Conditions of CPP (say BPP)
– Common Policy Conditions (6 items, p12)
– Commercial Property Conditions (9 items)
– BPP Loss Conditions ( 7 items, p35)
• Commercial Property Conditions
– Concealment
– Control of property 
– Insurance under two or more coverage
– Legal action against the insurance company
– Liberalization 
– Not benefit to bailee
– Other insurance
– Policy period, coverage territory
– Transfer of rights of recovery against others
1. Concealment, Misrepresentation,
or Fraud
• Void Insurance Contract
• Concealment or misrepresentation
• Fraud
• Material Fact: pertaining to
– The coverage part
– The coverage property
– The insured’s interest
 2. Control of Property
• Acts of omissions of other party other then
the insured
• Violation of policy condition at one location
• Example
– A liquor store’ policy
– Burglar alarm system disconnected by
building owner
– Failure to maintain the alarm system at one
location
 3. Insurance under Two or More
Coverage
• Preventing double recovery from two or m
ore CP coverage
• Total payment is limited to actual loss amo
unt
 4. Legal Action against the
Insurance Company
• Two requirements must be met before
suing the insurer
– Comply with all conditions of the policy
– Within two years after the date of loss ( rather
than date of denial)
 5. Liberalization
• Broadened coverage automatically extend
ed to all outstanding policies
– Extended coverage rather than limited covera
ge
– No additional permium
– Broadened amendment adopted
• Within policy period
• Within 45 days before the effective date
 6. No Benefit to Bailee
• Bailee may be liable to bailors
• Provisions limiting bailee’s liability in a bail
ment agreement
• Protection the right of subrogation against
the bailee
 7. Other Insurance
• Concurrent Policies (all are ISO CP)
– Loss payment of one insurer
= one policy limit  Loss
all policy limits

• Non-Concurrent Policies
– ISO policy is excess
– Other policy is primary
• Example on p75
8. Policy Period, Coverage Territory
• Effective date and time & expiration date a
nd time
– 12:01 AM: standard time at the insured’s maili
ng address shown in the dec
• Covered Territory
– USA, Puerto Rico, or Canada
 9. Transfer of Rights of Recovery
Against Others
• Right of subrogation
• Insured’s duty to protect the right of
subrogation of insurer
• Waiver of recovery
– Before loss
– After loss
• Insured under the same policy
• Parent company or subsidiary
• Tenant of insured property
 V Rating Commercial Property
Coverage
• Rate :price per exposure unit
• Premium = rate x limit of coverage
• Rating factors effecting commercial
property premiums
– Aspects of coverage
– Other factors
 Aspects of Coverage
• Limit of Insurance
• Causes of Loss
– Group I premium
– Group II premium
– Additional peril premium
• Coinsurance
– 80% coinsurance rate
• Deductibles
• Base deductible is $500
• Optional coverage
 Other Factors
• Construction
• Occupancy
• Protection
• Exposure
• Location
Class Retes and Specific Rates
• Specific Rating: inspecting and evaluating
the particular building
• Class Rating:reflecing the average probabi
lity of loss for businesses within large grou
ps of similar risks √

 Application Question 1
• The Murphe Corporation has a commercial property polic
y with a Causes of Loss – Basic Form covering its buildin
g. Explain whether each of the following losses would be
covered under its policy. If not, identify a cause of loss for
m, if any, that would cover the loss.
– a. A windstorm damaged Murphy’s roof.
– b. During a major storm, the river that runs near Murphy’s propert
y overflowed its bankis. The rising water seeped into Murphy’s bu
ilding, damage the hardwood floors.
– c.Vandals broke several windows in its building.
– d.An employee driving one of Murphy’s trucks accidentally backe
d into Murphy’s building and damaged an exterior wall.
– e. Heavy earthquake shocks caused structural damage to Murph
y’s building.
 Application Question 2
• Coverage for Jones’ building and business perso
nal property is currently subject to a cause of los
s- broad form. When Jones renews his property i
nsurance, he will purchase coverage subject to a
cause of loss- special form, rather than a broad f
orm. Briefly explain how each of the following wil
l be affected by this change in the cause of loss f
orm.
• The coverage for Jones building and business p
ersonal property
• The premium for Jone’s property coverage
 Application Question 3
• Better Builders, Inc. (BBI) is constructing a commercial b
uilding that it estimates will have a value of $250 000 upo
n completion. Construction has already begun, and the c
urrent value of the completed part of the building is $25 0
00. BBI is interested in purchasing a Builders Risk Cover
age Form on this building.
– What amount of insurance would BBI be required to carry on its
builders risk policy? Explain.
– How would the cause of loss to be covered under BBI’s policy de
termined?
– How can BBI obtain coverage for theft of its building materials on
the building site?
– If BBI is unable to find a buyer for its building upon completion, h
ow long will the builders risk coverage continue?
 Application Question 4
• The Bellevue Condominium Association onws a
twenty-story condo buidling constraining 200 offi
ce dondo owned by individuals.
– A. what ISO property coverage form could Bellevue u
se to cover its building?
– B. what ISO property coverage form could each indici
dual owner of the office condo use?
– C. what can an individual unit-owner do to protect aga
inst assessments made by Bellevue because of dama
ge to the building caused by a covered loss?
 Application Question 5
• Robust Toys, Inc., has constructed its new factor
y in coastal southern Califonia. Robust specializ
es in toy trucks, bulldozers, and cranes that are
high-quality replicas of full-size equipment. Rubu
st is contreacted by many of the manufacutrers o
f the full-size equipment to build these replicas a
nd mass produce them. Robust’s new factory is i
nsured by a commercial property policy with a sp
ecial csuse –of-loss form. What additional endor
sements would you add to Robust’s policy, and
why would you add them?
 Application Question 6
• Odyssey Hospital uses Ambrose Laundry
as its laundry service for linens and
uniforms. Ambrose experienced a fire one
night, and 20 000 worth of Odyssey’s
laundry was destroyed. Ambrose has
stated that it is not liable for the damage
and that Odyssey should collect the value
of the laundry from its own commercial
property insurance. Explain whether you
agree with Ambrose statement.
 Application Question 7
• Tower Corporation owns a red brick building in Anytown th
at it occupies as a retail clothing store. Tower has purchased
a commercial property policy from Payless Insurance Comp
any with a Causes of Loss ---- Broad Form on this building.
The policy has a limit of $500,000 on the building on a repla
cement cost basis with a 90 percent coinsurance clause and a
$1,000 deductible. Because Tower’s building is located fifte
en miles from the nearest fire department and twenty miles f
rom a police station, Tower has installed a sprinkler system
and a burglar alarm.
– In rating Tower’s commercial property policy, what factors will Payl
ess consider?
– How will the factors you identify in part (a) affect the premium for t
his policy?