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| March 2009, Volume 27 |
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130.4-2 CP 00 10–BUILDING AND PERSONAL PROPERTY COVERAGE FORM ANALYSIS E. LOSS CONDITIONS These Loss Conditions apply in addition to IL 00 17–Common Policy Conditions and CP 00 90–Commercial Property Conditions. 1. Abandonment The named insured still owns the property after a loss and is responsible for all expenses associated with it, unless or until the insurance company agrees to accept ownership of the property. Example: A sinkhole causes the Montgomery Fashion Palace to tilt and slide off its foundation into the middle of Main Street, creating a major traffic obstruction. Montgomery Fashion informs its insurance company that it will accept a cash settlement and then close the business. However, the insurance company is not interested and refuses to accept the property. As a result, Montgomery is responsible for either moving the building back to its original position or arranging for its demolition. Montgomery is also responsible for all fines and penalties from the city for the traffic obstruction. 2. Appraisal From time to time, the insurance company and the insured disagree on the value of property or on the actual amount of loss. This condition contains a procedure designed to solve this problem. In the first step, one of the parties determines that it has reached an impasse with the other party and makes a written request for an appraisal. At that point, each party hires an independent appraiser. The appraisers must be both competent and impartial. Example: Jane is the insured and her insurance company is Bargun-Downe Property Company. They disagree on the value of the roof damaged by a lightning strike. They both agree to submit the dispute to appraisal. Jane selects an experienced appraiser who just happens to be her brother. Bargun-Downe selects a totally impartial party who has no appraisal credentials. Both appraisers are rejected. Jane’s selection is biased and the insurer’s selection is not qualified. Next, the appraisers choose an umpire. If they cannot agree on an umpire, they can request that a judge of a court having jurisdiction over the matter select one. Once all parties are selected and in place, each appraiser states the value of the property and the amount of loss. If both parties agree, the loss amount is settled. Only amounts over which they disagree are submitted to the umpire. Any decision made by any two of the three is binding on both the insurance company and the insured. The expenses associated with this process fall outside the category of expenses paid under the coverage form. The insured pays the following costs or expenses and is not reimbursed by the insurance company for them: Its appraiser Its equal share of the cost of the umpire Its equal share of any other appraisal expenses The insurance company pays the following costs and expenses. None of these expenses reduce the limit of insurance: Its appraiser Its equal share of the cost of the umpire Its equal share of any other appraisal expense Example: Baron’s Furniture Store is seriously damaged by a tornado. Furniture is strewn over many city blocks. Sheila is the owner and believes the value of the loss is $560,000, based on inventory records. The insurance company claims representative visits the store, views both damaged and undamaged merchandise and determines the loss to be $350,000. Each side presents its case to the other but the impasse cannot be resolved. Sheila needs to restore the inventory and get back in business. She sends a letter to the insurance company and requests an appraisal. Each party selects a qualified and impartial appraiser but cannot agree on an impartial umpire. They ask a local judge to select the umpire and he does so. Sheila’s appraiser determines the loss to be $625,000 but the insurance company’s appraiser determines a value of the loss of $450,000. The umpire reviews their figures and agrees with the insured on some items and with the insurer on others. The final settlement is $510,000. Each side bears its own expenses for the appraisers and umpire but $510,000 is the agreed value of the loss. Please refer to PF&M Section 131_c083, Insurer Must Accept Decision Of Its Approved Umpire, in Court Cases, for an example of how a court decided on an appraisal challenge. 3. Duties In The Event Of Loss Or Damage The insured is expected to act in a reasonable manner immediately after a loss occurs. If not, the insurer’s obligation to pay the loss may end. The insured must: Notify the police or other law enforcement authorities if a law may have been broken. Even though this requirement may sound obvious, the circumstances surrounding a loss may make this issue more complicated than it appears. Example: A theft occurs at an insured location and the insured reports the loss to the insurance company. It begins to adjust the loss and finds that no police report was made because the insured suspects that a relative may be involved. Example: A fire destroys the insured’s warehouse. The insurance company adjuster discovers that a local gang may have started the fire. The insured does not fill out a police report because of fear of reprisal. In cases like these, the insurance company has the right to refuse to pay the loss. It needs this requirement to protects its interests, which include being certain that the claim is legitimate as well as making sure there’s a chance that the responsible parties are found and punished. When theft of property is involved, police involvement increases the chances that the property will be recovered. Give prompt notice to the insurance company of loss or damage and describe the property involved. Prompt notice is not a complete and thorough report but instead provides enough information for the insurance company to begin to process the claim and make decisions about how to respond. The meaning of "prompt" has been challenged in some court cases. As a result, the best advice for the insured is to send as much loss information to the insurance company as soon as it knows that a loss has occurred. Give a description of how, when and where a loss occurred soon as possible after the occurrence. This requirement is slightly different from the prompt notification obligation. That obligation is to inform the insurance company on a timely basis that a loss occurred. This obligation assists the insurer in determining if the loss is actually covered. "How" is the actual cause of loss. The answer determines if the loss is covered. "When" is the exact time of loss. Since coverage applies only if the loss occurs during the policy period, this information is very important. Coverage for a loss that occurs at 12:02 a.m. on the inception date may be more subject to debate than a loss that occurs at 11:59 p.m. on the expiration date. In addition, accurate information on when the loss or damage occurred may help resolve whether the loss occurred suddenly or over a period of time. Finally, this information is important because a distinction about the loss being fortuitous or a normal maintenance issue may come into play. "Where" involves whether the location where the loss occurred was listed on the declarations. If it was not, the form must be examined carefully to determine if any coverage applies at such locations. Do everything possible to protect the covered property from any further damage. The time to take that annual Florida vacation is not immediately after a loss occurs. The requirement to protect property involves taking reasonable measures, not extraordinary or unreasonable ones. Covering property with tarps to protect against moisture damage, boarding up windows and hiring security guards are examples of reasonable measures that might be taken after a loss. Any expenses the named insured incurs are taken into consideration in the loss adjustment and settlement but these expenses do not increase the limit of insurance. Finally, the named insured should separate the damaged property from undamaged property and set the damaged property aside for examination whenever possible. Example: The front window of Haptown Appliances blows in during a violent thunderstorm. The televisions on display are badly damaged by flying glass, debris and water. The police notify the owner and the owner informs his insurance agent and the insurance company. When the storm ends, the owner goes to the store and evaluates the situation. His immediate concern is that the security system is no longer working, so he purchases lumber, boards up the window and contacts the alarm company. The alarm company recommends a security company that can provide extra security until the window is repaired and the alarm system is put back into operation. After these arrangements are in place, the owner examines the appliances and moves the damaged ones to the rear of the store and begins to clean up. The insurance company includes the expenses for temporary security and boarding-up the window in the loss adjustment and settlement. Provide inventories of damaged and undamaged property when the insurance company requests them. This includes quantities, costs, values and the amount of loss claimed. This detailed information is vital to properly adjust the loss and offer a fair settlement. Since the named insured controls the inventory, it is responsible for supplying the information needed. The insurance company has the right to verify that the information the named insured provides is accurate and correct. For this reason, it may inspect the property for the purpose of proving the loss or damage and may also examine the insured's books and records. The insurance company can also take samples of the damaged and undamaged property and make copies of the insured's books and records. An important word in this particular condition is “reasonable”. Since it is not a defined term, the two parties might disagree about the intent of this condition. For example, the insurer may take the position that repeat visits are necessary in order to be thorough. The insured may view the same actions as being a delaying tactic that slows down the settlement. While the essence of this condition is to prevent the carrier from harassing the insured, it also benefits the insurance company. Because of the way it is written, an uncooperative insured cannot claim that a single visit is sufficient for the carrier to adjust and settle a loss. Please refer to PF&M Section 131_C087, Uncooperative Insured Can't Seek Arbitration (Classic), in Court Cases, for an interesting case on how the actions of an uncooperative insured can void a policy. Show good faith in the truth and accuracy of a claim for loss by providing the insurance company with a signed and sworn proof of loss. This must be done no later than 60 days after the insurer requests it, along with any other information needed. The insurance company provides the necessary forms and instructions on exactly what information is needed. Note: If the insurer's requests are unclear and the insured is confused, any delay in providing the information cannot be used as an excuse to deny coverage. Cooperate with the insurance company in the investigation or settlement of the claim. In addition to the points outlined above, the insurance company has the right to examine any insured under oath. The examination usually takes place individually and without another insured being present. The examinations can be done as often as necessary concerning any matter related to either the insurance coverage or the claim itself. They can include examinations of the insured's books and records. In all examinations, the written document on which the insured's answers are recorded must be signed. Pease refer to PF&M Section 131_C063, Insured Fails To Produce Required Documents Following Fire Loss, in Court Cases, for an example of how seriously the courts consider this obligation to be. Note: Loss investigation is a serious part of the insurance claims process and the insurance company must have complete access to information as necessary to investigate and settle the claim. This may include information the insured would prefer not to disclose. Claims adjusters want to believe their insurance customers are honest but the sheer number of incidents of fraud makes them cautious. While the insurance company cannot use intimidation or harassment, it must still be diligent in order to protect its assets and to prevent or limit fraud. 4. Loss Payment The insurance company decides how a loss is paid based on one of four options: Pay the value of the lost or damaged property. Pay the cost to repair or replace any damaged or lost property, excluding any expense for increased cost due to the enforcement of any ordinance or law regulating use, repair or construction of any property. Take all or any part of the property at an agreed or appraised value. Pay to repair, rebuild or replace the damaged property with property of similar type and quality, excluding any expense for increased cost due to the enforcement of any ordinance or law regulating use, repair or construction of any property. The value of damaged or destroyed property, or the cost to repair or replace, is based on the terms of the valuation condition of the coverage form or any other provision that amends or replaces the valuation condition. The insurance company must tell the insured the option it will exercise within 30 days after receiving a properly prepared and signed sworn proof of loss. However, it does not pay more than the insured's financial interest in the covered property. Example: Mary and Jane form a partnership called Mary Jane’s Clothing. Five years later, Mary purchases Jane’s interest. A covered loss occurs two months after that. Since Jane’s name is still on the policy, she files a claim against the policy. Because she no longer has a financial interest in the covered property, she is politely informed that she has no right to make a claim and that the coverage form will not respond to her claim. The insurance company has the right to adjust claims for loss or damage to property the insured does not own directly with the property's owner but may also allow the named insured to do so. The settlement must satisfy all claims for the property because the insurance company pays only once. In addition, the most paid is the property owner’s financial interest in the property. If the insurance company providing the property coverage decides to defend the insured against suits due to claims brought by the owners of property, it does so at its own expense. When the insured provides the insurance company with a signed and sworn proof of loss, it must pay the loss within 30 days of receiving it. This obligation depends on the insured meeting all policy conditions as well as the value of the loss being determine by one of the following: The parties having agreed on the amount of loss An appraisal award having been made When buildings abut one another, they often share a party wall. This wall separates the two buildings but is also part of each building. If the same insured owns all buildings, loss settlements are unaffected. However, if different insureds own the shared party wall, loss settlements may be more difficult. The 06/07 edition of the form formally addresses this issue for the first time. When both building owners plan to repair and rebuild, the insurance company pays its insured’s proportional share of the damage to the party wall. However, if the named insured wants to rebuild but the other building owner does not, the insurance company pays the full value of the party wall. It then has the right to subrogate against the adjoining building owner. 5. Recovered Property If either the named insured or the insurance company recovers property after a loss is paid, the recovering party must notify the other promptly and inform it of the recovery. The named insured has the right to decide whether to return the claim payment and keep the recovered property or allow the insurance company to keep the recovered property. The insurance company is responsible for the expense of the recovery and any repair to the recovered property, subject to the limit of insurance. Example: Burglars break into Floyd’s Music Shop and steal $25,000 in CDs. The insurance company pays the claimed amount of $25,000. Two years later, the police notify Floyd that the CDs have been located at a warehouse. Floyd notifies the insurance company of this development. The insurance company representative and Floyd visit the warehouse and Floyd realizes that the current value of the CDs is negligible due to their age. He decides to keep the claim payment and let the insurance company keep the CDs. 6. Vacancy Insurance companies are interested in insuring successful and ongoing businesses. Risk pricing contemplates an active occupancy. As a result, rates on vacant properties are heavily surcharged. Since vacancy is often discovered only after a loss occurs, the loss conditions severely limit coverage if the vacancy was not disclosed to the insurance company in advance. Before imposing any restrictions, the insurance company must define exactly what it means by vacancy. If coverage applies to a tenant, the only part of the building considered when analyzing vacancy is the portion the tenant occupies. That portion is considered vacant if the business personal property on premises is not sufficient for the tenant to conduct its customary operations. Example: Millie’s Florist Shop occupies a quarter of the Landow building. The tenant that previously occupied the rest of the building, The Cat and Mouse Café, moved out. The building owner is looking for a new tenant and the search is now in its ninth month. A fire breaks out in the vacant portion of the building and Millie's space experiences heavy smoke damage. In this situation, Millie’s loss is unaffected because the portion of the building she occupies is not considered vacant. If the named insured is the building owner or a general lessee, the entire building is considered in determining vacancy. The building is considered vacant unless at least 31% of the total square foot area is: Rented to a lessee or sub-lessee that uses it to conduct its customary operations, or Used by the building owner to conduct customary operations. The key word is customary. Example: If the lessee, sub-lessee or building owner is a retail business, the retail business is its customary operation. The insurance company may deny a claim when a loss occurs and it discovers that 90% of the building is used for storage, because the building is vacant according to the language in the coverage form. Buildings under construction or being renovated are not considered vacant. If the building or an area within it is temporarily vacant so that major renovation work can be done, and the tenant will return as soon as the work is done, the building is not considered vacant. Example: The Eastward Shopping Center has four separate buildings and always struggles with vacancy issues. Building A is totally occupied by one tenant. Building B has one shop that occupies 20% of the space. The rest of the building has been vacant more than six months. Building C has multiple tenants but is 15% vacant. Building D has just been leased subject to completion of major remodeling. A contract has been signed and remodeling has begun. A major summer storm’s heavy winds damage all four buildings. Based on the definition of vacancy, Buildings A and C are not vacant and their coverage is unaffected. Building B is vacant and is subject to a vacancy penalty. Since Building D is being remodeled, it is not vacant at the time of the loss and the vacancy penalty is not applied. Having defined vacancy, the vacancy condition can be stated. If the building damaged by a covered cause of loss has been vacant, as defined above, more than 60 consecutive days before the date of loss: The insurance company pays nothing if the loss is caused by vandalism, breakage of building glass, water damage, theft or attempted theft. It also does not pay for sprinkler leakage damage if the sprinkler system is not protected against freezing. The insurance company reduces the amount of any loss it pays by 15% if the claim is caused by or results from any covered cause of loss not listed above. Example: Building B in the Eastward Shopping Center example above was penalized 15% because the loss was caused by storm damage. The loss would have been denied if it had been caused by vandalism. Please refer to PF&M Section 131_C045, Vacancy Exclusion Held Applicable When Building Was Devoid Of Substantial Warehouse Contents, in Court Cases, for a court interpretation of vacancy. Please refer to PF&M Section 130.6-10, Vacancy, for a broader explanation of vacancy and options available to the insured. 7. Valuation The value of covered property at the time of covered loss or damage is determined as follows: Actual cash value at the time of loss except as indicated below. Actual cash value is not defined in the coverage form but court decisions refer to it as replacement cost new minus accumulated depreciation. The insurance company pays the entire loss if the building limit of insurance meets the requirements of the Additional Condition–Coinsurance and the cost to repair or replace it is $2,500 or less. This is a bonus to the insured for carrying a limit of insurance that satisfies the coinsurance requirement. Note: This cost does not include any increased costs due to the enforcement of any ordinance or law affecting construction or use. The following property is valued at its actual cash value: Awnings Floor coverings Refrigerating, ventilating, cooking, dishwashing or laundering appliances Outdoor equipment Outdoor furniture Stock sold but not delivered is valued at its net selling price less discounts and expenses the insured would have had otherwise. Example: Ben’s Wholesale stocks only merchandise it has sold. A covered loss destroys all the stock. The merchandise was sold at an agreed price of $600,000. Ben provides a 10% 30-day payment discount and it costs $50,000 to transport the merchandise to the customer. The value of Ben’s loss is $600,000 minus the 10% discount of $60,000 and minus transportation costs of $50,000, for a total of $490,000. Damaged glass required by law to be replaced with safety glass is replaced with safety glass. The insurance company covers this additional cost. Tenants’ improvements and betterments is unique because the tenant purchases, owns and uses them but cannot legally exercise the ownership right of removing them when the rental or lease ends and it moves out. Two valuation methods of valuation are available in cases like this: If the insured repairs them promptly, their actual cash value A proportional settlement if they are not repaired promptly. The formula to determine the payment is to multiply their original cost by the number of days from the date of loss to the expiration date of the lease. Then divide this value by the number of days from their installation to the expiration date of the lease. If the lease contains a renewal option, the expiration date of the renewal option replaces the expiration date of the lease provision. Example: Sally’s Card Shop added $5,000 in improvements when it moved in two years ago. The five-year lease includes a five-year renewal option. Lightning damages the improvements and they must all be replaced. Sally is not sure that the improvements are really needed at this time, so the proportion must be calculated in order to pay the loss. Step one:
Step two:
Sally receives $4,000 based on the proportion method. The insured receives nothing if another party, such as the landlord, repairs the improvements or betterments. Endorsements available to amend the valuation condition in the basic coverage form include: CP 04 38–Functional Building Valuation changes the valuation method to functional replacement cost as defined in the endorsement. CP 04 39–Functional Personal Property Valuation (Other Than Stock) changes the valuation method to functional replacement cost as defined in the endorsement. Please refer to PF&M Section 130.4-3, ISO Commercial Property Program Available Endorsements And Their Uses, for a list of coverage options. |