131.9-1

ISO TIME ELEMENT COVERAGE FORMS SAMPLE INSURANCE PROPOSAL LANGUAGE

(April, 2007)

REPRINT PERMISSION

All PF&M subscribers are permitted to reprint the following insurance proposal sample language when preparing insurance presentations for their commercial insurance customers. Other uses require permission by The Rough Notes Company, Inc.

PROPOSAL DISCLAIMER

The following paragraph or similar language needs to be included in all insurance proposals:

Consult the policy for definitions and limitations. The terms of this proposal do not represent contract terms. The policy is subject to company underwriting practices.

TIPS FOR USING THIS PROPOSAL LANGUAGE

This proposal language is not intended to be an entire insurance proposal. A client specific section including the name and address of the insured, the insurance company(s) and the agent, and information about them, a list of locations, limits, deductibles, and similar customer specific items are not included and should be prepared.

The intent of any insurance proposal is not to be a reproduction of the insurance policy, but to give a summary of possible coverages.

Paragraphs explaining coverages unique to this policy form may be the most important addition to your insurance proposal and sales effort. Coverage examples can be tailored to your individual customer. Be careful when altering any proposal language not to expand coverage beyond what the policy intends.

This proposal should be combined with proposals for other lines of business, such as commercial property, general liability and workers compensation, for a complete account proposal.

Please refer to PF&M 131.4-3, Time Element Coverage Available Endorsements and Their Uses, for a listing and brief description of endorsements that may be attached to the basic Time Element Coverage Forms. You may also want to include PF&M 131.7-3, Time Element Coverage Endorsements Checklist, for a checklist and quick reference of all endorsements available for use with the Time Element Coverage Forms.

SAMPLE PROPOSAL LANGUAGE FOR THE ISO TIME ELEMENT COVERAGE FORMS

INTRODUCTION

Protecting the insured's loss of business income and extra expenses is an important element of any insurance program. Small commercial operations may be even more vulnerable than large ones when it comes to an interruption of normal business operations but all business operations are subject to financial problems if the flow of revenue from their normal operations is interrupted. The Insurance Services Office (ISO) has the most common standard time element coverage forms in regular use today.

Time element is a generic insurance term for indirect losses that cause a suspension of business operations as a result of the occurrence of direct damage to covered property. Time element is used as a term to refer to Business Income (And Extra Expense), Business Income (Without Extra Expense), Extra Expense and Leasehold Interest Coverage Forms.

BUSINESS INCOME (AND EXTRA EXPENSE) COVERAGE FORM

This form provides coverage for loss of business income and extra expense at the premises listed and described on the declarations. The loss to covered property must first occur and be the direct result of the occurrence of a covered cause of loss in the causes of loss form attached and applying to the coverage form.

COVERAGE

Business income is the net income before income taxes, either a profit or a loss, that would have been earned, and continuing normal operating expenses incurred. It includes payroll. Net income also includes the net sales value of production for manufacturing risks. Coverage can apply to business income including rental value, business income other than rental value or rental value alone.

The insurance company pays the actual loss of business income sustained by the insured due to the necessary suspension of operations during the period of restoration. The suspension must be caused by direct physical loss or damage to covered property at a location listed and described on the declarations and for which a business income limit of insurance applies. The loss or damage must result from the occurrence of a covered cause of loss.

Extra expense applies if a limit for business income is shown on the declarations. Extra expense is the necessary expenses incurred by the insured during the period of restoration that would not be incurred if there was no direct physical loss or damage to covered property by a covered cause of loss.

The insurance company pays the extra expenses incurred to eliminate or minimize the suspension of business operations and to continue operations at the described premises or at replacement or temporary locations. It also pays to minimize the suspension of business operations if the insured cannot continue operations. In addition, it pays extra expenses incurred to repair or replace property only to the extent that it reduces the business income loss.

COVERED CAUSES OF LOSS

Three causes of loss forms are available. The basic and broad forms list the causes covered. The special form covers any cause of loss not excluded.

·         Causes of Loss–Basic Form includes fire, lightning, explosion, windstorm, hail, smoke, aircraft or vehicles, riot or civil commotion, sprinkler leakage, vandalism, sinkhole collapse and volcanic action.

·         Causes of Loss–Broad Form is an intermediate level form that includes breakage of glass, falling objects, weight of snow, ice or sleet and water damage in addition to the causes of loss included on the Causes of Loss–Basic Form.

·         Causes of Loss–Special Form provides coverage for any cause of loss not excluded or limited.

EXCLUSIONS

Exclusions are part of every insurance policy. It is important to be aware of these exclusions before a loss occurs so additional insurance may be purchased or cash reserves established to handle such a loss. All covered causes of loss forms are subject to the following exclusions.

·         Ordinance or law. Any increase in the cost of a loss because of the enforcement of ordinances or laws is excluded. This applies even in cases where the building must be torn down and rebuilt to meet and comply with building codes and ordinances.

·         Earth movement. Any form of earth movement, including earthquake, mudslide, mudflow and volcanic eruption, is excluded except for limited coverage for loss or damage due to volcanic action.

·         Governmental action. When the government takes over property for any reason and damages it, coverage does not apply unless the damage is done in order to stop the spread of fire.

·         Nuclear hazard. Loss or damage caused by nuclear radiation, radioactivity and similar events is not covered.

·         Utility services. Coverage does not apply if a utility service fails due to a problem at an offsite location away from the insured's premises.

·         War and military action of any kind is excluded.

·         Water damage of any kind caused by water, including flood, backup of sewers and drains, wind driven rain and similar events is not covered.

·         Damage to property caused by mold, mildew and fungus is not covered unless caused by or resulting from a covered fire loss.

·         Electric arcing damage caused by the arcing of artificially generated electricity is excluded.

CAUSES OF LOSS–SPECIAL FORM ADDITIONAL EXCLUSIONS

Because of the broad nature of the special causes of loss form, additional exclusions must be added to control the cost of insurance. Many of these exclusions are considered as "cost of doing business" types of losses, others as catastrophic loss exclusions and still others are better covered under a more specialized coverage form or policy.

·         Delay or loss of market. Coverage does not apply if the insured cannot maximize its profits because of a delay in meeting a deadline or it loses a customer because a contract date expires.

·         Smoke from agricultural or industrial smudging is usually intentional and preventable and is not covered.

·         Wear and tear occurs to virtually every kind of property and is an issue the insured must assume outside of insurance coverage.

·         Settling, cracking and shrinkage occur naturally to both buildings and personal property and the loss or damage that results is not covered.

·         Animal infestations, such as those involving bats, termites, raccoons, birds and others are not covered. However, sudden events involving animals, such as a bear damaging property to obtain food or a deer crashing through a sliding glass door are covered.

·         Mechanical and machinery breakdowns occur all the time and are a normal part of doing business. For these reasons, loss or damage caused by or resulting from such incidents is excluded.

·         Marring and/or scratching is not covered. Personal property is subject to nicks and scratches in the normal routine of handling that reduces its value. This is an issue for the insured to deal with outside of the insurance mechanism.

·         Steam boiler explosion that causes loss or damage is not covered. Coverage for such events is ordinarily arranged through a boiler and machinery or equipment breakdown policy.

·         Water seepage for more than 14 days that causes loss or damage and that continues without the insured acting or notifying anyone is not covered.

·         If heat is not maintained, or if water systems in an unheated building are not drained, there is no coverage for loss or damage by water or other liquids caused by the freezing of plumbing or other building systems.

·         Dishonest acts by the insured that result in loss are not covered.

·         Trick, fraud or deceit on the part of others against the insured or its employee that leads to covered property being turned over to the perpetrator and lost is not covered.

·         Property in the open damaged by rain or other climatic elements is not covered. Property stored outdoors and not otherwise protected must be able to withstand weather conditions.

·         Collapse of any kind that causes loss or damage is excluded. However, limited collapse coverage is provided as an additional coverage. This means that collapse coverage is limited to the specific types of collapse listed and described and not to every kind of collapse.

·         Pollutant discharge of any kind is excluded except as provided in additional coverages.

·         Neglect to save and preserve property means the insured is responsible for taking all reasonable steps after a loss to protect undamaged property from loss and damaged property from further loss. If this is not done, the initial loss is covered but coverage does not apply to the subsequent loss or damage.

·         Coverage does not apply if weather conditions cause an excluded cause of loss to occur that results in loss or damage to covered property. However if the weather conditions cause a covered cause of loss to occur, coverage applies for the subsequent loss or damage caused by the covered cause of loss.

·         Acts or decisions, including the failure to act or decide, by any person, group, organization or government entity that causes or results in loss or damage are not covered. However, if such an act or decision contributes to the occurrence of a covered cause of loss, the loss or damage to covered property as a result of that cause of loss is covered.

·         Faulty, inadequate or defective planning, design, materials or maintenance that results in loss or damage is not covered. However, if the faulty, inadequate or defective planning, design, materials or maintenance contribute to the occurrence of a covered cause of loss, the resulting loss or damage is covered.

ADDITIONAL LIMITATION–INTERRUPTION OF COMPUTER OPERATIONS

Business income coverage does not apply when a suspension of operations is caused by either destruction or corruption of electronic data or loss or damage to electronic data. Extra expense coverage does not apply to any action taken to eliminate or minimize a suspension of operations caused by destruction or corruption of electronic data or loss or damage to electronic data. This limitation does not apply to the Additional Coverage–Interruption of Computer Operations. Electronic data is facts, information or computer programs stored on or transmitted to or from computer software or other media used with electronically controlled equipment.

ADDITIONAL COVERAGES

The following additional coverages are included as described in the coverage form without an additional premium charge. Each has its own limit of insurance, description of coverage, limitations and exclusions.

·         Civil Authority. Coverage applies to the actual loss of business income sustained and necessary extra expenses incurred due to the actions of civil authorities prohibiting access to the covered location because of direct physical loss or damage to another property caused by or resulting from a covered cause of loss.

·         Alterations and New Buildings. Coverage applies to the actual loss of business income sustained and necessary extra expenses incurred due to physical loss or damage at the covered location caused by direct physical loss or damage caused by or resulting from a covered cause of loss to:

o        New buildings or structures completed or still under construction;

o        Alterations or additions to existing buildings or structures; or

o        Property used in construction work or incidental to the occupancy of new buildings.

·         Extended Business Income. Coverage is extended an additional 30 days after the period of restoration ends and business operations resume in order for activity and income levels to return to pre-loss levels.

·         Interruption of Computer Operations. This coverage provides a $2,500 limit that applies to the same items discussed in Additional Limitation–Interruption of Computer Coverage. Coverage applies for business income and/or extra expense due to direct damage to electronic data as defined in the coverage form. This limit of insurance is unique and is similar to an annual aggregate. It applies to all losses sustained during the year for all occurrences at all locations and ends when the period of restoration ends. Limited causes of loss apply.

COVERAGE EXTENSION

Newly acquired locations. Coverage written subject to 50% or higher coinsurance can be extended to apply to newly acquired locations, excluding fairs or exhibitions. The limit of insurance is $100,000 and the acquisition must be reported to the insurance company within 30 days after the insured acquires it or construction on it begins.

LIMITS OF INSURANCE

The most the insurance company pays in any one occurrence is the limit shown on the declarations. Payments made under coverage for alterations and new buildings, civil authority, extra expense or extended business income are part of the limit of insurance and not in addition to it. However, the limit that applies for the coverage extension for newly acquired locations is in addition to the limit of insurance.

LOSS CONDITIONS

The following loss conditions are outlined and explained in this section of the coverage form:

·         The appraisal loss condition explains how the insured and the insurance company come to agreement on the amount of net income and operating expense or the amount of loss in the event of a dispute between them.

·         The duties in the event of loss condition explains the insured’s post-loss responsibilities such as preserving property and efforts to resume operations as soon as possible.

·         The loss determination condition explains how the insurance company handles and pays losses. It separately addresses the issues of the amount of business income loss, the amount of extra expense, the resumption of normal business operations and the failure to resume operations.

·         The loss payment condition establishes that the insurance company pays covered losses within 30 days after receiving a properly executed proof of loss, if all other coverage terms are met.

ADDITIONAL CONDITION–COINSURANCE

The coinsurance condition explains how coinsurance works when the limit of insurance is inadequate, the manner in which the coinsurance penalty is determined and the operating expenses that can be deducted for the purpose of applying the coinsurance condition.

OPTIONAL COVERAGES

The following optional coverages can be provided if the appropriate entry is made on the declarations.

·         Maximum Period Of Indemnity is a very simple valuation clause. It states that the amount of business income loss and extra expenses incurred in the first 120 days after the loss date are covered up to the limit of insurance shown on the declarations. All other conditions of the policy are unchanged. The rating in this approach is more expensive but the final premium may be lower because lower limits of insurance can be purchased.

·         Monthly Limit Of Indemnity is more complicated than the Maximum Period of Indemnity but not as complicated as the coinsurance method. The insured chooses a percentage represented by the fractions 1/3 for 33 1/3%, 1/4 for 25% or 1/6 for 16 2/3%. These represent the percentage of the limit of insurance available to pay losses for each 30 days that the loss continues. Once the percentage of the limit for the month is reached, payments for that month end and do not resume until the next month. This continues until the months represented by the percentages are exhausted.

·         Business Income Agreed Value allows the insured to benefit from the coinsurance credit applied to the rating without being concerned about incurring a corresponding coinsurance penalty. The insured completes and signs a business income worksheet and submits it to the insurance company. The company then reviews the worksheet and at some point agrees that the values and calculations are acceptable. Any loss that occurs during the policy year is adjusted without regard to the coinsurance condition. If a new worksheet is not provided every 12 months or as required when policy limits change, the agreed value clause lapses and the coinsurance condition is reinstated.

·         Extended Period of Indemnity. The Extended Business Income portion of the Additional Coverages section of the coverage form extends coverage for 30 days after business operations resume. Since this may not be a sufficient amount of time for an insured, this optional coverage extends coverage for the number of days shown on the declarations. This option is attractive to and used by the insured that knows it will experience a continuing loss of business due to the effects of a loss on contracts and relationships. The insured must evaluate the difficulty of winning back customers after the business resumes operations and the amount of time needed to do so.

DEFINITIONS

·         Period of Restoration is the period of time that begins 72 hours after a covered direct loss or damage event that applies to business income coverage or immediately after the time of a covered direct loss or damage that applies to extra expense coverage occurs at a location listed and described on the declarations. It ends on the earlier of the date the property at the listed and described location should be repaired, rebuilt or replaced reasonably quickly and with similar quality material or the date business operations resume at a new permanent location. The waiting period can be reduced. The period of restoration is not cut short or affected by the expiration date of the policy to which this coverage form is attached.

·         The period of restoration does not include any increased time period required based on enforcement of any ordinance, regulation or law that regulates construction, use, repair or demolition of any structure or that requires testing, monitoring, cleaning up, removal, containment, treatment, detoxifying, neutralizing or in any way responding to or assessing the effects of pollutants.

·         Rental Value is the net income, either profit or loss, from rental income from tenants, including the fair rental value of the insured’s occupancy of its own premises. This also includes continuing expenses. These expenses may include the payroll and amounts that the tenants are legally obligated to pay but become the obligation of the owner during the period the premises are untenable.

·         Suspension means that business activities slow down or stop completely. It is also the portion of the premises that is untenable if rental value coverage applies.

BUSINESS INCOME (WITHOUT EXTRA EXPENSE) COVERAGE FORM

This form is identical to the Business Income (And Extra Expense) Coverage Form except that nearly all references to extra expense are removed. The only extra expense coverage provided is for those expenses incurred that reduce the business income loss. Any such expense is paid in an amount equal to the amount by which it reduces the business income loss.

EXTRA EXPENSE COVERAGE FORM

Some types of businesses do not actually lose income after experiencing a direct damage loss. They plan to spend any amount necessary to continue their operations, stay in touch with their customers and suppliers and take any other emergency measures needed to maintain their income stream. This form covers those expenses and is available to the business that does not need loss of business income coverage. Using this form allows the insured to establish a contingency plan, price out the extra expenses needed to operate that plan and then purchase the exact amount of coverage for the period of time required as determined in the plan. However, such an insured might want to consider purchasing coverage under Business Income (And Extra Expense) Coverage Form for a limit that represents 125% coinsurance before purchasing this coverage, paying a higher price and still having a limited loss payment. Since this type of business does not have an actual business income loss, it does not have to be concerned about a coinsurance penalty. In this case, the entire limit of insurance is available to apply to the extra expenses. This coverage form is identical to the Business Income (And Extra Expense) Coverage Form, except in the following areas.

COVERAGE

The insuring agreement is similar but all references to business income are removed. The remaining coverage items are identical except that extended business income is not covered.

LOSS CONDITIONS

This section has two significant differences compared to the Business Income (And Extra Expense) Coverage Form.

·         Limits on Loss Payment details the method used to determine the amount of extra expense and how it is paid out. The basic coverage form pays out the extra expense over a 90-day period in a number of different ways. The insured also has the option to select customized methods with payments extending to as many as 12 months. The method selected is shown on the declarations as a percentage of payment.

·         Loss Determination is changed slightly because all references to business income are removed.

ADDITIONAL CONDITION–COINSURANCE

This condition is removed because coinsurance does not apply to this coverage form.

OPTIONAL COVERAGES

This section is removed because there are no optional coverages.

LEASEHOLD INTEREST COVERAGE FORM

The coverage provided by this form pays the financial loss incurred by the insured when a covered cause of loss damages the property it leases and causes its lease to be cancelled. The financial loss includes more than just the loss of an advantageous lease.

COVERAGE

The statement of coverage clearly expresses that the coverage form pays for loss of the insured's leasehold interest. Coverage applies only if the lease is cancelled because of direct damage to property resulting from a covered cause of loss. Coverage does not apply to any other reason for a favorable lease being cancelled, even if the insured sustains a financial loss.

Covered Leasehold Interest means the following:

·         Tenants' lease interest is the difference between the rent paid at the described premises and the rental value of the described premises leased by the insured.

·         Bonus payments are the unamortized portion of a cash bonus not refunded to the insured. A cash bonus is money paid by the insured to acquire the lease. However, it does not include any form of rent or security.

·         Improvements and betterments are the unamortized portion of payments made by the insured for them. It does not include any value for them to which other insurance applies, to the extent of that other insurance. They are defined as fixtures, alterations, installations or additions made to the part of the building occupied by the insured that it does not own or acquired at the insured's expense and that cannot be legally removed.

·         Prepaid rent is the unamortized part of any rent paid by the insured in advance that will not be refunded. However, this does not include regular rent payments due at the beginning of each month or for any other designated rental period.

Covered Causes of Loss is the covered causes of loss form shown on the declarations.

EXCLUSIONS AND LIMITATIONS

All exclusions and limitations are included in the causes of loss form that applies and shown on the declarations.

LIMITS OF INSURANCE

·         Applying To Tenants Lease Interest. The most paid on any one lease is the net leasehold interest at the time the lease is cancelled. If the landlord then leases the same premises to the insured at a higher price, the most paid to the insured is the difference between the old rent and the new rent, or the net leasehold interest, whichever is less. The net leasehold interest amount is lower each month because it is based on the gross leasehold interest multiplied by the leasehold interest factor for the remaining period of the lease. The leasehold interest factor is part of a schedule on an endorsement attached to the policy.

·         Applying To Bonus Payments, Improvements and Betterments and Prepaid Rent. The most paid is the net leasehold interest at the time the lease is cancelled. If the landlord then leases the same premises to the insured at a higher price, the most paid to the insured is the amount of loss sustained by the insured or the net leasehold interest, whichever is less. The net leasehold interest amount is lower each month because it is based on the gross leasehold interest multiplied by the leasehold interest factor for the remaining period of the lease. The leasehold interest factor is part of a schedule on an endorsement attached to the policy.

LOSS CONDITIONS

The following conditions apply in addition to the Common Policy Conditions and the Commercial Property Conditions.

·         The appraisal loss condition explains how the insured and the insurance company come to agreement on the amount of net income and operating expense or the amount of loss in the event of a dispute between them.

·         The duties in the event of loss condition explains the insured’s post-loss responsibilities such as preserving property and efforts to resume operations as soon as possible.

·         The loss payment condition establishes that the insurance company pays covered losses within 30 days after receiving a properly executed proof of loss, if all other coverage terms are met.

·         Vacancy. When defined in terms of the insured's interest as a tenant, building is the unit or portion rented or leased to the tenant. A building is considered vacant when it no longer contains enough business personal property to conduct the customary operations of the tenant. Buildings being built or renovated are not treated as vacant. Since insurance is intended for ongoing profitable businesses, a penalty is imposed if a property becomes vacant. If the property is vacant more than 60 consecutive days and is subject to a sublease, coverage does not apply to loss or damage caused by or resulting from vandalism, sprinkler leakage, unless the system is protected against freezing, breakage of building glass, water damage, theft or attempted theft. Any other losses covered by the causes of loss form that applies are reduced 15%. However, if the property is vacant more than 60 consecutive days and no sublease is involved, there is no coverage.

ADDITIONAL CONDITION

This condition replaces the cancellation provision included in the Common Policy Conditions. The two cancellation provisions are identical except that item 6 explains the calculation of the earned premium in a leasehold interest situation. If the coverage provided by this form is cancelled, the earned premium is determined by:

·         Calculating the average of the net leasehold interest as of the inception date and cancellation date of the coverage; and

·         Multiplying the rate for the coverage period by the average net leasehold interest.

If the insurance company cancels, it refunds premium based on the difference between the amount of premium paid at policy inception and the proportion of the premium determined by the formula above. If the insured cancels, the refund may be less than the premium developed in the calculations above.