Valuable papers and records: Know your limits (Heavily Edited and Excerpted)

Today, because valuable papers and records to a great extent are stored and protected online, the hard copy exposure may not be as significant as it once was. It nonetheless is still important.

Complicating matters is the fact that coverage for physical loss or damage to electronic data is treated separately from coverage for hard copy valuable papers and records. Those who are confronted with both exposures may not be aware that they need coverage for both. Another problem is that not all policies that provide coverage for valuable papers and records contain definitions of precisely what is covered. This can wreak havoc when there is a loss and coverage is sought.

One form found defines valuable papers and records …to mean: [w]ritten, printed, or otherwise inscribed documents and records, books, maps, films, drawings, abstracts, deeds, mortgages, and manuscripts) but does not include data records, money, or securities. Another form does not define that term. Rather it refers to that term by stating…that valuable papers and records "include, but are not limited to proprietary information, books of account, deeds, manuscripts, abstracts, drawings and card index systems."

A question of limits

An ongoing concern with valuable papers and records coverage is insufficient limits. When a loss occurs to valuable papers or records, some insureds are surprised to learn that it is not the business personal property limit that applies, but rather the limit for valuable papers and records.

A court case is illustrative. There were two medical professional entities that stored photographs, x-rays, and more than 88,000 slides in the home of their principal. Each entity was insured under a policy that contained coverage for business personal property and valuable papers and records, the limit for the latter being $25,000.

A fire at the principal's home damaged or destroyed some of the photographs, x-rays, and slides. The cost of cleaning the smoke-damaged slides alone was estimated to be more than $500,000. After the loss, the insurer advanced a payment of $25,000 to each of the two entities, asserting that the items were "valuable papers and records" and that the coverage limit therefore was $25,000.

Considering the amount of the loss and the limit, the insurer should not have been surprised when the insureds filed an action seeking a declaratory judgment that the photographs, x-rays and slides were covered by their policies and were not subject to the $25,000 limit. (Note: each policyholder sued, arguing that their higher limits for business personal property should have been applied to the losses.)

Without addressing whether the photographs, x-rays and slides were "inscribed, printed or written," the district court concluded that they were valuable papers and records because they were film and because they fell within the type of material typically covered by a standard valuable papers and records exclusion. As a result, the material was subject to the $25,000 limit.

Valuable papers and records are likely to be treated as separate from business personal property and therefore subject to a lower limit. Many property policies treat valuable papers and records as a coverage extension. As a result, insureds are not likely to consider what the limits should be, in contrast to business personal property coverage where the insured is required to designate a limit in the declarations. This means that producers must ensure that the limits for valuable papers and records are adequate to cover the kinds of losses that these cases show can actually happen.

It may be difficult for producers to determine whether an insured has an extra-hazardous exposure dealing with valuable papers and records coverage, particularly today when so many businesses are relying on electronic data for the preservation of important documents. It would be worthwhile to explain to insureds the importance of higher limits, given the high costs for replacing or restoring records.