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INLAND MARINE INSURANCE
LESSON 1: INTRODUCTION
Introduction
Inland marine (IM) insurance protects against the financial consequences of loss
of or damage to specified types of property. The types of property covered
include property in transit, property of a movable (‘floatable’) nature and property
instrumental to transportation or communication.
Inland Marine insurance evolved in three stages:
1. Inland marine first appeared in the 1920s to describe policies developed
by marine insurers to meet new insurance needs. In the early 1900s,
states practiced a monoline approach to insurance regulation, limiting
insurers to one line of business: life, fire, marine or casualty. Marine
insurers could write policies covering property anywhere in the world
against any peril, using nonstandard forms and rates. Marine insurers
developed IM policies as a result of the increased use of the rail system
during World War I and the growth of the trucking industry after that war.
The increased use of rail and truck transportation increased the need for
insurance covering goods in transit. Marine insurers provided that
coverage.
2. IM expanded into other classes of property as a result of the general
increase in personal wealth after WWI. That increase in wealth prompted
an increased need for insurance to cover jewelry, furs and other precious
items. IM insurers developed the floater (policy that covers property that
does not always remain in a fixed location) for jewelry, fine art, cameras,
furs and other items in response to that need. IM insurers also developed
floaters for commercial loss exposures, such as bridges and tunnels,
property sold under installment plans, building materials while in transport
and mobile equipment.
3. The Inland Marine Underwriters Association (IMUA) was formed in 1931 to
stabilize the growing IM industry by controlling unfair business practices,
developing uniform forms and clauses and establishing rating methods
where possible. Today, the IMUA provides a forum for the discussion of
general IM problems, acts as an advisor regarding legislation that could
affect IM insurance and cooperates with state insurance departments.
The Purpose and Intent of the Nationwide Marine Definition
The Nationwide Marine Definition, adopted in 1933 by the National Convention of
Insurance Commissioners (NCIC, later replaced by the National Association of
Insurance Commissioners, the NAIC,) specified what could and could not be
covered by marine insurance. The drafters of the definition restricted covered
property to property in transit or property bearing some relation to transportation
or communication.
The definition’s purpose was to limit the insuring powers of marine insurers and
to prevent them from taking business from fire and casualty insurers. The
application of antitrust laws to the insurance industry in 1944 and the
development of multi-line insurance around 1950 made the Nationwide Marine
Definition obsolete.
The Nationwide Marine Definition was revised in 1953 to classify, rather than
restrict, ocean marine business. It was revised again in 1976 to include inland
marine business, including difference in conditions (DIC) policies, builders’ risk
policies and electronic data processing (EDP) equipment policies.
The effect of the current, 1976 Nationwide Marine Definition is to help insurers
properly classify IM premium and loss data and comply with rate and form filing
regulations. Simply, the definition prevents inland and ocean marine insurers
from providing unregulated coverage for items or situations that should be subject
to regulatory requirements.
The opening paragraphs of the 1976 Nationwide Marine Definition state that the
definition does not:
• List every coverage that can be classified as marine
• Guarantee that listed risks and coverages are always marine risks and
coverages
• Restrict or limit the exercise of insuring powers
The six property categories listed in the 1976 Definition include:
• Imports
• Exports
• Domestic shipments
• Bridges, tunnels and other instrumentalities of transportation and
communication
• Personal property floater risk
• Commercial property floater risk
Filed versus Non-filed Classes
Filed (controlled) classes must be written according to filed forms, rules and rates.
Some states let insurers modify their rates through consent-to-rate procedures.
The underwriter gets the insured’s written consent to a rate or form change and
files the consent with the state insurance department.
Nonfiled (noncontrolled) classes allow underwriters more flexibility to determine
policy provisions and rates, and let them respond better to customers’ needs.
Underwriters can use judgment rating on nonfiled classes to rate each risk
individually, relying on the underwriter’s experience and expertise. Nonfiled
classes often require skilled adjusters to handle losses.
Principal Classes of Commercial IM Business
Contractors’ risk coverage is the largest class of commercial IM insurance. Other
important classes include builders’ risk, transit, motor truck cargo, difference in
conditions and electronic data processing equipment coverages.
Principal Classes of Personal IM Business
Personal jewelry coverage is the largest class of personal IM insurance.
Other classes include bicycles, cameras, coin collections, farm equipment, fine
arts, furs, golf equipment, livestock, musical instruments, personal effects,
personal property and stamp collections.
The Scheduled Personal Property Endorsement
The scheduled personal property endorsement avoids three limitations found
under Coverage C (personal property) of the homeowners’ policy:
• Low monetary limits on recovery
• IM coverage for named perils only
• Application of a deductible
The Scheduled Personal Property Endorsement
The scheduled personal property endorsement is identical to the monoline IM
policy called the personal articles floater. Both the endorsement and the floater
cover specifically described jewelry, furs, cameras, musical instruments,
silverware, golf equipment, fine arts, stamp collections and coin collections for
their full value, often without a deductible, on a special-form basis.
How IM Remedies Restrictions in Commercial Property Forms
The ISO Building and Personal Property (BPP) Coverage Form excludes five
types of property that can be covered under inland marine policies:
• Bridges
• Personal property while airborne or waterborne
• Docks, piers and wharves
• Vehicles and self-propelled machines operated away from the described
premises
• Radio and television antennas
The BPP does, however, cover some IM exposures, but for low sublimits.
The Scheduled Personal Property Endorsement
Commercial property causes-of-loss forms exclude perils that can be covered
under IM. Even the special causes-of-loss form, which offers the broadest
coverage, imposes theft-related restrictions, like a $2,500 limits on furs, jewelry,
and patterns, dies, molds and forms. It also fails to cover contractors’ equipment
against theft and limits coverage for property in transit.
IM coverage may be attached to commercial package policies and
businessowners’ policies as coverage extensions. (Businessowners’ policies
combine commercial property and liability coverages with a limited number of
coverage options.) IM coverage is also included in output policies, which
combine most of the property and IM coverages organizations need.
LESSON 2: COMPONENTS OF INLAND MARINE
Components of Inland Marine Policies
Policy provisions for IM and other policies are either of the following:
• Boilerplate (standard provisions that address issues common to most IM
policies)
• Specific to the loss exposure being insured
Underwriters should know their company’s boilerplate provisions well to evaluate
individual policies more efficiently, and they should be aware that boilerplate
provisions vary from insurer to insurer.
Four Ways to Provide IM Coverage
There are four ways to provide Inland Marine coverage. They are:
• Use American Association of Insurance Services (AAIS) or Insurance
Services Office (ISO) forms without altering them. The insurer avoids
development costs at the risk of failing to meet each insured’s special
needs.
• Use an independently developed form. The insurer meets each insured’s
special needs, but incurs high development costs.
• Combine AAIS or ISO provisions with insurer-drafted provisions. The
insurer meets some of its insureds’ special needs while keeping
development costs low
• Use a form drafted by the insured’s broker. The insurer avoids
development costs, but incurs the costs of analyzing the form and
negotiating any changes.
There are four components of an AAIS or ISO IM coverage part. They are:
• Declarations page, which states the premium, limit of insurance,
deductible and other relevant information
• IM insuring agreement or coverage form, which contains the provisions
applicable to the property class covered. There may be multiple coverage
forms in one policy.
• Commercial inland marine conditions form, which contains provisions
common to all inland marine coverage forms
• Endorsements, which provide optional coverages or otherwise modify the
policy. Endorsements may benefit either the insured or the insurer (or,
usually, both.)
Named Perils versus Special Form Coverage
Named perils coverage covers only those perils specifically named in the policy.
Special form coverage covers all risks of direct physical loss except those
specifically excluded. Special form coverage is more advantageous to the
insured because:
• It is broader than named-perils coverage
• It covers unusual (and sometimes unanticipated) causes of loss
• It places the burden of proof on the insurer
Inland Marine Policy Provisions
Coverage Extensions (Additional Coverage)
Coverage extensions cover incidental loss exposures not covered by the basic
insuring agreement. There are five common IM policy extensions:
• Debris removal extension that pays to remove the debris of covered
property destroyed by a covered cause of loss. Most policies limit
coverage to 25% of the amount payable for the direct physical loss.
• Pollutant cleanup and removal extension that pays to remove pollutants
from land or water if the release of pollutants resulted from a covered
cause of loss. In most cases, the limit is low, such as $10,000.
• Newly acquired property extension that provides temporary coverage for
newly acquired property. This extension closes coverage gaps caused
when the policy covers only specifically described premises or real
property, or only scheduled items.
• Fire department service charge extension that pays the charge levied by a
fire department for saving or attempting to save covered property.
• Removal extension (preservation of property extension) that covers
property against all perils, even war, while it is being removed from the
insured’s premises and for a specified number of days after it has been
removed, if the removal was designed to prevent damage by a covered
cause of loss.
Inland Marine Policy Provisions
Exclusions
Exclusions state which perils are not covered and under what circumstances
normally covered perils will not be covered. Insurers use exclusions to remove
coverage for loss exposures that are too severe to insure, are customarily
insured under another policy, require special underwriting and/or can be treated
effectively through loss control. Exclusions exist in three tiers:
1. First tier exclusions preclude coverage for catastrophes (such as
earthquakes, floods and war) that could result in losses suffered by many
insureds at one time. These exclusions state that coverage is not provided
for losses caused either directly or indirectly by excluded perils. Most
inland marine policies exclude war and nuclear reaction. Many inland
marine policies cover earthquakes, floods and hurricanes. Five first-tier
exclusions are:
• Governmental authority exclusion, which excludes loss caused by
seizure or destruction of property by order of governmental authority.
There is partial coverage for property destruction by police and fire
services to prevent the further spread of insured destruction, which is
most commonly fire.
• Nuclear hazard exclusion, which excludes loss caused by nuclear
weapons, nuclear reaction and radiation and radioactive
contamination.
• War exclusion, which excludes loss caused by offensive or defensive
action by government forces and by military action taken against
government forces.
• Earthquake exclusion, which excludes loss caused by earthquake to
property while it is located at the insured’s premises. The insured
often may delete this exclusion for an additional premium. Fire
caused by an earthquake is covered.
• Flood exclusion, which excludes loss caused by flood, surface water,
waves, overflow of any body of water or their spray, all whether driven
by wind or not. This exclusion applies only to property while it is
located at the insured’s premises. Direct loss caused by fire, explosion
or theft caused by flood is covered. Alternative sources of flood
coverage include the National Flood Insurance Program and an IM
difference in conditions (DIC) policy.
2. Second tier exclusions vary greatly among the different coverage forms.
They target risks that do not usually involve concurrent causation. Seven
common second tier exclusions are:
• Voluntary parting exclusion, which excludes losses when the insured
(or the insured’s entrusted property holder) is tricked into voluntarily
turning over covered property, such as when a prospective car buyer
takes a car for a solo test drive and never returns with it.
• Unauthorized instructions exclusion, which excludes losses from
unauthorized instructions to transfer property to any person or any
place.
• Dishonest acts exclusion, which excludes losses from dishonest acts
by the insured or anyone entrusted with the property by the insured.
This exclusion does not apply to dishonest acts by hired carriers or to
employees’ acts of destruction.
• Unexplained disappearance exclusion, which excludes losses without
explanation (because such losses may have been caused by
dishonesty.)
• Inventory shortage exclusion, which excludes losses from shortage
discovered when taking inventory, unless it can be proven that the
shortage resulted from a covered cause of loss. This exclusion exists
because inventory shortages can result from accounting errors as well
as covered causes of loss.
• Delay, loss of use exclusion, which excludes coverage for all but direct
physical losses.
• Other exclusions include electronic disturbance, processing work, theft
from unattended or unlocked vehicles, marring and scratching,
exposure to light, breakage and other causes of loss unique to certain
types of property.
3. Third tier exclusions exclude coverage for losses directly resulting from
third-tier causes, but cover losses caused by ensuing covered causes of
loss. Five common third tier exclusions are:
• Weather conditions exclusion, which excludes losses caused by a
combination of weather conditions and a cause of loss excluded in the
first tier of exclusions.
• Acts or decisions exclusion, which excludes losses caused by “acts or
decisions, including failure to act or decide, by any person, group,
organization or governmental body.”
• Faulty planning, design, materials or maintenance exclusion, which
excludes losses caused by poor workmanship during or after
construction and installation.
• Collapse exclusion, which excludes coverage caused by collapse,
except as specified in the additional coverage collapse provision.
The additional coverage collapse provision covers building collapse
only if caused by a specified cause of loss. That provision was
designed to prevent state courts from applying the doctrine of
concurrent causation, which allows an insured to collect for a loss that
is caused jointly by an excluded peril and a peril not specifically
excluded. In an actual case, flood was the excluded peril and
government incompetence in dam design was the peril not specifically
excluded.
• Nonfortuitous losses exclusion, which excludes losses that are not
accidental, but rather are certain or expected to occur over time.
Nonfortuitous losses include wear and tear, gradual deterioration,
depreciation, mechanical breakdown and inherent vice (such as milk
souring, jewelry thinning, pipes corroding, iron rusting and people
aging.)
Inland Marine Policy Provisions
Conditions
Conditions are specific to and contained in each particular coverage form. They
are as follows:
• Coverage territory: This states the geographical boundaries within which
coverage applies.
• Valuation: Most IM policies value property at actual cash value (ACV,)
which is defined as replacement cost minus accumulated depreciation.
Insurers use valuation guidebooks, sales advertisements, local market
surveys and internet services to determine ACVs.
• Coinsurance clause: This requires insureds to insure property to its full
value or some stipulated percentage of its value (often 80%.) Under the
coinsurance clause, if the property is underinsured, the insurer will
penalize the insured at the time of loss by limiting the loss payment to (the
amount of coverage) divided by (the coinsurance percentage times the
value subject to loss), then minus the deductible, if any. Coinsurance is an
especially difficult requirement for bailees because bailees often find it
difficult to judge the value of others’ property.
• Reporting-form conditions: Some forms allow the insured to report
property values on hand to the insurer at set intervals and to have the
premium adjusted to the reported values. Insureds with widely fluctuating
inventories can pay lower premiums when inventory is low, yet still
maintain proper coverage. Coverage is provided only to the applicable
limit of insurance, even if a report lists a higher value. Most forms contain
a full value reporting clause (honesty clause,) which states that if the
reports were not made for the full value and on time, the amount of any
loss payment will be limited to (the amount declared) divided by (the
actual amount at risk when the report was made.) The separate, late
reporting clause usually limits coverage to the lowest of the amount of the
last report, ¾ of the initial amount of insurance (if the first report was late)
or the amount otherwise payable.
You can determine whether, and for how much, a loss would be covered by
an inland marine insurance policy by applying what you learned in this lesson.
LESSON 3: TRANSIT INSURANCE
Property in transit (cargo) is property being moved from one place to another.
Businesses with a financial interest in property in transit have transit loss
exposures.
The Five Components of Transit Loss Exposures
There are five components of transit loss exposures. They are:
• Property subject to loss: Some types of property are more susceptible to
loss.
• Number of parties involved: Loss exposures get more complicated if more
parties are involved. The three typical parties involved in the transit
exposure are:
o The consignor or shipper (who sells and ships the goods)
o The consignee (who buys and receives the goods)
o The carrier (who transports the goods)
• Mode of transportation: This is the shipping method. Intermodal
transportation ships cargo using two or more modes of transportation. An
intermodal cargo container is designed to fit aboard a truck trailer chassis,
railcar, barge and oceangoing cargo vessel. Intermodal cargo containers
decrease the possibility of damage by some perils (like water damage) but
increase the possibility of loss by other perils (like theft.)
• Terms of sale: This dictates when title (ownership) passes from shipper to
buyer and who pays the freight (shipping charges.) Shipper or consignee
may pay freight charges outright or charge them to the other party through
an increased or discounted sale price.
o FOB (Free On Board) Origin has the buyer assume the loss exposure
once the property is in the custody of the carrier and the bill of lading
has been issued.
o FOB Destination has the seller transport the property and assume the
loss exposure until delivery has been made to the buyer.
• Carrier liability: The circumstances of loss and the contract between the
shipper and the carrier determine if the carrier is liable for a transit loss.
The bill of lading is the carrier’s receipt for property being shipped. The bill
of lading may also contain the contract of carriage between shipper and
carrier. Many shippers and consignees buy transit insurance to cover
losses for which the carrier may not be liable or able to pay. Some
shippers and consignees retain transit losses because the values exposed
to loss are often small and the losses are predictable.
Annual Transit Insurance
Annual transit insurance covers the owner’s property while the property is being
transported by another. Coverage extends to all shipments made during the
policy period (usually one year.) Annual transit coverage is a nonfiled class.
The insured need not own the covered property. Coverage applies only to
property shipped by conveyances or carriers described in the policy. Annual
transit insurance excludes property targeted by thieves (like furs, jewelry and fine
art) or more appropriately covered under another form (like mail and securities.)
Property is only covered while it is in transit. Transit begins when the goods leave
their starting point (if the shipper is the carrier) or when the carrier takes custody
of the goods (if the shipper uses a carrier for hire.) Transit ends when the goods
have been delivered to their destination. Most policies cover property while it’s in
temporary storage, but not while it’s being temporarily processed at another
location. Some policies contain a provision that specifies when coverage begins
and ends. Property in transit is at the insured’s risk if the insured agrees to
provide insurance and/or the insured has title to the property.
Coverage Extensions
Coverage extensions are as follows:
• FOB shipments extension pays for the shipper’s interest in property
shipped FOB when the consignee refuses to pay for the loss.
• Rejected shipments extension pays for damages to rejected shipments
while the property is being returned to the shipper.
• Packing or consolidating companies extension extends coverage to
property in the custody of a packing or consolidating company being used
by named insured or consignee.
• Fraud or deceit extension pays for losses that occur when the insured or
the insured’s agent, messenger, customer or consignee gives covered
property to someone who falsely presents him/herself as the person to
receive goods for shipment or delivery.
• Other extensions include relocation to prevent loss, debris removal and
pollutant removal.
Coverage may be on an “all-risks” or on a named perils basis. Both types of
policies include all first-tier exclusions except for earth movement and flood.
Theft coverage may exclude dishonest acts, voluntary parting, unauthorized
instructions, unexplained disappearance and inventory shortages. Some policies
exclude breakdown of refrigeration equipment. Virtually every policy excludes a
list of specific perils, such as insects, vermin, inherent vice, contamination, war
and nuclear damage, rough handling, breakage, marring, scratching, chipping
and denting.
In the absence of a valuation clause, the insurer is liable for the actual amount of
loss at the time and place of occurrence. The most common valuation clause
sets the property value at its invoice price (the price of the goods shown on the
invoice,) including advanced freight and cost or charges incurred from the time of
shipment. Invoice price is advantageous to the seller because it is easily
determined and it includes the seller’s profit on the sale.
Coverage applies wherever the property is, within the policy’s stated territorial
limits. Land coverage includes imports and exports if they are not covered by
ocean marine coverage. Air and water coverage does not include imports and
exports.
The insurer preserves its right of subrogation against the property carrier or
bailee, which gives an insurer that has already paid a loss the chance to recover
some of that payment. The principal source of subrogation recovery is the
negligent carrier. Many policies include a clause that invalidates the policy if the
insured does anything to impair the insurer’s recovery rights. That clause
sometimes does not apply to ordinary bills of lading. The policy may allow the
insured to accept a released bill of lading, which limits, but does not eliminate,
the carrier’s liability for cargo loss. A released bill of lading may limit coverage to
$0.60 per pound, or some other unreasonably low amount in consideration of a
lower shipping charge.
The ISO mail coverage form insures:
• First class mail
• Certified mail
• USPS express mail
• Registered mail sent by banks, bankers, trust companies, insurers,
security brokers, investment corporations, fiduciary businesses and
corporations acting as security transfer agents or registrars for their own
security issues.
Transit Insurance Extensions in Standard Policies
There are two coverage forms. The first one is ISO Business Owners’ Special
Property Coverage Form. Special form coverage provides a $5,000 extension for
property in transit in motor vehicles owned, leased or operated by the named
insured.
The second one is ISO Building and Personal Property Coverage Form. The
personal property off-premises extension provides $5,000 coverage for personal
property in transit or temporarily at premises not owned, leased or operated by
the named insured. Property must be within the regular coverage territory, not
traveling between territories.
Underwriting Factors for Annual Transit Insurance
There are nine underwriting factors for annual transit insurance. They are:
• Type of property shipped: Many insurers assign a commodity classification
to the property that reflects the property’s damageability and
attractiveness to thieves. Target commodities (like cigarettes, jewelry, blue
jeans and over-the-counter medications) are especially attractive to
thieves. Some commodities require the removal of standard policy
exclusions. For example, museums wouldn’t want to have the fine arts
exclusion in place.
• Value of shipments: Insurers ask for the value of all shipments made at
the insured’s risk annually, categorized by mode of transportation.
Insurers charge different rates for different modes of transportation and
set limits at or near the insured’s usual maximum value per shipment.
• Use of own vehicles: Insurers want to know how many and what types of
vehicles the insured operates, details of the vehicle maintenance program,
how the insured recruits and trains its drivers, whether the insured
backhauls others’ property (or returns with an empty load) and the safety
procedures associated with shipping activities.
• Subrogation potential: Insurers want to know if the insured uses full or
released bills of lading.
• Distance and geographical scope of shipments: Long-haul shipping (trips
longer than 200 miles) is riskier than short-haul shipping. Shipping to and
from high crime areas increases the risk of theft.
• Loss history: A three-year to five-year loss history can indicate potential
loss problems. High-frequency losses indicate the need to establish and/or
improve loss control activities.
• Packing methods: Inadequate packing increases the risk of loss.
• Gross sales: Gross sales indicate the size of the insured’s business and
can be used as the rating basis when the insured would have difficulty
keeping track of shipment values.
• Terms of coverage: Policy details can eliminate coverage for high-risk
activities.
Trip Transit Policy
A trip transit policy covers a single, specified trip. The policy may cover the
owner’s interest or the carrier’s liability. Businesses that ship property
infrequently use trip transit policies.
Businesses with annual transit policies sometimes use trip transit policies to
insure high-value or one-of-a-kind shipments that exceed the limits of the annual
transit policy. Underwriting considerations are the same as for annual transit
policies.
How to Adjust Transit Insurance Claims
There are seven steps to adjust transit insurance claims. They are:
1. Check for unique coverages that may have been added to the policy.
2. For reporting-basis policies, make sure the insured’s reports were up-to-
date as of the date of loss.
3. Verify the facts of loss and ownership of lost property.
4. Get copies of key shipping documents; the bill of lading, shipping invoice,
purchase documents, shipping instructions, inspection records and master
contracts.
5. Inspect the goods to make sure damage has been minimized and
salvageability maximized.
6. Select a salvage firm.
7. Retain and use subrogation rights.
LESSON 4: MOTOR TRUCK CARGO LIABILITY
INSURANCE
Motor Carrier Cargo Liability Exposures
Motor truck cargo (MTC) liability insurance covers motor carriers against cargo
liability claims of shippers and/or consignees for property damaged or lost in
transit. A motor carrier uses automobiles to transport property or persons. A
motor carrier’s cargo liability exposure is the possibility that the carrier will be
legally obligated to pay for loss of or damage to others’ property in its care,
custody or control for purposes of transportation.
Underwriters must understand cargo liability exposures to evaluate MTC and
transit policy applicants.
The History of MTC Liability Insurance
The following is a history of MTC legislation:
• Carmack Amendment, 1906: This made common carriers strictly liable for
cargo losses. Strict liability is liability without regard to fault. Carriers could
limit their liability through released rates, reduced shipping rates in return
for limiting the carrier’s liability for cargo losses.
• Cummins Amendments, 1915 and 1916: These abolished and then
reinstated the use of released rates.
• Motor Carrier Act of 1935: This brought motor carriage and freight
forwarders under Interstate Commerce Commission (ICC) jurisdiction and
Carmack liability rules. A freight forwarder assembles and consolidates
shipments and hires carriers to do the hauling. (Consolidators and packing
houses assemble and consolidate shipments, but do not arrange for their
transport.)
• Motor Carrier Act of 1980: This partly deregulated motor carriage of cargo.
• Trucking Industry Regulatory Reform Act of 1994: This eliminated ICC
tariff-filing requirements.
• ICC Termination Act of 1995: This eliminated much of the Interstate
Commerce Act and gave the ICC’s remaining responsibilities to the US
Department of Transportation (DOT). The DOT further deregulated motor
carriage of cargo, reducing the Carmack Amendment to Section 14706 of
Title 49, which codifies common-law principles that traditionally applied
only to common carriers and applied them to both common and contract
carriers, with some exceptions (such as agricultural carriage and
emergency towing.)
Carrier Liability Defenses
Carriers are not liable for cargo losses caused by:
• Acts of God: Events that occur without human intervention or that cannot
be humanly prevented.
• Acts of the public enemy: Acts of nations or governments at war with the
nation in which the carrier is domiciled.
• Acts of a public authority: Acts taken by public officials acting with
governmental authority.
• Shipper’s fault or neglect: The shipper’s act is the sole cause of loss or
damage.
• Inherent vice: A property condition that tends to make the property slowly
self-destruct, as milk sours, iron rusts and your boss ages.
The carrier may still be held liable for a loss attributable to one of the above
causes if the carrier could have foreseen and/or avoided the loss.
When Does the Carrier’s Loss Exposure Begin?
The carrier’s loss exposure begins when the carrier receives and accepts
property for immediate delivery and the shipper has performed all necessary
actions. The carrier receives and accepts property when it picks up property at
the shipper’s address or when the shipper delivers its own property to the
carrier’s terminal.
When Ddoes the Carrier’s Loss Exposure End?
The carrier’s loss exposure ends when the carrier tenders the goods for delivery
at a reasonable time, place and manner. The consignee’s receipt is evidence of
property delivery. If the consignee does not provide delivery instructions by a
certain date, the carrier’s liability is reduced to that of a warehouse operator and
as such is only responsible for losses resulting from negligence. Negligence is
the failure to exercise the standard of care a reasonably prudent person would
have shown in a similar situation. Negligence requires a breached duty causing
damage.
The Major Types of Bills of Lading and Their Uses
A bill of lading is issued by a common carrier and serves as both a receipt for
goods placed in the custody of the carrier and as a contract between the shipper
and carrier. When the shipper seals the cargo container before delivering it to the
carrier, the carrier stamps the bill of lading with the shipper’s weight, load and
count to signify that the carrier will not be held liable for any loss resulting from
short load or count unless the shipper can prove the container was opened in
transit. The major types of bills of lading and their uses are:
• Released bill of lading: This releases the carrier from liability beyond the
value of the goods stated in the bill. That value may be stated as a
declared dollar amount for the whole load or as a dollar amount per pound
or per 100 pounds. Under such an arrangement, the carrier usually
charges a lower rate, called a released rate.
• Straight bill of lading: This does not include any limitations on value. The
straight bill states if the carrier’s services are to be paid for by the shipper
or by the consignee upon delivery.
• Order bill of lading: This is used for cash-on-delivery arrangements in
which the consignee does not receive the goods until they have been paid
for. An order bill of lading may or may not include liability limits as in a
released bill of lading. Order bills of lading are most common in ocean
commerce.
• Through bill of lading: This covers an interline shipment (a shipment
made by more than one transportation company) from its point of origin to
its destination with one charge for the entire service.
Loss Determination
The amount of loss is the market value of the lost or damaged property. The
claimant may also claim freight charges, but not expenses connected to filing the
claim.
Cargo Liabilities of Different Types of Carriers
There are five different types of carriers for cargo liabilities. They are:
• Rail carriers: These are liable for losses as stipulated in their bills of
lading.
• Domestic water carriers: These have relatively limited liability. In
addition to the usual exemptions from common carrier liability, domestic
water carriers are exempt from losses due to perils of the waters, errors in
navigation, rescue efforts and fire. Domestic water carrier liability is
governed by the Harter Act, unless the shipper and carrier agree to be
governed by the Carriage of Goods by Sea Act (COGSA).
• Domestic air carriers: These are liable for cargo in their custody unless
they can prove the loss or damage was caused by one of the five
defensible causes of loss or the domestic carrier was not negligent.
• Freight forwarders: These have the same liability as motor carriers. Their
liabilities are determined by the terms of each individual bill of lading.
• Freight consolidators: These are liable for their customers’ property as
bailees.
Motor Truck Cargo Insurance
Motor truck cargo insurance, like annual transit insurance, pays for loss or
damage to covered property resulting from a covered loss. Unlike annual transit
insurance, MTC insurance insures the carrier and only pays for losses for which
the carrier was liable. The carriers’ form covers the carrier’s legal liability for the
goods it transports. The owners’ form covers the property owner’s risk of loss to
property being transported.
Common Provisions for the Carriers Form
Here are the common provisions for the carriers’ form:
• Covered property is listed in the policy. Property is not covered unless it
has been accepted for transportation under the insured’s tariff and bill of
lading or shipping receipt. Coverage is restricted to lawful goods and
merchandise. Many insurers impose a lower limit for property at
unspecified terminal locations due to the increased risk of theft. Property
exclusions typically include accounts, bills, currency, deeds, evidences of
debt, notes, securities, jewelry, precious stones, paintings, fine arts and
property carried gratuitously or as an accommodation. Most policies
exclude coverage for loss or damage to the transporting vehicle and/or the
intermodal container. (Damage to vehicles being transported is covered.)
• Coverage extensions include debris removal and pollutant cleanup,
reloading expenses, losses at newly acquired terminals and earned freight
charges (freight that the insured has earned but is unable to collect, often
with a separate limit of coverage.)
• Covered causes of loss: The bill of lading form functions like an “all-risks”
policy, covering all causes of loss except named exclusions. The named
perils form covers all listed perils. Losses from flood, earth movement and
employee theft are usually covered. Losses from breakdown of
refrigeration equipment or violations of law are excluded from coverage.
• Coverage limits: There are separate limits for property losses per vehicle,
per listed terminal, per unlisted and/or new terminal and sometimes per
occurrence.
• Valuation is consistent with or tied to the insured’s legal obligation to pay
for losses.
• Coverage territory is limited to the US, its territories and possessions,
Puerto Rico and Canada.
• Coinsurance is rarely used.
• Gross-receipts reporting clause bases the insurance rate on the insured’s
periodic reports of gross receipts.
• BMC 32 endorsement: Motor carriers operating within federal jurisdiction
must provide evidence of adequate in-force cargo insurance. The
Interstate Commerce Commission (ICC) requires carriers to file form BMC
32 to prove they have their cargo insured. The insurer must file a
corresponding form, BMC 34. Many states require similar state filings from
intrastate and/or interstate carriers. The BMC 32 endorsement requires
the insurer to pay for all losses for which the carrier is legally liable and
which are subject to the jurisdiction of the Interstate Commerce Act,
regardless of policy exclusions. Although the endorsement contains per-
vehicle and per-occurrence limits, there is no limit to the number of claims
the insurer must pay.
Ten Underwriting Factors for MTC Liability Insurance
The ten underwriting factors for MTC liability insurance are:
• Carrier’s financial condition. A weak financial condition may indicate:
o The carrier’s inability to pay premiums and claims
o Poor overall management (which might include poor loss control
efforts)
o Moral hazard (the increased likelihood of intentional losses)
o Morale (also known as attitudinal) hazard (an indifferent attitude toward
preventing losses)
Underwriters assess carriers’ financial conditions by ordering analyses
from the Central Analysis Bureau, Inc. (CAB,) an information service that
rates motor carriers’ financial strengths, and by requesting a copy of the
carrier’s OS&D report, which lists open and unpaid claims against the
carrier for cargo losses.
• Commodities hauled: Target commodities require stringent theft control
measures. Commodities highly susceptible to damage and commodities
with low salvageability require careful handling and underwriting.
• Value of shipments: Underwriters base their coverage limits on the
average and maximum values per truckload.
• Vehicles and drivers: Assess the age and physical condition of the fleet,
vehicle maintenance program, driver hiring and training practices and
driver turnover rate.
• Gross receipts: Underwriters often base the insurance rate on the carrier’s
gross receipts.
• Bill of lading: The terms of the carrier’s bills of lading directly affect the
carrier’s liability.
• Distance and geographic scope of trips: Long-haul trucking and routes
through high-crime areas increase the risk of loss.
• Loss history: Underwriters use loss histories to avoid insuring bad risks
and to develop loss control programs for acceptable risks.
• Terminal exposures: Fire and theft are the main causes of property loss at
terminals. Evaluate the building construction and fire protection and
security features (sprinkler systems, burglar alarms.)
• Owner-operator exposures: An owner-operator owns its own trucks and
hires itself out to carriers to haul loads. Carriers that regularly hire owner-
operators are riskier to insure because the underwriter can’t evaluate
every owner-operator’s financial stability and loss history. Carriers that
regularly hire owner-operators should avoid buying MTC liability insurance
on a scheduled-vehicle basis because it then restricts itself to hiring only
listed owner-operators.
Loss Control Measures for MTC Liability Exposures
The following are control measures for MTC liability exposures:
• Management practices: Document loss control programs and
procedures. Become an active member of national motor carrier
associations. Maintain financial stability.
• Vehicle-related activities: Use equipment appropriate to the goods being
hauled. Have enough extra equipment to allow for regular maintenance.
Assign each driver permanently to a specific vehicle. Make someone
responsible for replacing worn equipment. Have drivers inspect their
vehicles before and after every trip.
• Personnel-related activities: Hire a properly trained person to handle
personnel matters. Develop driver selection standards. Keep a file on
each driver that includes the completed application and a copy of his/her
driver’s license, motor vehicle report and most recent physical exam.
Develop driver disqualification policies. Put new drivers through a driver
orientation program. Periodically put all drivers through refresher training
on the equipment they use.
• Cargo handling practices: Protect cargo from anticipated hazards. Do
not accept poorly packaged and/or damaged cargo for transport. Use
suitable equipment to load cargo onto suitable vehicles. Prevent water
condensation on the cargo. Balance cargo loads. Secure cargo on the
vehicle before beginning transport. Inspect the cargo and its securing
devices before beginning transport and at specified intervals during
transport. Inventory cargo regularly while it sits in the terminal.
• Security measures: Develop security procedures. Never leave cargo
unattended. Keep containers locked. Never drop off a load without having
someone sign for it. Ban unscheduled stops and unauthorized driver
companions.
• Reducing fire and water exposures: To reduce the fire hazard, install
sprinkler systems in terminals, store unused pallets and fuel in a safe
place, develop safe practices for cutting and welding operations in
terminals and install fire doors and firewalls. To reduce the water hazard,
protect cargo from rain before storing it outside, use pallets to keep cargo
off floors, prevent pipes from freezing, fix roof leaks quickly and inspect
sprinklers regularly to prevent malfunctions.
How to Adjust Motor Truck Cargo Liability Claims
There are four steps to adjust motor truck cargo liability claims. They are:
1. Determine coverage: Make sure the claim is actually covered.
2. Determine liability: Don’t pay for covered claims unless the insured is
legally obligated to pay.
3. Inspect damaged property: Determine the cause of loss and make sure
the property has been protected from further loss.
4. Salvage property and subrogate losses: Sell salvageable property and file
liability claims against responsible third parties.
LESSON 5: CONTRACTORS EQUIPMENT INSURANCE
Types of Contractors’ Equipment
Contractors’ equipment includes the tools and machinery used in construction,
renovation, earth moving and other activities typical of contractors.
• Earth-moving equipment: Clears job sites and moves construction
materials within the job site. Earth-moving equipment includes backhoes,
excavators, bulldozers, tractors, power shovels, loaders, scrapers,
graders, rollers, compactors and trenchers. The main hazards are upset
and overturn, fire (from broken hydraulic lines), collision, vandalism,
malicious mischief and theft.
• Site-improvement equipment: Prepares and finishes roads and parking
lots. Site-improvement equipment includes batching and mixing plants,
pavers, pavement planers and finishers. The main hazards are upset and
overturn, fire, flood damage, earthquake damage and vandalism.
• Material-handling equipment: Moves building materials and heavy
objects at the work site or into position within a structure. Material-
handling equipment includes lifts and cranes. The main hazards are
collision, fire, vandalism and theft. Cranes are prone to boom collapse,
generally caused by damage during erection, wind damage, metal fatigue,
weakened cables, lifting loads over the boom’s capacity, uncontrolled
crane movement and/or failure to use stabilizers.
• Miscellaneous contractors’ equipment: Supports or supplements other
contractors’ equipment. Miscellaneous contractors’ equipment includes air
compressors, generators and pumps. The main hazards are fire, collision,
flood damage and theft.
Twelve Types of Contractors’ Operations
The types of contractors’ operations include:
• Building contractor: Clears land and performs framing, concrete and
electrical work. Equipment includes pile drivers, tower cranes, mobile
cranes, derricks and excavators. The main hazards are theft and
vandalism. Other hazards include fire, overturn, collision and boom
collapse.
• Road building contractor: Builds new roads and repairs existing roads.
Equipment includes excavators, graders, asphalt and concrete finishers,
ditchers, loaders, rollers, scrapers, earthmovers, batching and mix plants.
The main hazards are fire, theft, vandalism, collision and upset. Work
done in mountainous terrain adds the hazards of landslide and overturn.
Work that includes blasting adds the hazards of flying debris and
accidental explosion. PML is usually low, unless equipment is
concentrated.
• Utility contractor: Installs water and sewage pipes, power lines,
telephone and cable television lines and other public service systems.
Equipment includes trenchers, digging equipment, backhoes, rough terrain
cranes and pipelaying machinery. The main hazards are fire, theft,
vandalism, collision and upset.
• Waste disposal operations: Treat and dispose of trash. Equipment
includes dozers, loaders, backhoes and specialized compaction and
incineration equipment, which is often old. The main hazards are fire and
losses caused by poor maintenance and operator errors.
• Municipal operations: These are funded and organized by state and
local governments. Operations and hazards are similar to those for
general, road building and utility contractors. The main hazards are fire,
vandalism and theft losses at the storage facility.
• Logging operations: Cut down trees for manufacturing and wood
processing operations. Equipment includes tractors, graders, chippers,
feller bunchers (which grab and cut trees and then lift and bunch the logs),
yarders (which reel logs into a consolidation point) and skidders (self-
propelled vehicles that drag logs.) The main hazards are fire, upset,
overturn, theft, vandalism and collapse of towers and spars.
• Mining operations: Gather solid natural resources underground and at
ground level. There are two main types:
o Underground mining uses shaft, slope and drift mines. Equipment
includes roof drills, roof bolters, loaders, conveyor belts, continuous
miners (which bore into the seam) and longwall miners (which move
horizontally across the seam.) The main hazards are roof collapse,
explosion, fire, blasting damage, shaft flooding and time element
losses when shafts are closed to smother fires.
o Surface mining removes natural resources from close to the surface of
the earth. There are two drilling methods:
� Auger drilling drills up to 200 feet into a seam and propels the
material backward.
� Punch-hole drilling drills up to 1,000 feet into a seam and uses a
conveyor belt to bring the material out. The main hazards are
overturn, fire, boom collapse, blasting, squeeze (pressure on the
drill bit) and highwall collapse (collapse of working face during
boring.)
• Quarry operations: Extract stone, sand, minerals and metal ores from
the earth using ground-level cutting or open-pit mining, in which a pit
slowly forms as the resource is extracted. Equipment includes crushers,
conveyors, air compressors, screens, shovels, drills, haulers, loaders and
bulk materials handling equipment. The main hazards are landslide,
flooding, falling rock, collapse of walls and explosion. Conveyor belt
systems are prone to fire. Mobile equipment is prone to upset, overturn
and collision.
• Well-servicing units: Create and maintain oil and natural gas wells.
Exploratory rigs drill wells to or through the pay zone. The servicing unit
then starts the flow of oil or gas by either of the following processes:
o Shooting the well (detonating an explosive charge in the pay zone.)
o Sand fracturing (using a high-pressure mix of oil and sand or water and
sand to access the resource.)
Servicing units also clean and replace machinery on existing wells to
increase production. The main hazards are blowout (drilling fluid, oil, gas
or water escaping uncontrollably from in the well) and cratering (the
formation of a basin-like opening around the rig caused by the erosive
action of oil, gas, air or water). Exploratory rigs tend to overturn. Sand
fracturing units catch fire.
• Shipyard operations: Build, repair and maintain ships. Equipment
includes forklifts, gantry cranes, cherry pickers, mobile cranes, burning
and welding units and locomotive cranes. The main hazards are fire,
windstorm and equipment falling overboard.
• Stevedoring operations: Load and unload goods on and off ships.
Equipment includes forklifts, cherry pickers, gantry cranes, mechanical
lifts,hydraulic lifts and materials handing equipment. The main hazards are
fire, windstorm and equipment falling overboard.
• Marine contractor: Builds structures on or over water, using mobile
equipment on large ships or waterborne structures. The main hazard is
equipment falling overboard.
Contractors’ Equipment Insurance Policy Provisions
Covered Property
A contractors equipment policy insures against loss of or damage to mobile
machinery, tools and equipment “of a mobile or floating nature” used in the
insured’s business. The property may be owned by the insured or rented or
leased equipment (equipment of others that the insured uses for a fee.)
Many policies offer both:
• Schedule coverage (for high-value items)
• Blanket coverage (for smaller items of less value)
Schedule (also known as scheduled) insurance lists the equipment to be insured.
Schedule insurance usually includes an acquisition clause that automatically
covers newly acquired property up to a specified amount if the insured reports
the acquisition within the specified time period. Schedule insurance lets the
underwriter define the exposure and satisfy insurance-to-value requirements, but
it also eliminates coverage for all undescribed equipment.
Blanket insurance covers all qualifying property with a single amount of
insurance. Blanket insurance is used to insure small tools or other low-valued
equipment. Blanket insurance usually specifies a per-item limit. Blanket
insurance for rented or leased equipment requires the insured to report the cost
of equipment hire or the values at risk at agreed-on intervals.
Excluded Property
Standard exclusions include vehicles designed and principally used for highway
transportation; aircraft; watercraft; property loaned, leased or rented to others;
property while waterborne; property while located underground; tires and tubes
(unless loss is caused by fire, windstorm or theft, or is coincident with an insured
loss); plans, blueprints, designs and specifications; property that is intended to be
or has become a part of a structure; consumable property (fuel, oil, paving
materials, building materials); and contraband. An insurer might agree to cover
property loaned, leased or rented to others if given satisfactory information about
the frequency of loan and the lessee’s location, typical work, reputation and
responsibility for loss or damage to the property.
Covered Perils
Policies are either “all-risks” or named perils. The most common named perils
are fire and lightning, windstorm and hail, explosion, flood, earthquake, collapse
of bridge or culvert, theft, collision, upset, overturn, perils of the sea and
vandalism and malicious mischief. Policies covering underground mining
equipment usually add slate fall, roof fall, cave-in, landslide, squeeze, strikes, riot
and civil commotion to the list of covered perils.
Excluded Perils
Contractors’ equipment policies usually contain all of the first-tier and some or all
of the second-tier exclusions. The insured can add coverage for some theft-
related losses by endorsement. Additional exclusions are:
• Artificially generated electric current exclusion: This excludes damage
caused by short circuits or electrical disturbances within the covered
property.
• Mechanical breakdown exclusion: This excludes coverage for mechanical
breakdown or failure, but not physical loss resulting from breakdown if
caused by a covered peril.
• Work upon the property exclusion: This excludes coverage for
adjustments, servicing or maintenance operations unless caused by an
ensuing fire or explosion.
• Pollution exclusion: This excludes loss caused by the discharge, migration
or release of contaminants or pollutants, unless caused by specified perils.
• Tire damage exclusion: This excludes tire damage and sometimes
vandalism to tires.
• Weight of load exclusion: This eliminates coverage for losses caused by
moving loads that exceed the equipment’s rated capacity.
• Tandem lift exclusion: This eliminates coverage for losses that occur when
two or more cranes are used together to perform one lift.
• Boom operation exclusion: This eliminates coverage for crane and derrick
booms unless the loss is caused by a specified peril.
• Brush or trash burning exclusion: This eliminates coverage when covered
property is used to move brush, trash and other material onto an existing
fire.
• Permafrost or muskeg exclusion: This eliminates coverage when the loss
is caused by ice subsidence or by the property breaking through ice or
sinking into permafrost or muskeg (a sphagnum bog.)
• Tsunami and wave action exclusion: This eliminates coverage for losses
caused by tsunami, tidal wave, tidal action, wave action or sea spray.
Coverage Extensions and Endorsements
Coverage extensions and endorsements include debris removal, pollutant
removal, fire department service charges, fire protection equipment and the
following:
• Rental reimbursement extension: This pays the insured for the extra
expense of renting substitute equipment to replace covered equipment
damaged by a covered peril. Most contractors prefer the rental
reimbursement extension because they can easily rent replacement
equipment and avoid business income losses.
• Business interruption and extra expense extension: This pays the insured
for lost profits and continuing expenses while business is stopped or
curtailed after a covered loss. Contractors with unusual equipment may
prefer the business interruption extension.
Limits
Scheduled policies set a limit for each item and sometimes a catastrophe limit
(the maximum amount the policy will pay for all losses associated with a single
occurrence.) Blanket policies may set a separate limit on any one item and may
include a catastrophe limit.
Valuation
Valuation is usually at actual cash value or ACV (often meaning market value) or
replacement cost. Replacement cost underwriting considerations include the age
and replaceability of the equipment and any moral hazard. A waiver of
depreciation provides replacement cost coverage for some partial losses in an
ACV policy.
Coinsurance
Scheduled policies usually have an 80% coinsurance clause applicable to each
item. Blanket policies usually have a 90% or 100% coinsurance clause.
Deductibles
Deductibles are negotiated on a per-policy basis. A split deductible is a separate
deductible that applies to specified property or perils.
Covered Locations
Covered locations are defined by the policy’s territorial limits.
Note: Eligibility for contractors’ equipment insurance is based on the Nationwide
Marine Definition, which requires such equipment to be of a “mobile and floating
nature” and principally designed for off-road use.
Underwriting Factors in Contractors Equipment Insurance
The eleven underwriting factors in contractors’ equipment insurance are:
1. The equipment’s eligibility for coverage
2. The principal loss exposures
3. The type of equipment including manufacturer, model, age and size
4. The equipment use including maintenance, type of job, type of site and
loss control measures
5. The equipment location including areas of use and storage and their
hazards
6. The management practices including loss control, personnel programs
and financial strength
7. The loss history
8. The probable maximum loss (PML)
9. The methods of maintaining insurance to value
10. The requested limits of business interruption and extra expense insurance
11. The rating method.
The Probable Maximum Loss (PML)
The probable maximum loss (PML) is the most severe loss likely to occur.
Calculation of the PML allows an underwriter to decide whether or not to accept
the risk.
PML is based on three factors:
1. The values of individual pieces of equipment
2. The concentration of equipment at one work site or storage facility
3. The exposure with the potential for the most severe loss
Maintaining Insurance to Value
Maintaining insurance to value prevents the insured from underinsuring his/her
equipment. Value equipment accurately by consulting the Green Guide for
Construction Equipment (which lists current fair market values for construction
equipment and optional attachments), trade journals or a local equipment dealer.
Book value (which is the fair market value depreciated on an accounting basis) is
inappropriate for valuing contractors’ equipment because many contractors
depreciate their values rapidly for tax purposes.
The Two Rating Method
The rate category approach assigns different rates to different types of
equipment depending on their exposures. This approach produces a premium
proportional to the risk, but it’s an awkward arrangement if the insurer buys and
sells a lot of equipment during the coverage period.
The average-rate approach uses a single weighted average rate for all insured
equipment, based on the total value of equipment at policy inception. This
approach is simpler than the rate category approach, but it produces a less
accurate premium
Loss Control for Contractors’ Operations
Crime Controls
Crime controls deter theft and vandalism. Two types of crime controls are
equipment controls and site controls. Equipment controls alter the operation or
appearance of the equipment to deter theft and to increase the likelihood of
identifying stolen equipment. Ways to alter equipment operation include separate
ignition keys, control of those keys, cut-off switches and removal of critical parts.
Ways to alter equipment appearance include repainting with distinctive colors,
attaching emblems and etching or punching serial numbers in both hidden and
obvious places, which makes it easy to identify stolen equipment by keeping a
permanent record of each piece of equipment. Site controls limit access to job
sites, use guards, fences and lighting to deter intruders.
Fire Controls
Fire controls reduce the frequency and severity of fire. Equipment maintenance
and inspection procedures reduce the incidence of damaged wiring, leaking fuel
tanks and broken hydraulic lines that can lead to fire. Don’t base maintenance
schedules on hours of use because hour meters are easily adjusted. Locate the
fuel source away from other equipment, fuel equipment carefully and develop
procedures for fuel spills. Place extinguishers on every piece of equipment and at
every fuelling station. Train personnel in their use.
Overturn Controls
Overturn controls prevent equipment from tipping over during operation. Ways to
implement overturn controls are:
• Driver/operator selection: Hire experienced drivers with good safety
records. Train new drivers by offering incentives for the safe operation of
equipment.
• Transit procedures: Transport equipment on flatbed trailers. Secure the
equipment and load and unload it correctly. When driving equipment on
roads, include an escort vehicle to detect problems ahead and to alert
other motorists.
• Operating procedures: Review soil conditions on the job site. Avoid
operating the equipment at full capacity or with a full load. Keep loads
low. Stay safely away from uneven ground and obstacles, avoid sharp
turns and use stabilizers.
To Adjust Contractors’ Equipment Insurance Claims
There are four steps to adjust contractors’ equipment claims. They are:
1. Verify coverage: Make sure the equipment and the cause of loss are
covered. Pay close attention to whether property is scheduled or
unscheduled, the scope of unique coverages and exclusions and the
policy’s valuation, coinsurance and loss payable provisions.
2. Investigate the claim: Get statements from the owner and the equipment
operator that include:
a. General information about the business
b. General details of the loss
c. A description of the damaged equipment
d. Prior losses to the equipment
e. Purchase and service history of the equipment
f. A description of the particular job being performed at the time of
loss
g. Financing details
h. Contracts involving the damaged equipment
i. Additional relevant facts
i. Investigate questionable losses
ii. Call in experts if needed
iii. Confirm official reports and contracts
3. Determine damages: A constructive total loss has the insurer pay the total
value of the equipment and sell the damaged property for salvage, even if
the equipment can be repaired. Insurers declare a constructive total loss
when the repair cost is higher than the amount needed to scrap the
equipment, minus its salvage value. If the loss is not a total or constructive
total loss, the insurer should call in experts as needed to determine the
amount of loss.
4. Recover: Subrogate against negligent third parties. Sell the damaged
equipment for salvage.
LESSON 6: BUILDERS’ RISK POLICIES AND
INSTALLATION FLOATERS
Builders’ Risk Policies and Installation Floaters
A builders’ risk policy covers a building or structure while under construction, plus
building materials and supplies while at the site, in storage or in transport to the
site. The property owner usually buys the policy. An installation floater covers
property to be installed in a building or structure while at the site, in storage or in
transport to the site. The contractor usually buys the policy.
Installation floaters may cover:
• The contractor’s interest in others’ property it will install
• The supplier’s interest in property it has sold but not yet installed
• The property owner’s interest in its own property
The construction contract between a project owner and a contactor specifies:
• What will be built
• When it will be built
• Where it will be built
• The cost of the project
• The details regarding insurance
The Provisions of Builders’ Risk Policies
Covered Property
Covered property is property undergoing construction, reconstruction, repair or
alteration, and for which the insured is liable. Types of insured property include
machinery, equipment, materials, supplies and fixtures that will become a
permanent part of the structure and materials and supplies owned by others for
which the insured is responsible. Coverage may also include forms (which hold
concrete in place until it hardens), scaffolding (support systems on which workers
stand while performing their work), falsework (temporary structures that support
the building until it’s strong enough to support itself), temporary structures and
the cost of debris removal.
Excluded Property
Excluded property may include land, water, automobiles, contractors’ mobile
equipment and tools, watercraft, aircraft, existing property to which alterations or
additions are being made and property in storage not specifically assigned to the
job site.
Covered Perils
Coverage is for “all-risks,” with special attention to the key loss exposures such
as:
• Flood and earthquake: Coverage may be added for additional premium,
and each peril is usually subject to special deductibles and limits
• Collapse: Some policies cover collapse by specified perils; others cover
collapse unless the cause of loss is specifically excluded
• Weather conditions: Some policies exclude coverage if weather conditions
contribute concurrently or in sequence with specified excluded perils
• Faulty design, materials or work: Most policies exclude the cost of redoing
part of the project caused by faulty design, materials or work, but include
physical loss caused by faulty design, materials or work
• Theft: Exclusions limit the scope of theft coverage
Time Period Covered
Coverage may begin when transit commences or when the insured acquires an
insurable interest. Coverage ends at the earliest of the following times:
• When the insured’s financial interest ceases
• When the buyer accepts the property as complete
• When the policy expires or is cancelled
• When the property is put to its intended use
• A specified number of days after construction has ceased
• When the insured abandons construction
Builders’ risk insurers do not like to insure structures being built on speculation
that are nearing completion but have not been sold because the builder is likely
to prolong construction to avoid buying a more expensive policy to protect the
finished—and unoccupied—property.
Limits
There are separate limits for property in transit, at the job site and at locations
other than the job site. There may be separate earthquake and flood limits.
Extensions
BI and EE exclude coverage for delay caused by labor strikes, inefficient
management, heavy rain and excluded perils.
Coverage may be extended to include:
1. Valuable papers and records (blueprints, plans, drawings and data-
processing media)
2. Trees, shrubs and plants (up to a stated limit per item and per occurrence)
3. Ordinance or law (to cover the increased cost of reconstructing a
damaged or destroyed building because ordinance or law requires new
features or demolition and rebuilding)
4. Testing (to cover losses caused by cold testing (testing of less hazardous
equipment, such as electrical or hydrostatic building components) and/or
hot testing (testing of hazardous equipment, such as boilers and
processing equipment)
5. Soft costs (expenses incurred as a result of completion delay, including
additional bank interest to extend the loan, advertising expenses,
additional taxes and commission expense for real estate brokers related to
re-renting or re-leasing the property)
6. Business income and extra expense insurance covers business income
losses (loss of rent or earnings caused by a covered completion delay)
and extra expenses (costs incurred to continue operations despite a
covered completion delay)
Valuation
The settlement basis is the cost of materials and labor to repair or replace
damaged property. Insurers encourage their insureds to maintain insurance to
value by including the equivalent to a 100% coinsurance clause that requires the
insured to insure the project at its full completed value or incur a penalty on all
loss adjustments.
Premiums
Policies may be written on a reporting or non-reporting basis. The completed
value non-reporting form charges a fixed premium for the expected completed
value of the property under construction. The value reporting form charges a
monthly premium based on monthly reported values, has the equivalent of 100%
coinsurance in its honesty clause and charges either a monthly premium or a
fixed, one-time premium based on monthly reports of the expected completed
values of all structures started during the preceding month. The completed value
rate under the completed value reporting form is expressed as a fraction of the
completed value per month (e.g., $0.10 per $100 per month) and may be used to
compute a monthly or a fixed premium.
Rating
Each insurer has its own rating formula. The rate usually equals a percentage of
the rate that would be charged for the completed building (often 55%), which
overcharges the insured during the early stages of construction and under-
charges him/her during the later stages. Rating also reflects the type of building
being constructed and its fire resistance.
The Provisions of Installation Floaters
Covered Property
Covered property may include any property being installed for which the insured
is liable. Installation floaters usually cover plumbing, heating, cooling and
electrical systems. There is no coverage for money, securities, plans, blueprints,
tools or equipment that will not be installed.
Covered Perils
Coverage is “all-risks,” excluding wear and tear, gradual deterioration and
inherent vice. Coverage may also exclude mechanical breakdown, artificially
generated electricity, design errors, faulty workmanship and materials and
explosion or rupture of steam boilers.
Time Period Covered
Time period covered is the same as with builders’ risk coverage.
Limits
There are separate limits for property in transit and at the job site.
Valuation
The usual method is actual cash value for the insured’s own property and the
amount of liability for property of others.
Premiums
Policies may be written on a reporting basis.
Ratings
Each insurer has its own rating formula. A common formula determines the
average fire contents rate of the building in which the property is to be installed
and loads the rate for theft, vandalism, transportation and all other covered perils.
Suggest coverage and recommend loss control measures for a case study by
applying what you have learned.
The Underwriting Of Builders’ Risk Policies
Fire
Underwriters evaluate the type of construction, the size of the project and the
contractor’s ability to handle a project of that size, work force, financial stability
and loss history.
Underwriters also evaluate specific underwriting factors such as fire, windstorm,
collapse, theft, earthquake and flood, breakage of structural components,
renovation, testing, storage and transit exposures and probable maximum loss.
The four main factors under fire are Construction, Occupancy, Protection and
External exposure (mnemonic: COPE).
Construction describes how a building is being or has been built. There are six
common types of construction, here arranged from least to most fire resistive:
• Frame has combustible exterior walls
• Joisted masonry has masonry exterior walls and combustible interior
walls, floors and roof
• Non-combustible has non-combustible exterior walls, floors and roof, often
of metal, supported by non-combustible material
• Masonry non-combustible has masonry exterior walls and non-
combustible floors and roof
• Modified fire resistive has masonry or fire resistive exterior walls, floors
and roof and can resist fire (1,700 degrees Fahrenheit) for at least one but
not more than two hours
• Fire resistive has masonry or fire resistive exterior walls, floors and roof
and can resist fire for at least two hours
Occupancy describes a building’s purpose and use. Some occupancies are very
hazardous (cooking and welding). Other occupancies are not very hazardous
(clothing stores and pet stores).
Protection includes both public and private fire protection. Fire protection consists
of fire prevention activities and equipment that reduce the frequency of fire,
detect fire and alert fire fighting personnel, and fire suppression activities and
equipment that reduce the severity of fire by containing and extinguishing fire.
Underwriters use public protection classifications (PPCs) to evaluate public
protection. The Insurance Services Office (ISO) assigns a PPC to each
municipality to indicate the quality of its fire protection (from 1—the best—to 10—
no protection). Buildings under construction sometimes have no nearby hydrants
and poor access for fire trucks, reducing the municipality’s ability to provide
adequate protection. When volunteers provide the local fire protection, the
underwriter should make sure there are a source of sufficient water close to the
job site and roads to the site and the water source.
External exposure is the possibility of fire spreading to the insured building from
nearby structures or through nearby media such as brush (a.k.a., exposing
properties).
Windstorm
High winds can damage and collapse buildings under construction. Underwriters
should consider the geographical location and building schedule for each
structure. It’s best to insure projects that will be built between hurricane seasons.
Collapse
Buildings under construction are weak until completed, increasing their likelihood
of collapse. The main causes of collapse are faulty design, faulty welds or
improper bolting in steel superstructures, improper bracing and inadequate
curing of poured concrete. In large projects, a clerk of the works—often a
professional engineer—provides day-to-day building supervision. The clerk of the
works can stop all work and require unacceptable work to be redone.
Theft
Builders’ risk theft losses are low severity but high frequency. Many underwriters
demand 24-hour guard service, nighttime lighting and perimeter fencing.
Earthquake and Flood
Use earthquake and flood maps to identify danger zones.
Breakage of Structural Components
Evaluate the exposure carefully; projects involving delicate and expensive
machinery can generate large losses.
Renovation
Renovations can be more hazardous than new construction because they involve
partial demolitions, structural alterations, cutting through firewalls, disabled
sprinklers and hot work near old, dry timbers. Underwriters may require a
separate insurance limit for the existing structure, separate valuation provisions
for old and new construction and separate coinsurance provisions tied to the
ACV of the existing property at the time of loss.
Testing
The testing exposure depends on the equipment being tested and on the testing
methods.
Storage and Transit Exposures
Determine if these exposures are unusually high.
Probable Maximum Loss (PML)
PML is usually based on potential fire loss, often ignoring the assumptions that
underlie the PML for a completed building (operational sprinkler system, timely
response by the local fire department and functional fire controls).
Note: The underwriting of installation floaters is the same as with builders’ risk
coverage.
Fire
There are four ways to reduce fire loss:
1. Control ignition sources: Hot work exposures stem from cutting, welding,
soldering, brazing, grinding, thermal spraying and similar operations that
produce heat and sparks. Control hot work exposures by developing a
hot-work permit program to minimize hot-work fire hazards, keeping
combustible materials away from hot-work areas, keeping fire
extinguishers close to hot-work areas, and monitoring the area for fires.
Control electrical exposures by using a properly fused temporary power
system and disconnecting it at the end of each day. Control temporary
heating exposures by allowing only approved heaters into the building,
keeping combustible material away from heaters, providing adequate
support for each heater and periodically inspecting heaters.
2. Store and handle flammable and combustible liquids carefully: Keep only
a one-day supply of hazardous material in the building, use approved or
UL-listed containers and keep fuel tanks at least 50 feet from the building,
properly diked and grounded.
3. Practice good housekeeping: Keep the site clear of combustible material.
Put dumpsters away from the building and its storage areas.
4. Provide adequate fire protection equipment: Keep the right kinds of fire
extinguishers in the building, inspect them regularly and make sure
employees know how to use them.
Water
Ways to control water risks are to inspect piping, valves and drains regularly.
Don’t store building material in basements. Protect susceptible materials from
rain.
Wind
Attach roofing and siding securely at the end of each workday and before severe
weather. Remove snow from roofs, brace walls and anchor mobile offices and
lightweight building materials.
Theft and Vandalism
Physical controls include limited vehicle access, fencing, guard services, local
police patrols, locking up all building materials and using roving patrols in
unfenced areas. Procedural controls include scheduling deliveries to avoid
stockpiling building materials and increasing security as on-site values increase.
How to Handle Builders’ Risk Claims
There are three steps to handle builders’ risk claims. They are:
1. Verify coverage: Make sure the policy covers the loss.
2. Investigate the claim: Inspect the construction site and gather all relevant
contracts.
3. Determine the amount of loss: Call in experts as needed.
LESSON 7: DEALERS’ POLICIES AND RELATED
COVERAGES
Dealers’ Policies and Related Coverages
A dealers’ policy is the inland marine policy designed to meet the specific needs
of merchants, including retailers, wholesalers and distributors. Dealers’ policies
are often called block policies (from the French en bloc, meaning ”all together”)
because they were among the first policies to offer “all-risks” coverage.
Dealers Eligible for the Inland Marine Dealers’ Policy
Dealers eligible for the inland marine dealers’ policy include jewelers, furriers and
dealers of cameras, coins, fine arts, mobile equipment, musical instruments,
stamps and other property that the ultimate buyer could cover under an IM policy
(such as bicycles and computers).
Dealers’ Policy Provisions
Covered Property
The policy covers the insured’s “stock in trade” (inventory) and similar property of
others in the insured’s care, custody or control. Coverage therefore extends to
property on consignment (property of others that the dealer holds and pays for
when it is sold to a third party). Coverage of others’ property allows the insured to
preserve customer goodwill by paying for those property losses even though the
insured isn’t liable for them. Some dealers’ policies exclude property of others
stored by the insured. Dealers’ policies can be extended, for an additional
premium, to cover furniture, fixtures, office supplies, machinery, tools, fittings,
patterns, dies, molds, models, tenants’ improvements and betterments and
money in locked safes or vaults on the insured’s premises. All eligible property is
covered while on the premises, in transit or in the custody of the insured’s
employees, or located elsewhere. Separate limits and exclusions apply to each
category.
Property not covered varies with each contract.
Covered Perils
Coverage is usually “all risks” with the usual IM and commercial property
exclusions. Many policies cover earthquake and flood. When the policy covers
property susceptible to theft, the policy typically excludes mysterious
disappearance, inventory shortage, dishonest acts, voluntary parting and
unauthorized instructions plus these additional exclusions:
• Unattended vehicle exclusion excludes theft coverage from any vehicle
unless someone is in or with the vehicle at the time of theft
• Unlocked vehicle exclusion excludes theft coverage from any vehicle
unless the vehicle is locked at the time of theft and there are visible signs
of forced entry
• Show windows exclusion excludes jewelers’ block coverage for smash-
and-grab thefts from show windows unless the policy lists a limit for show
window coverage
• Shortage losses to property in transit exclusion excludes jeweler’s block
coverage for missing property unaccompanied by evidence of theft
• Processing or work exclusion excludes coverage for losses caused by
processing or work on the property, except for resulting fire and explosion
losses
• Breakage exclusion excludes breakage of fragile items, except by
specified perils
• The named-perils approach limits theft coverage by naming and defining
the covered perils
Coinsurance
Some policies use a coinsurance provision; others do not.
Reporting Form
The reporting form is appropriate if the insured’s inventory values tend to
fluctuate and if the insured will actually report accurate values.
Peak Season Limit
Peak season limit is an alternative to the reporting form that applies a higher
insurance limit during the insured’s peak season, as described in the policy.
Valuation
Valuation varies among policies. Some policies value unsold inventory at ACV—
sold but undelivered property at its selling price—and others’ property at ACV, or
the amount for which the insured is liable. Dealers must maintain accurate and
current inventory values because some dealers’ raw materials fluctuate in value.
Most dealers’ policies contain a provision requiring insureds to keep accurate
inventory records.
Protective Safeguards Provision
Protective safeguards provision suspends coverage if the insured fails to
maintain and use protective safeguards (e.g., burglar alarms, sprinklers, guard
services), until those safeguards are back in place. Although some courts don’t
enforce some safeguard provisions, insurers still use them to remind insureds of
the importance of protective safeguards.
Proposal
Proposal is a special application form that becomes part of the policy. If the
insured provides false information on the application, the insurer may void the
policy for misrepresentation. With an attached proposal, the insurer needn’t
prove fraud.
How to Underwrite Dealers’ Policies
Analyze the proposal: The typical dealers’ policy asks the applicant to provide a
five-year loss history, information about showcases, show windows, alarms,
inventory values for the past year and descriptions of safes and vaults on the
premises. The applicant must also describe its inventory records, state the
percentages of property kept in locked enclosures outside of business hours and
request specific insurance limits.
Evaluate the theft exposure: Evaluate the type of merchandise sold, its
likelihood of theft and any loss control measures already in place. Underwriters
are more concerned with outside theft since most dealers’ policies exclude theft
committed by employees, the insured or others entrusted with covered property.
There are four categories of loss control for theft:
1. Physical protection includes passive restraints, safes and vaults:
• Passive restraints: Include door locks, bars, gates, grills and
breakage-resistant glass or plastic in show windows
• Safes include:
o Fire-resistive safes (protect their contents from fire and have
square or rectangular doors).
o Burglar-resistant safes (use thick walls and sophisticated
locks to protect their contents against theft and have round
doors). Most underwriters accept only Underwriters
Laboratories (UL)-labeled safes as burglar resistant. To
maximize the effectiveness of a burglar-resistant safe, the
insured should use the safe, secure it to the floor, make it
visible from outside the building, equip it with an alarm and
limit both the number keys in circulation and the number of
employees with the safe’s combination.
• Vaults: A vault is a room, built into the building, designed to protect
its contents from theft, fire and other causes of loss
2. Alarm systems indicate the presence of intruders. There are three levels
of protection:
• Perimeter protection signals unauthorized building entry
• Area protection protects specific areas within a building
• Object protection protects specific objects from theft. A local alarm
sounds an alarm only at the insured’s premises. A central station
alarm sounds an alarm usually at a central monitoring company but
sometimes at a local police station, ensuring a quick and
appropriate response. A holdup alarm is a central station alarm
triggered by an employee during a robber. Underwriters prefer UL-
certified alarm systems that are technologically current, appropriate
to the occupancy, continuously monitored and tested regularly.
Underwriters prefer alarm systems to protect all building openings
and to detect motion. Alarm systems don’t protect fully because
they don’t prevent robberies and many false alarms reduce police
response times.
3. Guards patrol the premises after (and sometimes during) business hours
4. Surveillance cameras and close-circuit television: Allows those monitoring
the cameras to detect intruders
Protect property: Protect property in the open by installing fences and bright
lighting, employing guards, using alarm systems designed to protect outdoor
property, installing surveillance cameras, storing the property in open spaces
where thieves can’t hide and physically securing the property.
Evaluate the fire exposure: Review the building’s construction, occupancy,
protection and exposures (COPE). Also review its special hazards.
Evaluate the flood and earthquake exposures: Evaluate the flood exposure
for the building and all yard locations, and evaluate the insured’s emergency
flood and earthquake plans
How to Handle Dealers’ Policy Claims
There are three steps to handle dealers’ policy claims. They are:
1. Make sure coverage applies: Be especially careful that all protective
safeguards were in good working order and in operation at the time of
loss.
2. Investigate the loss: Interview the insured, collect all needed documents
(inventories, receipts) and consider the possibility of subrogation against
the landlord (if the insured was a tenant).
3. Value the property: Use experts to value property.
4. Reduce further damage: Repair the property or maximize the salvage.
Floor Plan Policy
A floor plan is an agreement under which a dealer borrows money to buy
merchandise and pays off the loan as the merchandise is sold. The merchandise
is the loan’s collateral. The lender’s right to the property is the encumbrance. A
floor plan policy covers floor plan merchandise other than autos. Covered
merchandise must be encumbered to the lender. The dealer must not be able to
sell it unless the lender releases its encumbrance.
The single-interest floor plan policy covers either the dealer’s or the lender’s
interest in the property. The dual-interest floor plan policy covers both the
dealer’s and the lender’s interests. The ISO’s filed forms are on a reporting basis
and provide coverage similar to that of dealers’ policies. There is no earthquake
exclusion. Covered property not yet sold is valued at the least of restoration cost,
replacement cost or the price the dealer paid. The ISO single-interest form limits
loss payments to the insured’s proportional interest in the property at the time of
loss. The ISO’s dual-interest forms state that the lender’s coverage is not
affected by the dealer’s failure to meet policy conditions.
Underwriting: Evaluate theft, fire, other perils at the dealer’s premises, the transit
exposure, the earthquake exposure and the merchandise’s attractiveness to
thieves.
Installment Sales Policy
Installment sales policy covers the retailer’s, manufacturer’s or bank’s interest in
property other than autos while in transit to, or in the custody of, a buyer. The loss
exposure arises out of dealers’ conditional sales contracts, which let buyers take
possession of property after making down payments and agreeing to make periodic
payments. The buyer receives title to the property when he has finished paying for
it. The single interest policy covers the only seller’s interest in the property. The
dual interest policy covers the seller’s and the buyer’s interests in the property.
Coverage is on a reporting basis.
Underwriting: Evaluate the risks of the particular merchandise and the dealer’s
desire and ability to attract responsible customers.
Leased Property Policy
Leased property policy covers the lessor’s interest in property while in transit to,
or in the custody of, any lessee. It is only issued as a single-interest policy
because the lessor retains complete ownership of the property. Coverage is on a
reporting basis.
Underwriting: Evaluate the risks of the particular merchandise, the storage
facility’s exposures to fire, theft, and other perils and the dealer’s desire and
ability to attract responsible customers.
LESSON 8: BAILEE AND BAILOR COVERAGES
Bailee Liabilities
Bailment delivers the property of one person (the bailor) to another person (the
bailee) to be held for some special purpose. Three criteria prove the existence of
a bailment. They are:
• The bailor owns or has the right to possess the property
• The bailor delivers exclusive possession of and control over the property
to the bailee
• The bailee knowingly accepts the property and agrees to return it as
directed by the bailee
There are two types of bailee loss exposures: the first one is that there is a legal
liability for losses for which the bailee is legally liable. Bailees are liable for losses
if they do not take reasonable and necessary steps to safeguard property; the
second one is loss of customer goodwill, which is the loss of customers due to
their uncompensated property losses. Bailees not legally at fault often replace
damaged property to maintain good customer relations.
The bailee owes the bailor ordinary care for the safety of the property and is
liable for ordinary negligence. The care required of a bailee is less than that of a
common carrier. The bailee must demonstrate the exercise of due care to avoid
charges of negligence for property damage. The bailee’s liability may be
extended by oral or written contract with the bailor, advertisement or performing
actions beyond the bailment contract. The bailee may limit its liability by limiting
the property value(s) stated in the bailment contract.
There are three types of bailment:
1. Gratuitous bailment for the bailor’s benefit benefits only the bailor and
does not compensate the bailee. Example: “Patrick, will you take care of
our cat Tyke while we’re away?”
2. Gratuitous bailment for the bailee’s benefit benefits only the bailee and
does not compensate the bailor. Example: “Uncle Ray, may I use your
560SL for the prom?”
3. Bailment for hire (commercial bailment) benefits both parties, as the bailee
receives or pays a fee for holding the property. Example: “Mr. Taylor, may
I rent 12 chairs and a table for this weekend?”
Bailees’ Customers’ Policy
Bailees’ customers’ policy covers property loss irrespective of the bailee’s
liability. The policy is issued in the bailee’s name. Bailees choose this coverage
when their failure to pay for losses (for which they are not legally liable) would
result in a poor public image and loss of goodwill.
Note: Bailees’ customers’ insurance is dual interest insurance because it covers
both the bailee’s interest in property due to potential legal liability and loss of
goodwill, and the bailors’ interests in their own property.
Provisions
Covered property includes any property accepted for the type of service or
processing described in the policy. Some policies explicitly describe covered
property to narrow the scope of coverage. Some policies cover property held in
storage; others do not.
Excluded property includes common IM property exclusions (contraband,
property sold and delivered) plus valuable papers and records, jewelry and
precious metals, autos, watercraft, animals, delicate or highly valuable property
that may be serviced in the bailee’s operations, property services for no charge
and property in the custody of other bailees.
Excluded perils: Both the named-perils and “all risks” forms typically exclude:
• Mysterious disappearance
• Inventory shortage
• Employee dishonesty
• Theft of goods left overnight in an unsecured vehicle
• Misdelivery or careless destruction of goods
• Loss caused by processing or work on the property unless by ensuing fire
or explosion
• Changes or extremes in atmosphere, temperature or humidity
• Express or implied extension of bailee liability to guarantee processing
results
• Express or implied extension of bailee liability to guarantee insurance
coverage for the customers’ benefit
Covered locations: Property is covered at the insured’s premises, as described in
the declarations, at others’ premises, as described in the declarations, and while
being transported between locations in the coverage territory.
Coverage extensions are often subject to sublimits. They are:
• Confusion of property extension covers the insured’s inability to identify
the property’s owners after covered loss by a covered peril
• Processing damage extension cover loss caused by work on the property
• Property in storage extension covers stored property of others. Some
policies limit coverage to property accepted for processing work. Some
policies limit coverage to property accepted for processing work. Some
policies require the insured to issue storage receipts
• Earned charges extension: Covers uncollectible storage charges (and
sometimes processing charges) on lost property
• Defense of suits extension: Covers the insured’s cost of defending itself
against claims alleging covered losses
Limits vary by policy. Some policies list many per-occurrence limits. Others list no
limits other than the ACV of the damage property.
Valuation: Most policies value property at its ACV at the time of loss.
Underwriting and Loss Control
Evaluate the applicant’s general transit, fire and theft exposures, unique
exposures and existing loss control measures. For example, dry cleaning plants
are prone to fire, boiler explosions, mechanical failures and theft.
An underwriter should assess the average and maximum property values in the
dry cleaner’s custody at any one time, its use of flammable solvents, the amount
of flammable solvents stored on the premises, its storage and disposal practices
for those solvents, its housekeeping practices, its fire detection and suppression
systems and its theft security measures for property in transit.
Insurance to Value
Customer property values on an insured’s premises fluctuate due to:
• Large volumes of diverse property
• Rapid turnover of property
• Changing property values
• Seasonal changes
Different types of property require different valuation methods. The value of
covered property on a bailee’s premises depends on the types of properties on
its premises, the size of its storage facilities and its annual gross receipts (which
indicate turnover).
The formula for estimating the value of customers’ property:
(Gross Receipts) (Value of Each Order in Proportion to Service Charge)
Number of Days Open per Year / Average Turnover Time per Order
or
Total Value of Goods for Twelve Months / Number of Complete Turnovers
Reporting form policies base their premiums on the insured’s gross receipts for
each reporting period.
Claims adjustment
The four-step claims adjustment procedure:
Verify coverage: Make sure the policy covers the loss location. Determine which
coverage extensions apply to the loss and whether the policy covers defense
costs.
Investigate the claim: Get a statement from the insured to confirm the facts of
the loss. Get and review all relevant records, contracts and receipts. Get a
cause-and-origin expert to verify the cause of loss.
Determine damages: Value the property accurately. Protect it from further loss.
Subrogate and salvage: Subrogate against third parties if possible. Hire a
salvor to repair and sell the damaged property.
Furriers’ customers’ insurance is bailees’ customers’ insurance for furriers. It
differs from bailees’ customers’ insurance in six ways: Furriers’ customers’
insurance:
1. Offers broader coverage
2. Requires the insured to issue a receipt to each customer, stating each
article’s value
3. Limits recovery to the least of the receipt amount, ACV or
repair/replacement cost
4. Covers the insured’s legal liability beyond the receipt amount (excess
legal liability coverage)
5. Requires the insured to use protective safeguards
6. Lets the insured issue certificates of insurance to its customers
The Uniform Commercial Code (UCC) governs commercial transactions within
the US and includes provisions that relate directly to warehousing and
warehouse operator liabilities.
The UCC defines a warehouse operator as one engaged in the business of
storing goods for hire. The UCC states that a warehouse receipt should include
nine items of information:
• The warehouse location
• The date of issue
• The receipt number (receipts should be numbered consecutively)
• The individual or business to whom the goods will be delivered at the end
of storage
• The rate of storage and handling charges
• A description of the goods of their packages
• The warehouse operator’s signature
• A statement of ownership if the warehouse operator owns or partially
owns the goods
• The amount of advances made or liabilities incurred for which the
warehouse operator owns or partially owns the goods or claims a security
interest
Warehouse operators can limit their legal liability through storage receipts, but
such limitations are not always held up in court.
A dry-storage warehouse stores goods that do not require refrigeration. A cold-
storage warehouse stores perishable or temperature-sensitive property.
Warehouse operators that provide logistics services produce and/or distribute
customers’ goods as well as store them. Such warehousers may need additional
coverage for goods accepted for processing and motor truck cargo liability.
There are three types of warehouses:
1. Private warehouse: Stores a retailer’s or manufacturer’s own goods
2. Public warehouse: Stores the property of anyone willing to pay the
warehouser’s charges and accept its terms
3. Bonded warehouse: Stores imports, pending the owner’s payment of US
customs duties
Warehouse Operators’ Legal Liability (WHLL) Insurance
Warehouse operators’ legal liability (WHLL) insurance covers the warehouse
operator’s legal liability as a bailee for negligence and defense costs. There is no
coverage for loss of goodwill.
Provisions
WHLL policies are unfiled. The insuring clause contains the insurer’s agreement
to pay all sums owed by the insured due to legal liability and defense.
Excluded Property
An excluded property is a property for which the insured has assumed excess
liability or been released from liability, is not listed in a warehouse receipt, is in
transit, is of high value or susceptible to theft, has live plants and animals, is
requiring refrigeration and is held in a leased storage space (because the insured
will have little access to the storage unit or knowledge of its contents).
Excluded Perils
The policy excludes common first-, second- and third-tier exclusions plus:
• Contamination, deterioration and latent defect
• Processing or work on the property
• Inventory shortage
• Changes or extremes in temperature or humidity
• Breakdown of refrigeration equipment
Additional coverages include defense costs, preservation of property, debris
removal, pollutant cleanup and removal and earned warehouse charges.
Refrigerated warehouses may add an endorsement to cover damage due to
temperature changes. There is usually a separate limit per location, a limit for
unnamed locations and a catastrophe limit. There is no coinsurance clause.
Premiums may be flat annual or on a gross-receipts reporting basis. Rating is
based on the average amount at risk, usually estimated after an inspection of the
premises.
Underwriting is based on the:
• Applicant’s physical survey report, financial statements and claims history
• Terms of the warehouse receipt
• Types of goods stored
• Fire and crime protection
• Fluctuation in the amounts and values of goods stored
• Average and probable maximum losses
• Storage configurations
• Housekeeping and safety standards
• Accuracy of inventory records
• Deductible
Warehouse operators can demonstrate an adequate degree of care for others’
property through suitable fire and theft protection, good housekeeping practices,
properly trained personnel and accurate records. Warehouse operators need
accurate records of goods to track fluctuating property values and changing loss
exposures, reduce inventory shortages and defend against negligence charges.
Loss Control
Loss control reduces high-rack storage. High-rack storage lifts and stacks goods
onto shelving, which increases the fire exposure by reducing sprinklers’
effectiveness, keeps aisles between storage areas debris-free, installs sprinkler
heads within storage racks, protect against burglary with guard services, locks,
fences and alarm systems, installs extra protection for items more susceptible to
theft, does not store goods outside the warehouse, screens and trains
employees and maintains and properly operates machinery.
Claims Adjustment
The same four step procedure is used for claim adjustments in Warehouse
Operators’ Legal Liability Insurance as in Bailees’ Customers’ Claims.
Bailees can also cover some or all of their loss exposures through commercial
property policies, including business owners’ policies and commercial crime
policies, commercial auto policies and other marine policies, such as motor truck
cargo policies, builders’ risk policies, dealers’ policies, museum collection policies
and marina operators’ legal liability policies.
Garment Contractors’ Floater
Garment contractors’ floater is the bailor policy that covers a garment
manufacturer’s interest in its own property while in the custody of, or en route to,
a garment contractor’s premises.
Covered Property
Covered property includes:
• Types of property owned by the insured and described in the declarations
• Raw materials, finished and unfinished garments and their containers
• Similar property of others for which the insured is liable
• Property consigned to the insured
• Property for which the insured has made an advance payment
Excluded Property
Excluded property includes any types of garments specifically excluded in the
policy and any property more properly covered under another IM policy.
Covered Locations
Property is covered while on the insured’s premises, on the insured’s contractors’
premises and in transit between the insured, its contractors and its suppliers.
Covered Perils
Coverage is either on a named-perils or “all-risks” basis. Exclusions are either
general IM exclusions or specific to the garment manufacturing industry. The
consequential damage exclusion excludes coverage for the decreased value of
an undamaged garment (suit coat if the trousers are lost). Such coverage is
available by endorsement.
Limits
Many policies list separate limits for different forms of transit.
Valuation
Unfinished garments are valued at the costs of labor and materials. Finished
garments and all other property are valued at ACV.
Coinsurance
There is usually a coinsurance clause.
Underwriting
Underwriting factors include the contractors used by the insured, the forms of
transit and protection from fire, theft and water-damage losses. The transit
exposure is significant because the exposure is often great (because the covered
property is often in transit) and property in transit is especially susceptible to
theft.
Loss Control
In the event of a fire, prevent and/or reduce smoke and water damage to
garments by ventilating all areas of the building, storing goods in plastic
containers raised off the floor and separating storage and work areas.
Pattern and Die Floater
Pattern and Die Floater is the bailor policy that covers loss to patterns and dies
while in the premises of or in transit to or from a contracted foundry. Coverage is
on a scheduled or blanket basis. Coverage is “all-risks” or named perils. There is
no coverage for wear and tear, depreciation, obsolescence, soiling, inherent vice,
fading, rusting, poor workmanship, faulty manufacture, inventory shortage,
warping, cracking or splitting. Policies not written on a reporting form basis
include a coinsurance clause. Valuation includes value reductions due to
obsolescence. Underwriting factors include a review of the descriptions and
values of scheduled items, the covered locations and the methods of
transportation. Assess fire and theft protection at each covered location.
LESSON 9: COVERAGE FOR COMPUTERS AND
COMMUNICATIONS EQUIPMENT
Electronic data processing equipment (computer systems) became part of the
Nationwide Marine Definition in 1976. The five general types of computers are:
• Supercomputers, which million dollar computers used for research
• Mainframe computers, which are large-scale computers located in data
centers
• Minicomputers, which are scaled-down mainframes
• Microcomputers, which are scaled-down minicomputers that can fit on a
desktop
• Microcontrollers, which are computer ships embedded in cars, appliances
and other devices
Property and Time Element Exposures of Computers
Hardware
Hardware equipment includes consoles, computers, core storage units, magnetic
tape units, card readers, printers and their related equipment. Hardware is prone
to damage by fire, smoke, flood, earthquake and other perils. Hardware is
especially prone to vandalism from employees’ computer rage. Because
computers contain sensitive and complex components, they can sustain serious
damage from power outages, power surges, lightning, mechanical breakdown,
wear and tear and changes in atmospheric conditions.
Software
Software includes computer programs. Software is subject to the same perils as
hardware plus programmer errors, user errors, computer viruses, programs that
disrupt or destroy electronic data and/or data processing activities and hacker
activities such as computer fraud (the unlawful taking of property by using a
computer to cause the property owner to transfer the property to the criminal).
Time Element Exposures
Business income losses and extra expenses: Data losses can lead to
uncollectible debts, manufacturing delays, inability to provide contracted services
and costly data restoration. Mitigate data losses by duplicating records and
storing duplicates in safe locations.
Property and Time Element Exposures of Radio and TV
Broadcast Towers and Equipment
Property Exposures
Transmission equipment includes broadcast towers and their attached
equipment, ground-mounted satellite dishes, equipment in transmitter and studio
buildings and mobile production and transmission equipment. A guyed tower has
stabilizing cables called guy lines. A self-supporting tower uses a wide (and
sometimes pivoting) base to support itself. A monopole tower is a self-supporting
tower that supports cellular telecommunications equipment. Radio and TV towers
are prone to damage or collapse from windstorm, corrosion, lightning, ice,
aircraft, flood, earthquake, vandalism and structural failure. Four factors affect
the design of towers:
1. The required height
2. The weight of attached equipment
3. The forces to which the tower will be subjected
4. The amount of open land surrounding the tower
Engineers design towers to withstand the estimated wind load (the maximum
force of wind expected in the area) and ice load (the potential ice accumulation).
Time Element Exposures
Property losses can cause business income losses and extra expenses through
lost advertising time, lost rental income and the costs of renting backup
equipment and pre-taped programming.
The electronic data processing (EDP) equipment policy covers the insured’s risk
of direct loss to equipment, data and media it owns or rents, and the insured’s
risk of indirect loss due to resulting extra expenses and business interruption. It is
one of the largest classes of IM insurance.
Policy Provisions
Property covered includes the hardware, software and storage media owned by
the insured or in the insured’s care, custody or control. Some policies also cover
the insured’s air conditioning, fire protection and surge protection equipment.
Property not covered includes valuable papers and records not converted to
software form, stock in trade, property leased or rented to others and portable
personal computers.
Covered Locations
Coverage applies at the insured’s premises, in transit and on premises not
owned or operated by the insured.
Covered Perils
Coverage is “all-risks,” typically excluding acts of civil authority, war, nuclear
hazard, dishonest acts, voluntary parting, pollutants, wear and tear,
obsolescence and loss of use.
Perils Not Covered
There is no coverage for:
• Programming errors and omission (this applies only to extra expenses)
• Inherent vice
• Electrical and power supply disturbances
• Temperature and humidity changes
• Lease terms
• Computer viruses and hackers
Endorsements
The insured can add coverage for:
• Newly acquired locations
• Emergency removal and preservation of property
• Debris removal
• Pollutant cleanup
• Newly bought or leased equipment
• Software backup storage
• Extra expenses
• Business income
Coinsurance
Coinsurance is normally 80, 90 or 100% for equipment.
Valuation
Hardware is valued at actual cash value (ACV) or replacement cost (RC).
Software is typically valued at the cost to reproduce or replace lost information.
The upgraded value endorsement values hardware at the amount needed to
upgrade outdated equipment with the newest comparable equipment.
Limits
There are limits per location and separate limits for hardware, software and extra
expenses. Loss of business income coverage usually has per-day and per-
occurrence limits.
Deductibles
There are two deductibles: one for mechanical breakdown, power and electrical
disturbance losses and another for all other losses. Business interruption
coverage may have a waiting period that serves as a time element deductible.
The Electronic Data Processing (EDP) Equipment Policy
Underwriting
Assess the computer equipment and the way it’s used. Consider:
• How long the equipment is left running and unattended
• Personnel training
• Data security measures
• Protection against fire, smoke damage and electrical disturbance
Computer service agreements protect against some physical damage losses, but
do not cover mechanical breakdown and electrical disturbance losses. A
computer room houses computer equipment. Computer rooms increase the
building’s fire exposure by concentrating heat-generating equipment. A shell site
is an empty computer room that houses temporary or replacement computers in
the event of damage to the main room. A hot site is an alternate computer room
fully stocked with ready-to-use EDP equipment.
Loss Control
Protect the computer room: The room should be a cut-off, windowless,
noncombustible enclosure, should be fire resistive for at least one hour and
should have self-closing access doors. The room should incorporate protection
against electrical fires, electrical surges, power losses, temperature and humidity
extremes, smoke damage and water damage. To protect against water damage,
build the room on a raised floor with noncombustible decking material and
scuppers, above grade level, with a waterproof ceiling.
Control electrical disturbances: An uninterrupted power supply (UPS) prevents
EDP crashes from electricity spikes and power loss.
Control data security: Restrict access to both equipment and data. Access codes
prevent unauthorized persons from accessing sensitive equipment and data. A
firewall monitors and prevents data access between two networks. Encryption
encodes data so that only someone with the proper code can decipher the data.
Develop a contingency plan to handle catastrophic losses: Two arrangements an
insured can make in a contingency plan (in case EDP equipment becomes
damaged) are to arrange for replacement equipment and alternative computer
sites, and to maintain duplicate records and system
Claim
The seven-step claims adjustment procedure:
• Verify coverage: Make sure the property, location and type of loss are
covered
• Gather the relevant contracts, including software licensing agreements
• Plan the reconstruction of lost data
• Mitigate business income losses
• Hire a computer consultant to investigate unusual or complex losses
• Subrogate against landlords and/or vendors, if appropriate
• Salvage damaged equipment\
Radio and Television (RTV) Policy
Radio and television (RTV) policy covers direct physical loss or damage to
broadcasting structures and equipment. It is a small class of IM insurance.
Policy Provisions
Property covered includes:
• Towers and antennas, including dishes and other permanent equipment,
guy wires, masts, de-icing equipment, reflectors, transmission lines and
tuning equipment
• Transmitting, receiving and recording equipment, including storage media,
component parts, power-feed wiring and similar equipment;
• Mobile equipment, including both handheld equipment and equipment
attached to a vehicle (but excluding the vehicle itself)
• Studio equipment and contents, including:
o Audio and video apparatus
o Transmitting, receiving, recording, monitoring, switching and editing
equipment
o Cameras and projectors
o Software and storage media
o Film and tape libraries
o Sets, scenery, costumes and props
• Property not covered includes:
o Money and securities
o Accounts receivable
o Valuable papers and records
o Precious metals
o Jewelry
o Furs
o Works of art
Many policies also exclude motor vehicles, watercraft, aircraft and property while
waterborne or airborne. Some IM policies cover tenants’ improvements and
betterments, such as building additions that change the buildings and enhance
their values, such as partitions, soundstages and acoustic ceilings.
Covered Perils
Coverage is “all risks” with the usual IM exclusions.
Perils Not Covered
Perils not covered include:
• Electrical disturbances and mechanical breakdown
• Marring, scratching, exposure to light and glass breakage
• Tuning and retuning
• Failure to maintain towers and antennas
Endorsements
Insureds can add coverage for:
• Equipment at newly acquired locations
• Newly bought or leased equipment
• Emergency removal and preservation of property
• Debris removal
• Pollutant cleanup and removal
• Damage to buildings and personal property due to tower or antenna
collapse
• Tower retuning expense
• Business income and extra expense
The IM policy covers building and property damage due to tower or antenna
collapse as a holdover from when commercial property insurance excluded
coverage for falling objects.
Tower modification provision voids coverage if the character, design or
construction of a tower, or its attached equipment, is materially altered during the
policy period. Insureds who want to alter a covered tower must first get the
insurer’s approval.
Coinsurance
Coinsurance is 80, 90 or 100% for equipment.
Valuation
Valuation may be actual cash value or replacement cost.
Limits
There are limits per location and separate limits for hardware, software and extra
expenses. Loss of business income coverage usually has per-day and per-
occurrence limits.
Deductibles
There are two deductibles: one for mechanical breakdown, power and electrical
disturbance losses, and another for all other losses. Business interruption
coverage may have a waiting period that serves as a time element deductible.
Underwriting
The main underwriting factors are:
• The type of broadcasting the applicant conducts
• COPE factors for each location (Construction, Occupancy, Protection and
Exposure [or environment])
• Total values of the covered property
• Loss control systems and disaster recovery plans already in place
• Design and condition of the tower(s)
The PML of one tower is 100% of the tower’s value. The PML of two towers
within falling range of each other is the sum of both towers’ values. The PML for
business income and extra expense is based on the time needed to replace a
tower.
Loss Control
Design towers to withstand expected wind pressure and speed for the area,
expected ice accumulation, uneven melting of ice and the effects of lightning.
Fence towers to reduce damage from vandalism and auto collision. Keep the
area surrounding the tower free of grass, brush, building materials and other
combustible materials. Lock transmitter buildings. Inspect towers periodically for
signs of wear, loose guy wires, anchor-shaft corrosion and settling of surrounding
soil. Add and remove equipment to and from towers with great caution. Protect
studio equipment from fire and theft.
Claim
The seven-step claims adjustment procedure:
• Make sure the property, location and type of loss are covered
• Review the coverage details with the insured
• Review tower construction, design, maintenance, lease and purchase
documents
• Hire experts to determine the cause of loss and the value of damaged
property
• If there’s a business income or extra expense loss, review the insured’s
financial records
• Subrogate against landlords, manufacturers or repairers if appropriate
• Salvage damaged equipment
Other Sources of EDP Equipment Coverage
BPP Coverage Form
The BPP coverage form covers hardware and software owned or leased by the
insured. The BPP:
• Does not cover mechanical breakdown or electrical disturbance
• Does not pay for restoration of data
• Covers software-related business income losses for only 60 days
Output Policy
Output policy combines property, IM, auto physical damage and equipment
breakdown coverages. An output policy offers coverage similar to the EDP
equipment policy.
Commercial Crime Policy
Commercial crime policy covers computer fraud losses not covered by the EDP
equipment policy.
Medical Diagnostic Equipment
Medical diagnostic equipment includes x-ray machines, computer-assisted
tomography (CAT) scanners and magnetic resonance imaging (MRI) equipment.
Loss Exposures
Fixed-location equipment: The main causes of loss are fire, smoke, lightning,
water, flood, earthquake, windstorm, breakage, mechanical breakdown and
electrical injury.
Mobile equipment: The main causes of loss are collision, upset, overturn and fire.
Mobile units have higher exposures to fire than fixed units because mobile units
have less sophisticated fire detection and suppression systems.
Coverage
IM coverage is “all risks,” subject to policy exclusions. Coverages for mechanical
breakdown and electrical injury are available by endorsement and are subject to
separate deductibles. Many owners of medical diagnostic equipment forego the
service contract and instead buy “maintenance insurance” under an IM form,
property form or equipment breakdown form.
Medical Diagnostic Equipment
Underwriting
For mechanical breakdown and electrical injury coverage:
• Assess the service provider’s staying power and knowledge of the
equipment
• Assess the usefulness of the service hours
• Make sure the service provider will install manufacturer-approved parts
• Require the insured to maintain the service agreement during the policy
period
• Exclude losses covered by the equipment’s warranty.
If the insured requests coverage for the chassis on which mobile equipment is
installed, do not cover the vehicle power unit as well; insure loss of income and
extra expense with caution.
Cable Television Systems
A cable television system distributes television signals through cables running
from a master control center to the system’s individual subscribers. ”Head-end”
equipment translates signals received by an antenna at the master control center
into the signals sent via cable.
Property Exposures
Towers are subject to collapse and ice and windstorm damage. ”Head-end”
equipment is subject to fire, theft and vandalism. Outdoor cables and drop lines
are subject to windstorm, ice, snow and sleet damage. Underground cables
present little exposure. Utility poles are subject to fire, collision and lightning
damage.
Policy Provisions
Most cable television equipment can be insured under an RTV policy endorsed to
cover cable lines. There may be separate limits for underground lines, above-
ground lines and separate geographical areas. Cable television providers may
opt for large deductibles, thus retaining localized losses and buying coverage
only for severe losses.
LESSON 10: FINE ARTS INSURANCE
Fine Arts Loss Exposures
For Non-Museum Collectors
It includes fire, water damage, theft and breakage. Fire and water damage cause
low-frequency, high-severity losses. Theft and breakage cause high-frequency,
low-severity losses.
For Museum
It includes non-museum loss exposures plus transit losses and employee
dishonesty losses.
The Fine Arts Floater
The fine arts floater covers the art collections of businesses, institutions and
other organizations, and personal art collections that exceed the homeowners’
fine arts limits. (The HO policy covers art as it covers any other personal
property, usually for named perils up to the Coverage C limit.)
Policy Provisions
Property covered: Coverage is normally scheduled, although some insurers
provide blanket coverage for large collections.
Perils covered: Coverage is “all risks,” excluding:
• Breakage of fragile articles from non-specified perils
• Earthquake and flood excerpt for property in transit
• Processing and work
• Employee dishonesty
• Mysterious disappearance
• Inventory shortage
• Voluntary parting
• Theft from unattended and/or unlocked vehicles
The insured may add coverage for breakage, earthquake and flood for an
additional premium. Underwriters should consider the percentage of covered
property subject to breakage before eliminating the breakage exclusion.
Locations covered: Scheduled items are covered while at the described
premises, in transit or temporarily at other locations for exhibition, framing,
renovation, packing or appraising.
Endorsement: The policy may be endorsed to cover newly acquired fine arts for
the shorter of 60 days or the number of days until policy expiration.
Valuation: Fine arts floaters are valued policies. They value each item at its
agreed value (the value the insurer and the insured agree on at policy inception).
In the event of total loss, the insurer will pay the agreed value minus any
deductible. In the event of partial loss, the insurer will pay either:
• The restoration cost—up to the agreed value, if the item can be restored
to its full value
• The restoration cost plus the item’s loss in value—up to the agreed value,
if the item can not be restored to its full value
Museum Collection Policy
A museum collection policy covers art collections of museums plus museums’
bailee loss exposures.
Policy Provisions
Property covered:
Permanent collection: Art objects owned by the museum. Coverage is blanket.
Property is covered while at the insured’s premises, in transit or temporarily at
other locations for repair, restoration or storage.
Loan collection: Art objects the museum has loaned from, or to, others. Coverage
is either on a standing blanket basis or arranged at each borrowing. Most
coverage is on a wall-to-wall basis, covering the property from the time it is
removed from the owner’s walls until it is returned there. The museum’s loan
agreements describe the museum’s coverage responsibilities for items it borrows
or loans to others.
Liability covered: The policy covers the museum’s conservation department’s
bailee exposure for property of others in its care, custody or control. A conservation
department restores, protects and maintains its museum’s permanent collection
and may perform such services for private clients.
Perils covered: Coverage is “all risks,” excluding common IM exclusions plus:
• Processing and work
• Employee dishonesty
• Specified transit exposures
Locations covered: Territorial limits depend on the scope of the museum’s
operations.
Valuation: Owned objects are valued at their ACVs, fair market values or
amounts shown on the insured’s records. Borrowed objects are valued at their
agreed values. The buy-back option lets the insured buy recovered stolen
property back from its insurer if the insured has already been compensated for its
loss.
Deductible: Some museums set large deductibles on their permanent
collections but no deductibles on their loan collections because they want to
retain as many losses as possible and want to borrow items from owners who
require certificates of insurance to full value.
Limits: There are separate limits for:
• The permanent collection
• The loan collection
• Property at all other locations
• Property in transit
Reporting: If the value of covered property is likely to fluctuate, the insurer may
arrange coverage on a reporting basis.
How to Underwrite a Fine Arts Floater
There are 10 elements that need to be evaluated regarding the applicant. They
are:
1. COPE factors (Construction, Occupancy, Protection and Exposure
factors)
2. Loss control measures already in place
3. Likelihood of flood, water damage and earthquake losses
4. Percentage of fragile items in its collection
5. Value of property shipped annually
6. Modes of transportation used to ship objects
7. Loan agreements with collection borrowers
8. Frequency of loans
9. Typical destinations of loaned objects
10. Schedule of objects to be insured. Underwriters are most concerned with
losses from fire, water damage, theft and breakage. The schedule of
objects to be insured should list each object’s artist, title, medium or type
(oil painting, marble sculpture, etc.), year of creation and requested
insured value.
How to Underwrite a Fine Arts Floater
Apply the same underwriting factors would be applied to the fine arts floater plus
these additional considerations:
• Museum collections are likely to need reinsurance and are highly
susceptible to employee dishonesty losses
• Museums have greater exposures for borrowed objects, have greater
transit exposures, use professional conservators, curators and security
personnel to prevent losses and can’t afford to appraise every object in
their collections
• Museums accredited by the American Association of Museums (AAM)
have formal mission statements detailing how they manage their
collections, financial stability personnel skilled in collection management
and the capacity to document, care for and handle objects
Loss Control for Fine Arts
Transit Losses
Pack items properly, bearing in mind the method of transportation. Use special
transportation equipment when necessary (air-ride vans, vermin-controlled vans,
etc.). Get each carrier to agree to the values for which it is responsible in the
event of loss. Use qualified and experienced packers and shippers. Unpack
delivered containers immediately and inspect items for damage. Store items in
secure locations. Complete a condition report for each item before and after each
shipment, detailing its current condition. Request a facility report from each
borrower before loaning an item. A facility report details the borrower’s building
construction, security, fire protection and environmental controls.
Fire and Smoke Damage
Museum fire hazards increase when museums also contain restaurants,
workshops, storerooms and other fire-hazardous facilities. Most museum fires
are caused by:
• Faulty electrical heating equipment
• Inadequately controlled hot work
• Mishandled flammable materials
Control losses by installing firewalls and fire divisions, protecting building
services from fire, installing dampers to prevent the spread of smoke, protecting
storage areas from fire and smoke and installing fire detection and suppression
systems.
Water Damage
Store and display items in above-grade spaces and at least four inches off the
floor. Consider the use of scuppers. Install shields below overhead pipes. Cover
stored items in plastic. Use adequate ventilation and dehumidification to prevent
mold and mildew damage.
Theft
Use ropes and stanchions to prevent viewers from touching items on display.
Investigate all potential employees. Supervise staff after hours. Control access to
storage areas. Install solid, high-security locks on all building openings. Install
alarms on exterior doors. Hire guards to patrol the museum during and after hours.
Install and monitor surveillance cameras. Design exhibitions so guards can see all
the objects on display. Install an electronic intrusion detection system.
Environmental Hazards
Protect items from light, heat, cold, humidity and pests.
How to Handle a Fine Arts Claim
1. Make sure the policy covers the item
2. Make sure the insured has met all policy conditions
3. Collect and analyze all relevant records and documents (bills of lading,
loan agreements, etc.)
4. Inform the police of any stolen item
5. Record any stolen item with the Arts Loss Register (ALR) to increase the
likelihood of recovery
6. Hire a special investigator to assist in any theft loss
7. Hire a restoration specialist to advise on restoration of any damaged item
8. Hire an appraiser to verify the lost or damaged item’s value
LESSON 11: OTHER COMMERCIAL INLAND MARINE
COVERAGES
Accounts Receivable Insurance
Accounts receivable insurance covers the insured’s risk of uncollectible amounts
caused by damage to its accounts receivable records. The policy also pays for
interest on loans taken to offset uncollectibles, collection expenses in excess of
normal collection expenses and reasonable expenses incurred to reconstruct
damaged records. (Commercial property, EDP and businessowners’ policies
sometimes provide a limited amount of accounts receivable coverage, but many
insureds want the higher limits and broader coverage of accounts receivable
insurance.) There is no coverage for the usual IM exclusions plus no coverage
for bookkeeping, accounting or billing errors or omissions or electrical or
magnetic injury, disturbance or erasure of records other than direct loss caused
by lightning.
There are premium discounts for storing records in fire-resistant receptacles,
maintaining duplicate records stored in another fire zone and excluding coverage
for specified insureds whose records are more easily reconstructed.
Claims handling considerations:
1. Make sure the policy information is accurate
2. Make sure the insured has met all policy requirements
3. Base the loss valuation on the average account receivable adjusted for:
a. Seasonal variations
b. Uncollectible accounts
c. Bad debts, accrued interest and service charges
4. Monitor the insured’s recoveries of lost accounts and claim reimbursement
when entitled
Valuable Papers and Records Insurance
Valuable papers and records insurance covers the insured’s risk of direct
physical loss to valuable papers and records owned by the insured or in the
insured’s care, custody or control. The form covers property away from the
premises up to $5,000. Irreplaceable items are covered up to their agreed values
on a scheduled basis. Reconstructible items are covered at ACV on a blanket
basis. Coverage exclusions are the same as for accounts receivable insurance.
Control losses by storing records in fire-resistant receptacles and maintaining
duplicate records stored in another fire zone.
When handling claims make sure irreplaceable damaged items appear on the
schedule and hire a document restoration expert to reconstruct other damaged
items.
Signs Insurance
Signs insurance covers the insured’s risk of direct physical loss to signs owned
by the insured or in the insured’s care, custody or control. Signs in the filed class
include neon, fluorescent and automatic or mechanical electric signs and lamps.
(Commercial property coverage forms cover outdoor signs, but with low limits
and fewer covered perils.) Coverage is ACV up to the applicable limit. Coverage
applies anywhere in the US, Puerto Rico and Canada.
Coverage excludes:
1. Breakage during transportation, installation, repair or dismantling—except
for loss by fire, lightning or accident to conveyance
2. Electrical injury or disturbance within a covered sign caused by an artificial
current—except for direct loss by resulting fire or loss to any other covered
article
3. Property in transit to or from Alaska, Hawaii or Puerto Rico. The schedule
of insured signs describes each sign’s type, lettering, location and
coverage limit.
Commercial Articles Coverage Form
Commercial articles coverage form covers cameras, projection machines and
photographic equipment used commercially, and musical instruments and
equipment used for remuneration or public performance. Coverage includes
property owned by the insured or others’ property in the insured’s care, custody
or control.
Coverage excludes:
• Television cameras
• Coin-operated or token-operated devices
• Cameras insured in their dealers’ or manufacturers’ names
• Aerial cameras
• Radar cameras
Coverage is scheduled, blanket or both. (A professional musician or
photographer might schedule his own property and arrange blanket coverage for
property he borrows.) Blanket coverage is subject to 100% coinsurance. The
coverage territory is worldwide.
Underwriting considerations:
1. Camera equipment used in a studio suffers fewer losses than equipment
used outside
2. Loss exposures of motion picture equipment vary with each film
3. Dance bands and orchestras suffer more losses than all other groups that
insure musical instruments
4. Musical instruments often in transit have high probabilities of loss
Physicians’ and Surgeons’ Equipment Coverage Form
Physicians’ and surgeons’ equipment coverage form covers the insured’s risk of
direct physical loss to the insured’s medical and dental equipment (coverage may
be extended to equipment of others in the insured’s care), office equipment and
interest in non-removable improvements and betterments made at the insured’s
expense. The policy may be endorsed to cover only medical and dental
equipment, which might be used when the insured has covered the other two
property categories under a commercial property form. There are blanket limits
per location, but the insurer may schedule some items for separate limits.
There is no coverage for the usual IM exclusions plus processing or work on the
property except for direct loss by fire or explosion and marring, scratching,
exposure to light or breakage of glass articles other than lenses unless caused
by specified perils.
Claims handling considerations:
• Hire an expert to assess losses to high-value, state-of-the-art equipment
• Base replacement cost coverage for used equipment on the cost to
replace new, not the cost to buy more used equipment
Theatrical Property Coverage Form
The theatrical property coverage form covers the insured’s risk of direct physical
loss to scenery, costumes and other theatrical property owned by the insured or
in the insured’s care, custody or control, and used or intended for use in a
production described in the policy declarations. Carnivals, circuses, rodeos,
costume-rental firms and theatrical supply houses are not eligible for coverage.
Property is covered anywhere in the US, Puerto Rico and Canada, or while in
transit within that territory.
Coverage exclusions are the same as for physicians’ and surgeons’ equipment
coverage plus theft from unattended vehicle unless the vehicle was locked at the
time of loss and there were signs of forced entry.
Claims handling considerations:
• Confirm the name of the production and the specific property covered
• Hire an expert to estimate loss amounts
Negative Film Coverage Form
The negative film coverage form is the AAIS form that covers the insured’s risk of
direct physical loss to exposed motion picture film (negatives only), “properly
recorded” magnetic or video tape and sound-tracks. Coverage only applies to
productions included in the declarations. The ISO’s film coverage form covers the
same risk. Both forms cover educational, training and promotional films and
videos. (Major motion picture productions buy non-filed policies that also insure
cast members, props, sets and wardrobes.) Property is covered in the US,
Puerto Rico and Canada and within 50 miles of those places.
There is no coverage for the usual IM exclusions plus exposure to light, use of
developing chemicals and laboratory work on film. Loss valuation is the sum of
the property’s reproduction cost and the reduction in value to undamaged parts
of a production. There is no coverage for story, scenario, music rights, continuity,
permanent sets, owned wardrobes or props. Premiums are calculated on a
reporting basis.
Mobile Agriculture Equipment Coverage Form
The mobile agricultural equipment coverage form is a filed form that covers the
insured’s risk of direct loss to mobile agricultural equipment, including
accessories, tools and spare parts used to maintain the equipment.
Coverage is “all risks” and may be blanket or scheduled. Property not covered
includes self-propelled harvester-thresher combines used for hire, self-propelled
mechanical cotton pickers used for hire, machinery and equipment used in
logging or forestry operations, portable sawmills, irrigation equipment and lug
boxes.
Livestock Coverage Form
The livestock coverage form is a filed form that covers loss due to death or
necessary destruction of cattle, sheep, swine, horses, mules, goats and donkeys.
Coverage is for named perils, including:
• Fire and lightning
• Windstorm
• Hail
• Explosion
• Riot attending strike, civil commotion, aircraft or smoke
• Earthquake or flood
• Collision
• Sinkhole collapse
• Volcanic action
• Vandalism
• Theft
Coverage may be extended by endorsement to cover death by accidental
shooting, drowning, electrocution, attack by dogs or wild animals, loading or
unloading accidents and building collapse. Coverage may be blanket or
scheduled. Recovery under blanket coverage is limited to $2,000 per animal.
Coverage excludes:
• Livestock insured under a mortality policy
• Range animals (beef animals at any time; sheep while on the range)
• Horses, mules or donkeys used for racing, show or delivery
• Livestock at or being transported to or from stockyards or commercial feed
lots
• Livestock of others held by the insured for public sale
• Circus, carnival and theatrical livestock
• Livestock on winter ranges
• Livestock of others held by veterinarians or humane societies
(Insureds use mobile agricultural equipment coverage and livestock coverage
when they want to insure one or both of those classes of property and no other
class. Otherwise, a farmowner-type package policy provides ample coverage.)
(Insureds use nonfiled IM livestock coverages when the limits on filed coverages
are too low, their livestock aren’t eligible for filed coverage and/or they want to
insure livestock against disease.)
Animal Mortality Insurance
Animal mortality insurance is term life insurance on animals. Animal mortality
insurance covers the loss of the insured animal from death by accident, injury,
disease and theft. Endorsements add coverage for veterinary treatment, surgical
costs and loss of value from infertility.
Coverage is usually on an agreed-value basis. Coverage excludes neglect,
elective surgery unless the insurer gives prior approval, unauthorized instructions
to transfer the animal, seizure or destruction by governmental authority, war and
nuclear risks and intentional destruction of the animal unless the animal has an
irreversible or incurable condition, resulting from a covered cause of loss, the
destruction is for humane reasons and the insurer gives prior approval (unless
the animal must be destroyed immediately).
Claims handling considerations:
• Confirm coverage for both the animal and the loss
• Check the reliability of the animal’s medical history
• Make sure the insured received prior approval for destruction of the animal
• Hire a veterinarian to verify the cause of death
• Hire a market valuation expert to assess the animal’s fair market value
unless the policy is on an agree value basis
Feedlot Insurance
Feedlot insurance covers a feedlot operator’s bailee liability for animals in its
custody and for liabilities assumed by contract. A feedlot is a commercial facility
that fattens animals and markets them for slaughter. Coverage is named perils
often with no coverage for smothering or exposure to the elements.
Sales Persons’ Samples Floater
The salespersons’ samples floater covers risk of loss to merchandise samples
and their containers in the custody of the insured business’s sales
representatives, or while being shipped to or from sales reps. There is no
coverage for jewelry, furs or property held for sale. Coverage is “all risks”
excluding theft from an unattended vehicle (excluding common carriers).
Insurers sometimes delete or modify that exclusion.
The Nationwide Marine Definition lists (as instrumentalities of transportation,
which includes bridges and tunnels, piers, wharves and docks) pipelines—
including on-line equipment, power transmission lines and outdoor cranes—
loading bridges and similar loading, unloading and transport equipment.
IM policies may cover the above instrumentalities of transportation plus any kind
of property instrumental to transportation (e.g., rolling stock, traffic signaling
equipment and automated toll-collection systems).
LESSON 12: DIFFERENCE IN CONDITIONS (DIC) AND
OUTPUT POLICIES
Difference in Conditions (DIC) Policies
A difference in conditions policy supplements a named perils or special form
commercial property policy by providing “all risks” coverage over the underlying
policy. Insureds buy DIC policies to cover flood and earthquake exposures,
provide excess flood and earthquake coverage, provide excess flood coverage
over National Flood Insurance Program (NFIP) policies and/or cover loss
exposures not covered by underlying coverage.
Advantages of the DIC
The DIC offers:
• “All risks” coverage
• Cost-effective flood and earthquake coverage
• No coinsurance clause
• Replacement of several policies with one DIC policy
• Coverage modification to meet the insured’s individual coverage needs
Disadvantages of the DIC
• Since the market is small, coverage may be hard to find
• Court interpretations of non-standard provisions are difficult to predict
• Policy language is unapproved by insurance regulators
• Minimum premium requirements make coverage expensive for small
insureds
DIC Policy Provisions
DIC-type endorsements are named-perils endorsements to commercial property
policies that otherwise function like DIC policies. They typically cover flood and
earthquake losses. DIC-type endorsements:
• Are subject to separate, lower, limits
• Are subject to separate, higher, deductibles
• Do not contain coinsurance provisions
Covered property includes buildings and business personal property. Seven
common DIC exclusions:
• Currency, money, deeds, evidence of debt, notes and securities
• Jewelry, precious stones, precious metals, furs and fine arts
• Plants and animals
• Data processing equipment
• Property in the course of construction
• Property in transit
• Watercraft, aircraft, motor vehicles, rolling stock and pipelines
Covered perils: Coverage is “all-risks” excluding:
• Perils insured against under the underlying policy
• Steam boiler explosion
• Equipment breakdown
• Theft (if the insurer thinks the theft exposure is too large)
• Water damage with flood coverage available by endorsement.
Some of those perils can be added by extension. To be eligible as inland marine
insurance, DIC policies must exclude coverage for fire and extended coverage
(windstorm, hail, aircraft, riot, vehicles, explosion and smoke wharves). Flood
and earthquake coverages are often subject to separate limits and deductibles.
The flood deductible often equals the coverage limit of the underlying NFIP
policy, but because NFIP coverage is often narrower than DIC coverage, the
insured may end up retaining a substantial part of its flood deductible.
Coverage territory usually includes the US and Canada. Worldwide coverage is
available.
Valuation: The DIC policy should use the same valuation clause as the
underlying policy. There may be separate valuation provisions for different types
of property.
Other insurance: The DIC policy applies as excess over other policies covering
the same property and perils. If the underlying policy uses the same other-
insurance clause as the DIC policy, each policy becomes excess to the other,
and insurers must negotiate their shares of each covered loss.
Insurance to value: There is no coinsurance clause, because DIC coverage is
usually less than the full value of the property.
Underwriting DIC Policies
Compare the DIC and underlying policies to determine which exposures are
excluded by the underlying policy but covered by the DIC policy. Then, focus on
those exposures. The exposures most often focused on are:
• Flood
• Earthquake
• Theft
• Property in transit
• Collapse
Underwriting Factors for Earthquake Coverage
The factors include:
• The type of construction
• The location of the risk
• The susceptibility of the contents to earthquake damage
Use the ISO Commercial Lines Manual to identify properties in earthquake zones
and evaluate those properties according to ISO building classifications. The main
underwriting factor for flood coverage is the location of the risk. Use Flood
Insurance Rate Maps (FIRMs) to identify areas subject to flooding, both when
underwriting and when adjusting claims. The National Flood Insurance Program,
which provides federal flood insurance for flood-prone communities, can provide
insurers with flood maps and information on areas subject to flooding. The
National Flood Insurance Program offers non-residential limits of $100,000 on
buildings and $100,000 on contents under its emergency program, and $500,000
on buildings and $500,000 on contents under its regular program. The NFIP
policy’s other insurance provision reduces the insured’s recovery if the insured
had other flood insurance and did not buy the full amount of NFIP coverage.
Output Policies
Output policies (previously called manufacturers’ output policies or MOPs)
replace commercial property policies, covering the insured’s personal property
loss exposures under a single policy. Output policies were originally developed
for manufacturers, but today they are sold to wholesalers, distributors, real estate
owners and rental chains. Most policies combine commercial property, business
income/extra expense, inland marine, crime, auto physical damage and
equipment breakdown coverage.
Advantages of Output Policies
• One policy provides several coverages
• Rating is flexible
Disadvantages of Output Policies
• There is no liability coverage
• The insurer must file its forms and rates
Output policies are not IM policies, but they have traditionally been sold by IM
insurers because they involve transit and other IM exposures and they use
flexible rating plans.
Output Policy Provisions
The stock throughput policy, like the output policy, combines fixed location and
transit coverages. It covers ocean shipments in transit and in warehouses,
domestic personal property and domestic transit. Some insurers even add liability
and buildings and structures coverages.
Covered property:
• Buildings and other structures including equipment and materials within
1,000 feed (not 100 feet) of the premises
• Personal property stock, furniture and fixtures
• Equipment and machinery
• The insured’s interest in labor, materials or services arranged by the
insured on personal property of others
• The insured’s interest as a tenant in improvements and betterments.
• The insured’s personal property used in the business. Personal property
not owned by the insured is typically covered under an MOP when:
o The insured is liable for the property
o The insured sells the property and agrees to insure it until delivered
to the buyer
o Property has been sold under an installation contract. The output
policy excludes coverage for many of the same types of property
excluded by standard commercial property forms but the output
policy tends to cover foundations, underground pipes and retaining
walls. Personal property is covered anywhere in the coverage
territory.
Covered perils: Coverage is usually “all-risks” subject to that policy’s exclusions.
Flood and earthquake coverages are optional.
Valuation varies by policy.
Insurance to value: There is usually no coinsurance clause.
Rating: Rates are based on the insured’s industry classification and are adjusted
according to a deficiency point schedule, which charges deficiency points based
on the underwriter’s knowledge of the risk. Loss experience may also affect the
rate.
Auto physical damage coverage is an optional output policy coverage.
Insureds use high deductibles to retain small losses while protecting against
catastrophic losses to large fleets.
Equipment breakdown coverage is an optional output policy coverage. The
insurer generally reinsures this coverage with a specialist insurer. Some insurers
”add” this coverage not by attaching a separate coverage form but by eliminating
policy exclusions.
Underwriting Output Policies
The main underwriting factors are:
• Fire protection
• Protection from windstorm, burglary, explosion, collapse, water damage,
flood and earthquake, both at fixed and temporary locations