142.5

AAIS DIFFERENCE IN CONDITIONS FORM–
PROPERTY COVERAGE PART

(October 2008)

INTRODUCTION

Difference In Conditions (DIC) coverage is sometimes referred to as umbrella coverage for property lines of insurance. It does not provide excess coverage for existing insurance coverages. It provides coverage not found in underlying coverage forms and policies. Its name derives from the difference in coverage provisions between it and the underlying coverage forms and policies. The greater the number of differences in coverage between the underlying coverage and the DIC, the greater the coverage provided by the DIC.

The DIC was originally written over named perils coverage. It is now more commonly written over all risk or open perils, subject to certain exclusions and limitations. It is used primarily to provide earthquake and flood coverage. Most insureds are pleasantly surprised to discover that the DIC covers certain perils excluded in their underlying coverage forms and policies.

DIC insurance provides coverage designed to close specific gaps in standard insurance policies and is usually available only for larger industrial or commercial risks. It allows coverage to be customized to extend to such exposures as water damage, flood, collapse, earthquake, landslide, and other perils, according to the insured's needs. DIC coverage is usually provided by a separate coverage form or policy but in some cases is available as an endorsement to the underlying coverage form or policy.

Difference In Conditions coverage is not a controlled line of insurance and no standard form is available for use. In addition, some states do not treat it as inland marine insurance. In the past, each insurance company designed its own coverage form or policy and provided its own unique coverages and other features. However, the American Association of Insurance Services (AAIS) has a reputation for developing excellent inland marine coverage forms used in whole or in part by its members and subscribers. AAIS coverage forms are used here as the model to analyze, evaluate and explain the Difference In Conditions Form–Property Coverage Part.

Note: This analysis is based on the April 2007 edition of the coverage form. Changes from the previous edition are in bold print.

ELIGIBILITY

Any commercial operation with owned or leased property exposures is eligible for Difference In Conditions coverage.

POLICY CONSTRUCTION

AAIS Difference In Conditions coverage requires at least these four forms:

• CL 0100–Common Policy Conditions. This form contains five basic conditions that apply to all AAIS commercial lines coverage forms and policies.
• IM 7900–Inland Marine Declarations
• IM 7800–Difference In Conditions Form–Property Coverage Part
• IM 7805–Schedule Of Coverages–Difference In Conditions

SCHEDULE OF COVERAGES

IM 7805–Schedule Of Coverages–Difference In Conditions does not have spaces in which to enter the name, mailing address or other named insured information. That and other information appear on IM 7900–Inland Marine Declarations. IM 7805 contains the following information:

Coverages

Coverage applies on either a blanket basis or at scheduled locations. Scheduled locations coverage requires that the covered locations be listed and described on IM 7806–Locations Schedule–Difference In Conditions or be on a similar schedule on file with the insurance company.

Type Of Coverages

• The coverage provided is either DIC Coverage or DIC Coverage Excluding Property Perils.
• If DIC Coverage Excluding Property Perils applies, Policy Information identifies the insurance company and its policy number.
• If Excess Coverage applies, the applicable boxes for excess coverage for earthquake and/or excess coverage for flood must be checked.
• If coverage under the National Flood Insurance Program applies, the policy number must be indicated.

Earthquake Limits

If income coverage is provided and a loss caused by or resulting from earthquake occurs, the limit for income coverage is part of the following earthquake limits, not in addition to them.

• Earthquake Occurrence Limit
• Earthquake Aggregate Limit
• Earthquake Catastrophe Limit

Flood Limits

If income coverage is provided and a loss caused by or resulting from flood occurs, the limit for income coverage is part of the following flood limits, not in addition to them.

• Flood Occurrence Limit
• Flood Aggregate Limit
• Flood Catastrophe Limit

All Other Covered Perils Limits (Excluding Earthquake And Flood)

• All Other Covered Perils Occurrence Limit
• All Other Covered Perils Aggregate Limit
• All Other Covered Perils Catastrophe Limit

Coverage Extensions

The limits on the Schedule Of Coverages for the following coverages apply to all covered locations:

• Additional Debris Removal Expenses
• Emergency Removal
• Limited Fungus Coverage

Note: Each of these extensions applies. If a limit is not entered, the full policy limit applies, subject to any limitations in the coverage extension. Any entry under Additional Debris Removal Expenses reduces coverage. Emergency Removal coverage is limited to 10 days but the number of days can be increased.

Supplemental Coverages:

Each of these coverages provides additional limits of coverage or additional coverage. Required entries vary by type of coverage.

• Foundations Of Buildings, Pilings And Underground Pipes: If no limit is entered, a $100,000 limit applies.
• Newly Acquired Buildings: If no limit is entered, a $100,000 limit applies.
• Ordinance Or Law (Undamaged Parts Of A Building): Covered
• Ordinance Or Law (Increased Cost To Repair And Cost To Demolish/Clear Site)
• Personal Property–Acquired Locations: If no limit is entered, a $100,000 limit applies.
• Pollutant Cleanup And Removal: If no limit is entered, a $25,000 limit applies.
• Property In Transit: If no limit is entered, a $50,000 limit applies.

Coverage Option–Masonry Veneer

The appropriate box must be checked.

• Covered For Loss Caused By Earthquake
• Not Covered For Loss Caused By Earthquake.

Valuation

Valuation is based on either actual cash value or replacement cost.

Deductibles

Deductibles must be indicated for:

• Earthquake (flat dollar amount or percentage)
• Flood, (flat dollar amount)
• All Other Covered Perils (flat dollar amount)

Income Coverage Part

Coverage Options are:

• No Coverage
• Earnings/Rents/Extra Expense
• Earnings/Extra Expense

Income Coverage Limit

Note: The earthquake limits and flood limits are the only limits that apply when a covered loss is caused by or results from earthquake or flood.

Income Coverage Waiting Period

One of the following entries is required:

• Not Applicable
• Waiting Period (Hours)

Optional Coverages And Endorsements

This section of the schedule of coverages indicates coverage endorsements and forms included at the time of policy issuance.

FORM ANALYSIS–IM 7800–DIFFERENCE IN CONDITIONS FORM–PROPERTY COVERAGE PART

INTRODUCTION

This section explains that you and your are the parties indicated on the declarations as the insured. We, us and our refer to the insurance company providing coverage. Other terms are defined in the definitions section at the end of the coverage form.

AGREEMENT

This section states that the insurance company provides the coverage described in the coverage form and in the schedule of coverages in return for the insured's premium payment, subject to all the terms, conditions, and endorsements of the coverage form.

PROPERTY COVERED

Coverage applies to the property described in this section, subject to exclusions and limitations.

1. Coverage

The insurance company covers direct physical loss or damage to covered buildings and business personal property as described caused by or resulting from a covered peril.

2. Coverage Limitation

Coverage applies only to buildings and business personal property at covered locations.

3. Building Property

Covered buildings and structures also includes the following:

• Completed additions
• Permanent fixtures, machinery and equipment comprising part of a covered building or structure
• Outdoor fixtures
• Owned personal property used to service or maintain covered buildings or structures. Examples include air-conditioning equipment, fire extinguishing equipment, floor coverings and refrigerating, cooking, dishwashing and laundering appliances.
• Buildings and building additions under construction or being altered, renovated or repaired, including materials, equipment, supplies and temporary structures on or within 1,000 feet of a covered location and used with such construction activities

Note: This coverage applies only if the exposures are not covered by other insurance.

• Building glass
• Radio and television towers, antennas, satellite dishes, masts, lead-in wiring, guy wires, foundations, any permanently-attached similar or related property, awnings, canopies and fences

Note: This property is covered only if located on or within 1,000 feet of a covered building or structure.

• Signs attached to buildings or structures

4. Business Personal Property

This is owned business personal property in or on covered buildings or structures at covered locations, in the open, in or on vehicles or within 1,000 feet of covered locations. It includes:

• If the insured is a tenant, its use interest in improvements made at its own expense, such as fixtures, alterations, installations or additions to a covered building or structure it occupies but does not own

Note: The insured cannot legally remove such improvements if it vacates the building or structure.

• Personal property the insured leases that it is legally obligated to insure
• The insured's interest in personal property of others to the extent of its labor, material and services provided with respect to that property

Example: If the insured adds a body to a truck or van chassis, modifies a customer's machine to add protective guards, screen prints slogans on a customer's tee shirts, adds fragrance to a detergent or packages products for others, coverage applies to the value of the services performed. This includes the labor at the standard rate for anyone involved in the process, the raw materials consumed, including power and chemicals, and any other services provided for which a value can be determined.

• Personal property of others in the insured's care, custody or control, including property sold under installation agreements until the purchaser accepts the property

Note: Insurance company payments for loss or damage to personal property of others are only for the benefit of that property's owner.

PROPERTY NOT COVERED

Thirteen types of property are specifically listed as not covered:

1. Airborne Or Waterborne Property is excluded except if it is transported by regularly scheduled airline flights or ferry services.

2. Aircraft or Watercraft are excluded. This includes their related motors, accessories and equipment. The exception is any aircraft, watercraft or their parts, motors, equipment or accessories being held for sale by the insured or that the insured processes, warehouses or manufactures.

3. Animals of all kinds are excluded. This includes birds and fish.

4. Automobiles And Vehicles includes automobiles, motor trucks, tractors, trailers and similar motor vehicles designed and used to transport people or property on public roadways. This exclusion also applies to motor vehicles held for sale but not to motor vehicles the insured manufactures, processes or stores.

Note: This property is more correctly insured under commercial automobile or truckers coverage forms. Please refer to PF&M Sections 220.4-2, Business Auto Coverage Form Analysis–CA 00 01, 221.4-2, Business Auto Physical Damage Coverage Form Analysis–CA00 10, 222.4-2, Garage Coverage Form Analysis, and 224.4-2, Motor Carrier Coverage Form Analysis–CA 0020, for more information on insuring a variety of motor vehicles.

5. Bridges, Dams And Tunnels

6. Contraband is goods prohibited by law or treaty from being imported or exported. It also includes legal property in the course of illegal transportation or trade.

7. Crops means grain, hay, straw and other crops when outside a building or structure.

8. Exports And Imports. This is exported or imported property and is excluded. It can be covered under ocean marine cargo insurance that others have obtained to cover such property.

9. Furs, Jewelry, Stamps, Tickets And/Or Letters Of Credit are excluded. This also includes fur trimmed garments, lottery tickets held for sale and otherwise, watches, watch movements, jewels, pearls, precious or semi-precious stones, gold, silver, precious metals and property mostly made up of precious metals.

10. Land, Water Or Cost Of Excavation. Land is land of any kind, including the land on which the covered property is located. Water is any surface or subterranean water. The cost of excavations also includes grading or filling.

11. Money And Securities also includes accounts, bills, currency, food stamps, any evidence of debt and notes.

12. Property Of Others for which the insured either arranges transportation or is a carrier for hire. Transportation arrangers include carloaders, consolidators, freight brokers, freight forwarders and shipping associations.

13. Property You Have Sold after it is delivered.

Note: This does not include property sold under an installation agreement.

COVERAGE EXTENSIONS

Provisions That Apply To Coverage Extensions

There are three coverage extensions. The limit for each is either the limit indicated on the schedule of coverages or the default limit included in the coverage form if no limit is shown on the schedule of coverages. These coverages are part of the applicable limit for covered property and not in addition to it, unless otherwise indicated. These limits are not added to or combined with limits for any other coverage extension or supplemental coverage and are not subject to any coinsurance provisions that apply elsewhere in the policy.

1. Debris Removal

The insurance company pays costs incurred to remove debris caused by the occurrence of a covered peril but the amount is limited to 25% of the amount paid for the actual direct physical loss or damage. The combined value of the direct loss or damage and the debris removal cannot exceed the limit of insurance for the covered property. An additional $5,000 is available if the debris removal expense is more than 25% of the loss amount or if the combined cost of loss and debris removal is more than the limit of insurance for the covered property. Debris removal expenses must be reported to the insurance company within 180 days of the loss date in order for this extension to apply.

Note: This coverage extension does not apply to any pollutant cleanup, extraction, removal, restoration or replacement involving either land or water.

Note: Debris removal costs are part of the limit of insurance and the full limit of insurance is available to pay these costs, subject to the limitations indicated above. If a limit is indicated on the schedule of coverages, it is a sub-limit to the premises limit and is not in addition to that limit. This means increasing the limit on the schedule of coverages increases the $5,000 sub-limit but the total claim remains limited to the premises limit of insurance.

2. Emergency Removal

This covers direct physical loss or damage to covered property while being moved or stored elsewhere to avoid loss or damage caused by a covered peril. Coverage applies for up to ten days after the property is first moved but does not extend past the expiration date.

3. Limited Fungus Coverage

This coverage extension applies to direct physical loss or damage to covered property caused by or resulting from the existence or any activity of fungus. Loss or damage caused by or resulting from fungus is covered only when it results from a covered peril, other than fire, lightning or flood that occurs during the coverage period. This is subject to the insured having taken all reasonable steps to protect the property from additional loss or damage at and after the time of loss.

The most paid for all loss or damage at all buildings or structures is $15,000, regardless of the number of claims, locations, buildings or structures during any 12-month policy period or extensions of the policy period of less than 12 months, unless a different limit is indicated on the schedule of coverages. This limit also applies with respect to a specific occurrence of a loss that results in fungus, even if such fungus recurs or continues to exist during the current or future policy periods. The same limit also applies to cleanup, removal and testing activities and costs related to a fungus incident.

Note: If a covered loss or damage not caused by fungus occurs, that loss payment is not limited by the terms of this coverage extension. If fungus increases such losses, the increase is subject to the terms of this coverage extension.

SUPPLEMENTAL COVERAGES

Provisions That Apply To Supplemental Coverages

There are seven supplemental coverages. The limit for each is either the limit indicated on the schedule of coverages or the default limit included in the coverage form if no limit is entered on the schedule of coverages. If there is no limit for a supplemental coverage, coverage is provided up to the full limit for the applicable covered property unless a different limit is indicated on the schedule of coverages. Limits indicated for any supplemental coverage are separate from and not part of the applicable limit for coverage as indicated for covered property.

The limit available for coverage described under a supplemental coverage is the only limit available for it. It is not the total of the limit indicated for a supplemental coverage and the limit for coverage described under property covered. The limits are not added to or combined with limits for any other supplemental coverage or coverage extension and are not subject to any coinsurance provisions that apply elsewhere in the policy.

1. Foundations Of Buildings, Pilings And Underground Pipes

Coverage applies for direct physical loss or damage caused by or resulting from a covered peril to foundations below the lowest basement level or ground surface, pilings, piers, wharves, docks and retaining walls, and underground pipes, flues and drains. The most paid in any one occurrence for loss at any one covered location is $100,000. The limit can be increased on the schedule of coverages.

2. Newly Acquired Buildings

The insurance company insures against direct physical loss or damage caused by or resulting from a covered peril to buildings or structures the insured builds or acquires during the policy period. It begins on the day construction begins or the building or structure is acquired and ends when the policy expires, 90 days later or when reported to the company, whichever occurs first. The most paid in any one occurrence is the value of covered property as indicated on the schedule of coverages and as described under Valuation or $100,000, whichever is less. The $100,000 limit can be increased on the schedule of coverages but is still subject to the value of scheduled covered property.

Note: Additional premium is due from the date construction begins or the date the building or structure is acquired.

3. Ordinance Or Law (Undamaged Parts Of A Building)

When a covered building or structure sustains direct physical loss or damage from a covered peril and a governmental entity requires that the rest of it be demolished because of enforcement of an ordinance, law or decree, the insurance company pays for the value of any undamaged portions. Coverage applies only if the regulation requires demolition of the undamaged parts, regulates the construction or repair of the property or establishes specific requirements for zoning or land use at the covered location. The ordinance, law or decree must be in force at the time of loss.

However, there is no coverage for:

• Costs of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, responding to or assessing the effects of pollutants;
• Loss or increased costs caused by enforcement of any law affecting property resulting from the existence of or any activity of fungus; or
• Costs associated with enforcement of any law requiring testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, responding to or assessing the effects of fungus.

Example: Percy's Hotel, located in the downtown section of a small city, is a five-story brick building with ordinary wood floor and roof supports. Because it was constructed before any building construction ordinances or laws were on the books, it is grandfathered, or exempt, from the requirement that all buildings over three stories high be of at least masonry noncombustible construction. However, other ordinances require that if any such building is damaged to the extent of 50% or more, the undamaged portions must be demolished and the building re-built to meet current construction standards. An earthquake damages nearly 60% of the structure. The ordinance is enforced and this Supplemental Coverage pays for the value of the undamaged portion of the building that had to be torn down.

Note: Ordinance or Law Coverage was one of the Supplemental Coverages in the previous edition but this version is almost a complete rewrite. The coverage is separated into two different Supplemental Coverages in this edition and each must be reviewed to determine the complete extent of the coverage provided. Please refer to PF&M Section 130.6-8, CP 04 04–Ordinance or Law Coverage, for more information about Ordinance or Law Coverage.

4. Ordinance Or Law (Increased Cost To Repair And Cost To Demolish/Clear Site)

When a covered building or structure sustains direct physical loss or damage from a covered peril, the insurance company pays the increased cost to repair, rebuild or reconstruct damaged portions of a building or structure as well as undamaged portions, whether they must be demolished or not, resulting from enforcement of building, zoning or land use laws in effect at the time of loss. If the property is repaired or rebuilt, it must be for a similar occupancy or purpose as before, unless regulations require otherwise. Increased costs of construction are not covered until the construction is actually done and completed within two years after the date of loss. The insurance company may extend the period for repair or replacement during the two-year period. When it does, it must do so in writing.

The insurance company also pays the costs to demolish and clear the undamaged portions of the covered building or structure on the site of the covered loss if required by a government regulation in force at the time of the covered loss or damage.

However, there is no coverage for:

• Costs of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, responding to or assessing the effects of pollutants;
• Costs associated with enforcement of any law requiring testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, responding to or assessing the effects of fungus; or
• Costs associated with enforcement of any law that should have been complied with before the covered loss but was not, even if the building or structure was not damaged.

If the covered property is repaired or replaced at the same or a different site, the insurance company pays the amount spent to demolish and clear the site and the actual increased cost to rebuild with like kind and quality for the same purpose or $100,000, whichever is less.

If the property is repaired or replaced and required to relocate, the insurance company pays the amount actually spent to demolish and clear the site of undamaged parts of the covered building or structure plus the increased costs to rebuild at the new covered building or $100,000, whichever is less.

If the covered property is not repaired or replaced, the insurance company pays the amount actually spent to demolish and clear the site of undamaged parts of the covered building or structure or $100,000, whichever is less. The $100,000 limit can be increased on the schedule of coverages but is still subject to the actual costs.

5. Personal Property–Acquired Locations

Coverage applies to direct physical loss or damage caused by or resulting from a covered peril to business personal property at locations acquired during the policy period for up to 90 days after the acquisition date or when reported to the insurance company, whichever occurs first, but not past the expiration date. The most paid in any one occurrence is the value of covered property as indicated on the schedule of coverages and as described under Valuation or $100,000, whichever is less. Additional premium is due from the date of acquisition.

Note: The $100,000 limit can be increased on the schedule of coverages but is still subject to the value of scheduled covered property.

6. Pollutant Cleanup And Removal

The insurance company pays the insured's expenses to extract pollutants from land or water if their release or discharge in any manner was caused by a covered peril that occurred during the policy period. The expenses to extract pollutants are paid only if reported to the insurance company within 180 days of the date of loss. Costs related to testing, evaluating, observing or recording pollutants are not covered but the costs of testing necessary to extract pollutants from land or water are covered. The most paid is $25,000 at each location for all such expenses caused by a covered peril that occurs during each separate 12-month policy period.

Example: On 4/1/07, a covered peril occurs at the insured's building and causes a floor to collapse. The collapse damages the concrete basement and cracks an underground oil tank. On 9/1/07, oil is discovered in and around the private well providing an auxiliary water supply to the insured's building. After analyzing all the details and information, the conclusion is that the damage to the tank was a result of the covered peril that caused the collapse. The removal of the oil-soaked dirt is covered, up to the $25,000 limit, provided the expenses are reported to the insurance company in writing by 9/30/07.

It is unlikely that the $25,000 limit is sufficient to pay for most pollutant cleanup situations. Consult the Specialty Markets for EIL–Environmental Impairment Liability Coverage in The Insurance Marketplace, a publication of The Rough Notes Company, Inc., for sources available to provide this coverage with higher limits.

7. Property In Transit

Coverage applies to direct physical loss or damage caused by a covered peril to covered business personal property when in transit by any mode or conveyance. This does not apply to property in the hands of salespersons. The most paid in any one occurrence is $50,000, regardless of the number of vehicles, trailers, conveyances, containers or combination of any of these. The $50,000 limit can be increased on the schedule of coverages.

Note: This supplemental coverage is not subject to the 1,000-foot restriction involving buildings or structures at covered locations or within that distance of a covered location.

PERILS COVERED

1. DIC Coverage

When DIC Coverage is indicated on the schedule of coverages, the insurance company covers risks of direct physical loss or damage unless it is excluded or limited. However, it does not cover loss or damage caused by or resulting from a named peril as defined in this coverage form except for Limited Fungus Coverage under Coverage Extensions.

2. DIC Coverage Excluding Property Perils

When DIC Coverage Excluding Property Perils is indicated on the schedule of coverages, the insurance company covers risks of direct physical loss or damage unless it is excluded or limited, subject to the following provisions, exclusions and limitations:

• The insurance company does not cover loss or damage caused by or resulting from a peril covered by the underlying property policy indicated on the schedule of coverages, whether it can be collected or not.
• If Earthquake And/Or Flood Excess Coverage is indicated on the schedule of coverages, the insurance company pays the amount of loss or damage up to its limit that exceeds the limit provided by the underlying policy indicated on the schedule of coverages caused by earthquake and/or flood.
• If Flood Excess Coverage is indicated on the schedule of coverages, the insurance company pays the amount of loss that exceeds the limit provided under the National Flood Insurance Program (NFIP) policy, up to its limit, for loss or damage caused by flood.
• The insurance company does not drop down from its excess coverage position to pay amounts that cannot be collected under either the underlying property policy or the NFIP Policy.

PERILS EXCLUDED

1. The first group of exclusions is essentially absolute. Subject to specific exceptions, loss or damage by each is totally excluded, regardless of any other cause or event that contributes to a loss, either concurrently or in any other sequence. The insurance company does not pay for any direct or indirect loss or damage caused by or resulting from any of these events.

a. Civil Authority

There is no coverage for loss resulting from the order of any civil or government authority, including seizure, confiscation, destruction or quarantine of property. Coverage does apply for loss or damage resulting from such acts when done to prevent the spread of fire, as long as the fire resulted from a covered peril.

b. Earth Movement

Coverage does not apply to loss or damage caused by or resulting from any earth movement except to the extent that this coverage form provides earthquake coverage. This exclusion does not apply to sinkhole collapse or to covered property in transit.

c. Flood

The insurance company does not pay for loss or damage caused by or resulting from flood except to the extent that this coverage form provides flood coverage. This exclusion does not apply to covered property in transit.

d. Fungus

Coverage does not apply to loss, cost or expense caused by or related to the existence or any activity of fungus, except as provided under Coverage Extensions–Limited Fungus Coverage. This exclusion does not apply to loss or damage caused by or resulting from collapse caused by hidden decay or covered property in transit.

e. Nuclear Hazard

The insurance company does not insure against loss or damage caused by or resulting from any nuclear reaction, radiation or contamination, whether the nuclear incident was controlled or not or was caused by any means. Any loss caused by the nuclear hazard is not treated as a loss caused by fire, explosion or smoke. However, coverage applies to direct loss or damage caused by fire resulting from the nuclear hazard.

Example: Enterprising Hospital's radiation unit is located next to the boiler room. An earthquake causes the boiler room walls to crack, resulting in the release of radioactivity into other areas of the hospital. There is no coverage for the damage caused by the radioactivity.

f. Ordinance Or Law

There is no coverage for any loss or increased construction costs because of the enforcement of any government regulation that controls the use, construction or repair of any property, other than that provided under Supplemental Coverages–Ordinance Or Law. This includes demolition of that property and the removal of its debris. This exclusion also applies to enforcement that occurs even if the property has not been damaged and to increased costs incurred as a result of complying with the regulation, including any construction, demolition or debris removal activities.

g. Utility Failure

Coverage does not apply to loss or damage caused by or resulting from interruption of any power or utility service that takes place away from a covered location. This includes increased or reduced voltage, high or low pressure and other interruptions of normal services.

Note: Coverage does apply to direct loss or damage caused by or resulting from a covered peril that occurs at a covered location resulting from any power interruption.

h. War And Military Action

The insurance company does not pay for loss or damage caused by any act of war including undeclared and civil war or warlike action by a military force. It includes actions taken to hinder or defend against an actual or expected attack by any government or sovereign authority that uses military personnel or other agents. It also includes acts of insurrection, rebellion, revolution, or unlawful seizure of power taken by any government authority to prevent or defend against any of these. If any action within the terms of this exclusion involves nuclear reaction, radiation or contamination, this exclusion applies in place of the nuclear hazard exclusion.

2. The second group of exclusions applies to loss or damage caused by or resulting from any of the following loss events. Some of these exclusions have exceptions, conditions or limitations that should be noted and reviewed carefully. The insurance company does not pay for any loss or damage caused by or resulting from any of these events.

a. Animal Nesting, Infestation Or Discharge

There is no coverage for loss or damage caused by or resulting from nesting, infestation, discharge or release of waste products or secretions by animals. This includes, but is not limited to, birds, insects and vermin.

Note: If any animal act indicated above results in breakage of building glass, coverage applies to the loss or damage caused by or resulting from the breakage of building glass.

Note: Vermin refers to a variety of small animals and insects, such as rats and cockroaches that are destructive, annoying or harmful to health.

b. Collapse

Except as provided under Other Coverages–Collapse, the insurance company does not pay for loss or damage caused by or resulting from collapse. If collapse results in the occurrence of a covered peril, coverage applies to the loss or damage caused by or resulting from that covered peril.

c. Contamination Or Deterioration

Loss or damage caused by contamination or deterioration is excluded. This includes corrosion, decay, rust or any quality, fault or weakness in covered property that causes it to damage or destroy itself. If contamination or deterioration results in the occurrence of a covered peril, coverage applies to the loss or damage caused by that peril.

d. Criminal, Fraudulent, Dishonest Or Illegal Acts

Coverage does not apply to loss caused by or resulting from criminal, fraudulent, dishonest or illegal acts, committed alone or in collusion with another, by any of the following:

• The named insured
• Others with an interest in the property
• Others to whom the property has been entrusted

Note: If the covered property is in the custody of carriers for hire, this exclusion does not apply.

• The named insured's partners, officers, directors, trustees, joint venturers, members or managers as applicable based on the named insured's type of business organization.
• Employees of any if the groups indicated above. Employees are not covered even if the act occurs when they are not considered to be working.

Note: Coverage applies if employees destroy property. It does not apply to acts of theft done by employees.

e. Defects, Errors And Omissions

There is no coverage for loss or damage caused by or resulting from any act, error or omission, whether negligent or not, and whether on or off covered locations, relating to:

• Land use;
• Property design, specification, construction, workmanship, installation or maintenance;

Example: The Smallville City Council decides to delay performing preventive maintenance on a floodwall. The wall collapses and floods Healthy Manufacturing. Healthy Manufacturing cannot collect for its damages from this policy because the loss was due to improper maintenance of the floodwall.

• Planning, zoning, development, siting, surveying, grading or compaction; or
• Maintenance of property. This includes land, structures or improvements.

Coverage also does not apply to defects, weakness, inadequacy, fault or unsoundness in construction materials, whether on or off covered locations, the cost to make good on a design error, or data processing errors or omissions in programming or giving incorrect instructions.

In addition, the insurance company does not pay for loss to business personal property caused by deficiencies or defects in design, specifications, materials or workmanship or caused by latent or inherent defects.

Important: Coverage does apply to any resulting loss or damage caused by a covered peril unless that resulting loss is excluded.

f. Electrical Currents

Loss or damage caused by electrical arcing or currents is excluded. However, if the excluded arcing or currents results in the occurrence of a covered peril, the resulting loss or damage is covered.

g. Explosion, Rupture Or Bursting

The insurance company does not pay for loss or damage caused by explosion, rupture or other bursting of steam boilers, pipes and engines or steam and gas turbines. This exclusion applies only to loss or damage to the object in which the loss occurred.

h. Freezing

Coverage does not apply to loss or damage caused by or resulting from water, other liquids, powder or molten material that leaks or flows from plumbing, heating, air conditioning systems or appliances other than fire protection systems due to freezing.

Note: This exclusion does not apply if the insured uses reasonable care to maintain heat in the building or drains the equipment and turns off the supply in cases where heat is not maintained.

i. Increased Hazard

Loss or damage that occurs when the hazard is materially increased by any means within the insured's knowledge or control is not covered.

j. Loss Of Use

There is no coverage for loss caused by or resulting from delay, loss of use or loss of market.

k. Mechanical Breakdown

Loss or damage due to mechanical breakdown is not covered. This includes damage to moving parts of machinery because of centrifugal force. However, if such a loss results in the occurrence of a covered peril, the resulting loss or damage is covered.

Note: The Neglect exclusion in the previous edition is not in the April 2007 edition.

l. Missing Property

Unexplained or mysterious disappearance of covered property is not covered if the only proof that a loss occurred is based on an audit or physical inventory and there is no physical evidence to indicate what happened to it.

Note: This exclusion does not apply to covered property in the custody of carriers for hire.

m. Named Perils

Coverage does not apply to loss or damage caused by or resulting from a named peril except as described in Coverage Extensions–Limited Fungus Coverage.

n. Pollutants

There is no coverage for loss or damage caused by or resulting from any release, discharge, seepage, migration, dispersal or escape of pollutants, unless the event is caused by a named peril, and except for the coverage provided under Supplemental Coverages–Pollutant Cleanup And Removal.

o. Seepage

The insurance company does not pay for loss or damage caused by or resulting from repeated or continuous seepage or leakage of water that occurs over a period of 14 days or more.

p. Settling, Cracking, Shrinking, Bulging Or Expanding

Coverage does not apply to loss or damage caused by or resulting from settling, cracking, shrinking, bulging or expansion of pavements, footings, foundations, walls, ceilings or roofs.

Note: Any resulting loss or damage caused by the breakage of building glass is covered.

q. Smog, Smoke, Vapor Or Gas

There is no coverage for loss or damage caused by or resulting from smog, smoke, vapor or gas from industrial operations or agricultural smudging.

Note: The Specified Perils exclusion in the previous edition is not in the April 2007 edition.

r. Temperature/Humidity

Loss or damage caused by dryness, dampness, humidity, changes in or extremes of temperature is not covered.

s. Voluntary Parting

Loss or damage caused by or resulting from the insured voluntarily parting with either title to or possession of any covered property because of a fraudulent scheme, trick or false pretense is not covered.

t. Wear And Tear

Loss or damage caused by wear and tear, marring or scratching is excluded. If any of these events results in the occurrence of a covered peril, the resulting loss or damage caused by that peril is covered.

Note: Wear and tear is damage, diminishment in value or erosion due to long or hard use or exposure, including breakdown over time and eventually becoming unusable because of previous use. This includes the tendency of property to pull apart or break down into pieces because of forces applied to it.

ADDITIONAL PROPERTY NOT COVERED OR SUBJECT TO LIMITATIONS

1. Boilers

There is no coverage for loss or damage to steam boilers, steam pipes, steam turbines or steam engines caused by a condition inside them. In addition, coverage does not apply to hot water boilers or heaters for damage caused by any condition inside them, including bursting, cracking or rupturing.

2. Earthquake

Coverage does not apply to loss or damage caused by or resulting from earthquake that began before the inception date of this coverage form.

3. Glassware/Fragile Articles

The insurance company does not cover breakage of fragile articles such as glassware, statuary, porcelains, bric-a-brac or building glass.

Note: This exclusion does not apply to structural building glass, glass containers or bottles held for sale, or scientific instruments and photographic lenses.

4. Gutters And Downspouts

There is no coverage for loss or damage to downspouts and gutters caused by or resulting from the weight of ice, sleet or snow.

5. Interior Of Buildings

Coverage does not apply to loss or damage to the interior of buildings or structures caused by or resulting from rain, snow, sleet, ice, sand or dust unless they enter through an opening in the building first made by a named peril or the loss results from the thawing of ice, sleet or snow on the building or structure.

6. Masonry Veneer

Masonry veneer, other than stucco, on wood frame walls damaged due to earthquake is not covered unless it is indicated as covered on the schedule of coverages or if the veneer makes up less than 10% of the total building or structure exterior wall area.

Note: The value of masonry veneer is not included in the value of covered property or the amount of loss when applying the earthquake deductible.

Note: Missing Property in the previous edition is not in the April 2007 edition.

7. Personal Property In The Open

There is no coverage for loss or damage to personal property in the open caused by rain, snow, ice or sleet. Note: This exclusion does not apply to covered property in the custody of a transportation company or a carrier for hire.

8. Transferred Property

Property lost or damaged because it was transferred to a person or place away from a covered location due to unauthorized instructions is not covered.

OTHER COVERAGES

1. Collapse

Loss or damage caused by or resulting from direct physical loss involving collapse as defined below is covered. Coverage applies to a building or structure, a part of a building or structure or personal property inside a building or structure. The only collapse coverage provided is collapse caused by:

• Hidden decay, unless the insured knew the decay was present before the collapse;
• Hidden insect or vermin damage, unless the insured knew of the damage before the collapse;
• Weight of people or personal property;
• Weight of rain that collects on a roof; or
• Use of defective materials or methods of construction, remodeling or renovation if the collapse occurs during such operations.

If the collapse occurs after such operations are complete and is caused by one of the perils listed above, the insurance company pays for the loss or damage even if use of defective materials or methods of construction, remodeling or renovation contributed to the collapse.

Collapse is the sudden and unexpected falling in or caving in of a building, structure or any part thereof to the extent that it cannot be occupied for its intended purpose.

Buildings and structures not considered in a state of collapse include:

• One still standing or any portion of it still standing that shows evidence of bending, bulging, cracking, expanding, leaning, sagging, settling or shrinking;
• One in danger of falling in or caving in; and
• A portion still standing even if it has separated from another portion of the building or structure.

Example: The loud sound of a crack disturbs a prayer service at the church on a Sunday morning. A second crack alerts the loss prevention members in the congregation and they advise all to evacuate the building. The church hires a contractor to inspect the building. The report states that the main beam supporting the roof is rotted through and the roof is in imminent danger of collapse. The church sends a claim to the insurance company for collapse but coverage is denied because the roof has not yet collapsed.

2. Tearing Out And Replacing

When a covered loss to buildings or structures due to water, other liquids, powder, or molten material escaping from a system or appliance occurs, the insurance company also pays for tearing out any part of the building or structure to repair the system or appliance from which the escape occurred. Coverage does not apply to the system or appliance itself. The insurance company also pays the cost to repair damaged parts of fire extinguishing equipment and systems if damage resulted in discharge of any substance from such a system or if the damage was caused directly by freezing.

Example: The following situations are covered under this Other Coverage:

• A water pipe bursts inside the second floor wall but the wall is not damaged and the situation goes unnoticed. Water starts dripping through the first floor ceiling and the plumber traces the problem to the second floor pipe. The plumber must remove part of the second floor wall in order to repair the pipe. Coverage applies to the damage to the ceiling caused by the water because it covers both building and business personal property. This coverage pays the costs to tear out the second floor wall to remove and repair the piping. It does not cover the cost to repair the damaged pipe itself.
• When the sprinkler system discharges, the discharge causes some of the older pipes to burst. Coverage applies to both the damage caused by the water and the damage done to the sprinkler system.

WHAT MUST BE DONE IN CASE OF LOSS

1. Notice

The insured must give prompt notice of a loss to the insurance company or its agent and include a description of the property lost or damaged. In addition, the appropriate law enforcement agency must be notified if the event causing the loss is a crime.

Note: The insurance company may also require that the notice be in writing.

2. You Must Protect Property

During and after a loss, all reasonable steps must be taken to protect covered property from further loss. The insurance company pays reasonable costs the insured incurs to do so, subject to the insured keeping records of such costs incurred, but payment of these costs does not increase the limit. However, coverage does not apply for any repairs or emergency measures performed on property not already damaged by a covered peril.

Example: The cost of sandbags used to protect the property from an imminent flood is not covered, even if flood is an insured peril. However, if the flood causes damage to covered property, the cost of additional emergency measures is covered if flood is a covered peril.

3. Proof Of Loss

The insured must send the insurance company its prescribed proof of loss forms within 60 days of its request to do so. The information provided must include the time, place and circumstances surrounding the loss and information on any other insurance coverage that may apply. It must also include the interest of the insured and others with respect to the property involved, including lienholders, loss payees and mortgages. Any changes in title to the property during the policy period must be disclosed, in addition to providing any other reasonable information the company may require to adjust and settle the loss.

4. Examination

Examination under oath may be required in matters relating to the loss as often as reasonably requested by the insurance company. The company has the right to examine each individual and receive statements separately and not in the presence of others, if more than one person is examined.

5. Records

The insured must maintain and produce any records relating to the loss and allow the insurance company to make copies and take extracts of them as often as it reasonably requests. Records include, but are not limited to, tax returns and bank microfilms of all cancelled checks.

Please refer to PF&M Section 131_C010, Church Financial Records Held Subject To Review By Insurer, in Court Cases, for an example of a situation involving an insured refusing to release records.

6. Damaged Property

Both damaged and undamaged property must be made available for the insurance company's inspection as often as reasonably necessary. It must also be allowed to take samples of the property to the extent necessary to adjust and settle the loss.

7. Volunteer Payments

If the insured voluntarily makes any payments, assumes any obligations, pays or offers rewards or incurs any other expenses without the insurance company's express approval, except to protect covered property from further damage, it does so at its own expense.

8. Abandonment

Abandoning damaged property to the insurance company without its written consent is prohibited.

VALUATION

1. Actual Cash Value

If covered property is valued on an actual cash basis, the value is based on the actual cash value, including a deduction for depreciation, at the time of loss and further limited by items 3 through 6 below.

Note: Actual cash value is not the same as market value. Market value is the amount the insured could get by selling the property on the open market.

2. Replacement Cost

The value of covered property is based on its replacement cost and is further limited by items 3 through 6 below and the following:

• The cost of repair or replacement is limited to similar materials used for the same purpose. However, it cannot be more than the amount actually spent to repair or replace the damaged or destroyed property.

• The damaged or destroyed property must actually be repaired or replaced before replacement cost valuation applies.
• The insured may first make a claim for actual cash value before the damaged or destroyed property is actually repaired or replaced. A claim for replacement cost can be made later if the insured informs the insurance company of its intent to do so not later than 180 days after the date of loss.

3. Loss To Parts

The value of a lost or damaged part of property consisting of several parts is the cost to repair or replace only the lost or damaged part.

4. Merchandise Sold

The value of merchandise sold but not delivered is based on its selling price, reduced by all discounts and expenses not yet incurred.

Example: Rick's Electronics sells three televisions to Greg. The retail price is $500 each but Rick discounts the cost to $425 each because Greg purchases three of them. The retail price also includes a delivery fee of $25 each. Before Rick can deliver the televisions to Greg, a flood at the store destroys all of Rick's stock. The value of the televisions is $500 each, reduced by the $75 discount and the $25 delivery expense. As a result, the value of the three televisions is $400 each or $1,200 total.

5. Pair Or Set

The value of a loss that involves damage or loss of one part of a pair or set is based on a reasonable proportion of the value of the entire pair or set. Loss of one part of a pair or set is not considered a total loss.

Note: This recognizes that the value of the whole is greater than the value of the individual parts.

Example: The insured's chess set is valued at $1,000. After the set is scattered by the force of a tornado, all the pieces are located except for a rook and a queen. Because of the type of wood used in the construction of the set, the missing items cannot be replaced. Since the estimated value of the incomplete set is $750, the insurance company pays $250, the reduction of value of the set.

6. Tenant's Improvements

The value of tenant's improvements losses is based on the actual cash value if repaired or replaced at the insured's expense within 24 months.

If the improvements are not repaired or replaced, the value is based on a portion of the insured's original cost. It is determined by a formula best characterized as A divided by B multiplied by C, where:

• A is the number of days between the date of loss and the end of the lease;
• B is the number of days from the date the improvements were installed to the expiration date of the lease; and
• C is the original cost of the tenants' improvements.

Note: If the lease has a renewal option, use the last date in the option as the new expiration date.

There is no coverage if repairs are made at the expense of others. Please refer to PF&M Section 130.6-16, Improvements and Betterments, for more information on improvements.

HOW MUCH WE PAY

1. Insurable Interest

The insurance company does not pay more than the insured's insurable interest in the covered property at the time of loss.

Note: Insurance is meant to restore a person's pre-loss financial position, not to improve or enhance it.

2. Deductible

The insurance company pays only the amount of loss in any one occurrence that exceeds the deductible amount indicated on the schedule of coverages.

• With respect to flood and earthquake deductibles, the flood deductible is expressed as a dollar amount. Earthquake deductibles may be expressed as either a dollar amount or a percentage. A percentage deductible is the percentage of the value of the covered property at the time of loss.
• If more than one deductible is indicated on the schedule of coverages and more than one deductible can apply to a given loss, only the highest applicable deductible applies to the covered loss.

Examples:

• If the loss is $1,000 and the deductible is $5,000, no payment is made.
• If the loss is $5,000 and the deductible is $1,000, the amount paid is $4,000.
• The limit of insurance is $100,000. The loss is $110,000 and the deductible is $5,000. The full $100,000 limit is paid because the loss exceeds the deductible and the amount of loss is greater than the limit of insurance.

Note: All examples assume that the coinsurance clause does not apply.

3. Earthquake Period

Earthquakes that occur within a 168-consecutive hour period are considered a single loss. This time period is not limited by the policy expiration date.

Note: Earthquakes are subject to aftershocks. If each is treated as a separate occurrence, the deductible is applied to each occurrence. For this reason, all events that take place within 168 consecutive hours are treated as one occurrence and are not limited by the policy expiration date.

Example: The policy period is 1/1/08 to 1/1/09. The first earthquake shock occurs on 12/31/08. The insured's brick veneering falls off following an aftershock that occurs on 1/2/09. This loss is covered under the 1/1/08-1/1/09 policy period because it is within 168 hours of the first earthquake shock.

4. Loss Settlement Terms

The insurance company pays the lesser of the amount determined under Valuation, the cost to repair, replace or rebuild the property with material of similar kind and quality to the extent possible, or the limit of insurance that applies to the covered property.

• The occurrence limit indicated on the schedule of coverages is the most paid at a covered location in any one occurrence.
• The aggregate limit indicated on the schedule of coverages is the most paid at a covered location during a 12-month period.

The insurance company does not pay more during a 12-month period than the catastrophe limit indicated on the schedule of coverages, regardless of the number of locations involved.

5. Insurance Under More Than One Coverage

If two or more coverages in the coverage form apply to the same loss, the insurance company pays no more than the value of the actual claim, loss or damage sustained.

6. Excess Insurance

The insured has the right to purchase insurance in amounts that exceed the limits indicated on the schedule of coverages. That excess insurance is not considered when applying any pro rata or apportionment provision.

LOSS PAYMENT

1. Loss Payment Options

a. Our Options

The insurance company has four loss payment options if a covered loss occurs. It can pay the value of the lost or damaged property, pay the cost of repairing or replacing the lost or damaged property, rebuild, repair or replace the property with similar property, to the extent possible and within a reasonable period of time, or take any part or all of the property at the agreed on or appraised amount.

b. Notice Of Our Intent To Rebuild, Repair Or Replace

The insurer must notify the insured of its intent to rebuild, repair or replace within 30 days after receiving a properly completed proof of loss.

Note: The first two options involve only money transactions. The second two directly involve the insurance company with the property itself. Once the insured submits the required proof of loss, the insurance company must inform the insured of the option it plans to use within 30 days of the date it is submitted.

Example: Friendly Insurance Company informs Pringles Manufacturing that it is exercising the first option above for the building loss and pays $1,000,000 so Pringles can rebuild. Friendly exercises the last option above with respect to Pringles' stock and pays $500,000 based on the appraised value of the stock and Friendly keeping the stock to sell as salvage.

2. Your Losses

a. Adjustment And Payment Of Loss

The insurance company adjusts all losses with the insured and pays the insured, unless another loss payee named in the policy is involved.

b. Conditions For Payment Of Loss

The insurance company pays a covered loss within 30 days after it receives a properly prepared proof of loss and the amount of loss is established. This is done through either a written agreement between the insurer and the insured or after an appraisal award is filed with the insurer.

3. Property Of Others

a. Adjustment And Payment Of Loss To Property Of Others

The insurance company can adjust and pay losses involving property of others with either the insured acting on behalf of the property owner or with the property owner, at its discretion.

b. We Do Not Have To Pay You If We Pay The Owner

When the insurer pays the property owner, it is not obligated to pay the insured. In addition, if the property owner sues the insured, the company has the option of defending the insured in that suit.

OTHER CONDITIONS

1. Appraisal

The insurance company and the insured may not always agree on the value of a covered claim. This condition provides one method to solve disputed claims.

Either party can request an appraisal to determine the value of a disputed claim. Once requested, the parties have 20 days to obtain their own independent and competent appraisers and supply the appraiser's name to the other party. The two appraisers then have 15 days to select a competent impartial umpire. If they cannot agree on an umpire within 15 days, either can request that a judge in the court of record in the state where the property is located appoint one.

The appraisers then determine the value of the claim. Any differences are submitted to the umpire. Once any two of the three parties agree, the amount of loss is set.

Each party pays its own appraiser. Both parties share the cost of the umpire and other expenses.

2. Benefit To Others

The insurance provided does not directly or indirectly benefit any other party having custody of the insured's property.

3. Conformity With Statute

Any condition in this coverage form that conflicts with any applicable law is amended to conform to that law.

Note: The Control of Property condition in the previous edition is not in the April 2007 edition.

4. Estates

Note: This condition applies only if the insured is an individual.

a. Your Death

If the insured dies, the person having custody of the insured's property is an insured until a qualified legal representative is appointed. At that point, the insured's legal representative becomes an insured. Both are insureds but only with respect to the property insured under this coverage form.

b. Policy Period Is Not Extended

This coverage does not extend past the coverage expiration date.

Note: This was the Death condition in the previous edition.

Note: The Liberalization condition in the previous edition is not in the April 2007 edition.

5. Misrepresentation, Concealment Or Fraud

This coverage is void if any insured at any time willfully concealed or misrepresented a material fact relating to the insurance provided, the property covered or its interest in the property, or if fraud or false swearing by any insured took place concerning the insurance provided or the property covered.

Note: The insured must deal with the insurance company honestly. If the insured intentionally misrepresents or conceals a material fact or information, its rights of recovery may be voided. This means that the insurance contract is treated as simply having never existed versus a particular claim being denied.

Note: The Mortgagee Provisions condition in the previous edition is not in the April 2007 edition.

6. Policy Period

Only covered losses that occur during the policy period are paid.

7. Recoveries

Payment of the loss does not end the obligations of the insured and the insurance company toward one another. If the insurance company pays a loss and the lost or damaged property is subsequently recovered or the parties responsible for the loss pay for it, additional provisions apply.

Either party recovering property or payment must inform the other. Recovery expenses incurred by either party are reimbursed first. If the insured keeps the recovered property, it must refund the amount of the claim the insurance company paid, unless a different amount is agreed to. If the claim paid is less than the agreed loss due to application of a deductible or other limitations, any recovery is prorated between the insured and the insurer based on the insurer's respective interest in the loss.

8. Restoration Of Limits

Payment of a claim does not reduce the applicable limits available for future claims except as indicated under Limited Fungus Coverage and subject to the aggregate limit and the catastrophe limit.

9. Subrogation

The insurance company acquires the insured's rights of recovery from third parties after it pays a loss. The insured must assist the insurance company in securing those rights. If it hinders or impairs those rights, the insurer is not obligated to pay the loss.

Note: The insured can agree in writing to waive recovery rights from others before a loss occurs.

Example: If the insured tells a tenant that the loss was not its fault and that it doesn't have to pay for the fire damage to the building, it has impaired or jeopardized the subrogation rights of the company. Since this action technically violates the subrogation condition, the insurance company may not be required to pay the insured for this claim.

Example: The insured and its tenant agree in the written lease to mutually waive any rights of recovery against each other. If a covered loss occurs, coverage applies because the agreement was executed in writing before the loss occurred.

Please refer to PF&M Section 130.6-13, Transfer Of The Rights Of Recovery (Subrogation), for more information about subrogation.

Please refer to PF&M Section 131_C018, Mutual Subrogation Waiver Clause Barred Recovery By Property Owners Insurer, in Court Cases, for an example of written waivers of subrogation executed before a loss occurs.

10. Suit Against Us

The insurance company cannot be sued by anyone for any coverage until all the terms of the coverage form have been met. Suits must be brought within two years after the insured first had knowledge of a loss. If a state law invalidates this condition, any suit brought must comply with the provisions of that law and begin within the shortest period of time allowed by law.

Note: It is normal for a basic coverage form to be modified by mandatory state-specific endorsements addressing issues that relate to that specific state.

11. Territorial Limits

Covered property must be located in the United States, its territories and possessions, Canada or Puerto Rico in order for coverage to apply.

Note: The Vacancy–Unoccupancy condition in the previous edition is not in the April 2007 edition. It is in Additional Coverage Limitations analyzed below.

12. Carriers For Hire

The insured may accept shipping documents from transportation companies that limit their liability to amounts less than the replacement cost or actual cash value of the covered property.

ADDITIONAL COVERAGE LIMITATIONS

Vacancy/Unoccupancy

1. When Vacant Or Unoccupied We Do Not Pay For

The insurance company does not pay for loss or damage caused by or resulting from attempted theft, breakage of building glass, sprinkler leakage (unless the system was protected against freezing), theft, vandalism or water damage if the building or structure was:

• Vacant more than 60 consecutive days; or
• Unoccupied more than 60 consecutive days or the usual or incidental unoccupancy period for the covered location, whichever period is longer.

2. Reduction In Payment

The amount paid for any one loss not otherwise excluded is reduced by 15%.

3. Unoccupied Means

An unoccupied location is one where customary activities or operations are no longer being conducted but where business personal property still remains. A location is considered vacant when the occupants have completely vacated the premises and removed virtually all business personal property. Buildings or structures under construction are neither vacant nor unoccupied.

DEFINITIONS

Defined terms are used throughout the policy. Restricting their meaning to the definition in it provides the means for all parties involved with the policy to have a clearer understanding of the coverage intended. Fourteen terms are defined:

1. Aggregate limit is the limit or amount of coverage that applies to loss or damage at a covered location during each separate 12-month coverage period.

Note: This is limited by the expiration or anniversary date.

2. Catastrophe limit is the limit or amount of coverage that applies to all loss or damage at all covered locations during each separate 12-month coverage period.

Note: This is limited by the expiration or anniversary date.

3. Covered locations has different meanings:

• It means any location where the insured has buildings, structures or business personal property insured under this coverage form if Blanket Coverage is indicated on the schedule of coverages.
• It means buildings or structures described on the Location Schedule attached to this coverage form if Scheduled Locations Coverage and Refer To Locations Schedule is indicated on the schedule of coverages.

Note: Covered locations means buildings or structures described on a schedule the insured must submit to the insurance company for it to keep on file if Scheduled Locations Coverage and Schedule On File is indicated on the schedule of coverages. The schedule must describe each building or structure and provide a limit for it in order for coverage to apply.

4. Earth Movement includes most types of earth actions that can damage buildings including earthquake, landslide, eruption, explosion or effusion of a volcano or mine subsidence, whether in current use or not. It also includes sinking, shifting or rising of earth including, but not limited to, erosion, expansion, shrinking, freezing, thawing, improper soil compaction and movement of underground water that causes or results in cracking, settling or shifting of foundations, buildings or structures.

5. Flood includes any condition that inundates normally dry land. The number of conditions is expansive and includes:

• Any overflow of inland or tidal waters, waves, tidal waves, tsunamis and any resulting wind driven or others pray;
• Any unusual or rapid accumulation or runoff of surface waters, regardless of source; and
• Mudslide or mudflow caused by the unusual and rapid accumulation or runoff of surface waters or waves or water currents that are beyond normal cyclical levels.

6. Fungus includes, but is not limited to, mold, mildew, protists, algae, slime mold, wet rot and dry rot. It also includes bacterium or a chemical, matter or compound produced or released by any of these elements including, but not limited to, toxins, spores, fragments and metabolites, such as microbial volatile organic compounds.

7. Limit is the amount of coverage that applies to the insured property.

8. Named Perils are the perils common to basic property coverage forms. It means fire, lightning, explosion, windstorm, hail, smoke that causes sudden or accidental loss or damage, physical contact with and loss or damage resulting from aircraft, vehicles or falling objects, riot, civil commotion, vandalism, sprinkler leakage or discharge of water or other substances from an automatic sprinkler system, sinkhole collapse and volcanic action. The falling objects peril excludes loss or damage to business personal property in the open, to the inside of buildings or structures or to business personal property inside buildings or structures unless the exterior of the roof or walls is first damaged and opened by a falling object.

9. Occurrence limit is the limit or amount of coverage that applies at each covered location in any one occurrence.

10. Pollutant is a broad and expansive term. It includes solids, liquids, thermal or radioactive contaminants and irritants including, but not limited to, acids, alkalis, chemicals, fumes, smoke, soot, vapor and waste. Waste also includes materials intended for recycling, reclamation and reconditioning, as well as for disposal. Visible and invisible electrical or magnetic emissions and sound emissions are also considered pollutants and are included.

11. Schedule of coverages is any page labeled as such that contains coverage information, including declarations or supplemental declarations.

12. Sinkhole collapse is the sudden settling or collapsing of the earth's surface into an underground opening created by water acting on limestone or some other rock formation. It does not include similar collapse into mines or other man-made voids, the value of the land or the cost to fill sinkholes.

Note: The definition of Specified Perils in the previous edition is not in the April 2007 edition.

13. Terms are all policy provisions, limitations, exclusions, conditions and definitions that apply to this coverage.

14. Volcanic action is airborne volcanic blast or shock waves, including ash, dust and particulate matter. It includes lava flow but does not include the cost to remove dust, ash or particulate matter that does not directly damage covered property.

ENDORSEMENTS AND SCHEDULES

AAIS has developed the following endorsement and schedule forms for use with the Difference In Conditions–Property Coverage Part.

IM 7801–Difference In Conditions Form–Property Coverage Part–Excess Coverage

This basic coverage form is actually a coverage part and is virtually identical to IM 7800–Difference In Conditions–Property Coverage Part but is used for Difference In Conditions written on an excess basis. For this reason, it has no Coverage Extensions, Supplemental Coverages or deductible provisions since these are all provided in the primary coverage form or policy. Since the insured's participating layer applies to all covered perils, there are no separate limits for flood, earthquake and all other perils.

IM 7806–Locations Schedule–Difference In Conditions

This locations schedule is used with to IM 7800–Difference In Conditions–Property Coverage Part to indicate locations where coverage applies as well as describe the covered location.

IM 7808–Schedule Of Coverages–Difference In Conditions–Excess Coverage

This schedule of coverages is used with IM 7801–Difference In Conditions Form–Property Coverage Part–Excess Coverage to indicate limits, valuation and available income coverage options.

IM 7810–Difference In Conditions–Income Coverage Part

This endorsement is a coverage part. It is used with IM 7800–Difference In Conditions–Property Coverage Part to cover loss of income as a result of loss or damage caused by or resulting from a covered peril to covered property at a covered location. Loss of income coverage is available for earnings, for rents and extra expense, or for earnings and extra expense.

IM 7813–Excess Coverage Schedule

This schedule is used with IM 7801–Difference In Conditions Form–Property Coverage Part–Excess Coverage to indicate the name of the insurance company or companies, their policy number(s) and their corresponding limits for primary policies and the insurers providing coverage on an excess layer basis.

Note: Difference In Conditions coverage forms and policies vary by insurance company and each policy, along with all its related coverage forms and endorsements, must be reviewed to determine coverages and restrictions for each risk.

IM 7814–Difference In Conditions–Income Coverage Part–Excess Coverage

This endorsement is used with IM 7801–Difference In Conditions Form–Property Coverage Part–Excess Coverage to insure loss of as a result of loss or damage caused by or resulting from a covered peril to covered property at a covered location. Loss of income coverage is available for either earnings, rents and extra expense, or earnings and extra expense.

IM 7815–Mortgageholders Endorsement

This endorsement is used with IM 7800–Difference In Conditions–Property Coverage Part and IM 7801–Difference In Conditions Form–Property Coverage Part–Excess Coverage. It includes mortgage provisions that apply to mortgages named in the coverage form. It provides the number of days' notice the mortgagee receives in the event of cancellation or non-renewal in addition to information on premium and loss payments.

UNDERWRITING

Underwriting Difference In Conditions (DIC) coverage involves four distinct types of exposure.

1. Primary exposures

The DIC provides drop down coverage for differences in conditions, primarily coverages, between the primary policy and the DIC. According to the Nationwide Inland Marine Definition, the DIC must not provide fire or explosion coverage, so those perils must be insured by the primary policy. Since most DIC's are written over "All Risk," "Risks Of Direct Physical Loss Or Damage" or "Special Causes Of Loss" policies, there are only a few coverages to underwrite with respect to the drop down feature.

One essential element of underwriting is analysis of all underlying coverage forms and endorsements. If the standard Insurance Services Office (ISO) or AAIS forms are used, the review should be fairly simple and straightforward. However, if manuscript coverage forms or unusual endorsements are involved, a much more careful review is needed. Rating and premium calculations for the DIC do not contemplate any part of it dropping down and being primary on some peril that should be covered by the primary or other excess underlying policy.

2. Earthquake exposures

Earthquake is usually written on a primary basis on the DIC. The three key factors in underwriting earthquake coverage are the location(s) involved, soil conditions and building construction.

• A number of areas in the United States are more susceptible to earthquake activity than others. The San Andreas Fault is a significant fault-line affecting much of California and Alaska, with parts of Oregon, Washington and Nevada also being affected. The New Madrid Fault fault-line epicenter is located just south of St. Louis, Missouri and this fault affects parts of that state, as well as Tennessee, Kentucky, Arkansas, Mississippi, Illinois, Indiana and Ohio. Some tremors have also occurred in the northeast part of the United States but that activity has been comparatively minor and is not considered to be of great concern at this time.
• Soil conditions affect the stability or instability of a building during an earthquake. Solid ground offers a better chance for a building to survive an earthquake. Landfill situations, such as the San Francisco area, are poor foundations for buildings during an earthquake. Sandy soil or loam with underlying limestone or similar rock strata shift and collapse when an earthquake occurs.
• The type of construction is also a major consideration. Mixed construction fails and does not hold together well during an earthquake. The way these buildings move during an earthquake causes stress fractures that can rip and separate mixed construction buildings. This is the factor that causes the masonry veneer and brick chimneys to separate from a frame building. Frame buildings are the most flexible type of construction and tend to fare better than most of the other types of common construction. Masonry construction is usually very rigid and this resistance factor causes cracks and other construction failures during an earthquake. The best construction uses earthquake resistive technologies that provide sway and movement flexibility to better hold up to strong earthquakes.

Earthquake deductibles are used as an underwriting tool. The more earthquake prone areas may require a deductible of 10% or more of the property limit, while less susceptible areas may be written with a flat deductible or a lower percentage deductible.

3. Flood exposures

The National Flood Insurance Program (NFIP) is the primary source for coverage for buildings situated in flood prone areas as determined by the Army Corps of Engineers. A DIC is almost always used as excess coverage over the NFIP and only rarely as the primary coverage. Significant flood issues include proximity to oceans, lakes, streams, creeks, rivers and other bodies of water. Flash flooding after a heavy rain in normally dry rivers or streambeds can be an area of concern. The flood history of an area enters into any decision to write or refuse to write flood coverage in that area.

Basements and sub basement areas are more prone to flood damage and distribution of values at the property location is important in any loss evaluation. Property highly sensitive to water damage should be kept at or above grade level.

Deductibles for this coverage are used as an underwriting tool. The more difficult and susceptible areas frequently require a deductible of 10% or more of the property limit while less susceptible areas may be written with a flat deductible or a lower percentage deductible.

4. Excess coverage

When the DIC is used as excess coverage, the most important part of the underwriting process is a clear understanding of the coverages, restrictions and conditions contained in all underlying policies. Any gaps between the underlying coverage and the excess could result in unplanned and undesirable drop down situations. All underlying policies should be written by financially stable companies able to respond to any loss that could occur. Most insurance companies writing this coverage normally agree to write excess over insurance companies with a certain minimum financial rating by the A.M. Best Company or one of the other financial rating organizations. This financial rating requirement also holds true for any company with whom they are participating on an excess basis.