EXCLUSIONS

The form has only three exclusions but each has multiple subparts.

1. The causes of loss indicated in the first exclusion do not apply to loss or damage caused directly, indirectly or in any sequence in a chain of events that contribute to the loss. If an exception to the chain of events condition applies, it is stated in the exclusion subpart. Additional wording emphasizes that coverage for these events does not apply to the widespread nature of an event does not affect coverage.

• a. Ordinance or Law

Local governments develop ordinances and laws relating to the construction and remodeling of buildings. A building may be grandfathered, or granted an exception, as long as it remains standing. Once a substantial loss occurs and remodeling or rebuilding is necessary, the grandfathered laws activate and come into play. This exclusion states that the policy does not apply to any costs associated with meeting such laws and ordinances.

In addition, coverage does not apply to the expense of removing undamaged portions of the building and does not pay for rebuilding those undamaged portions. It also does not apply to the additional cost of rebuilding at a different location due to ordinances or laws. Finally, it does not pay to remodel a structure in order to bring the building up to current standards.

Example: Harvey’s Hatchery started in 1930. It is located on the family farm 15 miles from Little Town. Over the years, Little Town grew, along with Harvey’s Hatchery. As subdivisions sprouted, new city ordinances were enacted. One of them prohibits livestock and other farm animals inside the city limits. Over Harvey’s objection, the area where the hatchery is located is incorporated into the city. Harvey’s continues to operate as it did in the past and tries to be a good neighbor. However, chicken droppings are an unpleasant intrusion on city life. The hatchery sustains a covered loss and, thanks to the fire department’s quick response, only 60% of the building is destroyed. Unfortunately, the city inspector informs Harvey that he may not rebuild. They cannot obtain the permit needed to rebuild the hatchery in the city limits. Unless ordinance and law coverage was purchased, using Form CP 04 05, Harvey receives a settlement from the insurance company for the 60% loss to the building and must then find new property and rebuild there.

• b. Earth Movement consists of five separate components:
• Earthquake includes any sinking, rising or shifting of the earth.
• Landslide includes any sinking, rising or shifting of the earth.
• Mine Subsidence is a particular problem in the Midwest. This exclusion applies to both man-made and natural mines. Coverage does not apply whether the mine is still operating or not. Mine subsidence coverage may be purchased separately. In some states, mine subsidence coverage must be offered in certain counties. If coverage applies on property located in Illinois, Indiana, Kentucky, Pennsylvania or West Virginia, the laws in those states should be reviewed carefully to determine how to deal with this exposure.
• Sinkhole Collapse is covered but sinking of the earth is not. Any rising, shifting, erosion, contraction or expansion of earth is not covered. Water under the surface of the ground and poor soil conditions are also not covered.

An important exception to these exclusions is that if fire or explosion occurs as a result of any earth movement, coverage applies to the ensuing damage.

Example: An earthquake rocks Bardsville but there is little damage to the buildings. However, the rigid gas lines break. A spark causes an explosion and Sam’s Hardware burns to the ground due to the explosion and the inability of the fire department to respond. This loss is covered because it is due to a fire resulting from the earthquake.

• Volcanic eruption is not covered except if fire, breakage of building glass or volcanic action ensues. Volcanic action includes airborne blasts and shockwaves, the different types of dust, ash and similar material emitted by the volcano and lava flow. However, it does not include the cost of removing dust, ash and similar material if it does not cause direct physical loss or damage to insured property.

Volcanoes are very messy and usually erupt over a period of days. Any such event that takes place over a period of 168 hours is treated as one occurrence. This is very important to the insured with a substantial deductible for this coverage. Instead of multiple deductibles applying to multiple events, only one deductible applies to the 168-hour period for which only one limit is available.

Example: Prime Real Estate Management owns two commercial strip centers and covers them with a blanket limit of $6,000,000 on an agreed value basis. A volcanic eruption occurs nearby, lava flow destroys one center and fire caused by flaming debris destroys the other. Each center is valued at $6,000,000. Both losses are due to the same occurrence. Instead of receiving $12,000,000, Prime Real Estate Management receives only $6,000,000.

• c. Government Action

Coverage does not apply if the government seizes property or destroys property, unless the property was seized and destroyed to prevent the spread of fire, provided fire is a covered cause of loss.

• d. Nuclear Hazard

There is no coverage for anything involving any nuclear hazard. Nuclear reactions, radiation and contamination are not covered unless fire ensues, and then only for the loss or damage caused by the fire.

• e. Utility Services

Loss or damage due to utility failure or interruption is not covered if the failure occurs away from the described premises. However, if the failure of the utility causes a covered cause of loss on the insured premises, coverage applies for that covered cause of loss.

Example: In December, a fire occurs at the electric power plant and causes a blackout. Fred's Fine Food loses refrigeration and the food spoils. In addition, the pipes freeze and burst and cause considerable water damage. The spoiled food is not covered but the water damage is covered.

Please refer to PF&M Section 131_094, Fire and Casualty Insurance Power Failure Exclusion Was Not Ambiguous, Barred Coverage, in Court Cases for a court decision on this issue. Also, please refer to PF&M 130.6-20, Utility Service Coverage, as it applies to the Commercial Property Form and CP 04 17–Utility Services–Direct Damage for a solution to the gap in coverage.

• f. War and Military Action

This exclusion lists three specific types of activity considered to be war. Note that the words terrorist or terrorism are not listed. War can be undeclared or a civil war. It is important to review a dictionary definition to determine who can declare war. If an action does constitute a war, coverage does not apply. In addition, any action involving the military and or military agents is not covered. Finally, rebellions, revolution, usurped power, insurrection and the government response to them are not covered.

• g. Water

Damage caused by the action of water outside the building is not covered. To clarify this further, this exclusion is broken into four subparts, each of which defines exactly what is meant by water.

• Flood is not covered. Flood includes surface water, tides, and tidal waves. The overflow of any body of water is also excluded. A body of water is a river, creek, ocean or lake, whether natural or manmade. In addition, spray from the water and wind-driven water is not covered.
• Mudslide and mudflow can occur when a sudden large volume of water mixes with unstable soil conditions. Neither of these conditions is covered.
• Sewers, drains and sumps can be overwhelmed by the volume of water coming into them and begin to backup or overflow. The loss or damage due to or resulting from the backup or overflow is not covered.
• Water saturated ground can create pressure against the surface or subsurface portions of a building. This subpart excludes loss or damage from water that enters through foundations, walls, floors, paved surfaces, basements, doors, windows and other openings of a building.

In the same manner as found in some other exclusions, if fire or explosion occurs because of the action of water, coverage does apply for the damage caused by the fire or explosion. In addition, if a sprinkler leakage loss occurs due to the action of water, coverage does apply for the damage caused by the sprinkler leakage.

• h. Fungus, wet rot, dry rot and bacteria (04/02 addition)

Losses caused by the existence of fungus, mold, rot, bacteria and other growing organisms are not covered. However, if a specified cause of loss occurs because of their existence, coverage does apply for the loss or damage caused by the specified cause of loss.

This exclusion does not apply if the fungus, mold, rot, bacteria or similar organisms result from a fire or lightning loss or is covered under the Additional Coverage–Limited Coverage for Fungus, Wet Rot, Dry Rot and Bacteria.

Example: Millicent purchases a store. Six months later she notices an unusual odor. She hires a contractor who discovers mold behind ceiling tiles that is destroying the tiles. The tiles must be destroyed and the area disinfected. She turns in a claim and the claim is denied. However, if a fire occurs and the tiles are moldy because of the water used to extinguish the fire, that mold loss is covered.

2. There is no coverage for loss or damage caused by the following group of exclusions:

• a. There is no coverage if electricity, other than lightning, damages electrical devices unless a fire ensues. In that case, coverage applies only for the loss or damage caused by the fire.
• b. Loss of use or loss of market.
• c. Smoke, vapor or gas caused by agricultural smudging or industrial operations. However, other types of smoke damage are covered.

Example: Lenny’s Laundry must shut down and cleaned after a short circuit in a dryer causes smoke to fill the building. This cleanup cost is covered.

• d. Wear and Tear. This exclusion has seven subparts. Most of the items in these subparts should be viewed as simply costs associated with doing business and not as losses.
• Wear and tear. Loss simply caused by aging and everyday use is not covered.
• Rust, fungus and other hidden or latent defects, including any feature of the property that causes it to destroy itself, is not covered.
• Smog is not covered.
• All buildings, and some personal property, are subject to shrinking, expanding, cracking and settling. These events should be expected and accommodations made in building construction and design and with respect to storage of personal property. As a result, losses from these causes are not covered.
• Insects, birds, rodents and other animals cause considerable damage to buildings. The loss or damage caused by nesting or infestation is not covered. This includes the various waste products or secretions left by these animals.

Example: One day, Perry notices an unusual shimmering substance on the side of the church. He touches the amber liquid and realizes it is honey. He notices the amount of it increasing every day and notifies the trustees. The trustees bring in a contractor who investigates and finds a beehive in the walls of the church. The contractor brings in a beekeeper to remove the bees. The beekeeper must remove part of the interior wall to remove the hives, repair the damaged wood and seal the bee’s entrance point. None of these services are covered losses because all result from an insect infestation.

• Machines regularly break down because of use. For this reason, mechanical breakdown is not covered. Rupture and bursting caused by centrifugal force is also considered mechanical breakdown and is also excluded. The exception to this exclusion is that coverage applies to the damage caused if the mechanical breakdown results in elevator collision. This damage includes damage to the shaft, any property damaged by the elevator and the elevator itself.
• The exclusions above apply mainly to buildings. The final exclusion applies to Business Personal Property. Coverage does not apply to loss or damage caused by or resulting from atmospheric dampness or dryness, temperature extremes, any changes in temperature or from scratching or marring. Since these causes of property damage should be anticipated and expected by the insured, they are not covered causes of loss.

If any cause of loss referred to above results in either a specified cause of loss or breakage of building glass, the loss or damage caused by the specified cause of loss or glass breakage is covered.

Example: Susie's Fancy Finery is a tenant on the first floor of a three-story building. The upper floors are sealed and not used. Unknown to the building’s owner or Susie, birds are nesting in the attic and also find their way into the chimney. The chimney has an opening at the top that leads directly into Susie's shop. One day nearly a dozen birds enter the shop, panic and careen into objects and windows in their attempt to escape. The birds crack and break the windows before they escape. Coverage does not apply to the damage caused by the infestation but does apply to the glass breakage damage.

• e. Steam boiler, steam pipe, steam engine or steam turbine explosions are not covered if owned or operated by the insured or in the insured's care, custody or control. This means coverage to the insured's property does apply if the damage is due to explosion of one of these objects owned by another party. If the insured owns or operates any of these items, the only coverage available is for loss or damage due to fire or an explosion caused by combustion.
• f. Loss or damage due to water that leaks or seeps over a period of 14 days or more is not covered. In addition to water, any humidity, moisture or vapor present over a period of 14 days or more is not covered (04/02 addition). This means that water leaking internally is covered unless allowed to run unchecked and unnoticed for more than 14 days.
• g. Damage caused by water, other liquids, powder or molten material is not covered if the damage is due to freezing. This exclusion does not apply if the insured either maintained heat in the building or drained and shut off the supply. It also does not apply to fire protection devices.

This exclusion requires the insured to take care of maintenance issues that are not the responsibility of insurance. The insurance company has the right to expect the insured to act in a responsible manner toward their property even in cases where insurance coverage is provided.

• h. Coverage does not apply to dishonest or criminal acts by the insured, partners, members of a Limited Liability Company (LLC), officers of a corporation, managers, employees or anyone else to whom property is entrusted. This exclusion applies whether these parties act alone, in collusion with others, during business hours or after hours. The Insured should purchase employee dishonesty coverage to apply to these acts.

It is important to note that coverage applies if employees, including leased employees, destroy property. However, this coverage does not apply to theft.

Example: Sheila and Fred are long time employees of Frankel Egg Farm but decide they've had enough of the company. They steal the payroll and then burn the plant down to hide their tracks but are captured three days later. If the plans are not interrupted, the fire loss is covered but the theft of payroll is not. That loss is covered by employee dishonesty coverage.

• i. There is no coverage if the insured, or someone the insured trusts with its property, is tricked into giving it away.
• j. Personal property in the open is not covered for loss or damage caused by or resulting from rain, snow, ice or sleet.
• k. Collapse is initially completely excluded. However, some coverage is added back in the Additional Coverage for Collapse section located elsewhere in the form.
• l. Pollutant damage is not covered, unless the damage is caused by a specified cause of loss. In addition, if pollutant damage results in the occurrence of a specified cause of loss, coverage applies for the loss or damage caused by the specified cause of loss but not the pollutant damage leading up to it. Loss or damage to glass caused by chemicals applied to the glass is covered.

Example: Windstorm damages an outbuilding at Mayfield Nursery. The weed killers stored in the building blow out, cover and kill most of the growing stock and the standing stock. Since the spread of the pollutants was due to a specified cause of loss, the loss of the stock is covered. While waiting for the outbuilding to be rebuilt, Mayfield receives a new shipment of fertilizer. Mayfield stores the fertilizer in another outbuilding but this time places it too close to a heat source. The combination of the two starts a fire that burns the building down. Since the pollutant resulted in a covered cause of loss, coverage applies to this loss.

• m. There is no coverage if the insured neglects to use all reasonable means to save and preserve property from further damage at and after the time of loss.

Example: The Mayfield family is exhausted after the two losses described above. They decide to just walk way and take a week’s vacation. Thieves notice the unlocked doors and unattended supplies. Since the Mayfield family neglected their duty to preserve property, coverage does not apply to the theft loss of the supplies.

3. The subparts of this exclusion are sometimes referred to as the concurrent causation exclusions. These exclusions are unique in that, if a loss is covered as a covered cause of loss, with the exception of these exclusions, it is still covered. On the other hand, if the loss would have been excluded anyway, it is still excluded. The three subparts of this exclusion are:

• a. Weather conditions. However, this only applies if the weather contributed to a cause or event excluded in the first set of exclusions above.

Example: Heavy rains cause creeks to rise well above flood stage. The flooding damages businesses. Although the proximate cause is the weather condition, since flood is an excluded cause of loss, the weather exclusion applies and there is no coverage.

• b. Governmental entities and related groups can make decisions and take actions that not only affect others but also cause loss or damage. The acts and decisions that cause loss or damage are excluded.

Example: The dams along the river are getting old but the Corps of Engineers decides it is too expensive to replace them. The heavy spring rains cause the dams to fail and many homes and businesses are flooded. Since flood is an excluded cause of loss, the loss or damage due to the decision and actions by the Engineers is also excluded.

• c. This subpart has four separate elements but basically excludes any type of faulty, inadequate or defective planning, design, materials and maintenance.

Example: Mainline Construction Company prepares the land for an industrial park. Severe drought followed by drenching rains causes the newly constructed buildings to slide down the slope. It is later found that the ground preparation was inappropriate for the amount of slope involved. Since landslide is not a covered cause of loss, the loss is not covered.