BOOK SERIAL NUMBER: 211350717
COMMERCIAL BUSINESS INSURANCE
CHAPTER ONE - COMMERCIAL AND BUSINESS OWNERS’ INSURANCE 1
MONOLINE INSURANCE POLICIES 2
MULTILINE POLICIES 3
THE ROLE OF THE INSURANCE SERVICES OFFICE 4
CHAPTER TWO - COMMERCIAL PROPERTY INSURANCE 8
UNIFORM FORMAT 8
TRANSFER OF RIGHTS OF RECOVERY 10
NO BENEFIT TO BAIL 10
CONCEALMENT OR MISREPRESENTATION 11
LEGAL ACTION AGAINST THE COMPANY 12
INSURED’S DUTIES IN THE EVENT OF LOSS 13
INSPECTIONS AND SURVEYS 15
DESCRIPTION OF COVERED PROPERTY 16
PERSONAL PROPERTY COVERAGE 18
PROPERTY NOT COVERED 20
PERSON(S) INSURED 20
AMOUNT OF INSURANCE 20
PRO RATA DISTRIBUTION CLAUSE 20
REPLACEMENT COST COVERAGE 21
AGREED AMOUNT COVERAGE 22
ACTUAL CASH VALUE 22
OTHER LOSS PAYMENT OPTIONS 23
PROTECTION FOR THIRD PARTIES 23
BENEFITS RECEIVED BY MORTGAGEE 24
LOSS PAYABLE CLAUSE 24
CHAPTER THREE - COMMERCIAL PROPERTY POLICY FORMS 27
COMMERCIAL PROPERTY POLICY - BROAD FORM 34
COMMERCIAL PROPERTY POLICY - SPECIAL FORM 36
PROPERTY NOT COVERED 39
EARTHQUAKE INSURANCE 41
MISCELLANEOUS PROPERTY FORMS 42
BUILDERS RISK COVERAGE FORM 42
OTHER BUILDERS RISK FORMS: 43
GLASS COVERAGE FORM 44
CHAPTER FOUR - COMMERCIAL GENERAL LIABILITY INSURANCE 48
TYPICAL BUSINESS LIABILITY COVERAGES 50
OCCURRENCE FORM 50
COVERAGE A - BODILY INJURY AND PROPERTY DAMAGE LIABILITY 51
COVERAGE B - PERSONAL AND ADVERTISING INJURY LIABILITY 55
PERSONAL INJURY 55
ADVERTISING INJURY 55
COVERAGE C - MEDICAL PAYMENTS 56
MEDICAL EXPENSES 56
PRODUCTS LIABILITY - COMPLETED OPERATIONS 59
COMMERCIAL GENERAL LIABILITY FORM - “CLAIMS MADE” VERSION 60
COVERAGE AMOUNTS 60
ADDITIONAL COMPREHENSIVE LIABILITY POLICIES 62
BUSINESS INCOME COVERAGE FORMS 65
OPTIONAL COVERAGES 70
CHAPTER FIVE - COMMERCIAL CRIME COVERAGES 77
COMMERCIAL CRIME POLICY 77
COMMERCIAL CRIME POLICY - GENERAL PROVISIONS FORM 77
CRIME COVERAGE FORMS 82
FORGERY OR ALTERATION FORM - COVERAGE FORM B 82
THEFT, DISAPPEARANCE AND DESTRUCTION COVERAGE FORM C 82
ROBBERY AND SAFE BURGLARY 84
PREMISES THEFT AND OUTSIDE ROBBERY - COVERAGE FORM H 85
PREMISES BURGLARY COVERAGE - FORM E 85
COMPUTER FRAUD COVERAGE (FORM F) 86
EXTORTION COVERAGE (FORM G) 86
EMPLOYEE DISHONESTY (FORM A) 87
LESSEE OF SAFE DEPOSIT BOXES COVERAGE (FORM I) 87
SECURITIES DEPOSITED WITH OTHERS COVERAGE (FORM J) 87
LIABILITY, FOR GUESTS PROPERTY - SAFE DEPOSIT BOX COVERAGE (FORM K) 87
LIABILITY FOR GUESTS PROPERTY - PREMISES COVERAGE (FORM L) 87
SAFE DEPOSITORY, LIABILITY COVERAGE (FORM M) 87
SAFE DEPOSITORY, DIRECT LOSS (FORM N) 87
PUBLIC EMPLOYEE DISHONESTY - PER LOSS (FORM O) 88
PUBLIC EMPLOYEE DISHONESTY - PER EMPLOYEE (FORM P) 88
ROBBERY AND SAFE BURGLARY - MONEY AND SECURITIES (FORM Q) 88
CHAPTER SIX - BUSINESSOWNERS & FARMOWNERS / RANCHOWNERS
STANDARD FORM 94
LIABILITY COVERAGE 95
SPECIAL FORM 96
LIMIT AND AMOUNTS 96
FARMOWNERS - RANCHOWNERS POLICY 99
OPTIONAL COVERAGES 102
LIABILITY COVERAGES 103
CHAPTER ONE - COMMERCIAL AND BUSINESS OWNERS’
During the period of time when civilization moved from an agrarian society to an
industrial society, goods and methods of production of the population became more
concentrated. With this concentration, the possibilities of losses increased due to
situations beyond the control of the owners; primarily by fire, wind and water. While
farmers have always suffered such losses, they compensated for part of the cost by
helping each other in time of need. The “barn - raising” of rural America was well
documented as part of history, particularly in situations where property was
destroyed because of fire.
As the industrial society expanded, protection against losses was very
conservative, originally covering only losses by fire. Policies were written by hand
covering each situation differently. As more and more businesses required this
protection, more standardized wording became available, and with financial
institutions investing in commercial ventures, insurance had to be provided to
protect the investors interests. This further pushed the burgeoning insurance
industry to standardize coverages and policy provisions.
Marine Insurance is considered as one of the oldest (if not the oldest) types of
insurance, as ships and their cargoes were protected against losses at sea by
consortiums of wealthy persons who “underwrote” the protection by signing “under”
the contract and noting their share of the risk. Throughout the years certain words
used in the contracts became standardized and recognized by law as having
specific meanings. To this day, many marine policies contain language that may
seem archaic, such as referring to risks as “perils”, but is used because of the legal
interpretations that has evolved.
Other forms of insurance have changed so that it is easier to understand by the
consumer, and most of the antiquated language is no longer present.
As soon as protection from fire perils was available, protection against
windstorm, hail, water damage, and other such risks was created. These
coverages became known as “property insurance.”
Soon legal recourse against someone wronged by another was considered an
insurable situation, and the idea of protection against liability grew into what is now
called “casualty” or “liability” insurance. Many insurers became “Property and
Casualty Insurers.” Others preferred to continue to cover only one type of peril, such
as fire insurance, and these companies became known as “monoline” companies,
and policies that cover only one type of peril, became known as monoline policies.
MONOLINE INSURANCE POLICIES
With the complexities of modern life and modern commerce, many commercial
enterprises were faced with an increasing number of situations that were
determined to be insurable. Also, the number of types of commercial businesses
also increased each type with its own peculiarities and situations that are unique to
their business. With the increase in insurance situations, the number of insurance
policies needed to cover each contingency increased dramatically, to the point
where many customers had many policies. The problems with this approach soon
The sheer number of such policies became overwhelming, with a variety of
coverage’s provided by a variety of insurers, frequently represented by a variety of
With so many policies, it was inevitable that there would be duplication of some
coverage’s, and with no coverage provided for other risks.
Legally, it became reminiscent of the biblical scholars who debated for years as
to how many angels can dance on the head of a pin, i.e. since there was little
standardization of wording, legal interpretations were abundant. Many consumers
paid for years to protect themselves and their businesses against certain risks of
doing business, only to find that the wording of the policy did not provide the
coverage they thought they had purchased.
Twenty years ago, Joe started a shoe repair shop in a building that he had bought
from his uncle. At that time the only insurance he carried was fire insurance, which
he purchased from the Continental Fire Insurance Company, a monoline company
as all they did was insure against damage by fire. About 10 years later, a neighbor
lost his business because a customer had slipped on his floor and suffered severe
injuries, with the resultant lawsuit that had taken all of his money. Therefore, Joe
purchased liability insurance from another company that only sold liability insurance
to businesses - in effect another monoline company. Joe now had two policies
from two different companies, sold by different agents, and he had two premiums to
It soon became apparent that the only solution was to “package” policies.
Therefore, the “multiline” policy was born, which is several of the risks previously
insured under separate policies, now packaged into one policy. This has several
To the Insured:
There are fewer policies to purchase
The chance of delay in loss settlement due to
disputes of different insurers is substantially
The insured benefits from reduced
Michael’s Auto Transport Company carries auto liability with Intrinsurance Co.,
which had insured their auto liability for many years. They also have general liability
with Preferential Insurance. They suffer a loss and discover that the coverages of
the two policies overlapped in some sections, which resulted in delay in getting the
claims settled. The insurance agent suggested that they carry both coverages
under a multiline policy, which avoids the claims delay as the duplication of
coverage would no longer exist.
To the insurance company:
* The administrative expense is lessened because it costs less to underwrite
and issue one policy instead of several.
* Package policies help insurers avoid adverse selection by spreading the
risk among various insureds and among the various risks covered under the
Packaging is also advantageous for the insurance agent as it facilitates selling
a policy to cover the insured’s entire account, and many packages are more easily
sold and rated, so the agent can quickly and efficiently provide quotes.
COMMERCIAL COMMERCIAL CRIME
PROPERTY LIABILITY COVERAGE
THE ROLE OF THE INSURANCE SERVICES OFFICE
Insurance is a statistic - driven business. The premiums to be charged for any
insurance coverage must be based upon statistics derived from actual experience,
either of the insurance company itself, or from an industry average. And statistics
can only be meaningful if there is enough experience to provide a broad base upon
which to forecast future losses and expenses.
If each insurer attempted to collect sufficient statistics to provide adequate
premiums, the expenses would be excessively high, and the reliability of the
statistics could be questioned, as it would probably not be based upon an adequate
base. However, if companies banded together and shared their experience, the
expenses would be drastically reduced for each company.
Therefore, most companies use the services of the Insurance Services Office
(ISO) which is a statistic - gathering organization located in New York. While it
initially was involved in providing advisory rates to its subscriber members, it has
since withdrawn from providing rates, and now provides policy forms and
endorsements and manual rules for its members. It should be noted that subscriber
members are free to use whatever policy forms and rates they choose, but the
information provided by the ISO is considered as “Standard” wording for the
purposes of this text.
The American Association of Insurance Services, a competing firm, provides
similar services to approximately 400 regional insurers.
The ISO developed special “Special Multi - Peril Policies (SMP)” which always
included Property Coverage and Liability. They were designed to be used only by a
“Preferred” class of policyholder. When the SMP policies were introduced, this
added a new class of policy available to the monoline policies in use, adding to the
number of forms available to the consumer.
In addition, because of the different needs and desires of the smaller and
medium sized businesses, such as grocery stores, garages, bakeries, etc., a new
classification of policies was developed, appropriately called the “Businessowners
Policies.” These policies also covered both property and liability risks, but because
of the wide variety of risks peculiar to each type of business, many insurers offered
a variety of coverage’s. This class of policy will be discussed later in this text.
As the SMP policy evolved throughout the years, the ISO offered many revisions,
and eventually replaced the SMP policy with the “Commercial Package Policy”
(CPP) that had several new features:
The ISO rewrote all of the standardized commercial forms into more easily
The differences between the monoline and the multiline policy forms were
eliminated, with the welcome result that one set of forms can be used for one
coverage or many.
Much more flexibility was obtained as the customer no longer had to accept
the standard coverages, but could construct a policy using the forms that they
While the Commercial Package Policy has replaced the older SMP policies in
most areas, there still are some SMP policies used in a few areas that have not
adopted the ISO Commercial Package Policy.
The Businessowners Policies (BOP) differ from the Commercial Package
Policy in two significant details:
1) While almost any commercial venture is eligible for the CPP, there are more
restrictive rules as to who may purchase the BOP policies,
2) While the CPP is designed to be as flexible as possible in the types of
coverage’s available, the BOP is much more restricted as to the coverage’s
available, with very few options.
(See Discussion of Businessowners Insurance later in this text)
1. One problem with Monoline policies is that
A. each coverage is in a separate policy.
B. frequently there is no duplication of coverage.
C. they try to cover too many perils in a single policy.
D. they do not pay enough commission.
2. Monoline policies
A. are packaged policies.
B. cover only one risk.
C. can only be issued by Monoline companies.
D. can cover associated lines, such as liability, in the same policy.
3. The Package Policy is advantageous to
A. the insurance agent only.
B. the insured only.
C. the insurance company only.
D. the agent, consumer, and the insurance company.
4. Loss settlements can be delayed
A. because of disputes of different insurers of monoline policies.
B. because of disputes of different insurers of multiline policies.
C. if the losses are covered by a package policy.
D. because of administration problems in a package policy.
5. Which of the following statements is true?
A. Packaging of insurance coverage makes it more difficult to rate
B. It is more difficult for an agent to sell a package policy.
C. Packaging of policies facilitates selling policies to cover an insured’s
D. It is much more difficult to sell a package policy to a property owner.
6. The ISO rewrote the SMP policy and replaced it with the Commercial
Package Policy because
A. they wanted to be able to use more technical terminology.
B. the agents wanted things kept the way they were, but the companies
wanted to show the agents who was the boss in policy design.
C. they wanted to be able to furnish more coverage with less policy forms.
D. this enabled the ISO to receive a 3 year contract to simplify coverage.
7. Which of the following statement(s) are/is correct?
A. The CPP policy replaced the SMP policy.
B. The Businessowners policy replaced the SMP policy.
C. All insurers use the ISO form for Commercial policies.
D. The ISO is the only organization that develops commercial forms.
8. The Insurance Service Office (ISO) is
A. a rating service.
B. a statistical-gathering organization.
C. a private investigative firm.
D. a credit company.
9. The original SMP policy always included
A. inland marine and liability coverage.
B. burglary, theft and liability coverage.
C. commercial property and inland marine.
D. commercial property and liability.
10. The Businessowners Policies (BOP) differ from the Commercial Package
Policy (CPP) because
A. the BOP policies are much less restrictive as to who may purchase the
B. the CPP is about twice the premium for similar coverage with the BOP.
C. there are a lot more options available in the BOP policies.
D. BOP policies are more restrictive and offer fewer options.
ANSWERS TO STUDY QUESTIONS
1A 2A 3D 4A 5C 6C 7A 8B 9D 10D
CHAPTER TWO - COMMERCIAL PROPERTY INSURANCE
The ISO introduced a series of forms to protect commercial property and to
insure buildings, personal property, and business income and builders risks. The
coverage parts of this policy are:
Commercial Property Policy
1) Basic Form
2) Broad Form
3) Special Form
Commercial Inland Marine
Commercial General Liability
Commercial Boiler and Machinery
The policy is available to almost any type of risk and it is not necessary to
buy coverage on all the coverage parts - any two parts may be used to
comprise the policy.
The policy does not have to incorporate liability coverage.
Two classes of property are ineligible for this coverage: Homeowners
Policies and Farming Policies.
All three forms of the Commercial Property Policy and the other Commercial
insurance forms mentioned above, have a uniform format as all policies include
Common Policy Declarations and Conditions:
Name of Insured(s)
Location(s) of the Risk insured
Description of the Insured’s business (See Description of Property below)
Other details to identify the risk and describe the coverages.
(1) Peter Bilirakis III is President and majority shareholder in a food processing
company, doing business under the name of Pete’s Food Packaging which was
started by his grandfather under this name in 1935. The business was incorporated
in 1965 as Bilirakis Processing and Packaging, Inc. In 1976, a holding company
was formed, Bilirakis Enterprises, Inc., which owns Bilirakis Processing and
Packaging. When applying for a Commercial policy, Bilirakis gave the agent only
the name of Pete’s Food Packaging. In case of a loss, the claims payments could
be held up in court as (1) Pete’s Food Packaging may be considered a non-entity,
(2) another company could be operating under the name of Pete’s Food Packaging,
creating further legal problems.
To avoid such problems, the insured needs to notify the insurer of all of the
names under which this company operates.
(2) The original address of Pete’s was 15th and Main and was so indicated in
the telephone book, on letterhead stationery and in advertisements, and was the
address given to the insurance company. Actually, when the business was first
started, there was a small vacant lot on the 15th St. side of the business, which for
years was used by Pete’s to park some of their vehicles with the permission of the
owner. In 1995 the owner of the lot sold the lot to a drive-up photo developing
company, which erected a small building and a paved drive-through area.
According to the Post Office, Pete’s actual address is 1511 Main Street.
Again, in case of a loss settlement of the claim could end up in the courts,
especially if damage were done to the adjacent business as a result of a fire at
(3) The original company was a food packaging operation solely. When it was
incorporated in 1965, it expanded into food processing also, which rapidly became
the largest part of the operation. The supermarkets and butcher shops were all
using plastic packaging for their foods that were not pre-packaged from the
wholesaler or distributor. Eventually, the only packaging that was done at Pete’s
was the packaging of their own products. In 1976 Bilirakis leased farmland to
supply the foods that they would process and package in their own plant.
Even though food packaging was the original business of this company, care
must be exercised in notifying the insurance company as to what the company
actually does, in detail. One of the most important factors in determining the
premium for insurance is the activity performed at the location. If Bilirakis
Enterprises is primarily a farmland leasing company, which entails considerable
administration, the fire risk, for example, would be much less than a food packaging
company that uses heat to seal packages. Food processing has its own
operational risks, different from packaging or administration. (Continued)
(4) Care must be taken to avoid any lapse in coverage when a policy is written.
Conversely, any duplication of coverage is an added cost to the policyholder and
can create problems in case of a loss during the period of duplication.
(5) All declarations made by the insured when applying for commercial
insurance, should be well documented to avoid any of the difficulties as mentioned
above. While the insurance company’s underwriters will ask for financial and
technical information prior to approving the risk, the underwriters cannot be at the
physical location in most cases, and must rely upon information supplied by the
agent and the applicant.
Cancellation may be effected by either party, subject to conditions:
1) Cancellation by Insured: The first - named insured in the policy declarations
may cancel at any time by written advance notice, and will receive refund of
premium, generally on a pro - rata basis.
2) Cancellation by Company: Company must give notice as required by state
law, after which time policy may be canceled after 30 days, unless the
cancellation is a result of non - payment of premium, in which case only 10 days
notice is allowed.
TRANSFER OF RIGHTS OF RECOVERY
When the company pays a loss under its policy, it may require from the insured
an assignment of all rights of recovery against third parties; in effect, the company is
“subrogated” to the insured’s claims.
Johnson Security Devices Company suffered a fire loss caused by an improperly
parked gasoline truck that was left unattended and rolled down the hill and caught
fire in front of a building adjacent to the insured’s property. Since Johnson has
recourse against the owner of the truck, if Johnson’s insurer pays Johnson for
damage to his property, Johnson must assign all rights of recovery against the
owner of the truck and/or its insurer.
NO BENEFIT TO BAIL
A bail is a person or concern who has temporary custody of the property of
others for the purpose of repair, storing, processing, delivery, etc., and the owner of
the property expects the property to be returned to him. The policy states that the
Bailee will not benefit from the insurance.
The LaMonde Cleaners and Tailors was insured under a Commercial Package
Policy and suffered a fire loss. Mr. Sallinger had given the cleaners a $600 suit to
clean and to tailor. The owner had spent several hours on tailoring the suit and
estimated that if Mr. Sallinger had picked up the suit before the fire, he would have
been charged $125 for the tailoring. Since the suit was destroyed by the fire, the
insurance company would only pay the $600 value of the suit. The Bailee (the
business) cannot profit from the insurance.
Other policy provisions include:
Assignment of Rights and
The right of the company to make inspections and examine books
In addition to the common provisions outlined above, the following conditions
apply to the Commercial Property Policy in each of its three forms (Basic, Broad
As would be expected by the terminology, “Conditions” provide the
“conditions” under which the risk is accepted by the insurer. In effect, the insurer is
saying that based upon the information given and so stated in the “Declarations”, a
contract providing the stated coverage is provided under the conditions listed in this
CONCEALMENT OR MISREPRESENTATION
Policy is void if a material fact about coverage or insured’s insurable interest,
has been concealed or misrepresented by the insured.
Cianti’s Place is a well-known local specialty food store, specializing in Chinese
and Vietnamese food products. The Commercial policy insuring this business
indicates that they are a food retail outlet. However, more than half of the income
from Cianti’s is from the area behind the retail portion of the store, which consists of
8 tables and chairs. Cianti’s is known among its oriental customers as the place to
not only purchase the food, but to eat the food prepared in the fashion and style of
China or Vietnam. If Cianti’s has a fire because of the restaurant in the rear which
have not been disclosed, this is obviously concealment and misrepresentation and
losses would not be covered, and the policy would be canceled from inception and
Fraud will always cancel a policy. Fraud is defined as: “A false representation
of a matter of fact, whether by words or by conduct, by false or misleading
allegations, or by concealment of that which should have been disclosed, which
deceives and is intended to deceive another so that he shall act upon it to his
legal injury.” (Blacks Law Dictionary).
A discussion of the difference between fraud and misrepresentation or
concealment is outside the scope of this text. Generally speaking, if the insured
knowingly deceives in anticipation of financial gain, then it is fraud. If the insured
misrepresents a risk but does so out of ignorance and without the intent to receive
financial gain, it probably would be considered misrepresentation. In either event,
the “conditions” are not met and the policy is voided from inception.
LEGAL ACTION AGAINST THE COMPANY
No action can be made against the company if a period of more than 2 years
has transpired since the date of loss (with some state - mandated exceptions of
The cancellation clause described earlier is modified by an endorsement on a
Commercial Property Policy, stating that a policy covering a specific building can
be canceled by the Company at least 5 days prior to effective date of the policy, by
mail or delivery of cancellation notice, if:
the building has been vacant or unoccupied for more than 60 consecutive
days. Does not apply to Seasonal unoccupancy; and more than 65% of units or
floor area vacant or unoccupied is considered as vacant.
30 days has transpired since the payment of a covered loss and the repairs
have not been started or other contractual arrangements made to have the
the building has an outstanding order to facilitate or any outstanding demolition
order, or has been declared unsafe, by a government agency.
items that could be fixed and/or salvaged, and that aren’t necessary to any
rehabilitation or repair, are removed from the building and not replaced.
failure to furnish water, heat or electricity for 30 consecutive days (except if under
failure to pay property taxes that out outstanding for more than a year except
where the Insured is in a legitimate dispute with the tax authorities regarding the
payment of the taxes.
(1) The Seagull Beach Emporium is located one block from Siesta Beach. It is
open during “tourist season”, which usually lasts from Labor Day until the first
Monday after Easter. Depending upon when Easter falls, the store may be closed
for more than 90 days on occasion. The store is locked and a local security firm
watches the store and patrols the area. Store equipment and some inventory is
kept in a locked room. The policy would cover this business as it would be
considered seasonal unoccupancy.
(2) Sammy’s Deli suffered a fire loss caused by electrical wiring and the insured
paid him for the partial damage under provisions of his Commercial policy. Before
rebuilding, he heard that a new restaurant was moving into the same area, so he
decided that he would wait until he saw what kind of restaurant it was going to be
before he started restoration. His policy had been modified by an endorsement
allowing the insurer to cancel the policy by giving at least 5 days notice prior to
effective date of the policy, if 30 days had transpired and he had not made
arrangements to restore his restaurant. If Sammy waits more than 30 days, the
insurer can cancel his policy.
INSURED’S DUTIES IN THE EVENT OF LOSS
Certain duties of the insured occur even if the Company makes no demands upon
the insured to fulfill these duties. Other duties must be met only if the Company
makes a formal demand.
(1) Duties That Must Be Met By The Insured Regardless If Company Makes a
To protect the property from further loss.
To furnish a complete inventory of all property involved, damaged or
To furnish a proof of loss within 60 days after request by the insurer, including
complete statements regarding time and date of loss, the origin of the loss,
the value of the items involved, and all other details.
The Pineapple Wholesale Fruit Company suffered a fire loss covered under their
Commercial Policy. In order to put out the fire, the fire department broke the front
windows, and broke through the locked rear doors and loading dock. Pineapple
Co. must take action to protect the property and in this case, would be responsible
for boarding up the windows, and locking the rear door and the loading dock. If the
building suffered further loss because Pineapple Co. did not perform these duties,
even though they were not formally requested to do so by their insurer, the insurer
would not be liable for the damages.
The Rolling Toy Company made a claim with their insurer for losses due to a
covered peril (fire) in their warehouse. The fire occurred in November when the
Rolling Toy had a large inventory of toys in preparation for the Christmas season.
Most of the toys were destroyed. The Controller for the company recreated the
inventory by going to last years inventory at the same time, and from the last
inventory for tax purposes in May, an interpolating the amount of toys that were
destroyed. To this amount, the actual count of toys that were partially destroyed, or
were not destroyed at all.
(2) Duties That Insured Must Meet When Required By Company
Furnish detailed and verified plans and specifications of any building,
fixtures and/or machinery destroyed or damaged.
To agree to examination of any property that remains after the insured
To submit to an examination under oath.
To produce for examination all books of accounts, bills, invoices and
other records, and to produce extracts when requested.
The loss becomes payable after investigations, detailed Proof of Loss, and
other substantiating documentation. The company then must determine if there was
other insurance involved in order to determine their share of the loss. They must
also determine whether the specified loss is covered under 2 or more coverage’s,
and determine which is payable and in what proportion.
The Company can voluntarily broaden the policy coverage, which it may do for
customer relations, public policy, or to avoid threatened legal action even if they are
technically and legally not responsible.
INSPECTIONS AND SURVEYS
The insurance company has the right to inspect the insured’s premises and
operations at any reasonable time during the period of the policy. The company
may use its own personnel, or may employ others such as rating or service bureaus
acting on behalf of the insurer.
While the insurer can inform the insured of the results of the inspections and can
recommend changes, there is no duty or legal obligation for the insurer to do so.
The provisions states that the insurer:
is not obligated to make safety inspections.
does not guarantee that conditions are safe or healthful.
does not guarantee that the insured is in compliance with safety or health
The purpose of these disclaimers is to protect the insurer against lawsuits.
Beam’s Sheet Metal Works is covered under a Commercial policy, which
includes property and liability, with Corall Insurance Co. As a matter of routine, on
or about policy renewal time, Corall sends inspectors to the insured’s place of
business for a safety inspection. The safety inspector failed to notice an oil leak in
one of the metal stamping machines, which was creating a hazardous situation for
Two weeks after the inspection, the machine operator at the stamping machine,
slipped in the oil puddle and injured his arm to the extent that it had to be
amputated. Beam immediately instituted a lawsuit, claiming that the insurer was
negligent in they failed to detect this hazardous situation during the inspection.
This provision negates any such liability on the part of the insurer.
DESCRIPTION OF COVERED PROPERTY
(The CPP covers both buildings and personal property)
Description of The Buildings: All additions, fixtures, machinery and
equipment, etc. are included in detail. This should be the most carefully constructed
provision of the policy, as discussed earlier.
Landlord’s Furnishings and Property: Also covered is the personal property
of the owner used to maintain and service the building and its premises. Therefore,
this property should not only be detailed, but as these items may change frequently,
any substantial changes must be recorded in case of loss.
Newly Acquired or Constructed Buildings: It is not uncommon for
businesses to expand operations or to move to a better or secondary location.
These buildings will be covered under this plan.
Other coverage’s provide for service charges from a Fire Department (up to
$1,000), the removal of debris (up to 25% of the direct loss amount plus deductible),
and pays for removal of pollution to land or water as result of loss. If property must
be removed from the insured premises, the policy will pay for the removal and
Accounts, Bills, Deeds, Evidence of Debt,
Money, Notes or Securities.
Animals (unless owned by others and boarded by
Roads, paved surfaces, retaining walls
Contraband or property in course of illegal trade or
Cost of research, replacement or restoring of valuable
papers and records, including computer data.
Land crops on the land, or lawns.
Airborne or waterborne personal property.
Also excluded would be any property that is covered under another policy, and
those specifically excluded (such as swimming pools, chimneys, windmills, etc.
Property Outside Buildings Exclusion excludes items such as:
Fences enclosures, exterior walls, etc.
Radio and television antennas
Plants or shrubs
The local Sports Bar advertises that many NFL games can be seen in the bar and
at no other bar. This is made possible by television satellite dishes mounted on the
ground on a lot next to the bar. A fire in the bar, fanned by wind, created such heat
that the satellite dishes were warped and rendered useless. They would not be
covered under this provision.
PERSONAL PROPERTY COVERAGE
The Commercial Property Policy also covers business - related personal
property. Personal property includes all property other than real property (real
Business Personal Property of the Insured covers direct loss or damage to
personal property owned by the insured and used in the insured's business,
including furniture and fixtures, machinery and equipment, stock, and other similar
personal property (except for items excluded). The form defines stock as
"merchandise held in storage or for sale, raw materials and in - process or finished
goods, including supplies used in their packing or shipping." Business personal
property of the insured also includes labor, materials, or services furnished by the
insured on personal property of others.
The insured's interest in improvements and betterments also is insured as
business personal property, although improvements and betterments are actually a
part of the building. The form defines improvements and betterments as follows:
Fixtures, alterations, installations or additions that are made a part of a
building or structure occupied but not owned by the policyholder.
Property acquired by the policyholder or made at his/her expense, but
which cannot be legally removed.
Property for which the named insured has a contractual responsibility to
Personal Property of others, which is designed to protect the insured
against loss or damage to the personal property of others while such
property is in the custody of the insured. It is intended for businesses that
usually have non-owned property in their care, such as lawnmower repair
shops, furniture reupholster, etc. This type of property is covered only
while it is in the insured’s care, custody and control and while it is in the
The Premier Health Club is a coed health club (gym) located in a shopping mall
located about 6 miles from the downtown business area. The building was formerly
a supermarket and when rented, it consisted of a large open room with smaller
rooms at the rear of the store. Premier contracted to have the interior razed and on
one side of the large area, ladies’ and men’s locker rooms with complete showers,
lockers and bathroom facilities were erected. An area near the front of the building
was made into an office with a reception area. On the other side of the open space,
5 sales offices were erected. In the rear of the building, a separate workout area
was erected for “free weights.” The interior was painted and neon lights were
installed, special carpeting for health clubs was installed, and special rubberized
flooring was installed in the free weight area.
The exercise equipment was leased and part of the lease agreement was to
provide insurance against theft, fire and vandalism. Under terms of the lease,
Premier must maintain adequate coverage on the building and its contents. Some
of the equipment is the property of Premier and had been purchased by Premier.
All of the interior construction work, the equipment - leased and owned - would
be considered personal property of the business and would be covered under the
PROPERTY NOT COVERED
In addition to the Property Not Covered section above, on the Building Property,
Automobiles held for sale and vehicles or self - propelled machines of a certain
types are not covered.
The person(s) insured is either the insured, or the Legal Representative when acting
within scope of insured; otherwise anyone having property custody of the property
will have the rights.
AMOUNT OF INSURANCE
(Purpose of the insurance is to make the insured whole and to restore him to the
position he was in prior to the loss.)
Methods of “making whole” (Replacement Cost, Actual Cash Value, etc.), are
Building - If the amount of insurance satisfies the coinsurance requirement, then
losses of $2,500 or less will be settled on the full replacement value (without
deduction for depreciation) or the cost to repair.
Tenant’s Improvements and Betterment’s - The policy provides that recovery
for loss or damage to property that has been improved by a tenant, will be available,
either actual cash value or for a lesser amount, depending upon the work performed
and the time frame within which it was completed.
PRO RATA DISTRIBUTION CLAUSE
Blanket Policies - Fire insurance policies are sometimes written to cover blanket
coverage at two or more locations. A Pro Rata Distribution clause may be attached
to such blanket policies. The clause operates to distribute the amount of the policy
by providing that insurance attaches in each building or location in the proportion
that the values at the location bear to those in all locations covered.
Tom’s Drive-up Photo Developing Co. has 3 locations, with the value of the property
divided as follows:
Values at location A $10,000
Values at location B $15,000
Values at location C $25,000
Tom’s Drive-up purchases a Blanket policy of $50,000 with a pro - rata Distribution
clause at all three locations. The Pro Rata Distribution clause operates to
(distribute the insurance as follows:
Amount of Insurance Applicable to Locations:
Value at location A / Values at All locations = $10,000/$50,000, or 1/5 (2/10) of
$50,000 = $10,000
Value at location B / Values at All locations = $15,000/$50,000, or 3/10 of $50,000
Value at location C / Values at All locations = $25,000/$50,000, or ½ of $50,000
Under the terms of the Pro Rata Distribution clause, if values fluctuate as between
the different buildings, the insurance will automatically change. Thus, in the above
example, if all the values were to shift to Building A. all insurance would
automatically apply there.
If the full amount of the property is insured, there will be no limitation as to amount by
the policy. Also, if insurance does not equal the full amount of property value, it is
underinsured at all locations. If the amounts carried by Tom’s Drive-up is only 50%
of the value of the property, then he is underinsured by 50% at all locations.
REPLACEMENT COST COVERAGE
In general, one may insure buildings, improvements and betterment’s, furniture,
fixtures, machinery and equipment, and supplies in connection with such property on
a replacement basis.
Replacement Cost coverage does not take into consideration any
depreciation in the value of the property. Certain restrictions apply, such as
the minimum coinsurance clause.
Replacement Cost coverage policies stipulate that the Insured must replace
the property within a reasonable time, if he is to recover for his loss on a
replacement cost basis. Courts have held that one year is a reasonable
period within which to replace.
Replacement must be made within two years of the date of loss and on the
same site or another location within the state.
The Replacement Cost coverage in use by many companies also
incorporate maximum of 400% of the actual cash value of the property. As a
result of this clause, it can be seen, the Replacement Cost coverage does
not necessarily guarantee that the Insured will receive sufficient
indemnification for the full cost of replacing the damaged or destroyed
Tom’s Drive-up Photo establishment has a developing machine that cost Tom
$3,000 when purchased 5 years ago. This machine uses certain chemicals and
uses silver in its processing, the price of which has escalated recently to where the
same machine now would cost $5,000. If Tom had a total loss of the machine, the
insurer would pay the replacement cost, i.e. $5,000.
AGREED AMOUNT COVERAGE
Coverage is available modifying the basis on which losses are settled.
Some of Pete’s Food Packaging Company’s property is badly damaged. Pete’s
agrees to accept $5,000 from the insurer for the damaged property and the property
is then salvaged by the insurer. The insurer contracts with a salvage firm for
property of this type, and this salvage agreement would not be available to Pete’s
as the salvage company only contracts with large firms and insurers who can supply
large amounts of salvageable material.
ACTUAL CASH VALUE
The actual cash value, defined as the replacement cost less depreciation, is
frequently paid for losses on such items as household furniture, personal effects, art
works, and property of others.
Bayshore Cleaners has a fire as a result of an iron overheating and causing an
electrical fire. Betty loses a suit in the fire for which she had paid $500 2 years
previously. The adjuster estimates the suit had depreciated in value by $200, as the
length of depreciation is 5 years for such garments. Therefore Betty would receive
only $300 for her suit.
OTHER LOSS PAYMENT OPTIONS
Inflation Guard (Automatic Increase In Insurance) - Under this
endorsement, the amount of insurance is increased automatically by an annual
percentage rate specified in the Declarations.
Market Value Other Than Stock - Stock which has been sold but not yet
delivered to the purchaser will be valued at its selling price. Losses are paid on a
market value basis if repair of replacement is not contracted for within 180 days of
the loss; or on a replacement basis (with similar property that performs the same
function if repair or replacement is contracted for within 180 days of the loss or
Brand and Label Clause - By endorsement, the policy allows the insured to
remove the brand or label from property for salvage purposes.
Manufacturer’s Selling Price - Optional, all the insured’s finished stock,
whether sold or unsold, is valued at the insured’s selling price.
Market Value Clause - All stock is valued at its selling price and is used only
when the stock is of a type which is bought and sold at an established market
exchange where market prices are posted and quoted.
Alcoholic Beverage Tax Exclusion - The law permits the Treasury
Department to refund taxes and duties paid on alcoholic beverages damaged by
perils other than theft and excludes the value of such federal taxes on alcoholic
beverage held for sale.
Building Ordinance Coverage - Coverage may be acquired to cover the
losses suffered when a loss has destroyed a portion of a building but an ordinance
or law requires the insured to raze the undamaged portion.
PROTECTION FOR THIRD PARTIES
Generally, any losses paid by an insurer are paid to the insured named in the
policy. Because of a growing practice of mortgaging real estate property as
security for a loan, this Mortgage Clause was created.
The Mortgagee clause sets up a separate contract between the insurance
Company and the mortgagee. The clause grants the mortgagee specific protection
and imposes certain requirements on it.
BENEFITS RECEIVED BY MORTGAGEE
Any loss on the property is payable to the policyholder, as his/her interest is
shown in the policy. Since the mortgagor usually owns the original policy, the
Insured cannot cancel without the mortgagors consent. If the insured neglects to
care for the property, the mortgagee would still be protected to the extent of its
interest in the real property (real estate). Furthermore, the insurer has the option of
paying off the balance of the mortgage and receiving a full assignment of the
Masterful Manufacturing is insured by Capital Insurance with a face amount of
$200,000. Masterful’s building is mortgaged to The Hillsboro Bank under a
mortgage carried by Masterful, and suffers a loss for $100,000. Capital Insurance
will pay its share of the $100,000 loss by check payable to The Hillsboro Bank and
Masterful Manufacturing. The bank can either endorse the check over to the insured
who can then use the money to rebuild the property, or will credit him with the
amount of the payment to help reduce his mortgage.
Assume that Masterful Manufacturing had declared in the application for
insurance that they were manufacturing children’s toys, but in actuality they were
manufacturing only a very small amount of children’s toys, and the rest of the
business was a front for an illegal drug manufacturing operation. If this were
discovered at time of loss, the policy would then be void. Since Masterful had
violated the terms of his policy, the company would then pay the entire amount of the
loss to the Bank. The Bank may not credit the insured with any of that money since
he was not entitled to protection under the policy.
LOSS PAYABLE CLAUSE
1. A Loss Payable Clause states that any loss would be payable to a third party
(by name) thereby placing the mortgagee in the same position as the
2. A second form of a Loss Payable clause is available to lenders for receipts,
bills of lading, contracts, etc., which immunizes the lender to acts or breaches
of policy conditions by the insured, if the lender is unaware of such acts.
3. A third form provides coverage for the future buyer.
1. Jones opens a local package delivery service. He purchases property
coverage as required by the bank that holds the mortgage on the property.
He is strapped for cash but since his 2 delivery trucks are financed also, he
must take out auto coverage. He would like to purchase liability insurance,
but cannot afford to do it right now.
A. Jones has purchased a monoline policy.
B. Jones must purchase liability insurance if he wants a Commercial
C. Jones has purchased a Commercial Package Policy.
D. Jones can purchase other coverage later, but if he does, he will no
longer have a Commercial Package Policy.
2. The Declaration page of a Commercial Property Policy does not contain
A. the name of the insured.
B. the policy period.
C. the premiums.
D. description of the risk.
3. When an insurer can recover part of its loss from another insurer, this is
a. continuation of coverage.
c. insurable interest.
d. duplication of coverage.
4. After a loss covered by a commercial policy, the insured is not required to
A. put up plywood over windows if needed and otherwise protect the
property against further loss.
B. submit to an examination under oath.
C. furnish proof of loss.
D. provide blueprints of the building and specifications of equipment.
5. The most carefully constructed provision of the CPP is
A. what personal property is located in the insured building.
B. the name and address of the insurance company.
C. the details of the additions, fixtures, machinery and equipment to be
D. personal information (age, marital status, residence address, phone,
6. In respect to on-site inspections by the insurance company,
a. the insurer is not obligated to make safety inspections.
b. the insurer will guarantee that conditions are safe and healthful.
c. the insurer will guarantee that the insured is in compliance with
required safety procedures.
7. Margaret has an art gallery, which includes an original oil painting that had
been in her family for years. The exact value of the painting is difficult to
ascertain, but she and the insurer agreed that in case of loss, she would be
paid $15,000 for the painting. The Loss Payment Option in this case is
A. Replacement Cost.
B. Actual Cash Value.
C. Agreed or Appraised Value.
D. Mediation Value.
8. Bernice has $9500 invested in a display in her store, although she would
have had to pay at least $12,000 for the equipment but she was able to
purchase them from a wholesaler who was going out of business. The
display were destroyed in a covered loss, and the insurer paid Bernice
$12,000. The Loss Payment Option on this situation is
A. Agreed or Appraised Value
B. Actual Cash Value.
C. Mediation Value.
D. Replacement Cost.
9. A “bail” will not benefit from the CPP. What is a “bail?”
A. A bondsman.
B. An agent or General Agent.
C. An attorney.
D. A person who has temporary custody of property of others for the
purpose of repair, storing, etc., and the owner expects the property to
10. If there are more than one person listed on a CPP policy, who can cancel
A. Any of the ones listed on the policy.
B. The one whose last name appears first in alphabetical order.
C. Only the Agent.
D. The first named insured.
ANSWERS TO STUDY QUESTIONS
1C 2C 3B 4B 5C 6A 7C 8D 9D 10D
CHAPTER THREE - COMMERCIAL PROPERTY POLICY FORMS
The Basic and Broad Forms are written on a Named Peril basis, whereas the
Special Form is written on an Open Perils basis (similar to an all - risk).
The Basic Form permits coverage under causes of loss discussed below and
the Broad Form adds four additional causes of loss
Each of the three forms may be broadened by Earthquake Form, discussed
FIRE AND/OR LIGHTNING -
The policy covers both perils and loss by lightning
is covered whether or not fire ensues.
The fire must be “hostile” in order for the loss to be
covered as opposed to a “friendly fire”.
A friendly fire is one which is intentionally started
and is confined entirely within the area for which it
was intended (stove, fireplace, etc.).
A hostile fire is one, which escapes from its
As soon as (or if) a friendly fire escapes from the
intended area or confined space, it becomes hostile.
Heat damage from a friendly fire is not considered as
a hostile fire.
Proximate Cause - Covers loss by which fire is the proximate cause.
Proximate is defined as very close in space or time that creates a result without
interference or intervention of any force or factor from an independent source.
A warehouse was covered under an insurance policy. Large metal containers were
normally moved using a large suspended electrical magnet from an overhead crane.
A fire caused by faulty wiring in an electric grinder motor used in another section of
the building, shorted out the source of electricity for the magnet, causing a large
container to plunge to the concrete floor of the warehouse, sustaining considerable
damage. Even though the magnet or the crane were not reached by the fire, it was
held that the entire loss was covered under the policy.
A fire gutted a small store, but the roof and the sidewalls were still intact. The fire
had weakened the rafters to the point that after a heavy rain, the roof collapsed. In
most jurisdictions, the policy would cover the damage caused by the roof collapse,
even though the roof was not burned per se.
Restaurant activity provides good illustrations of this principal. If a stove fire
causes enough heat to damage adjacent walls, it is considered a friendly fire and
there is no coverage. However, if grease in a pan on the stove catches fire, the fire
is now considered hostile and damage would be covered.
All explosion losses are covered with the exception of
steam boilers, turbines, pipes, etc. Any damage done
because of bursting of water contained or steam boilers, etc.,
are not explosions. Any explosion because of gases, gasoline,
dry cleaning fluids, etc., will be covered.
Any explosion other than the kind specifically excluded can be covered, e.g.,
explosion of gases, gasoline, naphtha or other volatile explosion devices using
compressed air, etc.
WINDSTORM OR HAIL PROVISIONS
Damage by windstorm or hail is covered under the Basic
Form. Damage caused by frost, cold weather, ice (other
than hail), or snow is not covered. Also, any interior damage
caused by rain, snow, sand or dust is not covered unless the
wind or hail creates actual damage to the roof or walls of the
building; in which case the policy will pay for damage
caused by these elements entering through openings made
by the wind or hail.
Coverage against windstorm or hail may, be excluded from the policy and the
premium therefore reduced.
Outdoor property, such as antennae, signs, trees and
other landscaping, is not covered, although outdoor
signs and antennae may be added for an additional
Smoke causing sudden and accidental loss is covered,
except when due to agricultural or industrial causes.
AIRCRAFT OR VEHICLES
Loss or damage to the insured property as the result of
physical contact with an aircraft or vehicle, or from falling
objects from an airplane, is covered. The policy excludes
loss or damage caused by vehicles owned or operated by
RIOT OR CIVIL COMMOTION
Coverage is provided under the Basic Form. The term
“riot” is defined by statute in the various states and
should be researched as definitions can vary.
Civil Commotion is defined as “an uprising among a
group of people which occasions a serious and
prolonged disturbance and infraction of civil order, not
attaining the status of war or armed insurrection.”
Damage by vandals or youth gangs would not be
covered, but direct loss caused by striking employees
on the premises is covered. Looting at the time and
place of riot or civil commotion is covered.
Theft loss caused by burglars is not covered, but damage to
the buildings because of burglars would be covered, but
contents or any property other than buildings is not excluded.
Also, if the building has been vacant for 60 consecutive days
prior to the loss, there is no coverage under this provision (Can
Sprinkler Leakage covers loss caused by the leaking of or
discharge of water or other substance used in the sprinkler
system or from the collapse of a tank that is part of the system, or
hydrants, standpipes and outlets supplied by the automatic
sprinkler system. Leakage due to condensation on the pipes is covered. This can
also be deleted with a decrease in premium.
Loss of damage caused by land suddenly
sinking or collapsing because of the action of
water or limestone. Filling the sinkhole, or the
collapse or sinking of land into underground
cavities, such as old mines, is not covered.
Losses due to volcanic activities such as the airborne blast or
shock waves, the ensuing ash or other particulate matter, or
lava flow, are covered. It doesn’t pay for removing ash or other
volcanic matter, and applies only to losses above ground; i.e.
earthquake insurance would be necessary to cover any
damage as the result of earth movement.
NOTE: All damage sustained within a 72 hour period is considered as one
loss. Any damage sustained after a 72 hour period is considered a new loss
subject to the limits and deductible applicable to each.
War, Insurrection, Military Action, Rebellion - The policy
does not cover losses due to war, insurrection or military events,
including any action used to resist enemy attack.
Governmental Authority - The policy does not cover losses
due to seizure or detention of property by any governmental
authority except when for the purpose of fighting or resisting the
spread of fire.
Power Failure - There is no coverage for losses caused by
loss of power from a utility service away from the premises.
Coverage can be purchased for an additional premium.
Nuclear Hazards - Nuclear reaction or radiation or
radioactive contamination regardless of the cause, is
excluded, but any resulting fire damage would be covered.
Building Ordinance - Any losses as the result of any
building ordinance is not covered.
A fire destroys part of a building located in an area subject to frequent hurricanes.
Because of the hurricane hazard, local building ordinances require that the building
be rebuilt with steel girders instead of the wooden original girders, and several other
sections of the code make reconstruction with original material impossible. The
policy will not cover the forced razing of the undamaged portion of the building.
Coverage is available under a special endorsement (Building Ordinance
Sunrise Hotel and Country Club erected their main building in a cleared area in
Florida that had been a phosphate mine at one time. The owners and the architect
felt secure as phosphate mines are surface mines and had been covered up and
the ground leveled over 25 years ago. The main building collapsed when the
foundation sunk into the ground. If it is determined that the collapse was due to a
pocket in the old mine, the policy will not pay. However, if it was due to the wearing
away of underground limestone, it would pay.
Earth Movement - Any earth movement, other than
sinkhole coverage described above, including
earthquake, landslide, mine collapse, etc., would be
covered. Earthquake insurance may be separately
purchased. Fire caused by earth movement would be
Water Losses - Losses by flood, surface water, tide,
or spray, or water that enters through a sewer or drain,
or seepage through foundations or walls, floors or
paved surfaces, are not covered. If such leakage
results in fire or explosion or sprinkler leakage, the
policy will pay for the resulting loss or damage. There
is no coverage for mudslide or mudflow.
Electrical Apparatus Clause - If damages are suffered
to electrical appliances or wiring because of electrical
injury from artificial causes, losses are not covered. If
fire damage follows, the fire damage is covered, and
damage to such equipment because of lightning is
Explosion of Steam Boilers - If the steam boiler,
pipe, turbine or engine is owned or operated or
controlled by the insured, any resulting explosion of this
equipment is not covered under the policy.
Mechanical Breakdown - Mechanical breakdown
is not covered.
Vacancy - Losses that occur in a building which
has been vacant for more than 60 consecutive days
before a loss is not covered under the policy. For
purposes of this provision, property is considered to
be vacant when it does not contain enough business
personal property to conduction normal business
operations. If the building is vacant, there also is no
coverage for losses due to vandalism, theft,
attempted theft, sprinkler leakage, or building glass breakage. For other losses
which occur under these conditions, the Company will pay only 85% of the amount of
the loss. Buildings under construction are not considered vacant.
COMMERCIAL PROPERTY POLICY - BROAD FORM
The second of the three forms under which the Commercial Property Policy is
written is the Broad Form.
The Broad Form policy covers all the causes of loss (perils) insured by the Basic
Form (discussed directly above) and is identical with that policy on coverage
afforded by the causes of loss listed above.
In addition, the Broad Form adds coverage on the following causes of loss:
Glass breakage - While the Basic Form covers damage to
glass which is part of a building when caused by the perils insured
under that policy (except for vandalism), the Broad Form insures
against breakage of glass (which is part of a structure) from any cause. The
maximum payable in any one occurrence is $500 with no more than $100 on any
single plate, pane, multi-pane insulating unit, radiant or solar heating panel, jalousie,
louver or shutter.
Neon Signs - Specifically excluded from coverage is
neon tubing attached to the building. It should also be noted
that there is no coverage for damage to glass objects, which
are contained in a building but are not part of the structure.
Falling Objects - While the Basic Form covers damage to
insured property by vehicle or aircraft making physical contact
with the property, or by objects falling therefrom, the Broad
Form covers any damage by falling object except to personal
property, in the open, or to property within a building, unless the
falling object has first damaged the wall or roof of the structure.
Weight of Snow, Ice or Sleet - The Broad Form covers
loss to insured property by snow, ice or sleet except to
gutters and down - spouts or to any property outside of the
Water Damage - Policy covers loss due to the
accidental discharge of water or steam resulting from the
breaking or cracking of any vessel containing water or
If the policy covers a building or structure, it will also pay the
cost of tearing out and replacing any part of the structure in order to repair the
damage to the system or appliance.
There is no coverage for losses which are caused by
continuous leakage or seepage which occurs over a period
of 14 days or more to losses caused by freezing unless the
Insured has done his best to maintain the heat in the
building, or has drained the water system if the heat is not
While the policy pays for the loss caused by the leakage, it
will not be liable for the cost of repairs or replacement of the system itself.
Additional Coverage - Collapse - The Broad Form policy
will pay for direct physical loss caused by the collapse of a
building or a part thereof but only if the collapse is caused by
one of the perils insured under the Broad Form coverage
Prime Meats of Minneapolis uses continual running water in the meat plant for the
processing of various meats and meat products. A supervisor reported a leaking
pipe connected to a dripping faucet just before Labor Day. Because of the holiday,
the report was not routed to the maintenance department, and they were not made
aware of the situation until the first week in October, when a sudden drop in
temperature caused the leaking and dripping pipe to build up to the point to where
the pipes froze and burst in that area, causing considerable
(Continued from previous page)
damage as the pipes were not out in the open where they could be readily seen.
The insurer questioned the claim since more than 14 days had elapsed since the
reporting of the leak. Prime Meats had documented that they had maintained
normal temperatures within the plant, regardless of the temperature outside.
However, the pipes that froze were against a metal outside wall that was not
insulated and because of the sudden onset of the low temperatures, the heat did not
reach these pipes in time.
The insurer held that since all corrective action had been taken, the loss would be
Prime Meats also made a claim to the insurer to cover the cost of repairing the
pipes and faucet, cleaning the area where the water had dripped and frozen, and for
the cost of the new insulation. These costs are not covered and were declined.
COMMERCIAL PROPERTY POLICY - SPECIAL FORM
The difference between the Special Form and the Basic/Broad Forms - each of
which spells out the specific perils assumed under the policy, the Special Form
covers “risks of physical loss” excluding only causes of loss which are specially
enumerated in the policy, or which provides only restricted coverage as stated in the
Theft - The policy provides coverage against theft of most
personal property, but may be excluded by endorsement.
Thawing of Ice or Snow - The Special Form covers loss
to the interior of the building when caused by the melting
or thawing of ice or snow.
Collapse - As an additional coverage, The Special Form
provides protection against collapse, as described in the
Property In Transit - Personal property located more
than 100 feet from the Insured’s premises and while being
transported by motor vehicles owned, leased or operated
by the Insured, is covered. It does not cover any property
in the care or custody of or under the control of any
salespersons of the Insured.
This coverage applies only to such personal property when it is lost or
damaged by fire, lightning, explosion, windstorm, hail, riot/civil commotion,
vandalism, collision, or theft, and is limited to $1,000 in addition to the amount of
The Special Form is subject to all the exclusions which are part of the Basic
Form with some variations or additions.
The policy does not address causes of loss, but covers “Risk of Physical Loss”,
with specific exclusions of:
wear and tear,
rust, corrosion, fungus, decay, deterioration, loss due to inherent defect or
smog, release or discharge or contaminants or pollutants,
settling, cracking, shrinking or expansion,
insects, birds, rodents or other animals,
mechanical breakdown, rupture or bursting caused by centrifugal force.
Personal property covered under the Special Form excludes marring,
scratching, and damage by water, rain, snow, ice or sleet.
Glass Breakage is covered if the loss or damage would be covered under the
Dishonest Acts of Insured, Employees and Others - The Special Form excludes
losses by dishonest acts of the Insured, his partners, employees directors,
trustees or authorized representatives or anyone who is entrusted with the
property. However, destructive acts by employees are covered.
Theft - The Special Form covers most types of personal property by theft but can
be excluded by endorsement with an appropriate reduction in premium.
Weather Conditions - The Special Form excludes losses due to any weather
condition contributing to a loss which is excluded by the underlying policy
Acts or Decisions - The policy also doesn’t cover any losses that may be due to
the failure of any person, organization or government body to act or any
decisions they may render.
Faulty Design, Planning, Etc. - The Special Form does not provide coverage for
losses arising from faulty, inadequate or defective planning or design,
workmanship, repair, construction, grading or compaction; or due to
maintenance or materials used in repair or construction.
Voluntary Surrender of Property - The Special Form does not cover losses that
arise because the insured, or anyone to whom he has entrusted the property,
gives up the property and the act of giving was induced by a fraudulent scheme,
or under fraudulent or illegal pretense.
The Website Computer Equipment Co., a wholesaler of computer supplies,
decided to enter the retail market and hired Sampson as sales manager to
supervise the expansion. Sampson discovered that he could achieve the results
expected by the owners by discounting certain merchandise to a friend, even though
he had specific instructions not to discount this merchandise. The company owners
discovered what Sampson was doing, and gave him a weeks notice. In revenge for
being fired, Sampson infected several of the computers Website had for sale with a
virus which in effect, rendered the computers useless.
Website has the Special Form of coverage. The damages to the computers
created as a result of the action of Sampson would be covered.
The Special Form contains limitations on the following losses:
Hot Water Boiler - Damage to hot water heating equipment resulting from any
condition of or stemming from the equipment, except if due to explosion.
Rain, Snow, Sleet, Ice, Sand or Dust - Coverage is not provided for any damage
by rain, snow, sleet, ice, sand or dust to the interior of any building unless the
building is first damaged by a covered cause of loss, allowing rain, snow, ice,
sleet, sand or dust to enter through the damaged property, or through the ice,
sleet or snow thawing. Specifically excluded is damage to gutters and
downspouts by the weight of ice, snow or sleet.
Missing Property - There is no coverage for loss by theft of certain building
materials, and there is no coverage for missing property with no explanation, or
PROPERTY NOT COVERED
Certain types of property are excluded from coverage under the policy, or are
restricted in coverage.
Unless caused by the “specified causes of loss” or by glass breakage, the
policy, will not pay for loss or damage to:
Valuable papers and records, such as books of
account, manuscripts, abstracts, drawings, card index
systems, film, tape, disc, drum, cell or other data
processing, recording or storage media and other
Animals, and then only if they are killed or their
destruction made necessary.
Builders’ machinery, tools and equipment owned by
the Insured or entrusted to him, except for such property
held for sale by the Insured.
Fragile articles such as glassware, statuary and
porcelains, if broken. An exception from the
exclusion is made for glass, which is part of a
building, containers of property held for sale, or
lenses for photographic or scientific instruments.
Jewelry and Furs Limitations - The policy, will not
be liable for more than $2,500 for loss by theft to furs
and fur garments, jewelry, watches, pearls, precious
and semi - precious stones or precious metals or
Bailey’s Beauty Emporium uses a lot of hot water in their operation, and have a
large and rather expensive hot-water heater. Their water heater burst and caused
considerable damage to the Emporium. One of the most expensive losses was to
the hot water heater itself. Unfortunately, the policy does not cover damage to the
hot water heater, but only to damage caused by the heater to the business.
Case’s Candies manufactures specialty candy. Since Valentine’s day is so close
to the Christmas season, the company has a practice of doing annual inventory the
last day of February. During the candy manufacturing operations, they use
thousands of pounds of sugar, some of which is especially processed for their use
and is quite expensive.
During their last inventory, they discovered that sometime between Thanksgiving
and Valentine’s Day, more than 4 tons of sugar and 700 pounds of flavoring had
disappeared from their warehouse. They reported it to the police and hired their
own investigator, but no one could determine as to what had happened to the sugar
They filed a claim with their insurer. However, mysterious disappearance of items is
specifically excluded under the policy.
The Brite-Lite Company manufacturers and wholesales a variety of lamps. The
plant is located next to a railroad track as at one time in their history, they used to
ship most of their lamps by rail. They now use trucks but the tracks are still used
occasionally by freight trains hauling items for other companies in the area. After a
particularly productive period of manufacturing, while awaiting shipment, lamps
were stored throughout the store. During this period, a train came by late at night,
causing several lamps to fall and to break from the vibration caused by the train.
Brite-Lite made a claim to their insurer for breakage, however they learned that
breakage is not covered.
The Newcastle Publishing Company erected a new business building and in
keeping with their name, designed the building to faintly resemble an old castle,
complete with tower. They let the contract to the lowest bidder, even though the
contractor was new and was not known to the company.
Shortly after moving in, the tower collapsed onto the building, causing considerable
damage. Their insurance agent informed them that the cost of replacing the tower
would not be covered under their policy, as that is not considered as part of the
“building” as it served no purpose other than decoration.
Six months later, one of the load-bearing walls collapsed. Unfortunately, this was
not covered either as it did not occur during the construction phase of the building.
Earthquake insurance may be provided by special endorsement.
The Special Form adds coverage against perils of earthquake and volcanic
eruption. For purposes of determining coverage and the extent of damage
earthquake shocks and volcanic eruptions that happen within a 168-hour period
and that started while the policy was in effect, are considered as one event.
A special endorsement is available that provides coverage for earthquake or
volcanic eruptions that began within 168 hours before the policy takes effect and
cause damage within the policy period.
The Earthquake Form contains the same exclusions as appears in the three
forms under which the Commercial Property Policy is written.
The Earthquake Form adds a specific exclusion excluding loss or damage to
exterior masonry veneer on wood frame structures. Coverage may be provided for
an additional premium.
The effect of the 168-hour provision affects the amount that may be recovered
for certain events.
The Allegro Music Store has a policy containing a $100,000 Earthquake limit on
the endorsement. After a San Andrea’s Fault shake on a Monday, aftershocks
continued Tuesday, Wednesday and Thursday, with only slight tremors on
Allegro suffered damages of $50,000 the first day, $40,000 the second day and
$25,000 the third day. The total damage over the three-day period was
$115,000. Therefore the policy would pay only the policy limit of $100,000.
The policy has a deductible of 5% of the value of the damaged property, and the
building housing Allegro had an actual value of $275,000.
Therefore, $13,750 (5% of $275,000) would be deducted from the loss payment
to Allegro and the policy would then pay $86,250 ($100,000 less the deductible
MISCELLANEOUS PROPERTY FORMS
BUILDERS RISK COVERAGE FORM
The Builders Risk Coverage Form incorporates the provisions of the
Commercial Property forms, modified to make it adaptable to the class of property
The Builders Risk Forms may be attached to any of the three forms of the
Commercial Property policy: Basic, Broad or Special Form.
Buildings Under Construction - The policy covers buildings or structures
under construction as described in the Declarations, and includes foundations and
other temporary structures on the site if not covered by other insurance.
The policy may, also be written to cover renovations under construction, with a
maximum payment of $2,500 at each described premise.
Land or water
Property Outside Buildings such as lawns, trees, plants or shrubs, radio and TV
antennas, including their lead - in wiring, masts or towers. Signs not attached to
buildings are covered to a maximum of $1,000.
Coinsurance - The Builders Risk policy is subject to 100% Coinsurance.
Cessation of Coverage - Coverage ceases when the policy expires, is
canceled or when the Insured’s interest in the property ceases by transfer to the
purchaser, or it is put to the use for which it was designed, or the property is
OTHER BUILDERS RISK FORMS:
Builders Risk Monthly Value Reporting Form - Insurance may also be
written on a Form under which the Insured reports monthly the values of the
construction to - date. This Form is available to larger risks whose property
values either fluctuates, or they frequently as a matter of business, acquire or
relinquish locations other than their basic premises periodically.
Builders Risk Renovation - Covers the renovation values without the basic
structure being renovated.
Builders Risk Contractors Interest - There are two available forms: one
includes the value of the contractors’ labor, materials and supplies; and the
second form excluding such values.
Collapse During Construction - The Broad and Special Forms may be
endorsed to cover collapse due to defective materials or methods which
occur during construction.
The Insured buys a policy with a maximum limit of liability sufficient to cover the
maximum the Insured expects to have throughout the policy period. At regular
intervals (specified in the policy and discussed below), the Insured reports the total
values at risk on the specified day. The final earned premium is adjusted on the
basis of these reports as filed by the Insured within 30 days after the end of each
reporting period and after the policy expires.
The Insured must report the total (100%) of the value of the risk insured on the
specified date. If he reports a lesser value, any loss paid for that period of time will
be adjusted proportionately. (Continued)
Assume the Reporting Policy was for $500,000 and the reporting date was the first
of each month. One the first of March the value of the property insured was
$400,000, but the Insured only reported a value of $200,000.
The following week he suffered a loss of $100,000. He is entitled to a recovery of
Coverage can also be purchased for Additional Covered Property, Acquired
Locations and Incidental Locations.
GLASS COVERAGE FORM
Even though glass insurance is usually referred to as “Plate Glass policy”, the
Comprehensive policy may be used to cover most types of glass, including
structural glass, leaded glass, mirrors, Thermopane, barber poles, burglar alarm foil,
Plexiglas, tropical doors, windows and shutters, glass of special manufacture, etc.
Glass, such as types of art glass and stained glass windows which are insurable
under Inland Marine Forms, are not insurable under Glass coverage.
Glass can be written by Schedule Policies or Blanket Policies.
The Glass policy will also pay for repairing or replacing frames encasing insured
glass when damage to the glass makes it necessary to replace or repair the
The policy will also pay for installing temporary plates or boarding up windows or
other openings, when the glass cannot be replaced on a timely basis.
The policy may be extended to cover additional glass that is exchanged for the
same type of glass as described in the policy, either at the same location or at one
acquired by the insured.
The Glass policy insures against loss caused by breakage or chemical applied
to glass, subject to the exclusions outlined below.
Fire Invasion, Civil
Nuclear Cracked Glass
Vacancy - The building has been vacant for more than
60 consecutive days (unless additional premium has been
The Enchante Galleries was constructed on a prominent location near the top of
a knoll. The Galleries was designed by a well-known architect, and one of the
most important features of the building was the glass windows that was beveled
and cut so that the maximum of light would enter the building, but would still
diffuse the direct sunlight that could harm some of the very valuable works of art
exhibited in the galleries.
The gallery owner realized that it would be extremely difficult, if not impossible, to
arrive at a dollar amount to replace the glass as the glass was blown, cut and
beveled in Italy by artisans in Rome who may not be available to replace the
windows in the future. Therefore, an amount to be paid in case of loss was
agreed upon between the owner and the insurer, and the dollar amount was part
of the contract.
Optional Coverage - Large Plate Replacement - On plates with an area of
100 sq. feet or more, the Company has the option of replacing such glass with
two or more plates with a combined area equal to that of the described plate.
The number of plates will not exceed the number shown in the policy
1. Under a Commercial Package Policy, Basic Form, water losses
A. are always covered regardless of source of water.
B. are not covered if caused by flood, surface water, or tide.
C. that enter the building through the drain are always covered.
D. are not covered, except for tide which is always covered.
2. Snow on Michelle’s roof caused part of the roof to collapse, destroyed the gutters
and downspouts, and damaged an adjacent tool shed. What is covered?
A. The roof, gutters & downspout, and tool shed.
B. The roof only.
C. The roof and the toolshed only.
D. Only the gutters and downspout.
3. The Broad Form is the same as the Basic Form as far as coverages are
A. the Basic Form covers any damage caused by the collapse of a roof
because of the amount of snow and ice on the roof.
B. the Broad Form covers damage created by broken water pipes.
C. the Basic Form does not cover damage by unfriendly fire.
D. the Broad Form does not cover damage by unfriendly fire.
4. Damage caused by fallen objects are covered
A. under both the Broad Form and the Basic Form.
B. by the Broad Form only.
C. by the Basic Form only.
D. only under specific Floaters.
5. Glass Breakage is covered
A. only by the Broad Form.
B. only by the Basic Form
C. Not covered by either Basic or Broad Form.
D. by the Basic Form and is covered by any cause under the Broad form.
6. In a previous Illustration, an employee discounted merchandise (computers) to a
friend against the wishes of the employer. The company has the Special Form
coverage. The employee later installed a computer virus in the machines in
A. The insurer will pay for the losses suffered as a result of the
B. The insurer will not pay for the losses suffered as a result of the
C. The insurer will pay for the loss due to dishonesty because
they must also pay for the damage to the computers.
D. The insurer would only pay for the damage to the computer, not the
7. Exclusions under the Special Form, include
A. damage created by lightning.
B. losses as a result of infestation of mice and rats.
C. theft of personal property.
D. damage to the inside of a business building caused by ice & snow.
8. Which glass items are excluded under the Special Form:
A. lenses for cameras.
B. glass windows in the front of an office building.
C. statues where are replicas of Greek statues.
D. glass showcases that hold watches sold by the company.
9. Specific exclusions of the Special Form include
A. thawing of ice or snow.
B. wear and tear.
C. collapse of property.
10. Builders Risk Insurance specifically covers
A. television antennas.
B. buildings under construction.
C. pollution to water on the premises.
D. trees and plant surrounding buildings.
ANSWERS TO STUDY QUESTIONS
1B 2B 3B 4B 5D 6B 7B 8C 9B 10B
CHAPTER FOUR - COMMERCIAL GENERAL LIABILITY
Every individual and business is expected to exercise reasonable care in
avoiding injury to others or in damaging their property, or in any other way, to
wrongfully to cause them a loss. For Commercial enterprises, losses can occur in
many ways and the business can be liable for damages arising from the regular
operation of their business.
Many of these liabilities can be insured if the package includes the Commercial
General Liability Coverage Part, with the Common Declarations, Common Policy
Conditions, General Liability Declarations and the Nuclear Energy Liability
Exclusion Endorsement (Broad Form).
The Commercial General Liability Policy can be written as a monoline policy, or
combined with other coverage to make up a package policy. The Commercial
General Liability is offered in two versions:
1. The Occurrence version.
2. The Claims Made version.
The two forms are the same, with the exception of the “trigger” that initiates
The “Occurrence” version covers occurrences that take place when the policy is
in effect, i.e. during the policy’s term,
The “Claims Made” provides that the policy that covers the claim is the policy
that is in effect when the claim is actually made.
Recently a California decision by a high court regarding exposure to asbestos,
held that all policies in effect from the first exposure until death, or the date of the
filing of a claim, are thereby covered for such claims for bodily injury.
Under the claims - made policy, there would be coverage for claims actually
made while the policy is in force. However, the occurrence policy in force in any
year in which the claimant was first exposed to the risk, or filed a claim, or the
person died - all could be required to provide coverage.
Either Form covers Bodily Injury and Property Damage Liability; Personal Injury,
Advertising Injury; and Medical Payments as discussed in more detail later in this
Typical Forms constituting Commercial General Liability Coverage.
TYPICAL BUSINESS LIABILITY COVERAGES
Business liability coverage arises out of the every-day conduct of business, and
Liability arising from the ownership or occupancy and maintenance of business
locations, such as offices, plants, factories, warehouses, etc.
Liability exposure due to business operations performed away from the
premises, such as delivery work or other ventures essential to the business
Liability arising from the business use of automobiles, including maintenance.
Liability arising from duties and responsibilities of employees, subcontractors,
or agents of the business.
The assumption of another party’s liability through a contractual arrangement.
Product liability from defects in manufactured products.
The Pittstown City Council was letting contacts to various vendors for the new
stadium that was built to attract a major league team. Perrilli’s Foods was
successful in obtaining the concession stand franchise for the stadium if they would
assume full liability for any damages that might arise out of the delivery, preparation
and the serving of the food.
MaryBeth became violently ill after eating a hot dog at an event at the stadium. She
sued the stadium commission and Perrilli’s. Perrilli’s business liability policy would
cover any awards as they assumed the liability of the stadium commission through
the contractual arrangement.
Like other Commercial risk policies, the Commercial General Liability Form
includes a section on Declarations which identify the risk, and a section on Policy
Conditions. These conditions define:
Transfer of Rights or Recovery Against Others (Subrogation)
Separation of Insureds (Policy applies to each named Insured)
Other Insurance (Policy is Primary unless other coverage is Primary, and then
they will share in the loss, unless the other policy covers fire, windstorm, hail,
explosion, riot, aircraft, vehicles, smoke, builders and other similar coverage.
Also excludes if the policy covered use of auto, aircraft or watercraft.)
Premium Audit (coverage is written with estimated advance premium.)
Insured’s Duties in Event of Loss (Insured required to give notice, to furnish
the names of any witnesses, and to cooperate fully in the investigation.)
Legal Action Against the Company (No action brought against the company
until the Insured complies with all of the policy’s terms.)
Bankruptcy (Bankruptcy will not relieve the Company of its liability.)
COVERAGE A - BODILY INJURY AND PROPERTY DAMAGE LIABILITY
The bodily injury or property damage must be caused by an occurrence defined
as an “accident.” “Accident” can also describe continuous or repeated exposure to
basically the same harmful conditions.
Defense, Supplementary Payments:
All sums the insured is legally obligated to pay, including expenses incurred in
the defense of the suit and the cost of Bail Bonds.
Expenses incurred by Insured because of cooperation with the Company in the
investigation or defense of the suit.
Costs of defense to Insured.
Interest on pre-judgment award, or all interest on any judgment accruing after
the entry of the judgment as set forth in the policy provisions.
Intended Actions - No coverage for claims arising out of actions intended from
the Insured, however this does not apply to bodily injury resulting from the use of
reasonable force to protect persons or property.
Assumed Liability - Policy will not pay for bodily injury of property damage for
which the Insured is obligated to pay damages because the insured assumed
liability by contract or by agreement. (Continued)
Insured Contract - Defined as lease of the premises, an easement such as for
railroad of vehicle crossing, elevator maintenance agreement, etc., following the
definitions in the policy.
Care, Custody, Control Exclusion - Policy does not apply to property damage
to any property that is owned, leased, rented or occupied by the insured. Obviously
this provision does not allow an insured to “sue himself.”
Alcoholic Beverage Exclusion - Does not cover bodily injury or property
damage for which the insured could be held liable by reason of causing or
contributing to the intoxication of any person, or furnishing alcoholic beverages to
underage or intoxicated persons.
Employers Liability - Does not cover bodily injury for which the insured has any
obligation under Workers Compensation, disability benefits, or unemployment
compensation or similar law.
Pollution Exclusion - Policy provides no coverage for bodily injury or property
damage arising out of the actual, alleged or threatened discharge, dispersal,
seepage, migration, release or escape of pollutants. The list of possible
descriptions of points of pollution, types of pollutants, or origination of pollutants is
quite detailed, as is the description of “pollutant.” Because of the significant
exposure and detailed description of this exclusions, the exclusion should be
carefully studied in compliance with state requirements.
Companies have several options to provide pollution coverage, which are
accomplished through the use of Endorsements:
Pollution Liability Coverage Endorsement - deletes the pollution exclusion
in regards to bodily injury and property damage.
Pollution Liability Coverage Form - Provides for cleanup costs imposed by
the government. This Endorsement is quite lengthy and detailed and should
be studied carefully before recommendation.
Pollution Liability Limited Coverage Form - Provides the same coverage
as the Form immediately above, except coverage is limited to bodily injury
and property damage.
Aircraft, Auto, Watercraft Exclusion - Policy does not cover bodily injury or
property damage arising out of the usage or ownership of any aircraft, auto or
Mobile Equipment Exclusion - No coverage provided for bodily injury or
property damage arising out of transportation of mobile equipment.
War, Insurrection, Rebellion, Revolution - No coverage for bodily injury or
property damage due to these causes.
Damage to Impaired Property - Does not provide coverage for property owned
or created by the insured, if the property cannot be used or is less useful because it
is defective or dangerous due to fault of the insured.
Loss of Use, Withdrawal, Recall - Does not provide coverage for damages for
expenses involved in any recall, withdrawal, etc., of the insured’s product or work or
impaired property if it has been recalled because of defect, etc.
The Silver Spring Manufacturing Company produces specialty springs that are used
in computer discs. In an effort to save money and to be able to compete more
favorably with offshore companies, Silver Spring purchased some spring steel from
a Central American firm on a trial basis. Unfortunately the springs did not hold up as
well as intended, causing an accounting firm to lose some important data. The
accounting firm sued Silver Spring for damages caused because of a defective
product. Silver Spring attempted to convince the insurer that this claim should be a
covered loss as the spring material was not manufactured by them. However the
insurer refused to pay on the grounds that the product was defective as it left the
manufacturing facilities of Silver Spring, and therefore not covered under the policy.
The insured maintains a business location with an embankment in the rear. He
fences his property, but a local resident falls down the embankment and is injured.
The insured contracted with a surveyor to survey his property when he first
purchased the property and when he erected the fence. The contract with the
surveyor was to indemnify the surveyor for any injury or damage due to his error.
This would constitute an assumption of liability and would not be covered under the
Samuel’s Construction Company always has a big Christmas celebration, and
liquor is served. The bartenders are hired for the occasion, and are warned
specifically against servicing anyone who is underage or who obviously has had too
much to drink.
Samuel’s top foreman, Jim W., is well-known as a “party - animal and is known to be
able to drink large amounts of alcohol without any visible effects. Jim almost always
drank only beer or scotch whiskey, but on Christmas this year he decided that he
would try some of the “fancy” drinks, and attempted to drink his way through the
bartenders guide. While Jim might seem to be able to be in control as the night
wore on, when he left the party, he walked into the path of an oncoming taxi, which
fortunately was traveling very slowly, but Jim ended up in the hospital with some
expensive injuries. Of course, Jim had attorneys lined up by morning.
Samuel’s owner attempted to claim coverage under the Commercial Liability policy,
as Samuel’s was apparently liable for the injury. The insurer refused to pay the
claim, quoting the exclusion of “causing or contributing to the intoxication of any
The Silver Spring Manufacturing Company produces specialty springs that are used
in computer discs. In an effort to save money and to be able to compete more
favorably with offshore companies, Silver Spring purchased some spring steel from
a Central American firm on a trial basis. Unfortunately the springs did not hold up as
well as intended, causing an accounting firm to lose some important data. The
accounting firm sued Silver Spring for damages caused because of a defective
product. Silver Spring attempted to convince the insurer that this claim should be a
covered loss as the spring material was not manufactured by them. However the
insurer refused to pay on the grounds that the product was defective as it left the
manufacturing facilities of Silver Spring, and therefore not covered under the policy.
COVERAGE B - PERSONAL AND ADVERTISING INJURY LIABILITY
If the insured so wishes, this entire coverage or the Advertising coverage alone
may be omitted by endorsement.
Defined as other than bodily injury arising out of:
False arrest, detention,
The wrongful eviction from premises that an individual occupies, or wrongful
entry into, or the right of private occupancy of said premises, or
The publication of material that violates the right to privacy of an individual,
whether written or oral, or that slanders or libels a person, or an organization, or
discredits the products or services of another.
Defined as an injury that arises out of the publication of material violating a
persons rights or libels or slanders a person, organization or its goods or services,
or misappropriates advertising ideas or style or copyright infringement.
The Trolling Manufacturing Company, manufacturer of artificial fishing tackle,
introduced a new line of lures that seemed to attract more large-mouth bass than
other types of lures, and sales sky-rocketed.
Durtan Tackle, a competitor, found sales slipping in bass lures, so it embarked on a
high-cost and high-impact advertising campaign. Since their lures were not able to
compete with Trolling’s new line, they decided to attack Trolling’s company. They
received information from a disgruntled former employee of Trolling, that Trolling
was not as strong financially as the industry thought. Durtan then started an
advertising campaign intimating that Trolling was not as strong as many thought,
leaving the impression that Trolling was suffering serious financial difficulties, and
with the result that Trolling lost many of their best distributors.
Trolling sued Durtan for libel. Durtan had personal and advertising liability coverage
and their insurer would cover Durtan for any losses caused by the libelous
advertising up to the policy limit.
(Typical Exclusions as shown below, are self explanatory.)
Violation of Law
Breach of Contract
Failure of Goods to Perform
Advertising Business (No coverage for those in advertising, broadcasting,
publishing or telecasting)
COVERAGE C - MEDICAL PAYMENTS
This coverage may be omitted from the Commercial General Liability policy at
the option of the insured.
Coverage C provides payment for expenses set forth in the policy which are
caused by an accident, regardless of fault or legal obligation of the insured to pay.
This coverage closely resembles a Medical Reimbursement policy.
The policy provides for payments for
First Aid at the accident scene
X - Ray
- all subject to the limits of the policy.
War, Rebellion, Etc.
Excluded Persons (Does not cover the insured or anyone on insured’s
premises or persons taking part in athletics)
Other Excluded Persons (Does not pay for Bodily Injury to any person who is
injured on the premises which is owned or rented by the insured, which the
person normally occupies.)
Persons Eligible for Benefits (Does not cover expenses for Bodily Injury if
they are eligible for Workers Compensation or Disability Benefits under a
Tom’s Pizzeria has a softball team entered in the local industrial league. One of the
employees breaks a leg sliding into base. Tom’s makes a claim to their insurer
under the Medical Payments form of their General Liability Policy. The employee
would not be covered under this form as those engaged in athletics are specifically
PRODUCTS LIABILITY - COMPLETED OPERATIONS
If a person is injured or their property damaged because of some manufactured
goods, the manufacturer of such goods may be held liable. Even though a product
may not be “inherently dangerous”, courts have held that a product that causes
serious injury will be held to be dangerous simply because it has demonstrated that
it has the power to be dangerous if it contains defects.
Courts are also holding service persons and repair persons liable for failure to
take precautions that would have avoided an accident that created bodily injury or
Also, a seller or marketer may be liable for a defect in the goods that they
market, even though the seller or marketer had nothing to do with the manufacture or
packaging of the product, and it is still in the original container.
Bodily Injury and Property Damage - Bodily injury and property damage
arising out of the insured’s product or work occurring away from the insured’s
premises or as a result of work that the insured has completed.
A local Baker is interested in purchasing a new exhaust fan for his bakery. At the
local dealer’s place of business, while examining the fan, he is injured by the
rotating stainless steel blades. The liability of the local dealer would not be covered
under the Products hazard, but would be covered under the “Basic” policy.
If, however, the Baker asked to have the fan installed in his bakery on a trial basis to
determine whether it would perform as required, and a defective safety screen
caused the Baker to be injured, the Products hazard would then apply. Note that
even if the Baker had not paid for the product and it was still the property of the
dealer, this would apply.
Completed Work - Work is considered completed when all of the work called for
in the insured’s contract has been completed.
Tools, Uninstalled Equipment, Abandoned Materials - Products Liability
Coverage does not apply to Bodily Injury or Property Damage arising out of tools,
uninstalled equipment or abandoned or unused materials. (These would be
covered under Coverage A - Bodily Injury and Property Damage Liability,
Property Damage Defined - Defined as physical injury to tangible property,
including loss of use of property or loss of use of tangible property that is not
Warranties - Covers warranties or representations regarding the suitability of the
EXCLUSION: Property Located for Use by Others - does not cover any
property rented to or located for use by others, such as vending machines.
COMMERCIAL GENERAL LIABILITY FORM - “CLAIMS MADE” VERSION
Like the Occurrence form, the claims - made version covers situations which
are defined as accidents, including continuous and repeated exposure to
substantially the same general harmful conditions.
Retroactive Date - If a date is inserted, this date will rule as a cutoff point on
occurrences which take place before the inserted retroactive date.
The insured procures a “claims - made” liability policy on April 1, 1997, which
contains a Retroactive date of April 1, 1996. Three months later the insured is sued
for bodily injury suffered by a customer on September 1, 1997. The present “claims
- made” policy would apply as the occurrence was after the stated Retroactive Date.
However, if it is later determined that the injury actually occurred in March 1996, this
would be prior to the Retroactive date and the injury would not be covered.
Other “Tail” Endorsements - An endorsement is available that provides for a 5 -
year period (referred to as “tail” period) which is applicable to certain specified
accidents, products or locations.
Liability claims must be limited and the relationship between the limits must be
established. When property damage occurs, there usually is one occurrence (such
as a fire), but with liability there can be numerous claims, such as with product
liability when a defect in a product can produce claims with several injured
Limit of Insurance in Declarations - The basic limit shown in the policy is the
maximum amount the company will pay regardless of the number of claimants,
insureds or number of suits brought.
Paul’s Ladders manufactures ladders for commercial use. Their liability policy has
a limit of $2,000,000. They develop a new folding-ladder product that had a serious
design flaw in the locking mechanism, causing several lawsuits from injuries
suffered as a result of the ladder not locking in position. The total amount that their
liability policy will pay will be $2 million, regardless of how many lawsuits they lose,
or the amounts of lawsuits, but subject to the aggregate limit.
Each Occurrence Limit - Each occurrence has its own limit (Occurrence means
an accident including continuous or repeated exposure to substantially the same
Paul’s Ladders policy has an occurrence limit of $50,000. While most of the suits
are under this amount, they have 3 claims for over $100,000. The policy will pay
only $50,000 maximum to each claimant.
General Aggregate Limit - Theoretically, there could be an almost endless
number of occurrences, so the policy places a limit over all coverages. This means
that the policy will not cover Generally, there are two aggregate limits, i.e. a
general aggregate and a products-completed operations hazard aggregate.
The difference is that for the products-completed aggregate, the liability and
medical expense limits apply; for the general (or all-other) aggregate, frequently the
limits are doubled.
When a policy has liability and medical expenses limit of $500,000, during a single
policy period, the aggregate limit for injury and damage under the products-
completed operations hazard is $500,000. Any other hazard has an aggregate of
Individual Aggregate Limit - Various individual locations can have separate
aggregate limits by endorsement.
Fire Damage Limit - The limit is set for damages under Coverage A because of
loss arising out any one fire to rented premises.
Medical Expense Limit - Medical expenses are included in the General
Aggregate Limit, but it also has a maximum limit on Medical Payments (Coverage
C) which will be paid to any one person because of bodily injury.
Supplementary Payments - Provides for the payment of supplementary
payments in excess of payment obligations under various coverages.
ADDITIONAL COMPREHENSIVE LIABILITY POLICIES
Farmers Comprehensive Liability Policy (Covers farmers liability for personal
and farming activities in a single form)
Professional Liability Insurance (The Commercial General Liability Policy
excludes liability for bodily injury or property damage arising out of rendering, or
failing to render, professional services). Issued to various professions, such as
Advertisers, Army Post Exchanges, Baths, Beauty Shops, Barbers, Colleges,
Hospitals, etc., etc. Some of the more widely sold Professional Liability covers are:
Physicians, Surgeons and Dentists Professional Liability
Policy - This is a well recognized policy, with ever -
increasing rates and with regulatory bodies attempting to cope
with these premium hikes. In must places, these professionals
are required to carry Malpractice insurance. These regulations vary so widely
from jurisdiction to jurisdiction that is it imperative that state requirements be
closely scrutinized before offering this type of coverage to prospective clients.
Insurance Agents and Brokers Professional Liability
Insurance (Errors and Omissions) - Policy covers claims by
members of the insuring public or carriers represented by the
insured, and will also defend suits alleging negligent acts which
are covered by the policy, and all court costs and reasonable
expenses incurred by the insured.
Beauty Shop and Barber Shop Liability Insurance -
Policies cover any professional service while within the
premises, resulting from work, treatment or operation, or the use
of any preparation or appliance in connection with the operation
of a beauty shop.
Morticians Professional Liability Insurance - Covers the
usual bodily injury, sickness, disease or death, but in addition,
covers mental anguish as an insurable occurrence.
Directors and Officers Liability Policy - Covers suits
brought by stockholders or others against corporate directors
and officers for acts or omissions of the corporation officers or
Data Processing Errors and Omissions Insurance -
Pays all sums which the insured shall become legally obligated
to pay as damages because of any claim arising out of any
negligent act, error or omission of the insured in the
performance of data processing services for others.
ILLUSTRATION (PHYSICIANS, SURGEONS, & DENTISTS LIABILITY):
A patient with breast cancer was scheduled for a mastectomy of the left breast. The
surgeon was slated for two mastectomies the same day and the files were
switched, with the result that the wrong breast was removed. The surgeon’s
malpractice (Physicians, Surgeons & Dentists Professional Liability) policy would
pay, subject to the limitations and conditions of the policy.
ILLUSTRATION (INSURANCE AGENTS & BROKERS LIABILITY):
Alfred is a health insurance broker. Among the companies that he represents is the
Amalgamated Security, which he had been using as his primary health insurance
carrier. He received notification from the Department of Insurance, and immediately
thereafter, from Amalgamated, that the company was going to be placed under the
supervision of the Insurance Department because of their financial condition.
Alfred sold Mrs. Hancock a Major Medical policy underwritten by Amalgamated,
even though he was aware of the financial situation, as Amalgamated would accept
Mrs. Hancock as she suffered high blood pressure and none of his other companies
would accept her. Mrs. Hancock canceled her existing insurance as Amalgamated
premiums were much lower. Within 30 days of receiving her policy, Amalgamated
was placed into receivership, and the Insurance Department raised the premiums
on all policyholders in order to try to save the
(Continued next page)
company. Mrs. Hancock sued the company and Alfred, as Alfred was aware of the
financial condition of Amalgamated and he still represented them as a financially
strong company. Alfred’s policy would cover this situation, including court costs and
reasonable legal expenses.
ILLUSTRATION (BEAUTY SHOP AND BARBER SHOP LIABILITY):
Betsy was getting married and went to the Stylists Beauty Shop for a permanent
and hair styling prior to the wedding. She took with her a picture from Brides
magazine showing a hair style that she wanted. The cosmetologist and hair stylist
assured her that they could duplicate the style and the color. The chemicals used by
the stylist caused Betsy’s normal auburn hair to turn a yellowish-green and in
addition, the finished styling hardly resembled the one from the magazine. Betsy
was devastated and had to wear a wig to her wedding. She sued the shop. The
Beauty Shop Liability coverage would apply.
ILLUSTRATION (MORTICIANS PROFESSIONAL LIABILITY INSURANCE):
Pierre died of liver failure. He had been a tall, rather thin person during his life but
during the last few weeks of hospitalization, his body had swollen so that he was
hardly recognizable. His children had kept their mother from seeing him so horribly
swollen, by covering his body completely when she went to the hospital, and by
restricting her visits any way that they could. The mortician at the funeral home
accepted the body and asked Pierre’s son for him to be buried in. Of course the
suit did not fit the corpse well, as even after embalming, the corpse was badly
When Pierre’s widow arrived at the funeral home for the viewing, she was the first to
see his body and she became hysterical, and insisted that it was not her husband in
the casket. The shock to his widow was so severe that she was in the hospital when
her husband was buried. She sued the funeral home. The Morticians Professional
Liability Insurance would cover this situation, as it covers mental anguish as an
ILLUSTRATION (DIRECTORS & OFFICERS LIABILITY POLICY):
The Compiling Corp. is the leading producer of software for supermarkets and
similar retail operations, consistently contributing a 20% annual return to
stockholders. Their success was widely attributed to the genius of the Senior
Programmer, Gary Watts. Last year the Board of Directors increased the salary of
the President by more than 300%, and gave Watts only a token increase. Soon
after, Watts created a new enhancement for supermarkets that would increase their
supermarket business substantially. However, the Directors refused to
acknowledge the new product and decided to target only discount stores. Watts
resigned in protest.
By December, they had only sold one program to a small discount chain, but had
lost over half of their supermarket business, creating a loss for the first time in 20
years. The stockholders were irate, and sued the Directors and Officers. The
Directors and Officers Liability Policy would protect the Directors and Officers.
ILLUSTRATION (DATA PROCESSING ERRORS AND OMISSIONS):
Administrators, Inc., is a third-party administrator under contract with several health
insurance companies. They perform all data procession functions, and most of the
other administrative functions for their clients. They grew rather rapidly and hired
several new data - input personnel. Normally, persons are assigned to a particular
client company, and does administration and data processing for that company
only. However, a new employee was shifted from one company to another to fill in
during the absence of another employee, with the result that she became confused
and entered claims data into the wrong company’s actuarial records. The company
actuary, upon receipt of this information, raised the premium to account for the
increase in claims, thereby losing a lot of the healthy policyholders who could get
coverage for a lower price elsewhere. When the error was discovered, both
customers sued the administrator - the company with the higher-than-actual claims,
and the other for lower-then-actual claims. Data Processing Errors and Omissions
BUSINESS INCOME COVERAGE FORMS
The Commercial Property Policy covers buildings or personal property against
direct physical loss by a loss described in the policy. The term “Direct Loss”, is
construed to mean both the damages directly caused by a covered loss, but also
any damage suffered as a proximate cause. As an example, a fire loss (covered
loss under a Commercial Property Policy) would also include losses caused by
smoke from the fire, collapse of the structure as a result of the fire, water damage
because of efforts to extinguish the fire, etc.,
There is no coverage for inconsequential or indirect losses.
Mary’s Deli suffered a small stove fire with the result that the business had to close
until the health inspector could inspect the restaurant as required by local ordinance.
During this period of time, Mary’s suffered a loss of income. The policy would not
cover this loss of income.
Even though a business may be fully covered for actual direct damages, such as
by fire, if such a loss occurs, the business would either close or at the very least,
restricted in their operations. While going through the rebuilding process, generally
income either stops completely or partially. However the owners must continue to
pay certain continuing expenses, such as rent, salaries, interest on debt, insurance,
etc. If the building was rental property, all rental income would cease.
Many times the business interruption losses exceed the actual property damage.
Many businesses, particularly manufacturing businesses, rely upon equipment and
machinery being operative, and if they are damaged by fire, considerable expense
may be incurred to replace or repair the machinery and equipment.
If a business goes for a substantial period of time without earnings, it can lose its
credit standing which can be the death knell to many businesses.
The Business Income Coverage Form provides coverage on the loss of income
due to interruption of business by an insured peril.
The Form covers actual losses of business income during the restoration period
caused by DIRECT physical damage to the insured property, including personal
property at the described premises, or in a vehicle within 100 feet of the premises.
This restoration period typically starts on the date of the actual physical loss and
ends on the date that the property should be repaired according to the terms of the
Business Income is defined as the NET profit (or loss) - before income taxes -
that would have been earned if the loss had not occurred,
normal operating expenses that continue during the loss period.
For rental property, the loss of rents sustained by a lessor, or the rents that a
tenant would have to pay.
The coverage extends until the property is actually restored; however it must not
exceed the time that the restoration should normally take, according to reasonable
time and quality standards.
Once the property is restored, the insurers liability ends, even if the volume of
sales (or production limits) is not what it was prior to the loss.
Future earnings are insured, even though the experience of the business may
have been less than those projected for the future.
Typically, the indemnity period is the length of time it would take to replace the
damage, even if it extends past the expiration of the policy.
The Plastics Specialty Company, a plastic – product-manufacturing firm, is insured
under a Business Interruption insurance policy which is scheduled to expire on
January 1, 1997. The company suffers a fire over the Christmas holidays. It takes
until August 1997 to rebuild the plant and restore the equipment. The insured
receives indemnity until August of 1997, even though the policy has expired.
If the “period of restoration” as defined in the policy has ended, and if the Insured is
still sustaining a loss of business income, the policy will pay for the actual loss
sustained during this additional period up to a maximum of 30 days. At the end of
the 30-day period the coverage ends if the covered business could be restored to
the condition it would have been if the loss has not occurred. Longer period of time
can be obtained for additional premium.
If the insured had a fire in March which destroyed his property, and the period of
restoration as outlined in the policy ended on April 15, however the business
income has not reached the pre - loss level. The policy will pay for the loss of
income during the 30 days period from April 15 until May 15 only.
Extra Expense - The policy covers extra expense the insured suffers as a result of
extra cost because of the insured loss, such as having to operate at a substitute
location, or increased costs at the business location. Extra expenses on valuable
papers or records damaged in the loss are covered.
A Business Income loss can be reduced by $1,000 by using a new technology that
will cost $2,000. The policy will pay only for the amount the loss is reduced, i.e.
Civil Authority - If the Insured had a store in a shopping center, and an adjacent
business suffered severe damage, creating damage to parking and utilities to the
Insured’s business which was not otherwise damaged. Because of this damage, all
access to the Insured’s store and others close to the damaged property was denied
for several days while repairs are made. The policy will cover loss of business
income during the period of time access to the insured’s store was denied by civil
The Business Income policy will pay for the loss of business income due to
direct physical loss at the insured premises because of a covered loss to new
buildings and material used for alterations or construction.
Newly Acquired Locations - Coverage is available for loss of business income at
any location acquired by the Insured at any other location, subject to certain limits of
time and amount.
The Business Income policy incorporates the exclusions of the basic
Commercial Property Policy, plus
Ordinance or Strikes - The policy will not pay for any increase in the time to
rebuild, repair or replace the property, because of mandate by an ordinance or
from interference by a strike at the premises, subject to certain policy provisions.
Pollution - The restoration period specifically excludes any increased time
because of any law regulations or controlling environmental damage.
Business Income coverage can be written under one of three forms - Basic,
Broad or Special.
As indicated above, the extension to cover Newly Acquired Locations is in
addition to the limit of insurance in the policy.
On the other hand, the following Additional Coverages do NOT increase the
limits of liability shown in the policy Declarations:
* Extended Business Income,
* Extra Expense,
* Alterations and New Buildings, and
* Civil Authority.
Electronic Media and Records - There are special limits on payment for loss of
business income due to direct physical damage to electronic media and records.
Actual Loss Sustained - The loss is measured by determining what the earnings
of the business would have been after a loss if the loss had not occurred, taking into
consideration the income prior to loss.
The Business Income Coverage Form is liable only for the actual loss sustained and
will therefore pay the Insured the amount of the earnings that would have been
realized had no loss occurred, less the amount of non - continuing expenses.
The Insured operates a store with average weekly sales of $20,000. This gross
revenue is usually accounted for as follows:
Salaries that would continue after a loss $3,000
Cost of merchandise and inventory 8,000
Wages and other non - continuing expenses 2,000
Other fixed continuing expenses 3,000
Net Profit 4,000
If a fire causes total suspension of the business for one week, the insured will be
entitled to collect $10,000, as follows:
Total revenues that would have been realized had no loss occurred $20,000
LESS expenses that do not continue and cost of merchandise 10,000
Actual Loss Sustained $10,000
The Insured is in the same financial position he would have been in if no loss had
Business Income Coverage Form pays for all loss of earnings, even if the
business is losing money from operations. Whether profitable or non-profitable,
almost all businesses have ongoing expenses that must be met. Since young
businesses will usually suffer more by such a loss than a more established
business, this Business Income Coverage is popular with the newer businesses.
Coinsurance Clause - The Insured may be required to carry insurance in an
amount equal to at least the stated percentage times the sum of the net income and
all operating expenses that would have been earned in the 12 months following the
effective date of the policy.
If the Insured carries less than this required amount, the liability of the Company
is reduced proportionately, according to the provisions of the policy.
The formula used in applying the coinsurance clause is
C/R x L = % of Loss Paid
where C = amount of insurance in force at the time; R = the amount of insurance
required (the stipulated percentage of the net income and the operating expenses in
the 12 month period following the inception of the policy; L = the amount of the loss.
ILLUSTRATION: (of inadequate insurance)
Net Income and operating expenses, 12 mo. period after inforce $200,000
Coinsurance % stated in Declarations 50%
Amount of Ins. in force at time of loss 80,000
Amount of loss 50,000
C = $80,000
R = $100,000
L = $50,000
Therefore $80,000/$100,000 (4/5) times $50,000 = $40,000
ILLUSTRATION: (of adequate insurance)
Assume same figures as above, except insured carries $100,000 of insurance
Therefore: $100,000/$100,000 (100%) times $50,000 = $50,000
Insured receives full payment for loss.
Ordinary Payroll Limitation - If a business suffers a loss and will probably sustain
losses from business interruption, however the loss will be of a short duration, the
insured may continue to pay all of his employees in order to keep from losing them.
However, if the loss appears to continue longer than anticipated, he may wish to
release the unskilled laborers and other more replaceable employees.
A special endorsement is available under the Business Income policy that will
allow the Insured to determine the number of days that full payroll will be needed,
and the number or classification of employees that will be exempted. For these
purposes, ordinary payroll includes all employee benefits, FICA payments, union
Several options are made available:
Limitation of the maximum period of indemnity.
Limitation of the monthly limit of indemnity.
Agreed value coverage.
Premium Adjustment Form - Allows the Insured to have a policy for an amount
larger than his estimate of his future earnings by filing a statement of actual
earnings at the end of the policy year. The actual premium is then adjusted on
the basis of the true experience.
If the Insured has business income of $250,000 and he has a policy with 50%
coinsurance, he could purchase $125,000 of insurance to comply with the
coinsurance clause. However, if his business increased and at time of loss he
found that he should have carried $150,000 as his business had increased to
$300,000. He would be penalized as illustrated earlier.
However, if he had purchased a policy in an amount of $150,000 he would be
covered for such a contingency. But if his business did not increased by the end of
the policy term, he would be entitled to a refund for the unused amount of insurance.
Building Ordinance - Increased Period of Restoration - The Basic Business
Income Coverage Form does not cover losses sustained during a restoration
period when the restoration period is increased because of any law, ordinance, or
regulation of construction or repair. Once the period of restoration has expired, the
coverage is terminated, regardless of the longer time it may take to completely
rebuild. Coverage against a loss suffered during this additional period of time can
be insured by special endorsement.
Business Income From Dependent Properties - Many firms are dependent
upon other firms for essential materials.
Conversely, a producer whose entire or major production is distributed or
marketed through one or two outlets, or whose production is absorbed by a
commodity assembled or completed elsewhere, would suffer serious losses
and could bankrupt the firm, because of situation or interruption of operations
at another location other than their own, even though their own firm has not
been damaged by any loss.
Many shopping centers have one major store, considered the “magnet”
store, and other businesses in the center is dependent upon business from
customers of the magnet store. If something happens to the magnet store,
nearly all of the other stores in the center will suffer. The policies of the other
stores would not cover any such loss due to the magnet store.
Therefore a special endorsement is available to risks which face this
exposure, covering either Contingent Locations or Recipient Locations
Contingent Business Property - i.e. property operated by others, but the
insured depends upon one of the following situations:
1. Contributing locations - Those locations which delivery materials or services
to the Insured.
2. Recipient Locations - Those locations that accept the products manufactured
or produced by the insured, or receives services from the Insured.
3. Manufacturing Locations - Locations where products are manufactured for
delivery to the Insured’s customers under contract.
4. Leader Locations - Locations which, by their existence or proximity, attract
customers to the insured’s business.
The Sport Shoppe specializes in sporting wear, such as gym wear, athletic shoes,
dietary products for those who exercise frequently, and various forms of drinks
prepared for those exercising. The Sport Shoppe is located next door to a large
and well-established gym, and with a frozen yogurt shop and a real estate firm, the 4
businesses constitute the entire shopping center.
While many exercise clubs have their own shops for clothing, etc., the one next to
Sport Shoppe had elected to not do so, and have a relationship with the Sport
Shoppe where they refer customers to each other. If the gym were to leave or to go
out of business, it is doubtful that the Sport Shoppe could long survive.
This would be considered a “Leader Location” as if the gym suffered a loss that
would stop their operations for any period of time, Sport Shoppe would also suffer.
The Contingent Business Property endorsement would be valuable here.
Order of Civil Authority - Similar to the Basic Business Interruption policy,
coverage is provided, typically not to exceed a two week period, for any income
interruption because of a loss at any other locations as a result of regulations, laws,
or ordinances. This is quite limited in scope.
Insurance On Loss Of Rents - Business Income Insurance can be written for
owners of property who derive their income from leasing facilities to others.
Extra Expense Insurance: The Business Income forms provides any extra
expense the Insured assumes by speeding up the period of restoration in order to
minimize the loss of income.
Certain businesses, such as newspapers, must be willing to spend whatever is
necessary in order to continue its business without interruption. A policy is available
which is written with a limit of insurance, but also provides that no more than certain
specified percentages of the limit are recoverable in 30 day increments. For
instance, an often used set of percentages is 40, 80, 100%, whereby the Company
is liable for no more than 40% of the policy limit if the period of recovery is 30 days
less; 80% when the period of recovery is over 30 days but less than 60 days; and
100% of the limit when the period of recovery is more than 60 days.
Tuition And Fees Insurance - Educational Institutions, such as Colleges,
universities, private and parochial schools, that depend on tuition fees for financing,
usually require a special form of the Business Income insurance. Because
arrangements for school attendance and tuition is received for this period, any loss
this can cause a short suspension of classes could conceivably result in the loss of
an entire year’s revenue.
If a fire damaged a college school building near or just prior to the start of the Fall
semester, and it would take at least 2 months to restore the building, many of the
students that would otherwise be using the building, would make arrangements with
other schools, causing an entire year’s loss of tuition to that school. The standard
Business Income Coverage Form limits the period of recovery to the time to rebuild
or replace the property, and would not be applicable to the problems of a college.
The policy is specifically designed to meet these problems as the insuring
clause does not limit the recovery to the time to rebuild. It provides that if a school
suffers a covered loss, and the loss is rebuilt or replaced 30 days or less before the
scheduled opening of the next school term, the policy will pay the actual loss of
business income from tuition and fees, during the school term following.
Central State University suffered a fire damage to its Business Administration
Building on August 31st. The building was restored and reconstruction completed
by November 1 of the same year. Tuition Fees insurance will cover the loss of
tuition fees during the entire school term.
Two forms of the endorsement are offered:
Tuition and Fees - Broad Form - The Broad Form endorsement covers not
only tuition and fees but, also loss of, fees, research grants, income from
bookstores and athletic events.
Tuition and Fees - Limited Form - The Limited Form covers only loss of
tuition and fees.
Leasehold Interest Insurance:
Many leases contain a clause which allows the landlord to cancel the lease if fire
or other insured peril destroys or seriously damages the property. This option to
cancel in some leases applies only if the premises are rendered totally unfit for
occupancy, while some clauses consider the premises as unfit for occupancy if they
are substantially damaged, more than 50% destroyed, or some other criteria.
These clauses create a Leasehold Interest which a tenant would need to insure.
A tenant has a leasehold interest in property when they pay rent or lease for an
amount that is less than the normal rental or lease value of the premises. Therefore,
the tenant will suffer financially if they can no longer use the present premises, as
they will have to pay more for similar accommodations elsewhere. The leasehold
policy will pay the difference between the rent that had been paid and what
comparable accommodations would cost at the time of the loss.
Some of the more common types of situations arising creating leasehold
1. When the tenant paid a bonus of some sort when entering into the lease and the
bonus will be forfeited if the lease is canceled.
2. When the property has undergone large scale improvements which has
enhanced the value of the property with subsequent increase in rentals, but the
tenant occupied the premises prior to the improvements.
3. When the tenant has invested heavily in improvements of the premises under the
impression that the lease would continue for a long time, but the lease can be
canceled in case of a loss.
4. When a tenant sublets the premises to another for a higher amount than what the
tenant is paying for the premises.
Leasehold Interest Insurance protects the individual or firm against losses as
outlined above, by insuring the difference between the actual rent being paid under
the lease, and the usual and normal rental value of the premises when the premises
are damaged by a covered cause of loss and the landlord exercises the
1. During the Christmas rush season, an employee in the gift wrapping department
of Durel’s Department Store, accidentally stabbed a customer with her scissors.
Which of the following is true regarding the business liability insurance carried by
the Department Store:
A. The insurance will not cover the incident as it was performed by an
employee and not the business owner.
B. The insurance will not cover the incident as the scissors were defective.
C. The insurance will cover the incident as it would be considered an
indirect responsibility of an employee.
D. The insurance will cover the incident as it is considered as an accident
and the liability policies cover all accidents.
2. Company B is a competitor of Company A. Company B spreads the word in
the industry that Company A is on the rocks financially. Company B has
personal and advertising liability insurance. The insurance would not pay if
A. the information published about the financial standing of Co. A was true.
B. Co. B published information intimating that Co. A. was having financial
difficulties, and this information was untrue and Co. B knew it.
C. advertising of Co. B made statements about the private life of the
President of Co. A.
D. Co. B had made aspersions about the quality of the product Co. A sells.
3. Which of the following statements is correct:
A. Coverage C provides Medical Payments in addition to Workers
B. Medical expenses as the result of an accident are covered.
C. Expenses related to diabetes are covered.
D. Coverage C does not include any First Aid given at the scene of an
4. Medical Payments are ______________ of a Commercial General Liability
A. a mandatory part
B. an optional part
C. never included as part
D. is part of the Commercial General Liability occurrence form but not of the
Claims Made version.
5. Which of the following statements regarding Products Liability is true:
A. A company can not be held liable for injuries suffered from a product
that is normally not considered as “dangerous.”
B. A salesman cannot be held liable for defective goods if they did
not participate in the manufacture.
C. Repairmen have been found liable for failure to take precautions that
would have avoided and accident that created bodily injury.
D. Products liability – Completed Operations – provides coverage only on
losses occurring on the insured’s premises.
6. Products Liability Coverage – Completed Operations –applies to Bodily Injury or
Property Damage arising out of
B. uninstalled equipment.
C. abandoned or unused materials.
D work that the insured has completed.
7. Which of the following is not a typical limit in a liability policy:
A. Each Occurrence limit.
B. Medical Expense limit.
C. Premium Increase limit.
D. Aggregate limits.
8. Physicians, Surgeons and Dentist Professional Liability Policy is another name
A. Directors Errors and Omissions.
B. Product Liability Insurance.
C. Medical Malpractice Insurance.
D. Physicians and Surgeons Property Floater.
9. Doctor Johnson was appointed to the Board of Directors of Wainwright
Pharmaceuticals. His attorney strongly recommended that he purchase
________ so that he would not personally liable if the company introduces a new
drug that has deleterious effects on consumers.
A. Product Liability Insurance
B. Directors and Officers Liability Insurance
C. Medical Malpractice Insurance
D. additional liability coverage under his homeowners policy
10 Comprehensive Liability Policies (CLP) are necessary because
A. the Commercial General Liability Policy excludes liability for bodily
injury or property damages arising out of rendering professional
B. Barbers and Agents cannot work without liability insurance.
C. they keep the insureds from being sued.
D. by law, an insurer cannot issue CPP policies without also issuing CLP
ANSWERS TO STUDY QUESTIONS
1C 2B 3B 4B 5B 6D 7C 8C 9B 10A
CHAPTER FIVE - COMMERCIAL CRIME COVERAGES
Businesses and professional associations have always been threatened by
losses due to criminal acts by employees and by those outside of the business.
Thefts by employees adds millions of dollars to the cost of goods to consumers
because of these illegal and unlawful activities. Small businesses, in particular, are
susceptible to criminal activities such as burglary and holdups. Employee theft is
usually covered through Fidelity Bonds and in some form of Crime policies.
COMMERCIAL CRIME POLICY
Crime Coverage Forms are attached to Common Policy conditions and
Declarations, and will include a General Provisions Form.
The Commercial Crime Coverage Part was developed by the ISO and the
Surety Association of America, and consists of six parts. If only one coverage part
is used as the policy, it is considered a monoline policy. If two or more parts are
used, it is considered as a Commercial Package policy,
The six parts that create a Crime Coverage Part are:
Common Policy Declarations,
Common Policy Conditions,
Commercial Crime Declaration,
General Provisions Form,
One or more Crime Coverage Part,
Endorsements, if any.
The Common Policy Declarations and Common Policy Conditions follow very
closely the provisions of the Commercial Property Policy.
COMMERCIAL CRIME POLICY - GENERAL PROVISIONS FORM
Typical policy provisions include:
Right of the company to inspect the Insured’s books and other records for a
three year period after the loss.
Coverage provided for any property or asset acquired through purchase or
merger to be added automatically for 30 days with an additional premium.
Persons performing work for the Insured away from the premises, are not
considered Employees, such as agents, brokers, independent contractors,
directors or trustees.
Insured is obligated to maintain records of all insured property.
The Insured must cooperate with the Company by prompt notification and ,
submit to an examination under oath.
The policy also contains a Legal Action Against Company provision and a
Subrogation provision, standard for commercial policies.
As with all Commercial policies, certain specific General Exclusions apply. Other
exclusions are peculiar to the particular Crime Coverage form.
Loss Committed By The Insured or Partners - The policy does not cover
criminal or dishonest actions committed by the Insured or his partners, either acting
alone or in collaboration with others.
War and Similar Actions - No coverage for loss due to war, insurrection, rebellion,
Nuclear Hazards - Any loss because of nuclear reaction or radiation or
contamination is excluded.
Governmental Action - Any losses as the result of seizure or destruction of any
property because of governmental authority will not be covered.
Indirect Loss - Any covered loss or damage to the property insured must be as
the direct result of an occurrence.
Discovery Period - Due to the nature of crime, many criminal acts are not
apparent immediately. The policy provides that the loss must occur while the policy
is in force, and must be discovered within one year after the policy expires.
Loss Sustained During Prior Insurance - The policy has provisions to pay for
losses that were sustained while a prior policy was in force, but which was not
discovered during that policy’s term, provided there was no break in coverage and it
can be shown that it was a loss that would have been covered under the present
(new) policy had that policy been in force when the loss occurred. The amount paid
is the lesser of the amount the previous policy would have paid for the loss if the loss
had been discovered during the policy term, and the amount the present policy
would have paid if it had been in force
The insured firm was a family-owned business that had been in the family for many
years. As the family grew, so did the business. It had always been the practice of
the family to take from the company certain costs as they arose, regardless of the
percentage of ownership. For instance, daughters of two of the family owners had
to have braces at the same time, and the parents drew the Orthodontist fee from the
cash register, simply notifying the bookkeeper that they were doing so. This
business suffered a loss by burglary and many of the bookkeepers records were
destroyed in the process.
When the claim was filed, the insurer required an accurate accounting of all income
and disbursements. To reconstruct the company’s books was beyond the ability of
the bookkeeper, and they had to bring in the outside accountant. Even though the
insurer was the one that required the services of the accountant, the insured
business had to pay the added cost of accounting services.
Johnson Musical Instrument Company purchases a Crime policy from Brokers
Insurance with an insured amount of $20,000 on January 1, 1994. The policy was
kept in force for 3 years, expiring on December 31 1997. It was immediately
replaced on January 1, 1998 by a Crime Policy from Security State Insurance with
an insured amount of $40,000. Benefits and coverages under both policies were
essentially the same.
In April 1998, while moving some of the merchandise to a second store location, it
was discovered that many musical instruments were missing from their cases, with
a worth of $35,000. The instruments had been locked in the store room in June 1,
1996, taken out and displayed in September of 1996, and then returned to the
storeroom in January 1997 which was left unlocked until July 1997 when it was
locked and all indications were that the room had not been entered since , thereby
fixing the time of loss as the period between January 1997 and July 1997.
Since the loss was discovered too late to be covered by the first company, the
second (replacing) company assumes the loss as there was no break in coverage.
However, the maximum payment by Security State would be $20,000, the maximum
allowed under the first policy.
Ownership of Property; Interests Covered - The type of property may differ from
form to form, however they all apply only to property owned or held by the Insured, or
property for which he is legally liable.
The amount of the Crime coverage part governs the amount of insurance, unless
specific extensions are included.
Loss Sustained By Several Insureds - Policy will not pay more than it would if
there were only one insured, regardless of the number of insured persons suffering
Loss Covered Under Several Coverages - If more than one coverage applies
to a loss, the policy will pay up to the maximum for each coverage, but not more than
the amount of the loss under all coverages combined.
Non - Accumulation of Liability - Although several dishonest acts can create loss,
all of the separate losses committed over a period of time, are considered as one
loss and liability is limited to the policy limits and cannot accumulate even though the
policy may have been in force for a substantial period of time.
Fabric’s Unlimited has a large warehouse storing various materials offered in its
stores, including some very expensive silks. During certain times during the year,
Fabric’s opens their warehouse to designers, retailers, and to those who simply
want to purchase larger than usual amounts of fabrics. They employ part time help
during this time.
At year-end inventory, they discovered that there was a large amount of the more
expensive fabric that could not be accounted for. They hired a firm of Pri vate
Investigators and were able to catch two of their part-time employees stealing from
them. The employees would personally take rolls of silk and put it in the trunks of
their own cars, they would sell rolls of cloth and other material and when they could,
they would pocket the money. In addition, one of the employees had an
arrangement with the driver for a clothing manufacturer wherein he would ostensibly
purchase material, sign all the forms, and then take the material to his own home
where he would later sell it to other stores. The employee would destroy the
Fabric’s had policy limits of $250,000 per loss. Their accountants were able to
determine that they lost over $350,000 from these two employees.
Even though there were several instances of theft over a period of time, the insurer
was liable for only $250,000, the total limit per loss.
However, if Fabric’s also suffered a holdup during this period of time, and the two
employees were not involved, this would be treated as a separate event.
Excess Insurance Over Other Insurance - Coverage will apply only to any
amount that is not recoverable from other policies.
Loss Covered Under Present and Prior Policies In Same Company - If a loss
is covered by a present policy, however the previous carrier was the same
company, the insurer will pay only the larger amount recoverable under either the
present or the prior policy.
Assume that during the period of loss by theft suffered under Fabric’s, Fabric’s
changed the policy to add additional benefits and to increase the policy limits. The
previous policy was in force when the thefts by employees first started, and the
policy limit to cover the theft losses was $250,000. The policy limits was raised to
$350,000 with the new policy. Also assume that the total loss was $500,000.
The insurer would pay $350,000, the larger of the policy limits since both policies
were with the same company. However, they would not combine the two policy
amounts ($600,000 total) but would only pay the larger of the two policy amounts.
Recovery (Salvage) - Any salvage after claim settlement is shared between the
insured and the insurer, taking into consideration settlement costs which will be
Coverage Outside of the Policy Territory - Coverage for up to 90 days is
afforded for losses committed while an employee is temporarily outside the policy
Schedule Coverage - The form may be written on either a Name Schedule or
Position Schedule basis. (The descriptions above pertain to the Blanket Form, the
Schedule Form covers only losses by persons [employee] named in the Schedule
form or person occupying a particular position listed in the Position Schedule).
Employee Prior Dishonest Act - If any employee is discovered by the Insured to
have committed a dishonest act during present or prior employment, coverage on
that employee is immediately terminated. However this can be at the discretion of
Alter Manufacturing Co. manufacturers plumbing supplies and carries a crime
policy. They received a large contract from a hotel chain and hired additional
personnel. Because of the influx of employees, their Human Resources Department
performed only cursory background checks on employees.
Bill had formerly worked for Ceramic Manufacturing and had experience needed by
Alter. He had an impeccable record for his 10 years with Ceramic, and left them
only because of higher income and more opportunity with Alter. However, when
quite young, he was convicted of stealing a hunting knife from a hardware
(Continued from previous page) store where he worked while going to school. He
made full restitution and he was put on probation.
When this was discovered during an investigation of robbery at Alter, the insurer
immediately terminated coverage on Bill. The executives at Alter were irate and the
insurer then reversed their decision and Bill remained covered.
Inventory Losses - Any loss discovered by inventory is not covered if there is no
evidence of employee dishonesty.
CRIME COVERAGE FORMS
B FORGERY OR ALTERATION FORM - COVERAGE FORM B
This Form covers any loss due to forgery or alteration of a check or draft,
promissory or similar written promise. It also covers any legal expense if the
insured is sued for refusing to pay any covered instrument that was forged or
C THEFT, DISAPPEARANCE AND DESTRUCTION COVERAGE FORM C
This Form provides coverage for any losses of money or securities because
of theft, disappearance or destruction, and adapts the General Provisions
Form to the specific needs of the Insured.
The policy is divided into two Sections, as follows:
Loss Inside Premises
Loss Outside Premises
Acts of Employees, Directors, Etc. - Losses caused by any dishonest act of an
employee, officer, director, trustee or representative, either alone or acting with
others, are not covered.
Exchanges or Purchases - Any loss arising from the gift of covered property,
whether exchanged or sold, is not covered.
Accounting Errors - Losses resulting from accounting or mathematics errors are
not covered under the policy.
Money Operated Devices - Any money-operated device is not covered unless
there is a continuous recording instrument in the device.
Transfer or Surrender of Property - Any losses arising from the surrender of
property to a person outside of the premises because of unauthorized instructions,
or as a result of threat to do bodily harm, is not covered. However, if property is in
the custody of a messenger and the insured was not aware of any threat at the time
the property was given to the messenger, or if the threat was not specifically related
to the property involved, the loss would be covered.
Voluntary Parting With Property - Losses resulting from the insured (or anyone
acting on his authority) being persuaded to voluntarily part with the property by a
Damage By Fire - Losses to the premises by fire are not covered.
Vandalism - Damage by vandalism is excluded.
Duties In Event of Loss - In addition to the requirements in case of loss spelled
out in the General Provisions the insured has an obligation to notify the policy if
he/she has reason to believe that a loss to property covered under the policy,
actually involves a violation of the law.
D ROBBERY AND SAFE BURGLARY
other than money and Securities.
Money and securities are excluded if coverage is on other forms, or if the
insured has no need to cover such property, subject to endorsement to include
money and securities.
Robbery - Robbery is defined as taking of property from the person who has
custody by threat of bodily harm, or by bodily harm, or by one who has obviously
committed an unlawful act witnessed by the custodian of the property. Loss of or
damage to property (excluding money and securities) by robbery of a custodian
while inside the premises is covered. Custodian is any person who has custody
of the property, except watchpersons or janitors.
Premises Damage - Loss from damage to the premises resulting directly from
a covered cause of loss is covered, if the insured is the property owner or liable
for the damage.
Safe Burglary - Safe burglary is covered, including removing the safe or vault
from the property. Visible marks of forced entry must have been made upon the
exterior of the safe.
Premises, Safe, Vault Damage - The policy, will also pay for damage to the
premises or its exterior of a locked safe or vault located inside the premises
resulting from a covered cause of loss, provided the Insured is the owner of the
premises or liable for their damage.
The policy does not cover motor vehicles or semi-trailers or their equipment or
The property covered and the causes of loss are the same as under the Inside
Transfer or Surrender of Property - The same provisions as under Coverage C
Acts of Employees, Fire, and Vandalism Exclusions.
H PREMISES THEFT AND OUTSIDE ROBBERY - COVERAGE FORM H
Different risks are covered on the insured’s premises than those off premises
and each group is considered separately.
Premises Theft Coverages - Under this section of the policy, all property is
covered against loss by theft, and covers any act of stealing, including burglary,
theft, robbery, pilferage, etc. Losses by employee theft or computer fraud are
There are separate limits of liability, for on - premises and off - premises coverages.
The exclusion regarding loses occurring at the premises during a fire, can be
deleted by endorsement.
E PREMISES BURGLARY COVERAGE - FORM E
This Coverage Form E is offered to nearly all business enterprises, including
manufacturers, wholesalers, retailers, etc., and offers coverage:
Covered Property - The policy covers all property of the Insured except Money,
Premises Damage - If the insured property suffers damage as a direct result of
a covered cause of loss, and if the insured is the owner of the premises or liable
for the damage, coverage is afforded.
Limits on Special Property - Coverage is restricted to no more than $1,000 for a
loss to the following classes of property:
Precious metals, precious or semi - precious stones, pearls, furs or items
made of or containing such materials, when the principal value of the article is
because of these items.
Manuscripts, drawings or records of any kind or the cost of reconstruction or
Burglary - Burglary requires unlawfully entering or leaving the premises, and there
must be a visible mark or forcible entry or exit. There is no coverage without the
visible mark, even if desks or cabinets were broken into and there were marks on
Robbery of A Watchperson - The policy covers taking property by threat or by
witnessing an unlawful act. Robbery coverage under Premises Burglary does not
apply to any loss from robbery of a watchperson.
In addition to the hazards excluded in the Crime General Provisions Form
(discussed earlier), this Crime coverage part is subject to the following additional
Vehicles - Specifically excluded are motor vehicles, trailers, and semi - trailers or
equipment and accessories attached.
Acts of Employees, Directors, Trustees, etc. - Losses resulting from any dishonest
or criminal act by any employee, director, trustee, etc., as outlined above, will not be
Fire - The policy. does not cover loss resulting from fire however caused, except
loss from damage to a safe or vault or loss occurring during a fire.
Vandalism - Vandalism or malicious mischief is not covered.
Change In Conditions - If there is any change in the condition of a risk because of
conditions within control of the Insured increasing the chance of loss, the risk will not
The policy provides that after a loss occurs, any further coverage is suspended until
the premises are restored to the same state of security it previous enjoyed, however
if a watchperson(s) is maintained, the restriction will not apply.
F COMPUTER FRAUD COVERAGE (FORM F)
The policy covers money, securities and other property from computer fraud,
defined as theft of property following and related to use of any computer to
fraudulently cause a transfer of property from inside the premises, to one outside the
It excludes acts of employees, directors, etc.
G EXTORTION COVERAGE (FORM G)
Extortion - Extortion is defined as the surrender of property away from the
premises as a result of a threat which is communicated to the Insured and
which, if carried out, would do bodily harm to the Insured, an employee, relative, or
others who are being held captive. The threat to do bodily injury must be
communicated to the insured during the policy period.
The insured is required to make a reasonable effort to notify an associate, the FBI
and/or local law enforcement.
The Extortion Coverage Form is written as either (1) loss participation by the
Insured, whereby the Insured pays part of the loss, or (2) no loss participation by the
Insured and the Company pays the full amount.
1) Loss participation by, the Insured.
2) No loss participation by, Insured.
A EMPLOYEE DISHONESTY (FORM A)
I LESSEE OF SAFE DEPOSIT BOXES COVERAGE (FORM I)
J SECURITIES DEPOSITED WITH OTHERS COVERAGE (FORM J)
K LIABILITY, FOR GUESTS PROPERTY - SAFE DEPOSIT BOX
COVERAGE (FORM K)
L LIABILITY FOR GUESTS PROPERTY - PREMISES COVERAGE (FORM
M SAFE DEPOSITORY, LIABILITY COVERAGE (FORM M)
N SAFE DEPOSITORY, DIRECT LOSS (FORM N)
O PUBLIC EMPLOYEE DISHONESTY - PER LOSS (FORM O)
P PUBLIC EMPLOYEE DISHONESTY - PER EMPLOYEE (FORM P)
Q ROBBERY AND SAFE BURGLARY - MONEY AND SECURITIES
1. Which statement is true? The Commercial Crime Coverage Part
A. consists of six parts.
B. is available only for the large business.
C. excludes losses by theft.
D. allows the insured to only use one part and therefore it is a Monoline
2. The Common Policy Declarations and Common Policy Conditions of the
Commercial Crime Coverage Part
A. are completely different than any other commercial policy.
B. closely follows the provisions of the Commercial Property Policy.
C. are insignificant as every coverage stands on its own.
D. are identical and are stated so for emphasis.
3. Local Pawn Shop is owned by Bill and Frank as partners and they have a crime
coverage policy. Bill steals money and other items from the Pawn Shop. Which
A. The policy does not cover this situation.
B. Frank would receive full reimbursement for the items taken.
C. Frank would receive payments only for the other items taken.
D. The policy would be null and void ab initio (from the beginning).
4. Assume that the Local Pawn Shop has a policy available from the Association of
Pawn Brokers, that covers theft of pawnshop items up to $5,000. A burglar stole
several items worth $10,000. Which is true?
A. The Crime Coverage policy would pay $10,000.
B. The Crime Coverage policy would not pay anything.
C. The Crime Coverage policy would pay $5,000, the excess over what
is covered by the Association coverage.
D. Each company would pay 50% of the claim.
5. Cecil is a diamond broker and attends a gem collectors convention in Los
Vegas. A burglar steals diamonds insured under the Crime Coverage Policy of
the business which is located in New Jersey. Which is true?
A. Crime Coverage Policy coverages are not transportable. No coverage.
B. The policy would pay as the Coverage Outside of the Policy Territory
C. The policy would not pay as Cecil has not been gone for more than 90
days as required by the policy provisions.
D. The policy will pay the excess over the New Jersey Crime insurance
6. A check was sent to a vendor, and it was stolen and the amount changed. Which
Crime Coverage Form would apply?
A. Form C - Theft, Disappearance & Destruction Coverage.
B. Form H - Premises Theft and Outside Robbery Coverage.
C. Form B - Forgery or Alteration Form.
D. Form J – Fraud and Counterfeiting Form.
7. Bruce goes to work for Jewelers Wholesale. He becomes very proficient in
designing jewelry so he makes an agreement with Jewelers Wholesale to
contract with them in designing jewelry for their customers that want specially
designed jewelry. A customer wanted a necklace designed and Jewelers gave
Bruce $250,000 in diamonds and other jewels for this purpose. Bruce was not
heard from again. Jewelers Wholesale has a Commercial Crime policy. Will it
A. It will not pay as Bruce is working for the company and is considered as
B. Bruce would have to carry his own Commercial Crime policy as he is an
independent contractor, and if he did not, Jewelers will not pay.
C. Since Bruce disappeared, he is not considered as a contractor any
longer so the policy will not pay until Bruce shows up again.
D. The policy will pay as Bruce is an independent contractor and is
performing work for the insured away from the premises, which is
8. Jewelers Wholesale exchanged their Commercial Crime policy for a newer
version that had a better billing method and cost than their own policy and they
increased the limits from $500,000 to $750,000 with the new policy. They
cancelled their old policy on the effective date of the new policy, Jan. 1, 2000. In
April, when they do their usual inventory, they discovered that someone had
removed a jeweled pin worth $700,000 from a showcase and had replaced it
with paste jewelry. They have no idea as to how long ago the theft took place, or
who did it.
A. The insurer will pay the full $700,000.
B. The insurer will not pay any amount since the date of theft was not
C. The insurer would only pay $500,000.
D. The insurer would split the difference, and pay $650,000.
9. Jewelers Wholesale had an expensive brooch on display over a weekend, that
attracted a lot of attention. One very well dressed gentleman with a Rolex watch
(who knows if it was real…) convinced a salesperson that the only way he could
tell if the color of the sapphires matched his wife’s eyes was to take it out in the
sunshine. Usually at a request as this, the salesperson accompanies the
customer, but the salesperson was distracted by a lady customer fainting, and
when he returned to watch the man with the brooch, both the man and the broach
were gone. If Jewelers has Crime Coverage Form C, how much will the insurer
A. None, Nada, Not a farthing. Voluntary parting with property by a
dishonest act is an Exclusion.
B. The entire Cash Value of the brooch according to the valuation provision
of the policy.
C. The policy states that for Voluntary Parting (being persuaded to
voluntarily part with the property) the act must be an honest mistake.
Therefore the policy will pay for the entire listed value.
D. Only for the scheduled value of the stones in the brooch.
10. Jewelry Wholesalers also has Form E – Premises Burglary Coverage. One
morning they discovered that during the night someone had stolen several
Rolex watches from a locked case. There were no marks around the doors or
windows, so they believe that the thieves picked the lock. However, the case
holding the Rolex watches was a steel box welded to the floor, but the thieves
evidently hit it with a sledgehammer and broke the door to get inside. Now
A. There is full coverage on this situation as the case where watches were
visible marks of forced entry.
B. In any event, it was obvious a burglary, and since illegal tools were used
to gain entry (lock-picking tools) this would be adequate for the definition
C. Nothing again. There must be visible marks showing forcible entry and
even with the marks on the case, there still must be marks at the point of
entry (or exit).
D. Jewelry Wholesalers also pointed out that they had a valuable brooch
stored in the box with the Rolex watches, and since it was gone too, that
obviously was a burglary, so the insurance investigator took a deep
breath and reminded them that the brooch was taken by a man outside
the store. However, they will still pay, but just for the watches.
ANSWERS TO STUDY QUESTIONS
1A 2B 3A 4C 5B 6C 7D 8A 9A 10C
CHAPTER SIX - BUSINESSOWNERS & FARMOWNERS /
The Businessowners Policy is a special package policy designed specifically
for the small business, including apartments and offices.
Coverage is afforded for both first party property and third party liability, and the
Insured is offered a series of optional coverages such as
Earthquake and Volcanic Eruptions.
This policy is quite popular, and many insurers have their own individual forms
which differ from the standard forms which will be discussed in this text.
The policy has been designed for the smaller risk. For instance, it is offered to
apartment risks of not more six stories and with no more than 60 apartment units.
For some businesses, it is limited to 7,500 feet of mercantile space. For office
buildings it is limited to up to three stories in height or not more than 100,000
square feet. Banks, credit unions and other financial institutions are also eligible.
Mercantile buildings with public area space of 7,500 square feet can be covered,
except if they are occupied in part for purposes of manufacturing, processing or
service operations, or as an automobile business. Amusement places are not
acceptable. Wholesalers or restaurants are also not acceptable.
The Businessowners Policy offers insurance on personal properties, including
money and securities, on insured - owned real estate, loss of income, and public
liability. Also, several optional coverages are available.
ACCEPTABLE NOT ACCEPTABLE
Apartment Building not more than 60 stories, Manufacturing
or less than 60 apartments Service Operations
Banks Automobile Business
Credit Unions Amusement Places
Financial Institutions Signs (Optional)
Mercantile Building with public access of Grass, crops, lawns
7500 square feet Trees, landscaping
Personal Property, including Aircraft
Insured-owned Real Estate Restaurants, Bars & Grilles
Loss of Income Condominium Associations
Public Liability Household personal property
Over 2-family family dwelling
Coverages on personal property and buildings are written on a Standard (named
perils) Form, or on a Special Form.
In addition to coverage against the perils of the Extended Coverage endorsement,
the Standard Form provides coverage against:
The Standard Form covers the Insured for liability arising out of the premises
owned, leased or operated, and
Employers Non - Owned Automobiles,
Legal Liability for damage to buildings,
Blanket Contractual (on written contracts only),
Employees as additional Insureds,
Broad Form Property Damage ,
Host Liquor Law Liability, and
Lessors of the premises occupied by an Insured can be added to the policy for
Burglary and Robbery Option - Coverage on merchandise and or money and
securities against these perils may be added by endorsement. (The Special
Form includes these perils under the basic policy, and no endorsement is
Written on an “all risk” basis.
Coverage: building and general property and includes Burglary. and Theft and
Money and Securities.
Boiler Explosion - This optional coverage is available to cover boiler and other
pressure vessels and air conditioning units.
Exterior Grade Floor Glass - Extends the policy to cover exterior glass and
lettering but does not have a $75 limit on the cost of repairing frames, removing
Signs - Optional coverage may be added to cover outdoor signs on a
Employee Dishonesty - Coverage against loss caused by employee
dishonesty is available, up to $5,000.
Volcanic Action - Similar to that discussed in the Earthquake Damage
The exclusions mirrors the individual forms very closely.
LIMIT AND AMOUNTS
Real and Personal Property - Replacement cost coverage is
provided on real property but real property may also be insured
on an actual cash value (optional). No Coinsurance clause.
Provides for automatic increase of 2% quarterly, which can be
increased by endorsement.
Personal Property Off Premises - Coverage on losses to property, occurring off
the insured premises is generally limited to $1,000 and does not apply to money
Newly, Acquired Property - The policy affords $10,000 of coverage on newly -
acquired personal property, for 30 days or to the expiration of the policy,
whichever is earlier.
Peak Season Value on Personal Property - If the Insured has carried insurance
in the amount of 100% to actual value for twelve months, the policy affords an
automatic increase of 25% during peak seasons.
Valuable Papers and Computer Media Coverage - Limited
to the replacement cost of the blank materials and the expense
of reproducing the records.
Tapes, discs and other media for electronic data processing
are covered only for the cost of the blank media.
Loss of Income - The actual loss of income sustained and the
extra expense borne by the Insured after a loss covered under
the policy are covered for a period of up to twelve months. No
dollar limit and No Coinsurance requirements.
Burglary Coverage - Loss by burglary is covered
automatically under the Special Form up to the limit of the
amount of insurance and is applicable to personal property.
Optional under the Standard Form with a limit of 25% of the
limit in the policy on personal property, with aggregate limits on
furs, jewelry and watches.
Money and Securities - Coverage on moneys and securities
is part of the Special Form. optional under the Standard Form
regarding Burglary insurance with stated limits under both
COMPARISON BETWEEN COMMERCIAL PACKAGE POLICY VS
ITEM COMMERCIAL POLICY BUSINESSOWNERS POLICY
Qualifications Nearly all Commercial Risks Limited by size of business and
size of occupancy
Coverages Coverages are selected according Covers Property & Liability
to risks, some coverages mandated Building & personal property
owned by insured must be
Types of Property
Loss of income Optional, and subject to endorsement No Contingent cover available
Contingent cover available Excluded for business income
Indemnity Period extension available actual loss and extra expenses.
Indemnity period may not be
Replacement Cost Generally is optional Usually automatic with actual
cash value option.
Coinsurance Applies in most policies Typically not required.
Buildings at newly Coverage is extended for both Extended coverage not
acquired location & available from every insurer
pers. prop. therein
Collapse Coverage Broad & Special causes of loss forms Typically in open perils policy
Inflation Coverage Optional ` Included, chooses percentages
Seasonal increase Unlimited by endorsement Included, limited to % and then
personal property (optional) available in specific situations
Types of Loss
Named Perils Form Certain perils can be excluded No perils can be eliminated
by endorsement; used in either Usually available, depending
Broad of Basic form on insurer
Open Perils Form Available Available, exclusions vary
Transportation Perils Optional, High limits available Included usually, lower limits
Property Coverage Basically, unlimited coverage Included but lower limits
Crime Coverages Optional crime coverage, all Employee Dishonesty available
crime coverages Money/Security cover available
Burglary & robbery coverage
in open perils form, otherwise
Medical payments Included Included with dollar limits
Fire Legal liability Included, eliminated by endorsement Included with dollar limits
Professional liability Not included in CPP Pharmacies & pharmacists
included, others by
Business Auto All available by option Hired & non-owned auto avail-
Liability able by endorsement / insured
cannot have commercial auto
FARMOWNERS - RANCHOWNERS POLICY
The Farmowners - Ranchowners Policy program offers Property and Liability
insurance coverages in one policy. All farms and ranches can be covered, with the
Farms that supply commodities for manufacturing or processing by the
Insured, and offering such for sale to others, such as dairy farms that
operate freezing or dehydrating plants. Poultry factories are also
excluded. Dairy Farms that operate only as such farms, are NOT
Farms or ranches engaged principally in the raising of horses for racing
or show purposes.
Vacant farms or ranches.
Mobile homes or trailer homes, or their contents, may be written under the
policy, but only for certain coverages.
This policy furnishes several coverages, as follows:
Household Personal Property
Other Structures Appurtenant to the Residence
Loss of Use and Additional Living Expense
Other Farm Structures
Scheduled & Unscheduled Farm Personal Property
Physical property insurance may be written in a form as follows:
Contents Broad Form,
Scheduled Farm Personal Property,
Unscheduled Farm Personal Property, and a
Barns, Buildings, Structures and Additional Dwelling Form.
Farmowners - Ranchowners Program also offers liability coverage and Medical
The Program provides that the coverages be written with certain stated
minimum limits under the separate sections, typically as such:
Coverage Dwelling - Type A - $2,000, Type B - $10,000, Type C - $8,000.
Coverage B - Unscheduled Personal Property - 50% of limit on
Coverage C - Additional Living Expense - 10% of limit on Coverage
Dwelling (Coverage A).
Coverage E - Farm Personal Property (Blanket) - $15,000 minimum.
Deductibles - The Property coverages are subject to a $100 flat Deductible
under all of Section 1, except additional living expenses and fire department
Optional deductibles of $250 or $500 are available, as above. An optional $250
deductible applicable only to loss by theft is available.
The limit on money, bullion, securities, numismatic property, accounts, bills,
deeds, evidences of debt, letters of credit, notes, passports, railroad and other
tickets, stamps and stamp collections may be increased by endorsement.
Property Damage Coverages - The coverage under this section may be amended
Additional Living Expense - The limit in the basic policy may be increased.
Building Additions and Alterations - The limit in the basic policy may be
Unscheduled Personal Property - The limit in the basic policy, may be
increased, decreased, or the coverage eliminated entirely.
Scheduled Personal Property - Subject to certain exceptions, coverage may
be provided on an all - risk basis.
The following coverages may be added to the policy by endorsement:
Credit Card and Depositors Forgery
Fire Department Service Charges
Glass Coverage to cover scheduled items of glass
Inland Marine Coverage on farm personal
property, agricultural machinery, livestock and
The following coverages may be added to the Liability section of the policy by
a) Additional residence premises rented to others.
b) Business pursuits of the insured other than businesses of which he is the
c) Custom farming. Incidental custom farming is covered under the basic
Liability section Where such activity, is more than incidental, coverage may
be provided by, endorsement.
d) Employers liability.
e) Farms rented by the insured to others or held by him for rental or sale are not
covered under the basic Liability section of the policy, and must be declared
and specifically insured.
f) Liability coverage for outboard motors of more than 25 horsepower or other
watercraft not covered under the basic policy may be insured against liability
claim by endorsement.
1. Which of the following is not an acceptable risk on a Businessowners policy:
A. Sam’s Pool Hall
B. First National Bank
C. City Employees Credit Union
D. Mike’s Landscaping Service
2. The Businessowners policy, Standard Form, providers coverage against
A. Theft by employees.
B. Lightning damage.
C. Earthquake damage.
D. Boiler explosion.
3. Which is an option available on the Special Form, Businessowners Policy?
A. Boiler explosion.
4. In case of a covered loss under the Businessowners Policy, valuable papers and
A. is not covered.
B. is replaced on the basis of the loss of income to the business.
C. is limited to the replacement cost of the blank material & the expense
of reproducing the records.
D. is fully replaced, including programming expense.
5. Which of the following is not a typical coverage under a Farmowners Policy:
A. Physical damage to a race horse.
B. Fire damage to barns or other structures on the farm.
C. Fire damage to a Farm Residence.
D. Lightning damage to Farm Personal Property.
6. Farms and Ranches can be covered, except for
A. dairy farmers.
B. poultry factories.
C. cattle ranches.
D. hog farms.
7. Farmowners Physical property insurance can be written in a
A. Basic, Broad, Contents Broad Form, and Scheduled Personal
Property, or Unscheduled Personal Property form.
B. Special All-Risks coverage form only.
C. Broad or Special Form only.
D. Scheduled Umbrella coverage form only.
8. Thomas Enterprises is a large land-owning company that buys and sells ranches
and farms. They have Farmowners and Ranchowners policies in place on their
owned property. They recently purchased a dairy farm that does no milk
processing on the property, a cattle ranch that raises buffalo and cattle (beefalo)
and they most recently bought the Sunshine Stables, a well known racing stable
that raises and trains thoroughbred horses, and its sister farm, the Sunshine
Arabian Farms that breeds, trains, shows and sells Arabian horses. Which of
these recent purchases will not be eligible for Farmowners or Ranchowners
A. They will all be grandfathered in and coverage available for each.
B. They can all be covered, except for the dairy farm.
C. The ranch that raises the buffalo cannot be insured as the stock is
considered as “exotic” and requires special policies. The rest are all OK.
D. The 2 stables will not be eligible for coverage, the remainder will be OK.
9. One of the big differences between the Commercial Package Policy (CPP) and
the Businessowners policy (BOP) is
A. the CCP has lower limits on property coverage.
B. the crime coverages are not available under the BOP.
C. Pharmacies and pharmacists are included in the BOP, others by
endorsement, whereas professional liability is not included in the CPP
D. Coinsurance is not required in the CPP, but mandatory in the BOP.
10. The Standard BOP does not cover the insured for liability arising out of
A. personal injury.
B. employers non-owned automobiles.
C. personal liability.
D. boiler explosions.
ANSWERS TO STUDY QUESTIONS
1A 2B 3A 4C 5A 6B 7A 8D 9C 10D