Commercial Property—The Five Key Issues You Must Know About Commercial Property Insurance

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Commercial Property—The Five Key Issues You Must Know About

Commercial Property Insurance


Your Instructor Today

Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRISPresident and Co-Founder of

The Insurance Community Center


•Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. The instructional materials provided by The Insurance Community Center and its authors is intended as a general guideline and any interpretations provided by The Community do not modify or revise insurance policy language. •Information which is copyrighted and proprietary to Insurance Services Office, Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized Representatives is limited to use solely on behalf of one or more ISO Participating Insurers.•The authors of these materials, Insight Insurance Consulting and The Insurance Community Center assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided.

Insight Insurance Consulting714 803-5830

laurie@insightinsuranceconsulting.comwww.insightinsuranceconsulting.comwww.theinsurancecommunity.com

Copyright 2010All Rights Reserved

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What this class will cover

1. Building Ordinance2. Tenants Improvements and Betterments3. Off Premises Utility Interruption4. Blanket and Margin Clauses5. Building vs. Personal Property vs. Property of

Others

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#1 Building Ordinance

Ordinance or Law Issues as it relates to Buildings, Personal Property &

Business Income

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Building Ordinances Any building regardless of age can be

affected.

Regulates HOW buildings are built or re-built.

Affects building costs, time to rebuild, demolition and debris removal.

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Building Ordinances

Municipal and/or County Building Codes Uniform building codes are emended to

reflect needs of communities State Building Codes

Regulates specific industries for usage and building quality such as for hospitals, schools, or public buildings.

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Building Ordinances Federal Building Codes

Imposed on federally sponsored housing and governmental buildings.

Americans with Disabilities Act—enforceable July 26, 1992. Not a Building Ordinance Law per se but does contain requirements for building in compliance with the federal act.

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Regulate Everything About “How” A Building Is To Be Constructed Plumbing Electrical Structural support Grading Sloping Roofing Parking Spaces Set Backs

Flooring Insulation Landscaping Signs - placement,

size and type Materials used vs.

Occupancy ADA Miscellaneous

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Who Needs The Coverage For Building Owners For Tenants of Buildings who

Have put in tenants improvements and betterments

Are responsible contractually to replace/upgrade tenants improvements and betterments

For Tenants that could suffer “extended” business income losses due to the lessor having to bring the business up to current code.

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Building Ordinance

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Your Business Personal Property

6. Your use interest as tenant in improvements and betterments. Improvements and betterments are fixtures, alterations, installations or additions:

(a) Made a part of the building or structure you occupy but do not own; and

(b) You acquired or made at your expense but cannot legally remove;

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Causes Of Loss - Special FormCP 10 30 06 95B. EXCLUSIONS1. We will not pay for loss or damage caused directly or

indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.a. Ordinance or Law. The enforcement of any ordinance or law:

(1) Regulating the construction, use or repair of any property: or

(2) Requiring the tearing down of any property, including the cost of removing its debris.

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Causes Of Loss - Special FormCP 10 30 06 95

Note: the exclusion is for any property not just Building

Ordinance Or Law Endorsement provides direct physical loss coverage for BUILDINGS ONLY.

No coverage applicable for increased ordinance or law requirements for machinery, equipment, etc.

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Ordinance Or Law CoverageCP 04 05 Coverage A—Coverage For Loss to the

Undamaged Portion of the Building Coverage B—Demolition Cost Coverage

If a Covered Cause of Loss occurs to covered Building property and Demolition Cost Limit of Insurance is shown…we will pay…

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Ordinance Or Law CoverageCP 04 05 Coverage C - Increased Cost of Construction Coverage.If a Covered Cause of Loss occurs to covered Building property and an Increased Cost of Construction Limit of Insurance is shown in the Schedule above, we will pay for the increased cost to repair, rebuild or construct caused by enforcement of buildings, zoning or land use ordinance or law if the property is repaired or rebuilt. It must be intended for similar occupancy as the current property, unless otherwise required by zoning or land use ordinance or law.

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Ordinance Or Law CoverageCP 04 05

However, we will not pay for the increased cost of construction if the building is not repaired or replaced.B. We will not pay under this endorsement for the costs associated with the enforcement of any ordinance or law which requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants".

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Building Ordinance And Law Coverage Options Any policy providing a different set of perils

coverages needs to be endorsed with Ordinance coverage.

Commercial Property, Business Owners, Boiler & Machinery, Difference in Conditions, Builder’s Risk including Soft Cost, etc.

Provides coverage due to direct physical loss by a peril insured against.

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Building Ordinance & Business Income

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Putting The Business Income Form Into Perspective

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Ordinance Or Law Exclusion For Business Income The Cause of Loss Form is attached to a Business Income

Coverage Form. Accordingly the same exclusion for Ordinance or Law applies to the Business Income coverage form that applied to the Building and Personal Property Coverage Form.

The loss incurred on Business Income is due to the potential additional “time” it might take to bring a building up to code. Additional time equals additional revenue loss.

This situation applies more often in a partial loss than a total loss.

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Ordinance Or Law—Increased Period Of Restoration(CP 15 31)A. If a Covered Cause of Loss occurs to property

at the premises described in the Declarations coverage is extended to include the amount of actual and necessary loss you sustain during the increased period of suspension of "operations" caused by or resulting from the enforcement of any ordinance or law that:

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Ordinance Or Law—Increased Period Of Restoration (CP 15 31)1. Regulates the construction or repair of any property;2. Requires the tearing down of parts of any property not damaged by a Covered Cause of Loss; and3. Is in force at the time of loss.

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Ordinance Or Law—Increased Period Of Restoration (CP 15 31)

However, coverage is not extended under this endorsement to include loss caused by or resulting from the enforcement of any ordinance or law which requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants".

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Ordinance Or Law—Increased Period Of Restoration (CP 15 31)B. The PERIOD OF RESTORATION definition is

replaced by the following:3."Period of Restoration" means the period of time that begins:

(1)72 hours after the time of direct physical loss or damage for Business Income coverage; or

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Ordinance Or Law—Increased Period Of Restoration (CP 15 31)(2)Immediately after the time of direct physical

loss or damage for Extra Expense coverage; caused by or resulting from any Covered Cause of Loss at the described premises; and

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Ordinance Or Law—Increased Period Of Restoration (CP 15 31)b. Ends on the earlier of:

(1)The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or(2)The date when business is resumed at a new permanent location.

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Ordinance Or Law—Increased Period Of Restoration (CP 15 31)"Period of restoration" includes any increased period required to repair or reconstruct the property to comply with the minimum standards of any ordinance or law, in force at the time of loss, that regulates the construction or repair, or requires the tearing down of any property.The expiration date of this policy will not cut short the "period of restoration".

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Ordinance Or Law—Increased Period Of Restoration (CLM)A. Ordinance or Law—Increased Period of

Restoration1. Description of Coverage

The Business Income…coverage form may be extended to cover additional loss of

time necessary to replace or repair the damaged building to conform with

current building laws or ordinances.

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Ordinance Or Law—Increased Period Of Restoration (CLM)2. Rate Modification

a. Causes of Loss Other Than Earthquake multiply the time element rate by 1.2

b. Earthquake—multiply the time element rate by 2.0

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Building Ordinance versus Zoning Laws

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Zoning Laws Regulate Everything About “What” Is Built

Where Building height Parking allowance Occupancy Environmental Impact Studies Building dimensions vs. land size

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Manuscript ACV Cap LanguageWhen any building(s) and/or structure(s) is affected by zoning laws so that the building’s usage, size (height, total square footage, dimensions) are limited by law, the policy will provide replacement cost for that portion of the building the insured can, by law, replace and will then pay actual cash value (ACV) for the differential in value that the insured can not replace by law.

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#2 Tenants Improvements and Betterments

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TIBs are under Business Personal Property Note: “Your” (Named Insured’s). Anyone

other then the “named insured’s” is considered property of others

Note: “consisting of the following property unless indicated on the declarations page” You could specific something other than those items listed on the Declarations.

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Note: Can indicate Business Personal Property on the “Separation of Coverage Form (CP 1910) Separate based on “Cause of Loss” Separate out Tenants, Improvements and

Betterments (rating, Building Ordinance) Note: Valuation Issues Note: Blanketing ( A & B)

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1. Furniture and fixtures2. Machinery and equipment3. “Stock”4. All other personal property owned by you

(named insured) and used in your business5. Labor, Materials or services furnished or

arranged by you on personal property of others

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Tenants Improvements & Betterments

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#3 Off Premises Utility Interruption

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Off Premises ServicesUtility Interruption What type of utility service is covered by

addition of the endorsement? Electrical power Communication services Air conditioning services Heating Gas Water Steam


Property ExclusionsOff Premises Services

Exclusions:

The failure of power or other utility service supplied to the described premises, however caused, if the failure occurs away from the described premises.

But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.


Property Exclusions

Mechanical Breakdown, including rupture or bursting caused by centrifugal force. However, this does not apply to any resulting loss or damage caused by elevator collision;


Property Exclusions

Artificially generated electric current, including electric arcing, that disturbs electrical devices, appliances or wires.

But if loss or damage by fire results, we will pay for that resulting loss or damage.


Property ExclusionsSpoilage

Rust, corrosion, fungus, decay, deterioration, hidden or latent defect or any quality in property that causes it to damage or destroy itself; (a) Dampness or dryness

of atmosphere; (b) Changes in or extremes

of temperature


What Coverage Needs To Be Provided?

Direct Damage Building Contents, including stock

Indirect Damage Spoilage Business Income Extra Expense


Off Premises Commercial Property

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Off Premises Equipment Breakdown

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Off Premises Earthquake

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What Policies Need To Be Endorsed?

Property EDP Boiler and Machinery (Equipment

Breakdown) Earthquake / Flood / DIC Foreign property


Off Premises ServicesUtility Interruption Does the policy cover BOTH public utilities

and privately owned utilities? Does the policy have a limitation as to the

distance from the insured’s premises that the object that caused the accident Is within 500 feet of the insured’s premises or the

location where the accident originated? Is 500 feet from the insured’s premises? Check for a footage limitation contained in Boiler

and Machinery Policy and request removal or advise insured.


Off Premises ServicesUtility Interruption Does the policy indicate that the utility

service that supplies the insured must solely supply that insured’s location? Some of the company forms restrict

coverage by use of the word “solely.” This word can be modified to the word

“directly” or eliminated in its entirety. Check policy for other perils exclusions

that necessitate adding utility services to other policies.


#4 Blanket and Margin Clauses

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Blanketing There is NO definition in the property forms There is ONLY a percentage on the

declarations page The CLM manual defines as a rating rule Designed to reduce the amount of insurance

TO coinsurance

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Blanketing

Customary definition of Blanketing is NOT in contract language

Proposals when they discuss advantages of blanketing are extra contractual

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Blanketing To Blanket or Not to Blanket--that Is The

Question Definition of “Blanketing” Blanketing multiple entities (not identical

ownership) Blanketing Business Income only Blanketing Business Income and other property

coverages Blanketing JUST TO BLANKET

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Margin Clause Margin Clause

Typically provides for a fixed % swing or margin above values as stated under the Statement of Values

Can be used in conjunction with a Blanket Policy

Always best to eliminate it Utilize approved letters to advise clients

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Margin Clause (ISO)

CP 12 32 06 07 Limitation on Loss Settlement Blanket

Insurance (Margin Clause)

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Margin Clause (ISO)

This endorsement applies to loss settlement on property that is subject to a Blanket Limit of Insurance.

A Blanket Limit of Insurance is a single Limit of Insurance that applies to any of the following as shown elsewhere in this policy:1. Two or more buildings; 2. Building and contents; 3. Contents of more than one building; or4. Contents at more than one premises.

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Margin Clause (ISO) With respect to property that is subject to a

Blanket Limit of Insurance, we will determine a maximum loss payable for each building and for the contents of each building or the contents at each premises. The maximum loss payable is determined by applying the applicable Margin Clause percentage indicated in the Schedule to the value of the property as shown in the latest statement of values reported to us.

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Margin Clause (ISO) If the statement of values does not state

individually the value of each building and the value of contents at each building or premises, we will determine individual values as a part of the total reported values prior to application of the Margin Clause percentage.

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Margin Clause (Travelers)

“The most we will pay for loss or damage in any one occurrence at any one premises location is 120% of the value(s) for each Building or Structure and separately for the total of Personal Property (including but not limited to furniture and fixtures, machinery and equipment, “stock,” all other personal property owned by you and used in your business and you use interest in improvements and betterment's) and Personal

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Margin Clause (Travelers)

Property of Others at each location as shown on the latest Statement of Values filed with us and at each premises location as subsequently reported to and agreed by us to insure.”

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#5--Building vs. Personal Property vs. Property of Others

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Personal Property of Others This is “first party” not “third party” coverage

Very Important Distinction Should consider blanketing B & C Often an unknown exposure

3PL Non owned warehouse

If do not activate the coverage there is an automatic $2500 (see coverage form) extension

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Personal Property of Others

Personal Property of others that is in your care, custody or control

The role is that of a bailee/bailor and accordingly the requirements imposed are that of a prudent person principle

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Warehouseman’s Legal Liability The standard of care is imposed upon a

warehouseman by Section 7-204 of the Uniform Commercial Code Most contracts follow this duty of care


UCC § 7-204. Duty of Care; Contractual Limitation of Warehouseman's Liability(1) A warehouseman is liable for damages for

loss of or injury to the goods caused by his failure to exercise such care in regard to them as a reasonably careful man would exercise under like circumstances but unless otherwise agreed he is not liable for damages which could not have been avoided by the exercise of such care.

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Upcoming Dates for Valuation, University and Community Classes

University 5/11 Five Key Commercial Property IssuesUniversity 6/9 Real Estate Issues and Concerns

FREE Community Class on 5/26/11 Insurance Coverage Litigation

Tharpe and HowellJoin the Community TODAY at:

www.insurancecommunitycenter.com

5/17 5/24 & 5/25

6/2 6/15

6/30 7/27

Documents

Commercial Property—The Five Key Issues You Must Know About Commercial Property Insurance