130.6-24

CP 00 90–COMMERCIAL PROPERTY CONDITIONS FORM ANALYSIS

(December 2008)

BACKGROUND

CP 00 90–Commercial Property Conditions contains nine conditions that apply to the Commercial Property Program. These are in addition to IL 00 17–Common Policy Conditions and the Loss Conditions and Additional Conditions in the particular Commercial Property Coverage Form. The conditions are:

• Concealment, Misrepresentation Or Fraud
• Control Of Property
• Insurance Under Two Or More Coverages
• Legal Action Against Us
• Liberalization
• No Benefit To Bailee
• Other Insurance
• Policy Period, Coverage Territory
• Transfer Of The Rights Of Recovery Against Others To Us

A. CONCEALMENT, MISREPRESENTATION OR FRAUD

Coverage is void if the named insured fraudulently or intentionally conceals or misrepresents a material fact of any kind concerning any of the following:

• The coverage form
• Covered property
• The insured's interest in the insured property
• A claim under the coverage form

This portion of the form deserves careful attention. Each state has its own philosophy with respect to the actions it considers concealment, misrepresentation or fraud. Similarly, each state has laws or precedents that establish when an insurer may or may not void, cancel or suspend a coverage form or policy. With this in mind, no review of coverage is complete without an analysis of the state specific endorsements attached to the coverage form or policy.

B. CONTROL OF PROPERTY

Only the named insured's negligence or its negligent acts affect the coverage provided. Negligent acts or neglect of parties other than the named insured and outside the named insured's direction and control do not affect coverage.

This condition emphasizes the fact that the insurance company cannot deny coverage for the negligent acts of parties other than the named insured or deny coverage because of situations beyond the named insured's control. The insurer must always be fair and have a legitimate basis for denying a claim.

If an act, neglect or breach occurs at one location, that location is the only one affected. In other words, while the named insured may be negligent at one location, it does not necessarily mean that it is negligent at its other locations.

Example: Paul Flybynight has a commercial property policy covering three furniture outlets. Two of them are on opposite sides of a mega-mall having significant customer traffic. A severe storm strikes the part of town where the mall is located. Both of Paul’s stores are seriously damaged by windborne debris, the display windows at each are blown out and the interior of each store sustains damage. Paul instructs his employees to secure location one, including boarding up windows and bringing in large fans to help dry things out. For unknown reasons, Paul does absolutely nothing at the other store. His staff at that location goes home and does nothing more than lowering and locking the store's security gates. Meanwhile, the wind and rain cause tremendous damage to the store. Paul’s insurer makes a complete settlement for the damage at the one store but successfully denies the claim at the other store because of Paul's negligence in attending to the damage.

Note: The insurance company cannot void, cancel or otherwise terminate coverage at other unaffected locations.

C. INSURANCE UNDER TWO OR MORE COVERAGES

When two or more coverages within a coverage form apply to the same loss or damage, the insurance company is not liable for more than the actual amount of the loss or damage. This condition is important because it points out that insurance is a contract of indemnity. It is intended to protect the insured's assets. It is not a license to profit from an accidental or intentional loss.

Example: Patty has a commercial property policy covering her building and business personal property. A fire damages a refrigeration unit. Patty reads her policy and, realizing that the refrigeration unit could qualify as either building or personal property, decides to file a claim under both coverages. She is paid the full value of the refrigeration unit and nothing more.

D. LEGAL ACTION AGAINST US

Any legal action against the insurer must be brought within two years after the date of the loss or damage. Besides filing legal action within this time frame, the insured must comply with all other terms and conditions of the coverage form.

Purchasing insurance coverage does not relieve the insured of all obligations and responsibilities. The insured must act responsibly and protect undamaged property after a loss, as well as cooperate fully with the insurance carrier to establish a legitimate amount of loss.

This condition states that the insured cannot take legal action against the insurer unless it has completed all reasonable duties and responsibilities required of it after a loss. This includes handling loss disputes using the appraisal condition instead of taking legal action against the insurer. This condition is designed to preserve the insured's right to a legal remedy in court while ensuring that doing so is a last resort.

E. LIBERALIZATION

If the insurance company adopts a revision to the insurance coverage form that broadens coverage without charging an additional premium within 45 days prior to or during the policy period, the broadened coverage automatically applies to the coverage form.

This condition is meant to provide the insured with the full benefit of coverage upgrades the insurance company makes to the coverage form. One of the reasons this condition is important is that many insurers begin reviewing and processing renewal policies well in advance of the expiration date in an attempt to reduce expenses, increase efficiency and comply with state non-renewal laws. As a result, the insured may not receive the most current policy upgrade, even if it becomes effective for that renewal. To eliminate the expense to the insurer of issuing subsequent endorsements to the renewal policy, this condition permits the broader coverage to apply automatically as long as it is not accompanied by a premium charge.

However, the opposite is not true. Changes in the new or upgraded version that reduce coverage do not automatically apply. In addition, enhancements or upgrades that would have been offered with an additional premium charge are also not automatically included.

F. NO BENEFIT TO BAILEE

Only the insured may benefit from this insurance, even in cases where another party has custody of covered property. Loss payments are made to the insured and only for its financial interest in the covered property. There is no coverage for the time, labor, loss of use or other potential loss that might be experienced by any other party having custody of the covered property. The two primary reasons for this provision are that every entity having property at risk must be responsible for protecting that property and commercial property coverage pricing is based on covering only eligible property as outlined and defined by the coverage form or policy. This condition helps preserve the pricing issues and coverage intent of the form.

G. OTHER INSURANCE

This condition explains how coverage is determined or losses handled when other insurance coverage is available.

1. If the insured has other insurance subject to the same plan, terms, conditions and provisions as this coverage form, the loss is shared on a proportionate basis. The insurance company's share is based on the proportion of its limit to the total limits of all insurance covering the property on the same basis.

Example: A coin laundry burns to the ground. It is insured by two commercial property policies issued by two different insurance companies. Both policies are written on the same basis and have identical limits. In this case, each of the two insurers is responsible for half of the loss.

2. If any other insurance that applies to a covered loss is not of the type described above, this insurance applies only on an excess basis. This coverage form pays the amount that exceeds any other such insurance, whether collectable or not. Even if the other insurer denies coverage, this coverage form acts in the same manner as if the other insurer paid and offers only the amount above what the other insurance should have paid. However, even when this coverage form is used as excess, it does not pay more than the limit of insurance indicated on the declarations.

Example: Gayle has a package policy that includes property, inland marine and general liability coverages. The property coverage form includes a $2,500 limit on valuable papers and records as additional coverage. One of the inland marine coverages Gayle purchases is valuable papers and records with a $25,000 limit. When a covered valuable papers and records loss occurs, the inland marine coverage responds first for its $25,000 limit and the property additional coverage for valuable papers and records then responds with an additional $2,500 amount of insurance, if needed.

H. POLICY PERIOD, COVERAGE TERRITORY

This condition explains the policy period and coverage territory. Both apply to all losses.

1. In order for coverage to apply, loss or damage must first occur during the policy period indicated on the declarations and in the coverage territory.

Example: Karen’s policy period is 1/1/08 to 1/1/09. A small spark starts a fire in her business at 11:50 p.m. on 12/31/08. The fire smolders and no one notices it until 2:00 a.m. on 1/1/09. Since the fire started prior to the policy expiration date and time, coverage applies.

2. Coverage Territory consists of and is limited to the United States of America, its territories and possessions, Puerto Rico and Canada.

Example: Karen drives her pickup while vacationing in the Southwest. On a whim, she travels into Mexico. When the pickup overturns, coverage does not apply to the covered commercial property damaged in the incident because she is operating it outside the coverage territory.

I. TRANSFER OF THE RIGHTS OF RECOVERY AGAINST OTHERS TO US

This condition provides the details of how the insured's rights of recovery against another party, including another insurance company, transfer to the insurer once it pays the insured for its loss or damage. This is sometimes referred to as subrogation.

If the insured or any other covered party has rights of recovery against another entity, those rights transfer to the insurer at the time it makes payment to the insured or the covered party. The rights transferred apply to the extent of the payment made.

The party that receives payment must do everything necessary to secure and protect the rights of the insurance company, including exercising care not to impair those rights after a loss.

If the insured waives its rights of recovery against another party, the insurance company can refuse to pay the insured’s claim for loss or damage. However, the insurance company permits the insured to waive its rights under three circumstances:

• All waivers must be in writing.
• All rights can be waived if done so prior to the loss or damage.
• The rights may be waived after a loss but only if, at the time of loss, the party against whom rights of recovery are being waived is one or more of the following:
• A party covered by this insurance
• A business entity the insured owns or controls
• An entity that owns or controls the insured
• A tenant of the insured

Such waived rights do not restrict this insurance. Please refer to PF&M Sections 131_C018, Mutual Subrogation Waiver Clause Barred Recovery By Property Owner's Insurer, 131_C049, Subrogation Held Barred By Insurance Agreement Between Landlord And Tenant, 131_C067, Broad Subrogation Clause Waives All Of Insurer's Rights and 131_C085, Waiver Of Subrogation Applies To All Losses, in Court Cases, for several interesting court cases involving subrogation.