CO 1000–COMMERCIAL OUTPUT PROGRAM PROPERTY COVERAGE PART ANALYSIS

(June 2025)

INTRODUCTION

AGREEMENT

DEFINITIONS

PROPERTY COVERED

PROPERTY NOT COVERED

COVERAGE EXTENSIONS (2002 edition)

SUPPLEMENTAL COVERAGES

SUPPLEMENTAL MARINE COVERAGES

PERILS COVERED

PERILS EXCLUDED

ADDITIONAL PROPERTY NOT COVERED OR SUBJECT TO LIMITATIONS

OTHER COVERAGES

WHAT MUST BE DONE IN CASE OF LOSS

VALUATION

HOW MUCH WE PAY

LOSS PAYMENT

OTHER CONDITIONS

INTRODUCTION

The Commercial Output Program (COP) is the American Association of Insurance Services, Inc. (AAIS) expanded property coverage form similar to a manufacturer’s output policy. The CO 1000 is the mandatory form that supports the entire program’s other coverages.

This policy can be stand alone since it contains building, business personal property, and inland marine coverages. Additionally, the form is written on an open peril blanket basis without a requirement for coinsurance.

This analysis is based on the Edition 3.0 version of the form. This form was last updated in 2002, and changes from the previous edition are in bold print.

Related Article: Compare: Commercial Output Program Edition 3.0 to Commercial Output Program Edition 2.0

AGREEMENT

The insurance company agrees to provide coverage in exchange for the named insured's payment of the required premium. The coverage provided is described in the coverage form and is subject to all policy terms and conditions. The Schedule of Coverages is treated as part of this policy, as are conditions relating to assignment, transfer of rights, cancellation, policy changes, inspections and examinations of books and records as part of CL 0100–Common Policy Conditions.

Related Article: CL 0100–AAIS Common Policy Conditions

Endorsements and schedules included with the policy at inception are listed as such on the Schedule of Coverages. Words having specific meanings are explained in the policy's Definitions section and are noted by quotation marks or bold type in the coverage form.

DEFINITIONS

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

NOTE: Coverage is given and also taken away through the use of definitions. Whenever a defined word is used in a form, review its definition carefully in order to understand its impact on the coverage.

The Editors added titles to enhance clarity.

1. You and Your

This is the named insured. It includes the individuals or organizations listed as insureds on the Schedule of Coverages. If a business acquires, sells, or establishes new entities during the policy period, it is crucial to add these new entities to the policy. Using broad terms, like "et al" or any similar general language, is not acceptable. Each covered entity must be individually listed, with any additions or deletions managed appropriately throughout the policy period.

Related Court Case: Seller of Restaurant Held Not Entitled to Policy Proceeds Despite Security Agreement with Buyer

2. We, us and our

This is the insurance company providing coverage.

3. Accident (2002 edition)

NOTE: This term is used only with equipment breakdown coverage.

Direct physical loss from one or more of the following:

4. Business (2002 edition)

Normal business activities that occur at locations covered by the policy. When coverage includes rents, business also means the operations conducted to keep the rental properties available for occupancy.

5. Computers

This term means not only the computer-related hardware that is owned or in the care, custody, or control of the named insured, but also includes its software.

Hardware and software are specifically defined elsewhere in the definitions section. While hardware must be owned or be the property of others in the named insured’s care, custody, or control, software does not have that limitation. This means that software can be a product the named insured owns, leases, or loans to others, or it may be software belonging to others that is in the named insured’s possession. The software could even be in the cloud!

6. Computer hacking (2002 edition)

This definition consists of two parts. First, there must be unauthorized entry by outside parties or employees into a computer, website, or network. Second, some level of damage must result from that entry. The following are damages that might occur, but other types of damage could also be included under this definition:

7. Computer virus (2002 edition)

This is a malicious, self-replicating electronic data processing code introduced into a computer, network, or website with the intent to cause damage. The following illustrates this term, but other types of damage could qualify under the term:

NOTE: The definition examples are identical to those under computer hacking except for the removal of the copying, scanning, and viewing of data records.

8. Covered equipment (2002 edition)

NOTE: This term is used only with equipment breakdown coverage.

There are two types of covered equipment. One type is machinery or items involved with generating, transmitting, or using energy. Another is the type that operates under vacuum or pressure environments during normal usage. The equipment must also be considered covered property as described in the Covered Property section of this coverage form.

It does not include any of the following:

9. Covered location (2002 change)

This is a premises or location where the named insured has buildings, structures, or business personal property that are insured under this coverage form. A vehicle containing covered property is not a covered location unless it is within 1,000 feet of a covered building or structure. CO 1052–Location Schedule can be used to limit coverage to apply only at specifically scheduled locations.

10. Data records (2002 edition)

This refers to files, documents, and various forms of information that are stored electronically on media.

11. Dependent locations (2002 edition)

Locations upon which the named insured’s business depends. These locations cannot be operated by the named insured. The following are examples of dependent locations, but not limited to:

NOTE: Declarations has been removed as a defined term and replaced by Schedule of Coverages.

12. Fine arts

These are rare, historical, or possess artistic merit and are authenticated works of art. Items that could qualify include paintings, etchings, pictures, tapestries, and art glass windows but may be expanded. 

13. Flood (2002 edition)

Flood is flood, but it's also surface water, waves, tidal water, or simply the general overflow of any body of water, whether driven by wind or not. Spray resulting from any of these conditions is also considered flood.

Because the definition of "flood" also includes the word "flood," the dictionary definition must be used alongside the rest of the definition to achieve a complete understanding of the term.

NOTE: In the 3.0 edition, the previously single Water exclusion has been separated into two different exclusions, Flood and Sewer Backup and Water Below the Surface. As a result, the definitions have also been separated.

14. Hardware

Any network of electronic machine components that is capable of accepting instructions and information, processing such information and using the instructions so that the desired result occurs. This definition includes all types of computers, peripherals (printers, monitors, and modems), and servers.  

15. Limit

This means the amount of coverage provided. Limits can be found on the Schedule of Coverages and in specific coverage extensions and supplemental coverages.

16. Media (2002 edition)

Films, tapes, cards, discs, drums, cartridges, cells, DVDs, CD-ROMs, flash drives, and other similar items used with hardware to record data. Media is also used to store data, programs, and proprietary programs used with computers.

17. Mobile equipment

This is equipment not stationary, but mobile in nature. It must be contractors’ equipment or similar to it. Self-propelled vehicles carrying mounted equipment are also considered mobile equipment if the primary purpose and design of the vehicle is to carry such equipment. Another category is unlicensed vehicles that, although designed for highway use, are not used on public roads.

Example of Mobile Equipment:

image001 mobile equip

18. Money (2002 edition)

Currency, bullion, coins, and circulating banknotes are all forms of money. Additionally, travelers checks, register checks, and money orders available for purchase are also classified as money.

19. Off-site server (2002 edition)

A computer or network utilized with the named insured’s website that is not situated on the named insured's premises. It must be located at the premises of the web host for the named insured. The web host may be either an independent contractor or the named insured’s internet service provider.

20. One accident (2002 edition)

NOTE: This term is used only with equipment breakdown coverage.

An initial accident and all resulting accidents or incidents stemming from that initial accident are treated as one. Every accident arising from the same occurrence is considered the same accident. This is important for applying deductibles and establishing limits of insurance.

Example: A boiler explodes. The explosion rips through the electrical wires, causing a sudden loss of centrifugal force, resulting in a machine bursting apart due to being thrown off balance. All of the damage results from the same occurrence and is therefore considered only one accident.

21. Perishable stock (2002 edition)

Personal property maintained under controlled conditions because it may be harmed if those conditions change.

NOTE: Commonly, perishable stocks are those requiring refrigeration, but this term also includes property susceptible to changes in humidity and light.

22. Pollutant

This encompasses nearly every type of solid, gas, thermal, electromagnetic, or sound contaminant or irritant. Waste includes any material intended for recycling, reclamation, or reconditioning, as well as waste intended for disposal. It also includes visible and invisible electrical or magnetic emissions, along with sound emissions. While electrical or magnetic emissions are not specifically defined, they may include stray voltage, microwave radiation, excessive light from lamps, and radiation from high-tension wires. Although sound emissions lack a formal definition, they might encompass loud music, machinery noise, and damage resulting from excessive vibration due to sound.

23. Programs and applications (2002 edition)

Operating software programs that were purchased separately by the named insured and stored on media, or purchased along with the hardware. Examples are word processing, spreadsheets, and graphic design programs.

24. Proprietary programs (2002 edition)

Programs and applications developed by or for the named insured and stored on its media and/or hardware.

25. Rents (2002 edition)

This represents the total of several components lost to the named insured:

·         Rental income from a covered location, reduced by the amount of any non-continuing expenses.

·         The fair rental value of any portion of a covered location occupied by the named insured, also reduced by any non-continuing expenses.

·         Tenant obligations for which the named insured becomes responsible after a loss occurs.

Example: Rudolph manufactures plastic novelty items. He owns the building he occupies for his business and rents part of the building to a machine shop operation. Rudolph negotiated for an electric power supply at an attractive rate for both his business and the machine shop. However, the arrangement cannot be discontinued for any reason except complete destruction of the property.

A fire completely destroys the machine shop and moderately damages Rudolph's operation. The machine shop operator decides to take his insurance proceeds and retire. The following items are considered rents:

  • The income from the machine shop Rudolph would have received if it had not been destroyed.
  • The fair rental value of the space that had been occupied by Rudolph.
  • The cost of the machine shop’s electric supply.

26. Restoration period (2002 edition)

The amount of time following a loss that is needed to bring a business back to the level of operation at the time the loss occurred. The period begins when a direct physical loss caused by a covered peril occurs at a covered location and ends when the named insured should be able to resume operations, whether it does so or not.

Fire dmg to bldg with new HCB on site

Example: Fully Functional Furniture is damaged by fire. Fully's owner decides to do some remodeling at the same time as making the repairs. Fully could have resumed operations in three months, but it took six months because of the remodeling. The period of restoration, in this case, is only three months.

Restoration period includes any additional time required to comply with ordinances or laws regulating the use or construction of a building, even if demolition of undamaged property or relocation is required. To be covered, the ordinance or law must have been in effect before the loss occurred. If the ordinance or law involves the cleanup of pollutants, that cleanup is not covered except under Supplemental Income Coverage Pollutant Cleanup and Removal.

The definition changes when used with dependent properties. It means the time the named insured’s operation will take to resume normal activity following covered damage to a dependent property. The period begins at the time of the damage and ends when the dependent property should be rebuilt or when the *business resumes at a new location.

*In the above paragraph, the form uses the word business–not dependent property–so it is unclear as to which business is resumed at the new location.

The definition also changes with respect to Supplemental Income Coverages: Off Premises Utility Service Interruption, Property In Transit, On Exhibition or In The Custody Of Sales Representatives. The period of restoration begins when a covered loss occurs at a property not owned by an insured or located at a covered location but owned by a utility, landlord, or supplier.

Additionally, coverage applies to an offsite server, property in transit, on exhibition, or in the custody of sales representatives. Coverage ends when the property should be repaired, replaced, or rebuilt.

The expiration date of the policy does not affect the period of restoration. As long as the direct loss occurs prior to the policy expiration date, there is coverage until the end of the restoration period or when the limit of insurance is exhausted.

27. Schedule of coverages (2002 edition)

The policy includes pages known as schedules, declarations, and supplemental declarations that are related to the coverage.

28. Securities (2002 edition)

Negotiable and nonnegotiable instruments and other contracts that represent money or other property, such as stock certificates, tokens, tickets, and stamps in current use, including the unused value in a metered machine, are all considered securities. In addition, credit, debit and charge card receipts or other evidence of debt issued by the named insured are also securities. However, money is not considered securities.

29. Sinkhole collapse

A sinkhole collapse must be sudden. The earth must collapse because water has created openings and voids below ground in limestone or other rock formations. Sinkhole collapse coverage does not apply to the cost of the land or costs related to filling sunken land.

30. Software

This is media on which data, programs and applications, and proprietary programs are stored, as well as the data, programs and applications themselves.

31. Specified perils

The specified perils are used to limit coverage. In some cases where coverage is excluded, the specified perils are used to provide limited coverage. These perils include: aircraft incidents, civil commotion, explosion, falling objects, fire, leakage from fire extinguishing equipment, hail, lightning, riots, sinkhole collapses, smoke, sonic booms, vandalism, vehicle damage, volcanic action, water damage, the weight of sleet, snow, or ice, and windstorms.

Falling objects must be explained further. It does not include loss to personal property stored in the open. It also does not include damage to the interior of buildings or personal property stored in buildings unless a falling object first breaches the building's exterior.

Water damage also requires further explanation. Water damage occurs when there is a sudden or accidental discharge or leakage of water or steam. This happens as a direct result of a component of the system or appliance, containing water or steam, cracking or breaking.

32. Spoilage (2002 edition)

Damage caused to perishable stock by a change in its physical state. The change must be detrimental to be considered spoilage. The following are examples of such a change:

33. Terms

These are all the provisions, limitations, exclusions, conditions, and definitions pertaining to the policy or coverage form.

34. Theft (2002 edition)

Burglary, robbery or any other type of act of stealing.

35. Valuable papers

Handwritten or printed documents or material on films. Manuscripts, motion pictures and other films, blueprints, charts, graphs, books, deeds, abstracts, mortgages, maps, and other paper records are all valuable papers. Operations manuals, sketches of ideas and patents are also considered valuable papers.

36. Volcanic action

Airborne volcanic blast. This includes ash, dust, or particles, and shock waves. Lava flow is also considered volcanic action. Coverage applies to the damage caused by the volcanic action, including the cleaning up of the damaged building and business personal property. However, the cost to remove ash, dust or other material from undamaged property is not covered.

PROPERTY COVERED

The property listed in this section is covered if it sustains direct physical damage by a covered peril at a covered location during the policy period. However, there are exclusions and limitations for property that will be discussed later in this article.

BUILDING PROPERTY

1. Covered Building Property (2002 edition)

·         Buildings

·         Structures

·         Completed additions

·         Fixtures, machinery or equipment but only when a permanent part of a covered building or structure

·         Outdoor fixtures. The term fixture implies an element of permanence, so it does not include portable property. Fountains, streetlights, sprinkler irrigation systems and other fixed property are examples of outdoor fixtures.

·         Personal property used to maintain or service a covered building, structure or the insured premises. This includes lawn and garden tractors, snow removal equipment and water hoses. Property specifically identified includes air conditioning equipment, fire extinguishing apparatus (fire extinguishers, automatic sprinkler systems, etc.), and floor coverings. Refrigeration, cooking, dishwashing, and laundering equipment are also listed.

As a result, refrigeration and cooking equipment in the employee cafeteria and dishwashing and laundry equipment is all considered part of the building. However, only such property owned by the named insured is covered.

Example: Snow removal equipment, lawn and garden tractors, vacuums and other cleaning equipment are used to maintain the premises and kept on the premises.

Scenario 1: All items are owned by the named insured. These are covered even if used by an independent contractor.

Scenario 2: All items are owned by the independent contractor who maintains the premises for the named insured. None of the items are covered.

·         Buildings and any additions that are under construction, renovation, or repair are covered only when not covered elsewhere. The COP can be a substitute for a builders risk policy, but its coverage ends when specific builders risk coverage is written elsewhere. Property that can be covered is:

o   Equipment, materials, supplies, and limited time/use structures, such as a tent or shed, on or within 1,000 feet of a covered location, subject to such property eventually being used in the construction, repair, or addition of buildings.

o   The contractual obligation of the named insured for the interest of contractors and subcontractors in the materials to be used for additions, repair, or construction of buildings within 1,000 feet of a covered location.

Example: Mabel hires Fritz Air Conditioning to install a new heating and air conditioning system in her building. The project is scheduled to be finished in 30 days. Mabel signs an agreement for the installation but doesn’t read the fine print that requires her to be responsible for all of Fritz’s equipment while he is working on her premises.

A sudden windstorm levels the building on the jobsite containing Fritz’s equipment. Because Fritz has no insurance coverage for his property on the job site, Mabel’s coverage under the COP pays the loss.

·         Building glass. This normally includes glass building blocks, windows, and glass in exterior or interior doors. Glass objects, glass dials on equipment not related to the building and stocks of glass are not considered building glass.

·         Radio and television towers, satellite dishes, lead-in wiring, support wires, their foundations, and any equipment attached to any of this property, including transmitters, transponders, backup generators, are covered. However, coverage applies only if the item is located within 1,000 feet of a covered building or structure. Fences, awnings, and canopies are also covered but subject to the same 1,000 feet of a covered building or structure limitation.

·         Signs are covered without restriction to location. They may be attached to a covered building or structure or may be freestanding.

NOTE: The Property Covered section states that all items must be at a covered location, defined as any place where the named insured has structures or personal property. While most items refer to a building, the sign item does not, which may lead to freestanding signs being covered both on and off premises. It's advisable to consult with the underwriter.

·         Foundations that support buildings, structures, boilers, or machinery. (2002 addition)

Example: An explosion at Harvey Rubber Manufacturing starts a fire in a stack of tires. It takes days for the fire department to totally extinguish the blaze. The fire’s intense heat caused the foundation of some processing machinery to crumble. The damage to the foundation is covered.

2. Building Property That Is Not Covered (2002 edition)

Certain types of building property are not eligible for coverage. Be sure to review the Property Not Covered and the Additional Property Not Covered or Subject to Limitations sections for additional items that are not covered.

The following items are not covered as building property:

·         Pilings, piers, wharves, docks or retaining walls

·         Underground pipes, flues or drains

·         Bridges, walkways, roadways and similar paved surfaces

NOTE: There is coverage for some of these items under Supplemental Coverages – Underground Pipes, Pilings, Bridges, and Roadways.

BUSINESS PERSONAL PROPERTY

1. Covered Business Personal Property (2002 edition)

The named insured’s business personal property located at any of the following:

·         Inside buildings or structures at a covered location

·         In the open, but only if the property is on a covered location or within 1,000 feet of it

·         Inside a vehicle, but only when the vehicle is on a covered location or within 1,000 feet of it.

Such covered property includes:

·         The named insured’s use interest in building improvements. Coverage applies only if the named insured is a tenant in the building and is not permitted to remove the improvements. The improvement must have been made or acquired at the named insured’s expense.

Improvements are fixtures, alterations, installations, and additions. Some common examples are false ceilings, internal walls, light fixtures, improved wiring, telephone switching systems, cooking equipment, HVAC improvements, carpeting, built-in shelving and common renovations like new roofs installed by a tenant with a long-term lease.

·         In addition to coverage on damaged improvements, coverage also applies to undamaged improvements that cannot be used because a covered loss terminates the lease.

Example: Phil’s Shoe Store occupies a space in a strip shopping center. Phil adds $25,000 in improvements shortly after he moves in. After a fire destroys 75% of the shopping center, including part of the shoe store’s entrance, the owner decides to demolish the entire center and rebuild. Phil’s lease permits this, and Phil loses his remaining interest in the improvements. Under the COP, this event is a covered loss even though the improvements in Phil’s store were not damaged by the fire.

Example: Cammon, Inc. refurbishes industrial machinery. Each job takes between 1 to 45 days to complete. A windstorm sweeps through and destroys Cammon’s building and the equipment inside. In addition to its own personal property being covered, Cammon is paid for 180 accumulated days of labor included in the various items being refurbished and the $30,000 of parts that had been installed in the customers’ machinery that was still on site.

NOTE: It's crucial to compare the coverage offered in this form with that of any current computer-specific coverage before advising a customer to abandon their existing coverage. Additionally, make sure to review the Supplemental Marine Coverages included later in this form.

Related Articles:

AAIS Electronic Data Processing Equipment and Business Computer Coverage Forms

ISO Computer Systems Coverage Form

This coverage is available for building or renovation contractors, millwrights, machine installers, and others working on real or personal property away from their premises. Covered materials include lumber, steel, machines, HVAC supplies, signs, machine parts, carpeting, flooring, brick, fencing, and cement slabs. Eligible property for coverage is broad and could replace an installation floater if transit limits are sufficient. Before abandoning specific coverage, compare it with other forms to identify possible coverage gaps.

Related Articles:

AAIS Installation Floater Coverage Forms

ISO Installation Coverage Form

Related Articles:

AAIS Contractors' Equipment Coverage Forms

ISO Contractors’ Equipment Coverage Form

NOTE: Coverage is adequate only if the insurance limit is sufficient to cover the value of others' personal property. Additionally, this provision applies only to personal property and excludes real property and permanent structures, such as machinery, equipment, HVAC, and plumbing. Payment for covered losses benefits the property owner, not the named insured. Real property can be insured through specific property insurance for leased buildings or covered under Legal Liability Property or Commercial General Liability coverage forms.

Related Articles:

CP 00 40–Legal Liability Coverage Form Analysis

AAIS Commercial Liability Coverage Form Analysis

ISO Commercial General Liability Coverage Forms Analysis

2. Business Personal Property That Is Not Covered (2002 edition)

Only a few personal property items are not covered. However, remember to review the Property Not Covered and the Additional Property Not Covered or Subject to Limitations sections for additional items that are not covered.

The following items are not covered as business personal property:

·         Any computer server off-site 

·         The property listed below is not covered. However, there is coverage as described in the Supplemental Marine Coverage section:

o   Personal property in transit (as described in item 8. Property In Transit)

o   Fine arts (as described in item 5. Fine Arts)

o   Computers when away from a covered location as described in Off Premises Computers (as described in item 6. Off Premises Computers)

o   Property temporarily away from the covered location on display or exhibit (as described in item 7. Property on Exhibition)

o   Sales samples of the named insured's stock (as described in item 9. Sales Representative Samples)

o   Any backup or duplicate software (as described in item 10. Software Storage)

PROPERTY NOT COVERED

The following property is not covered, but many of these items have exceptions where some coverage applies. Each must be examined carefully to determine the nature and extent of any coverage provided.

1. Airborne or Waterborne Property

Personal property is not covered when it becomes airborne or waterborne, except in two cases: if it is on a regularly scheduled airline or a ferry service. The question is, what are regularly scheduled airlines and ferry services?

Regularly scheduled airlines operate on a fixed schedule, while ferry services transport people and goods over narrow bodies of water. Note that passenger liners and Great Lakes cargo ships are not considered ferry services, regardless of their schedules.

While charter services are excluded, the status of regularly scheduled air freight-forwarding firms as airlines remains unclear due to the lack of a specific definition for "airline."

2. Aircraft and Watercraft

When aircraft and watercraft are operated primarily away from a covered location, they are not covered. In addition to the aircraft and watercraft not being covered, their accessories, motors, and equipment are also not covered.

However, there are exceptions. The named insured’s manufactured, processed, warehoused aircraft or watercraft or ones that are held for sale by the named insured are covered. Rowboats and canoes are also covered if they are out of the water and at a covered location.

Example: Macafee Boats is located on a small retention pond with a dock. Occasionally boats are placed as advertising displays, but they are not regularly operated on the pond. If a covered loss would occur to such a boat while it is out of the water, it would be considered covered property.

3. Animals (2002 edition)

Animals are not covered personal property. The word animals is not defined except to say it includes birds and fish but not limited to birds and fish.

However, there are exceptions. If the animals are owned by others and boarded by the named insured, they are covered. In addition, if the named insured owns the animals and is holding them for sale inside a building, they are also covered.

NOTE: Please refer to the Additional Property Not Covered or Subject to Limitation for a significant animal-related limitation.

4. Automobiles and Vehicles (2002 edition)

Conveyances designed and used to transport people and/or cargos over the road are not covered. Examples of what is not covered are trucks, tractors, and trailers.

However, there are exceptions. Property considered mobile equipment is covered. In addition, automobiles and vehicles manufactured, processed or warehoused by the named insured, are covered property. Automobiles or vehicles held for sale or for lease, loan, or rental are not covered.

5. Checked Luggage (2002 edition)

If computer laptops, palmtops, notebook PCs and similar types of portable computers are in transit and checked as luggage, they are not covered property but only when the loss is caused by theft or disappearance.

Example: Paula places her laptop in her checked luggage but keeps her tablet to use on the plane.

Scenario 1: A fire occurs in the terminal, and her luggage, including the laptop, is destroyed. The laptop is covered.

Scenario 2: The laptop is not in her luggage when she opens it at the hotel. The laptop is not covered because the loss was due to disappearance.

Scenario 3: Paula has her tablet in her purse. As she is walking through the terminal, her purse is snatched. Because it is not in checked luggage, the loss of the tablet is covered even though it was due to theft.

6. Contraband

All contraband is excluded. Additionally, legal property involved in illegal transportation or trade is also not covered.

Example: Sheila’s Restaurant Wholesalers supplies food and beverages to its customers. However, in addition to its legal activities, it also arranges for shipments of cigarettes to be moved from Kentucky to New York to avoid the higher state cigarette tax. A load of cigarettes is damaged when the transporting truck overturned. There is no coverage for the loss.

7. Cost of Excavation (2002 edition)

There is no coverage for the costs of excavation, grading, filing, or backfilling, with one exception: if a covered loss occurs to covered underground property, there is coverage for the necessary costs to repair, rebuild, or replace that property, including the cost of excavation.

NOTE: The Cost of Excavation was previously combined with Land and Water as not covered.

8. Crops While Outside of Buildings (2002 edition)

The 2002 edition adds “while outside of buildings.” Grain, hay, straw, and other crops are not covered when outside a building. This means that wheat in grain elevators or storage bins awaiting processing into flour, indoor gardens, nursery greenhouse stock, and grain in laboratories working on creating hybrid strains would be covered.

9. Exports and Imports

Exported and imported properties are not covered by this coverage form if they are covered under an ocean marine cargo or similar policy, regardless of who holds the ocean marine policy.

However, if an ocean marine cargo policy excludes a specific loss not excluded by the COP, coverage may be available under the COP, but only if the loss occurs within the COP coverage territory.

Related Article: Ocean Marine Insurance Overview

10. Land, Water, and Growing Crops (2002 edition)

The 2002 edition removes the Cost of Excavation, as it is now its own exclusion, and adds Growing Crops to this exclusion. Land, water, and growing crops are not covered; this includes the land where the covered property is located, as well as both underground and surface water.

11. Money, Securities, Accounts and Valuable Papers (2002 edition)

Money, securities, accounts, bills, and the cost to reproduce, replace, or restore valuable papers and lost information are not covered.

NOTE: Limited coverage for such property does exist in other sections of the policy.

12. Outdoor Trees, Shrubs, Plants or Lawns (2002 edition)

Trees, shrubs, plants, and lawns are not covered unless they are held as stock by the named insured or included under Supplemental Coverages.

 

Example: A fire destroyed Perry’s Wholesale Florist. All stock was covered, but the trees, lawn, and plants used for Perry’s landscaping were not covered except for the limited amount provided by Supplemental Coverages.

NOTE: This item is labeled as “Outdoor” trees, etc., but the wording of the item does not mention outdoor. Therefore, if a building has indoor trees and landscaping, is there coverage? What if there is an open atrium?

13. Property More Specifically Insured (2002 edition)

When a coverage form is purchased specifically to cover an item that is also included under this coverage, it is not covered by this coverage form. If the loss exceeds what is available under that specific coverage form, this coverage will respond, but only in excess. If the other carrier refuses to pay for any reason, this coverage still responds, but only in excess of the other coverage amount.

14. Property of Others

Property of Others is not covered when the named insured acts as a carrier for hire, a freight forwarder, or a logistics coordinator responsible for that property. This coverage should be obtained through an Inland Marine Motor Truck Cargo Legal Liability or Carriers Coverage Form.

Related Articles:

AAIS Motor Truck Cargo Legal Liability Coverage Form

ISO Motor Truck Cargo Carriers Coverage Form

15. Property You Have Sold

Any property that has been sold by the named insured and delivered is not covered. The one exception is property sold using an installation agreement.

COVERAGE EXTENSIONS (2002 edition)

This section was titled Additional Coverages in the previous edition of the COP. Most of the coverages provided in this section have separate insurance limits included. It is important to understand how the limits work.

First, the limits provided are part of the limit for Covered Property in the Schedule of Coverages. This means that limits in the extensions are not in addition to the coverage property limits.

 

Example: The limit of insurance is $1,000,000. The Off Premises Utility Service Interruption limit is $50,000. If a total loss occurs involving both a standard peril and the Off Premises Utility Service Interruption, the limit available to pay the loss is only $1,000,000, not $50,000 plus $1,000,000.

Second, if there is no specified limit for a coverage extension, it defaults to the policy limit. This limit is included in the coverage for Covered Property and is not an additional amount.

Example: Limeland & Company removed covered property from their building due to an impending covered peril. This would be covered under the Emergency Removal Coverage Extension. Since this extension does not have a separate limit, the total amount available is the total limit of insurance indicated on the Schedule of Coverages.

If a single covered incident causes damage to property at both the emergency location and Limeland’s other covered location, the limit available will be capped at the property limit outlined on the Schedule of Coverages.

Third, the limits in the Coverage Extensions can be increased on the Schedule of Coverages. When such a limit appears, this amount replaces the Extension’s default limit in the coverage form.

NOTE: It is important to remember this is an extension of coverage and not additional coverage. Therefore, the Coverage Extensions are still subject to the Covered Property limit on the Declarations.

Example: The Debris Removal limit on the Schedule of Coverages is changed to $100,000. This replaces the $50,000 standard limit provided in the coverage form. The insured has a $100,000 limit available, not $150,000.

Fourth, the limits are not combinable with or added to the limits for any other Coverage Extension or Supplemental Coverage, including any coverage added by endorsement.

Finally, coinsurance does not apply to any Coverage Extensions, even if coinsurance conditions are added to the policy. 

1. Consequential Loss (2002 edition)

NOTE: This was included in Supplemental Coverages in the previous edition.

Coverage applies to the loss in value of the undamaged business personal property as a result of damage to other business personal property by a covered peril up to the coverage limit. The business personal property is considered to have lost value if it is no longer marketable.

Example: Forest Products makes dining room tables from select hardwoods. The dining room tops are stored in one part of the warehouse and the table legs in another. A fire occurs in the area where the table legs are stored. The legs are destroyed, but the tops are not damaged. The tops still have value, but it has been substantially reduced by the loss of the matching legs. The difference between the value of the top before the destruction of the legs and after is the consequential loss amount.

Related Court Case: Consequential Loss Denied Under Direct Loss Scheduled Property

2. Debris Removal (2002 edition)

The cost of removing the debris of covered property after a covered loss is limited to 25% of the amount paid for the direct loss plus $50,000. The combined loss cannot be more than the limit of insurance plus the $50,000.

Example:

Scenario 1: The coverage limit on Polly’s policy is $1,000,000. The covered fire loss is $900,000, and the expense to remove debris is $200,000. The debris removal expense limit is calculated as follows:

  • $900,000 X .25 = $225,000 + $50,000 = $275,000. This is the maximum debris removal expense limit available before capping any limits.

NOTE: The $50,000 additional limit is available only when removal expenses exceed the limit for damaged property.

  • The value of the claim is $1,100,000 ($900,000 + $200,000). Since the coverage limit is $1,000,000, recovery is limited to the $1,000,000 limit plus the additional $50,000 debris removal limit. This means that only $150,000 is available to apply to the debris removal expense.

Scenario 2: The coverage limit is $1,000,000. The covered loss to property is $500,000, and the expense to remove debris is $300,000. The debris removal expense limit is calculated as follows:

  • $500,000 X .25 = $125,000 + $50,000 = $175,000. This is the maximum debris removal expense limit available before capping any limits.
  • $500,000 + $175,000 = $675,000.

In this scenario, the capping of the debris removal expense at $175,000 represents the maximum amount of debris removal expense to be paid, even though the actual expenses were $300,000.

Debris removal expense does not include the costs of extracting pollutants from land or water or the costs of removing, restoring, or replacing polluted land or water. Debris removal expenses must be reported in writing to the insurance company within 180 days after the direct physical loss to covered property.

Some examples of covered expenses for damaged property are:

Costs for repairing or reinforcing an undamaged building, or for protecting machinery, equipment, and stock during debris removal, are not considered debris removal. These costs are covered as direct property damage under the part of the coverage form that deals with protecting property from further damage after a covered loss.

3. Emergency Removal (2002 edition)

Emergency removal applies to property moved by the named insured because the property is threatened by a covered peril. Coverage applies while the property is being moved in addition to when it is at another location or in storage. Emergency removal protects against loss from any direct physical loss peril.

NOTE: It's important to remember that there are no exclusions for the property while it is at the new location to which it has been moved. However, the property must be relocated to the emergency site or be in transit to it due to the threat of loss or damage from a covered peril. Coverage at the emergency location lasts for a maximum of 365 days or until the coverage expiration date, whichever comes first.

Example: A wildfire quickly gets out of control, and the owners of S&B Fabric Shop remove as much of the shop inventory as possible, place it in rented vans and trucks and move it to a vacant warehouse beyond the range of the wildfire. An earthquake occurs three months later and destroys the warehouse, including the S&B inventory. The earthquake loss is covered because the inventory had been moved to this location due to the threat of the covered fire peril.

4. Emergency Removal Expenses (2002 edition)

The insurance company pays up to $5,000 for the cost to remove and/or store property threatened by a covered peril. Coverage applies for 365 days or until the expiration date of the policy, whichever occurs first. This amount is in addition to the policy limits.

Example: In the S&B Fabric Shop example above, S&B spent $1,000 to rent the vans and trucks, and the warehouse rental was $750 per month. These expenses are covered under Emergency Removal Expenses.

5. Fraud and Deceit (2002 edition)

If covered property is lost because it is given to any persons who represent themselves as authorized persons or present fraudulent bills of lading or receipts, there is $5,000 coverage available. This is important because Perils Excluded – u. Voluntary Parting excludes coverage.

6. Damage from Theft (2002 edition)

If the named insured is a tenant renting space in a non-owned building, coverage is provided for damage by theft or attempted theft to the rented building and to non-owned maintenance or servicing personal property in that building. This coverage extension applies only when a contractual obligation in the lease to pay for such damages exists.

Example: Precious Collection’s lease requires it to pay for damage to the building it rents if someone breaks in or tries to break in. A thief forces open the building door and gains entry. This coverage extension applies to the damaged door, even though the door is not owned by Precious Collection’s. In this case, the building owner is the contractual beneficiary.

7. Off Premises Utility Service Interruption (2002 edition)

·         Coverage

Direct physical damage to covered property at a covered location is provided when the loss is caused by utility service interruption. The utility property must be off premises and the interruption must be caused by a covered peril. The utility services can be power, gas, water, or telecommunications services.

·         Overhead Transmission Lines

The coverage includes damage to overhead transmission lines unless checked as excluded on the Schedule of Coverages.

·         Perishable Stock Exclusion

There is no coverage for damage to perishable stock by spoilage because of fluctuations in, or loss of, electrical current.

·         Applicable Limit

The maximum limit available under this extension is $50,000.

Example: MJ Glass Works produces blown glass products. Electrical power is lost when the power lines are damaged by wind. The glass hardens and cannot be used. MJ's $13,000 loss is not covered because the hardened glass is perishable stock.

SUPPLEMENTAL COVERAGES

Supplemental Coverages includes 13 different coverage provisions. The applicable limit is specified in the policy form but can be increased. Any increased limit will be reflected in the schedule of coverages. If a limit is not indicated on the policy form or the schedule of coverages, then the applicable limit will default to the covered property limit.

Eleven of these supplemental coverages are not included in the property limit but may increase the total or partial loss amount. One coverage is included in the property limit but cannot increase the total loss amount. Additionally, there is another coverage that is also not part of the property limit but also cannot increase the total or partial loss amount. Further details regarding the specifics of these coverages are outlined below.

Example: The limit of insurance on the Schedule of Coverages is $1,000,000. The Brands and Labels Expense limit is $50,000. In the case of a total covered fire loss, if the insured wants all labeling removed from potential salvage, the entire $50,000 limit is the amount available for that activity. If $1,000,000 is paid out for the direct damage loss, the $50,000 remains available to pay for the removal of the labeling.

Brands and Labels Expense is included in the 11 supplemental coverages that can increase a total loss amount.

The limits in the Supplemental Coverages can be changed on the Schedule of Coverages. When such a limit appears, that amount replaces the limit in the policy. In this case, the amount is a substitution or replacement amount and not an additional amount.

Example: The Brands and Labels Expense limit on the Schedule of Coverages is changed to $100,000. This replaces the $50,000 standard limit provided in the coverage form. The insured has a $100,000 limit available, not $150,000.

The limits are not combinable with or added to a limit for any other Supplemental Coverage or Coverage Extension. This includes any coverage added by endorsement.

Supplemental Coverages apply to covered property at covered locations or within 1,000 feet of a covered location.

If coinsurance applies to any coverage, none of the Supplemental Coverages are considered when determining the required limits of insurance.

1. Brands or Labels Expense

This is a two-part coverage, and it applies only after a covered loss to business personal property.

The first part, which may be the most important to the named insured, is that all brands and labels on salvageable personal property can be removed as long as the removal does not damage the property. Certain labels may contain information required by law, in which case the items must be relabeled in accordance with the law.

The labels and branding can be removed from both the business personal property and its containers. This is permitted even though doing so could significantly reduce the salvage value to the insurance company. The decision by the named insured to do this will not impact the value of the loss to the named insured. There is no separate limit of insurance for this part of the coverage.

The second part is that the insurance company pays the expense the named insured incurs to remove the labels and brand marking. A $50,000 limit is available to pay for this expense.

DesignerLabel copy

Example: Snobby Threadz is a high fashion men's clothing store that sustains a great deal of smoke damage to its merchandise from a comparatively small fire. The salvaged clothing is dry-cleaned, and most of the smoke damage is removed, but the owners and the insurance company both agree that Snobby's customers are unlikely to purchase clothing damaged by smoke at any price.

In addition, the contracts Snobby has with three different specialty clothing manufacturers prohibit the sale of any of their labeled merchandise damaged in any manner.

Snobby arranges for all labeling and branding to be removed. The insurance company pays Snobby’s expenses and sells the items to a third-party salvage company.

 

2. Expediting Expenses (2002 edition)

Once the property is damaged by a covered peril, $50,000 is available to pay expenses to encourage the quick repair of the property. Examples of such expenses are overtime pay, additional labor costs, and transportation costs, but these are not the only expenses that can be paid. It also pays for temporary repairs to covered damaged property.

3. Fire Department Service Charges (2002 edition)

If the named insured has a contractual agreement to pay for fire department service charges, the coverage pays up to $25,000 to cover those charges. The agreement must have been in force prior to the loss. The only charges covered are those incurred while the fire department was attempting to save or protect property from a covered peril. This Supplemental Coverage is not subject to a deductible.

 

Example: The management of Felling Apartments asks the fire department to come and remove a tenant's kitten from one of the trees in the complex. Felling submits the charges to the insurance company. The insurance company denies the claim for payment because the covered property was not threatened by a covered peril.

4. Inventory and Appraisals Expenses (2002 edition)

Up to $50,000 is available to the named insured to cover the costs it incurs because the insurance company has requested it take an inventory and/or perform an appraisal. The request must be related to a covered property loss and must be designed to assist the insurance company in determining the amount of the loss.

This supplemental coverage does not cover any of the costs associated with the Other Conditions–Appraisals. It also does not cover fees for public adjusters and/or attorneys.

Examples of covered expenses could be hiring part-time individuals to sift through and record inventory, and paying the daily fees, transportation and living expenses of a recognized expert to appraise certain fine arts lost in a fire.

5. Ordinance or Law (Undamaged Parts of a Building) (2002 edition)

If a covered peril damages covered property and an ordinance or law requires demolition of the entire building, this supplemental coverage applies to the loss of value of the undamaged portion of the building that must be demolished. The ordinance or law must regulate construction or land use, be in effect at the time of the loss and require the demolition.

However, this coverage excludes any costs associated with pollution.

It does not have a separate limit; rather, it falls under the limit of the covered property listed in the Schedule of Coverages. It can increase a partial loss amount but cannot increase a total loss amount.

Example: Percy’s Hotel, located in the downtown section of a small city, is a five-story brick building with an 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.

In addition, other ordinances require that if a grandfathered building experiences damage to more than 50% of its total area, the entire building must be demolished and rebuilt to meet current construction standards. The Hotel was struck by a tornado that damaged nearly 60% of the structure. The ordinance was enforced, and this Supplemental Coverage paid for the value of the undamaged portion of the building that had to be torn down.

NOTE: Ordinance or Law Coverage is a Supplemental Coverage located 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.

Related Article: CP 04 04–Ordinance or Law Coverage

6. Ordinance or Law (Increased Cost to Repair and Cost to Demolish and Clear Site) (2002 edition)

The Ordinance or Law Supplemental Coverage mentioned above in Item 5. covers the loss in value of the undamaged portion of the building. However, it does not cover the costs associated with demolishing the building or rebuilding it to comply with current ordinances and laws. This Supplemental Coverage – 6. Ordinance or Law does address those costs, as well as any increased repair costs that do not involve the demolition of undamaged parts of the building.

The combined limit for these costs is $100,000. It is important to note the coverage for demolition costs and increased construction costs are treated as two separate items as follows:

This section covers additional expenses for both damaged and undamaged covered buildings caused by a covered peril, necessary to comply with enforced ordinances or laws. This coverage is only valid if the ordinance or law was in place at the time of the loss. For coverage to apply, rebuilding, repairs, or replacements must be started and completed within two years of the loss date.

Additionally, the building or structure must be repaired or rebuilt with the intention of being used for a similar purpose as before the loss. However, an exception applies if otherwise required by building zoning, land use ordinance, law, or decree.

Example: Marcy's Day Care is damaged by fire and smoke. When the contractors performing the repairs apply for the necessary building permits, they are informed that the building must first be brought up to current code. This includes widening hallways and increasing the size of the bathrooms. Because the ordinances and laws requiring these improvements were in effect on the date of loss, the additional costs are covered.

This section covers the costs and expenses necessary to demolish the undamaged portion of the building damaged by a covered peril. It also pays the necessary costs to clear the site and prepare it for rebuilding.

NOTE: The removal of the damaged portion of the building is covered under Debris Removal.

The insurance company does not cover any costs related to enforcing the following ordinances or laws:

o   Any laws or regulations requiring a response to or assessment of the effects of pollution in any form.

o   Any laws or regulations the named insured was required to comply with prior to the loss, but failed to do so.

Example: In the example above, prior to the loss, Marcy's Day Care had received notice from the health department that its kitchen had to be updated to meet current regulations. Because the cost of doing so was more than Marcy could afford at the time, she decided not to comply. After the loss, Marcy notified the insurance company of the requirement to update the kitchen, hoping that the coverage provided would respond to the expense. The insurance company refused to pay the expense because the obligation to comply with the change existed before the loss occurred.

o   If the building is repaired or replaced, the actual costs to demolish and clear the site plus the increased cost of construction of a similar building or structure or $100,000, whichever is less.

o   If the building is not repaired or replaced, the lesser of either the actual demolition costs plus the amounts the insured would have spent to replace with a similar building or structure (including a similar property use) or $100,000, whichever is less.

7. Personal Effects (2002 edition)

This Supplemental Coverage pays up to $15,000 for loss or damage caused by a covered peril to personal effects of the named insured, its officers, partners, or employees. Examples of covered personal effects are clothing, knick-knacks, briefcases, plaques, awards, fine arts, software or furniture that are owned by the individual. The $15,000 limit does not apply per person but applies per occurrence or per location.

Example: Rough and Ready Tool and Die has three locations in town. It is located close to manufacturing plants to provide fast service. A severe windstorm damages two of the three locations. The employees and officers file claims for $12,000 at one location and $10,000 at the second location. Does the loss get capped at $15,000 because there was only one occurrence? On the other hand, is the limit applied per location?

8. Pollutant Cleanup and Removal (2002 edition)

This Supplemental Coverage pays up to $50,000 per site annual aggregate for the costs of extracting pollutants from land or water if the pollution is caused by a covered peril.

 

Example: A pesticide tank located above ground is damaged and releases chemicals after a roof collapses on it due to the weight of ice and snow.

 

The incident must occur during the policy period, and the expenses must be reported in writing to the insurance company within 180 days of the date on which the covered peril occurs.

NOTE: The loss date may not necessarily be the same date as the pollution incident.

Example: On April 1, 2025, a fire loss at the insured's building causes a floor to collapse. The collapse damages the concrete basement and cracks an underground oil tank. On September 1, 2025, 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 oil must have escaped from that damaged tank but went unnoticed.

Since the fire was the proximate cause of the oil escape, the removal of the oil-soaked dirt is covered, up to the $50,000 limit, provided the expenses are reported to the insurance company in writing by September 30, 2025.

Extracting pollutants involves activities such as digging, dredging, well drilling, scraping, and transporting pollutants to an approved disposal site or facility. Coverage also includes testing needed to extract pollutants from land or water. However, it does not cover any soil testing, test wells, chemical analyses, or laboratory studies related to the effects, levels, or presence of pollutants. Expenses do not cover court or defense costs related to a pollution event.

NOTE: It is unlikely that the $50,000 limit is sufficient to pay for most pollutant cleanup situations. Consult The Insurance Marketplace, a publication of The Rough Notes Company, Inc., for sources available to provide higher limits for this coverage.

9. Recharge of Fire Extinguishing Equipment (2002 edition)

The insurance company pays up to $50,000 to reimburse the named insured for expenses it incurs to recharge any type of fire extinguishing equipment after it has been discharged in fighting a fire. It also pays if the discharge was caused by a covered peril or was due to an accidental discharge. It does not pay expenses to recharge equipment discharged during testing or installation.

Examples of covered expenses are the refilling of Halon or Ansul systems, the costs of filling private water reservoirs for automatic sprinkler systems and recharging or refilling all other types of fire extinguishing equipment. The insurance company has the option of replacing equipment if doing so is less expensive than recharging it.

Example: Gary, an assistant chef at Eatum's Cookery, is speaking to his girlfriend on the phone. As the conversation goes on, Gary absent-mindedly fiddles with the manual pull on the automatic fire extinguishing system. When a waiter yells at him about an order, Gary quickly hangs up the phone and accidentally yanks the manual pull. The system discharges over the entire kitchen. While coverage does not apply to the costs of the kitchen cleanup, it does apply to the costs of recharging the automatic extinguishing system.

10. Rewards (2002 edition)

A reward of up to $10,000 is available for information leading to a conviction for theft, arson, or vandalism that caused a covered loss. The amount paid is for each loss and not for each person providing information.

NOTE: The key to this coverage is a conviction. The perpetrator(s) must be convicted for the reward to be paid.

11. Sewer Backup and Water Below the Surface (2002 edition)

Coverage is available up to $25,000 for any single incident involving loss or damage caused by:

·         Water backing up through a sewer or drain

·         Water beneath the surface, including issues like water pressure, or water flowing, seeping, or leaking into buildings, sidewalks, driveways, swimming pools, and similar or related property. These examples illustrate covered losses, but other types also exist.

This Supplemental Coverage has a separate limit. It does not fall under the limit of the covered property listed in the Schedule of Coverages and cannot increase the total or partial loss amount.

12. Trees, Shrubs and Plants (2002 edition)

The insurance company covers direct physical loss or damage, including debris removal expenses, to outdoor trees, shrubs, plants, and lawns at covered locations. Coverage applies only to loss or damage caused by fire, lightning, explosion, riot or civil commotion, falling objects or vandalism. The limit is $50,000 in any one occurrence. However, stock held for sale by the insured is excluded.

NOTE: Trees, shrubs, plants, and lawns are property not covered elsewhere in the coverage form. This Supplemental Coverage gives back some limited coverage for the described perils. It is important to consider the losses that are not covered, such as those from wind, hail, rain, vehicles, animals, chemicals, or pest damage.

To find broader coverage for additional perils on crops and other plants, refer to The Insurance Marketplace, a publication of The Rough Notes Company, Inc.

13. Underground Pipes, Pilings, Bridges and Roadways (2002 edition)

This section provides coverage for underground pipes, pilings, bridges, and roadways with a limit of $250,000 at any one covered location or in a single occurrence for damage to these items, but only if the loss is caused by a covered peril.

NOTE: This section used to be named Foundations of Buildings, Pilings, and Underground Pipes. Foundations of buildings, structures, machinery, or boilers is now located in Property Covered – Building Property and is covered up to the property limit.

Point to Ponder: If two locations are damaged in the same occurrence, is there $250,000 coverage available for each location or is the total loss capped at $250,000?

SUPPLEMENTAL MARINE COVERAGES

Supplemental Marine Coverages includes 11 different coverage provisions. The applicable limit is specified in the policy form but can be increased. Any increased limit will be reflected in the schedule of coverages. If a limit is not indicated on the policy form or the schedule of coverages, then the applicable limit will default to the covered property limit.

Example: The limit of insurance is $1,000,000. The Accounts Receivable Supplemental Marine Coverage limit is $50,000. If a total loss involving both covered property on the Schedule of Coverages and Accounts Receivable occurs, the $1,000,000 limit applies to the covered property, and the $50,000 limit applies to Accounts Receivable.

If a limit for a Supplemental Marine Coverage is not provided, the limit is the full limit for the applicable coverage unless a different limit is shown on the Schedule of Coverages.

Example: An electrical disturbance occurs and damages computers. This coverage provides up to, but not more than, the policy limits for business personal property.

The limits for the Supplemental Marine Coverages can be changed on the Schedule of Coverages. When a limit for a Supplemental Marine Coverage is on the Schedule of Coverages, it replaces the limit shown in the coverage form but is not an additional limit.

Example: The Accounts Receivable limit on the Schedule of Coverages is changed to $100,000. This limit replaces the standard $50,000 limit in the coverage form and is not an additional limit. In this case, the limit available to the insured is $100,000, not $150,000.

The limits provided are not combinable with or added to a limit for any other Supplemental Marine Coverage, Coverage Extension, or Supplemental Coverage, including those added by endorsement.

If coinsurance applies to any coverage, none of the Supplemental Coverages are considered when determining the required limits of insurance.

1. Accounts Receivable (2002 edition)

This coverage reimburses the insured for sums it cannot collect from its customers as a result of direct physical loss or damage by a covered peril to its records of accounts receivable. It also covers the interest the insured must pay a bank if a loan is taken against the receivables to provide the operating capital necessary to continue its operations.

Furthermore, extra expenses beyond the normal amount required to collect monies owed and costs to reconstruct accounts receivable records in either paper, disk or tape format are also paid. The limit for this Supplemental Marine Coverage is $50,000.

Example: After a devastating fire destroyed its accounts receivable records, Weaklee Rentalls hired several temporary accountants for three weeks at the cost of $10,000 to help the Chief Financial Officer (CFO) reconstruct the accounts receivable records. The CFO spent 90 hours on the task at the cost of $6,750, based on her standard wage rate of $75 multiplied by 90 hours.

Many of Weaklee's customers decided to withhold payment on their account balances until Weaklee could prove the amounts owed. Records for $10,000 of the normal accounts receivable could not be recovered, and the destroyed accounts were not paid. Weaklee then dispatched its sales force to spend weeks tracking down late payers at an allocated payroll cost of $4,000. The sales team lost $25,000 in anticipated opportunities.

Since receivables trickled in at only 25% of the pre-loss levels, the company took out a 90-day bank loan against its probable collectibles. The interest on the loan amounted to $650.

The insurance company paid a total of $31,400 as follows:

$10,000 for the temporary accountants

 $6,750 allocated for the CFO expense

$10,000 in lost receivables

$4,000 sales force additional cost to collect receivables

$650 loan interest

The $25,000 in lost sales opportunities due to the time the salespeople spent collecting money is not a reimbursable expense.

2. Electrical or Magnetic Disturbance of Computers (2002 edition)

The direct physical loss from electrical or magnetic damage to computers and the loss of electronic records that are damaged, erased, or disturbed is covered. The loss must be caused by a disturbance of electrical or magnetic origin. Because this Supplemental Marine Coverage does not have a specific sublimit, the coverage provided is part of the property covered policy limits.

 

Example: Drake becomes upset when he finds out his position is relocating abroad and that he is deemed redundant. On his final day, he takes a magnet and wanders through the office, deliberately damaging as much equipment as he can. The costs are covered due to this provision.

3. Power Supply Disturbance of Computers (2002 edition)

If a power supply disruption causes direct physical damage to the computer, coverage applies. Examples of such disruptions include power supply interruptions, power surges, blackouts, or brownouts. Since this Supplemental Marine Coverage does not have a specific sublimit, the coverage provided is part of the Property Covered limit.

4. Virus and Hacking Coverage (2002 edition)

When computer hacking or a virus causes a direct physical loss or damage to computers or the named insured’s computer network or its website, there is coverage. However, the following items limit the coverage provided:

The limit is $25,000 in a single occurrence, subject to a 12-month policy period aggregate limit of $50,000.

5. Fine Arts (2002 edition)

The named insured’s fine arts are covered for direct physical loss up to $100,000 at a single location or in a single occurrence. Loss or damage must be caused by a covered peril at a covered location. Fine arts are also covered while temporarily displayed or exhibited away from a covered location and while in transit between the exhibit location and the covered location.

Point to Ponder: If there is a single occurrence over multiple locations, will the loss be capped at the $100,000 occurrence limit or will each location have up to the $100,000 coverage?

6. Off Premises Computers (2002 edition)

This coverage is for computers that are away from a covered location. They are covered only if they are in the named insured's custody or in the custody of an officer, partner, or employee. They are also covered while in transit between a covered location and the named insured, its officers, its partners, or employees. Coverage is limited to direct physical damage to the computer for no more than $25,000 in a single occurrence.

NOTE: Review the Checked Luggage Exclusion, which excludes coverage for any computer checked in luggage during transit. It may be problematic that this coverage does not explicitly mention the Check Luggage exclusion.

7. Property on Exhibition (2002 edition)

Business personal property temporarily on display or exhibited at locations not regularly occupied by the named insured is covered for direct physical damage if caused by a covered peril. The limit is $50,000 in any one occurrence, regardless of the number of locations where the property is exhibited. Exhibitions include trade shows and flea markets.

8. Property in Transit (2002 edition)

Business personal property in transit is covered for direct physical loss if caused by a covered peril. The limit is $50,000 in a single occurrence.

The following are additional provisions for Property in Transit:

·         Property sold and shipped by the named insured at the purchaser’s risk is covered when damaged by a covered peril. If this damage causes the purchaser to reject the shipment and refuse payment, coverage applies.

·         Any shipment rejected due to direct physical loss from a covered peril is covered during its return transit to the named insured or while it is waiting to be returned to the named insured.

·         The named insured has permission to accept a bill of lading or shipping receipts from carriers for hire, limiting the carrier’s liability to less than the actual cash value of the covered property.

·         There is no coverage for loss or damage to perishable stock caused by refrigeration equipment breakdown on any type of transportation carrier or conveyance.

9. Sales Representative Samples

Direct physical loss or damage caused by a covered peril to samples of the named insured's product, including containers and similar property of others is covered. This coverage applies only when the property is with the named insured’s sales representatives, is in the named insured's custody while acting as a sales representative or while in transit between a covered location and a sales representative. The limit of insurance is $50,000 per occurrence.

image024 hotel w PL

Example: On a Wednesday, Cumulous Bedding held a one-day mandatory regional sales meeting at a hotel for all its sales representatives. The representatives brought their sales boxes in their cars to prepare for sales calls before and after the meeting.

A tornado struck, impacting the hotel’s parking lot where the representatives had parked their cars. The tornado destroyed most of the vehicles belonging to the Cumulous representatives. Each of the 50 affected sales representatives had $1,000 worth of samples in their cars, and the sample boxes themselves were valued at $2,500 each.

The total loss amounted to $175,000; however, the coverage available under the Supplemental Marine Coverage is limited to a maximum of $50,000 for a single occurrence.

10. Software Storage (2002 edition)

Duplicate and backup software kept at a software storage location is covered for direct physical damage when caused by a covered peril. The software storage building must be at least 100 feet away from a covered location. The limit of insurance is $50,000 in any one occurrence.

Example: Nankin Products keeps all its software records at an offsite facility owned by its accountant. That building burns down, and every backup is destroyed. The cost to duplicate and create a new backup set of software is covered up to the $50,000 limit.

11. Valuable Papers (2002 edition)

The cost of research and other expenses necessary to reproduce, replace or restore lost information as a result of direct physical loss caused by a covered peril to the named insured’s valuable papers is covered. The limit is $100,000 without reference to occurrence, location, or aggregate.

Example: Simmons Architects has a major fire. Many of the older drawings lost or damaged were on CAD-CAM, while duplicate records were stored at an offsite location. These records were reinstalled on new equipment purchased to replace the damaged workstations, but the installation encountered a major conversion problem.

Due to the encountered issue, outside programmers were hired and paid $3,500 to complete the conversation. In addition, the architects had to incur $3,000 in costs to duplicate other records. They had to search through customer records to replicate plans and drawings of current projects. The total payroll cost amounted to $15,000. This expense added to the $6,500 duplication expense, bringing the total value of the covered loss to $21,500.

NOTE: Valuable Papers no longer include electronic or magnetic media records protection.

PERILS COVERED

Risks of direct physical loss or damage are covered unless the peril that caused the loss is limited or excluded by the policy.

PERILS EXCLUDED

1. Group One Exclusions

The doctrine of concurrent causation holds that coverage applies to a property loss that can be attributed to a covered source of loss even if it is accompanied by one or more excluded sources. As a result, coverage has been found for earth movement, flood, and other specifically excluded events.

This set of exclusions attempts to avoid concurrent causation by stating that the event is excluded, regardless of any other causes that contribute to or aggravate the loss. With this approach, there is no coverage for concurrent loss situations. This is considered to be anti-concurrent causation language.

Example: An earthquake occurs. It topples a huge tree that falls onto and collapses the roof of the insured’s factory. At the same time, the earthquake damages one of the factory’s walls. Coverage usually applies to damage caused by falling objects but, because the tree-fall was a result of the earthquake, neither event is covered.

Related Article: Concurrent Causation and Anti-concurrent Causation Clauses–A Discussion

a. Ordinance or Law (2002 edition)

Any increased cost or loss caused by the enforcement of any building code or law is not covered except as covered under the Supplemental Coverages. Coverage does not apply even if the loss itself is due to enforcement of a code in an undamaged building or is due to increased costs incurred following a direct physical loss to the property, including debris removal.

Related Court Case: Building Code Compliance Held Compensable By Reasonable Expectations of Insured

b. Earth Movement

Damage to covered property caused by earth movement, other than sinkhole collapse, or caused by eruption, explosion, or effusion of a volcano is not covered. Examples of earth movement are earthquakes, landslides, mudflows, mudslides, mine subsidence, and the sinking, rising or shifting of the earth.

There are exceptions. When direct loss by fire, explosion, or volcanic action occurs that was caused by and resulted from either earth movement, or the eruption, explosion or effusion of a volcano, there is coverage for that fire, explosion, or volcanic action loss.

Computers, mobile equipment, and the Supplemental Marine Coverages are not subject to this exclusion.

Related Article:CO 1221–AAIS Commercial Output Program Earthquake Endorsement

Example: Pete’s building is damaged by an earthquake. This resulted in cracked walls and collapsed shelving. The shifting earth causes a gas main to rupture, and the resulting fire burns 80% of the building. The earthquake damage to the building is $200,000, and the total loss estimate is $1,000,000. In adjusting the loss, the insurance company may deduct the $200,000 in earthquake damage and pay only the $800,000 loss caused by the fire.

c. Civil Authority

Loss or damage caused by the order of any civil authority is excluded. Seizure, confiscation, destruction, and quarantine of any property are examples of excluded civil authority actions. There is one exception. If the civil authority destroys the named insured’s property as a means of preventing the spread of a fire, there is coverage, but only if the fire itself is a covered peril.

Example: The local fire department burns down the insured’s garage in order to create a firebreak against an advancing forest fire.

Scenario 1: The forest fire was started by a lightning strike. The garage loss is covered.

Scenario 2: The named insured intentionally started the fire that went out of control and became a forest fire. The garage loss is not covered.

d. Nuclear Hazard

Loss caused by nuclear reactions, radiation, or radioactive contamination is not covered. Any loss resulting from a nuclear hazard is not considered a loss caused by fire, explosion, or smoke. There is one exception: if a direct loss by fire results from the nuclear hazard, it is covered.

Coverage for nuclear risk is available only through nuclear coverage associations.

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

e. War and Military Action (2002 edition)

There is no coverage for loss or damage caused by any of the following:

If any action above involves nuclear reaction, nuclear radiation, or radioactive contamination, this exclusion applies in place of the Nuclear Hazard exclusion. There are no exceptions in this exclusion.

f. Flood

There is no coverage for loss or damage caused by flooding. However, there are exceptions. Coverage applies if a fire, explosion, or sprinkler leakage occurs due to a flood. Additionally, this exclusion does not apply to computers, mobile equipment, and the Supplemental Marine Coverages.

NOTE: Flood is a broad term, so reviewing its definition in the Definitions section is important. This exclusion was included in the Water Exclusion in the previous edition. Although the term flood is now officially defined, its definition closely resembles the description of water damage that was excluded in the previous edition's Water section exclusion.

Related Article: CO 1223–AAIS Commercial Output Program Flood Endorsement

g. Utility Failure

When a utility service failure occurs off the insured's premises, such as a failure of power, gas, water, or other services, there is no coverage for the covered location, regardless of the cause.

However, there are exceptions to this exclusion. It does not apply to computers, mobile equipment, or any of the Supplemental Marine Coverages. Additionally, limited coverage for utility failures is available under Coverage Extensions for Off-Premises Utility Service Interruption.

Editor's Note: There is another exception for utility failure when a covered peril causes the loss at the insured's covered location. This appears to pertain to Utility Failure occurring on the insured's premises, but the policy does not explicitly clarify this information.

h. Sewer Backup and Water Below the Surface (2002 edition)

Loss or damage caused by the backup of sewers and drains is not covered by this policy. Additionally, damage caused by groundwater pressure is also excluded. Some examples of losses not covered include damage resulting from water pressure or the flowing, seeping, or leaking of water into buildings, foundations, sidewalks, driveways, swimming pools, and similar types of covered property.

However, there are exceptions. If sewer backup or underground water causes a fire, explosion, or sprinkler leakage, the resulting loss or damage from those events is covered. This exclusion does not apply to computers, mobile equipment, or Supplemental Marine Coverages.

A limited amount of coverage is available under Supplemental Coverages for Sewer Backup and Water Below the Surface.

NOTE: In the previous edition, this exclusion was part of the Water exclusion, and the wording is similar.

2. Group Two Exclusions

The second group of exclusions pertains to loss, 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.

NOTE: The Freezing exclusion was eliminated with the 2002 edition.

a. Animal Nesting, Infestation or Discharge (2002 edition)

This exclusion does not cover damage caused by animals nesting, infesting, discharging, or releasing waste or other secretions. The term animal is extended to include birds, insects, and vermin, but is not limited to these.

There is an exception. If any of the above results in the breakage of building glass or triggers a specified peril, coverage applies to that particular loss or resulting damage.

NOTE: Prior editions excluded loss caused by animals, while this one only excludes certain animal activities.

Example: Bats nest in the attic of an old church. Coverage does not apply to the waste materials on the floor of the attic. However, when a bat bites some electrical wiring, causing a fire, coverage applies to the resulting fire damage.

b. Collapse (2002 edition)

Loss or damage caused by collapse is excluded. However, there are exceptions. If the collapse results in the occurrence of any covered peril, coverage applies to the loss or damage caused by that covered peril. Also, it does not apply to computers, mobile equipment, or the Supplemental Marine Coverages.

Example: A shelf collapses, knocks over a Bunsen burner, and causes a fire in the laboratory. The damage resulting from the collapse of the shelf is not covered, but the damage caused by the ensuing fire is covered.

Limited coverage is provided by Other Coverages–Collapse located elsewhere in the policy.

c. Computer Virus or Computer Hacking (2002 edition)

Any damage caused by computer virus or hacking is not covered. This applies whether the damage is direct, indirect, or resulting from loss of access, use, or functionality. However, there is limited coverage provided under Supplemental Marine Coverages–Virus and Hacking Coverage.

d. Contamination or Deterioration

There is no coverage when contamination or deterioration is the cause of loss or damage. This includes examples such as corrosion, decay, fungus, mildew, mold, rot, and rust. Contamination or deterioration also refers to any inherent quality, fault, or nature of the covered property that leads to its self-damage or destruction.

However, there are exceptions. If contamination or deterioration results in a specified peril or causes breakage of building glass, coverage will apply to the loss or damage specifically caused by those events.

Example: A portion of the roof above a restaurant dining area collapsed due to the wood joists rotting. The collapse overturned candles burning on the tables. The candles ignited the tablecloths, furniture, and carpeting. The damage to the ceiling because of the rotting wood joists is not covered, the damage because of the collapse is not covered, but the damage from the resulting fire is covered.

If an air conditioning system servicing the computers sustains direct physical damage from a covered loss, and this damage leads to corrosion, decay, fungus, mildew, mold, rot, or rust that affects the computers, then the resulting damage to the computers is covered.

e. Criminal, Fraudulent, Dishonest or Illegal Acts (2002 edition)

The 2002 edition of this exclusion adds “or Illegal” to the title. Loss caused by criminal, fraudulent, illegal, or dishonest acts are not covered if the act(s) is committed alone or in collusion with others by any of the following:

However, there are exceptions. Loss due to acts of destruction by the named insured's employees is covered, but theft by employees is still excluded.

Example: During a strike at Autumn Manufacturing, disgruntled strikers break ten windows in the plant building. This damage is covered. However, there is no coverage when two employees take advantage of the situation and break into Autumn's offices to steal money, securities, and other property from the safe.

NOTE: CO 1006 Crime Coverage Part – Employee Fraud and Dishonesty can be added to the policy for employee theft coverage.

Related Article: CO 1006, CO 1007 and CO 1008—Commercial Output Program Crime Coverage Parts

Additionally, covered property in the custody of a carrier for hire is not subject to this exclusion.

Example: First Rate Products hires Great Trucking to deliver products to a number of stores, but three packages never reach their destinations. It turns out that the packages were stolen by the trucker’s employees and were not recovered. This loss is eligible because it occurred while the packages were in a hired carrier’s possession.

f. Defects, Errors and Omissions

The following losses are not covered:

o   Land use

o   Design, specification, construction, installation, workmanship, or maintenance of property

o   Planning, zoning, development, siting, surveying, grading, compaction

o   Property maintenance

Example: The Smallville City Council postponed necessary maintenance on a floodwall, which ultimately led to its collapse and subsequent flooding of Health Manufacturing. Aware that they lacked flood insurance, Healthy Manufacturing filed a claim arguing that the damage was caused not by the flood itself, but by the City Council's poor decision-making. However, their claim was denied due to this exclusion.   

Example: As a result of this exclusion, the following situations are not covered:

  • Property built on wetlands that must be torn down.
  • Inferior roof supports that cause the roof to bow.
  • Weak welds in a conveyor system that causes it to crack and send twenty newly manufactured computers crashing to the floor.

However, there is an exception. If any of the situations described in this exclusion cause a covered peril to occur, coverage applies to the loss or damage caused by the covered peril.

g. Electrical Currents (2002 edition)

Loss that is caused by electrical arcing or electrical currents of any kind other than lightning is excluded. There are exceptions.

h. Steam Boiler Explosion (2002 edition)

The 2002 edition of this exclusion changes the title from Explosion to Steam Boiler Explosion. When the named insured owns, leases, or operates steam boilers, steam pipes, steam turbines, or steam engines, any loss resulting from one or more of these components exploding is not covered.

However, there are exceptions. If an explosion in one of these objects causes a fire or a combustion explosion, the resulting loss or damage is covered. In addition, loss or damage from a fuel or gas explosion inside a firebox, combustion chamber, or flue is covered.

Example: Coverage applies to the following situations:

  • The boiler explodes because an improper fuel mixture causes gas to accumulate in the combustion chamber, and the boiler cannot contain the combustion.
  • The boiler overheats, explodes, and bursts into flames. The damage to the cracked boiler is excluded, but the damage caused by the ensuing fire is covered.
  • The steam pipes in the office of the named insured, who is a tenant in the building, explode and damage equipment and furniture. Because the tenant has no control over the steam pipes, there is coverage.

 

Example: Coverage does not apply to the following situations:

  • The steam pipe in the owner’s warehouse bursts and ruins thousands of dollars of paper stock inventory.
  • The boiler runs out of water, cracks and explodes, causing damage to the walls of the boiler room.
  • The boiler explodes and is propelled through the back wall of the boiler room.

i. Increased Hazard

If the insured’s operation materially increases, which creates a higher hazard that is within the insured’s control and knowledge, there is no coverage in the event of a loss.

 

Examples:

  • A retail grocery store that opened a fireworks factory in its back room. This is an increased hazard.
  • A retail grocery store keeps a 5-gallon can of gasoline inside the building to use with its newly purchased lawn mowing equipment. This is not a material increase in hazard.
  • A restaurant originally having only baking ovens adds a deep fat fryer. This is a material increase in hazard.

NOTE: Businesses routinely make significant changes. It is important that agents make their clients aware of this particular exclusion. It may encourage them to send notice of such changes.

j. Loss of Use

The following losses are not covered:

Some loss of use situations can be covered by loss of income coverage forms. Others are economic or market losses not typically insured under standard policies.

Related Article: CO 1001–AAIS Commercial Output Program Income Coverage

k. Mechanical Breakdown

Any loss due to mechanical breakdown is excluded. In addition, when a centrifugal force causes a machine’s moving parts to rupture or burst, there is also no coverage.

However, there are exceptions. If either of these excluded situations causes a specified peril, breakage of building glass, or elevator collision to occur, the insurance company covers the loss or damage resulting from those events. This exclusion also does not apply to computers.

 

Example: Coverage does not apply to the following situations:

  • A punch press requiring 440 volts loses one-fourth of its electrical phase and releases the cycle on a customer's die prematurely, resulting in damage to both the die and the punch press.
  • Lack of lubrication causes an engine to seize up.
  • A governor on a machine breaks, the engine revolutions exceed safe operating standards, and the flywheel flies off the machine, resulting in damage to the machine and to the adjacent walls and windows.

 

Example: Coverage does apply in the following situations:

  • The pulleys controlling an elevator suddenly seize. The elevator jerks, swings, and strikes the elevator shaft walls, resulting in damage to both the elevator and the shaft walls. The damaged elevator and shaft walls should be covered.
  • The flywheel flies off a machine and breaks a light bulb. This creates a spark that ignites textile dust in the rafters and causes a major fire. The damage caused by the fire should be covered but not the damage to the light bulb.

Related Article: CO 1003–AAIS Commercial Output Program Equipment Breakdown Coverage

l. Neglect

Insurance coverage is issued with the anticipation that the named insured will operate in a reasonable manner to protect property before, during and following a loss. If the named insured does not take such reasonable measures, the insurance coverage should not be expected to respond.

This exclusion reinforces that concept by not covering loss or damage caused by the named insured failing to use reasonable means available to save covered property during and after the occurrence of a loss. In addition, there is no coverage for loss caused when a named insured fails to make reasonable and available efforts to protect threatened property from a covered peril.

 

Example: Coverage may be denied in the following situations:

  • Peter is just not quite sure what to do, so he makes no effort to douse a small fire that starts in a supply closet but decides to wait until the fire department arrives. The fire damage to the supply area would be covered, but the claim on the rest of the damage could be denied.
  • A tree limb falls on the roof and creates an opening. Paul is tired and decides to take no action to prevent further damage and instead waits for the adjuster to arrive the next day. Before the adjuster arrives, rain from a thunderstorm sends torrents of water through the hole, damaging walls and floor coverings and ruining hundreds of reams of special paper stock. The damage caused by the tree falling is covered, but the claim for the rest of the damage could be denied.

NOTE: These situations illustrate the problem of defining what a reasonable person should do. In the first, the lack of action could be explained by the insured having an unusual fear of fire of any kind. In the second, an argument could be made in favor of coverage if the insured was not aware of the approach of the storm, was physically unable to take the action required or simply didn’t realize the extent of the damage.

m. Pollutants

There is no coverage for loss caused by any action of pollutants. However, there are exceptions:

NOTE: For more details on specified perils, refer to the definition section above for a list of the included perils.

 

Example: Coverage may apply in the following situations:

  • A fire causes transformers containing PCBs to burn, and the resulting PCB contamination requires the destruction of the entire building and its contents.
  • An accidental sprinkler discharge flows into an open tank full of chemicals. The chemicals eventually spill over and, even though diluted, damage the floor.
  • A chemical spill causes a fire to occur. The chemical spill is not covered, but the damage from the resulting fire is covered.

n. Seepage

This is really another case of not paying for neglect. If water or steam is seeping and leaking for 14 days or more and causes loss or damage, there is no coverage.

Example: A slow leak goes on for months; it is not discovered until the sheetrock wall is thoroughly soaked and has collapsed. There is no coverage because the seepage occurred over a period of more than 14 days.

NOTE: The insurance company must prove that the leak went on for more than 14 days. Depending on the details of the situation, the insured may decide to challenge the company on this point.

o. Settling, Cracking, Shrinking, Bulging or Expanding

Loss or damage due to the settling, cracking, shrinking, bulging or expanding of any pavement, footings, foundations, walls, ceilings or roofs is not covered. However, there are exceptions. If any of these excluded events result in a specified peril or breakage of building glass, coverage applies.

In addition, this exclusion does not apply to computers or mobile equipment.

p. Smoke, Vapor or Gas (2002 edition)

This exclusion does not apply to every type of smoke, vapor, or gas. It only applies when smoke, vapor, or gas causing the loss comes from agricultural smudging or industrial operations. This exclusion also does not apply to computers and mobile equipment.

NOTE: Industrial incinerators may release harsh acids and chemicals into the air, resulting in bleached or chipped paint or damage to plastic and rubber products. Some agricultural smudging operations conducted to reduce insect infestations or to keep crops from freezing release greasy smoke that can discolor paint and do other damage to nearby buildings.

Smog was part of this exclusion, but in the 2002 edition, smog became a separate exclusion.

q. Smog (2002 edition)

Loss or damage due to smog is excluded. However, there are exceptions. If the smog causes a specified peril or breakage of building glass to occur, the loss or damage is covered. In addition, this exclusion does not apply to computers and mobile equipment.

r. Temperature/Humidity (2002 edition)

Personal property or perishable stock that sustains loss or damage because of dryness, dampness, humidity, or extremes of temperature is not covered.

However, there are exceptions:

 

Example: Coverage does not apply to the following situations:

  • A bird flies into and breaks a window in a laboratory. This changes the controlled temperature and humidity conditions in the laboratory, ruining an expensive batch of pharmaceuticals.
  • An employee accidentally shuts off a restaurant freezer, and all the frozen fish thaws and spoils.

 

Example: Coverage applies to the following situations:

  • A wind shear destroys the air conditioning unit on the building's roof. The computer room overheats, causing circuits to melt down. The computer damage is covered.
  • The air conditioning in a special red label adhesives storage room fails. The room temperature rises, fumes accumulate, and an explosion destroys the storage room and its contents. The damage from the explosion is covered.

s. Wear And Tear

Loss or damage due to wear and tear, marring or scratching is excluded. These losses are more in line with the costs of doing business. There are exceptions. If these losses result in the occurrence of a specified peril or the breakage of building glass, coverage applies to the resulting loss or damage. However, there remains no coverage for the wear and tear, marring, or scratching.

 

Example: A chandelier’s chain broke because of its age. The damage to the chandelier is not covered, but the table and chairs that it destroyed are covered.

t. Weather

If a weather condition contributes to a peril excluded in the paragraph 1 exclusions (ordinance or law, earthquake, civil authority, nuclear hazard, flood, utility failure, war, sewer backup), then the damage caused by the weather condition is also excluded. However, if weather conditions contribute to a loss caused by a covered peril there is coverage. This is an anti-concurrent causation exclusion.

Example: Coverage does not apply to the following situations:

  • Heavy rain causes the river to rise and flood the building.
  • Torrential rains start a mudslide that knocks a building off its foundation.
  • A tornado destroys the power station that supplies power to the insured’s glass products manufacturing plant and ruins all the glass being manufactured.

Related Article: Concurrent Causation and Anti-Concurrent Causation Clauses–A Discussion

u. Voluntary Parting (2002 edition)

If the property is voluntarily given to another party, there is no coverage. There is no coverage even if the receiving party was part of a fraudulent trick or scheme.

Example: Coverage does not apply to the following situations:

  • A product is sold to a person whose check bounces, and the person cannot be found.
  • An employee permits a potential customer to test drive an item of mobile equipment, but the customer never returns, and neither does the equipment.

However, there is some limited coverage provided under the Coverage Extensions–Fraud and Deceit.

ADDITIONAL PROPERTY NOT COVERED OR SUBJECT TO LIMITATIONS

In the 2002 edition, 6. Gutters and Downspouts limitation and 7. Interior of Buildings requirement have been removed.  

1. Accounts Receivable

Accounts receivable losses that occur as a result of bookkeeping, accounting, or billing errors are not covered. Coverage also does not apply if the only proof that a loss occurred is a discrepancy discovered in an audit or during the taking of inventory.

2. Animals

This item states that loss to animals, including birds and fish, are not covered. However, there is an exception:

NOTE: There may be ambiguity between this Animal exception and the Animal exception in the Property Not Covered section. The ambiguity arises because the description for Animals in the Property Not Covered section states that animals owned and held for sale are covered while inside buildings. However, this exception states animals held for sale are only covered when death or destruction is caused by a specified peril or building glass breakage. Which exception will apply when a loss occurs?

Example: It Takes a Village Pet Shop sells fish and reptiles. It also boards dogs and cats. A fire occurs. The fish and reptiles die, and coverage is provided for that loss because it was due to a specified cause of loss, and the animals died.

Four dogs and three cats that were being boarded were also in the shop when the fire broke out. All were saved by the fire department, but all need to be treated by veterinarians. Since there is ambiguity in the exception wording, the cost of the veterinarian services could be paid because nothing in the policy addresses limitations to the covered boarded animals.

3. Boilers

Loss or damage to steam boilers, pipes, turbines, and engines that occurs due to an internal condition or event is not covered. However, there is an exception: coverage is provided if the loss or damage is caused by an explosion of gas or fuel in the firebox, flue, or combustion chamber.

Additionally, there is no coverage for loss or damage to hot water boilers or heaters resulting from any internal condition or event, such as bursting, cracking, or rupturing. The only exception in this case is if the loss or damage is due to an explosion.

Related Article: CO 1003–AAIS Commercial Output Program Equipment Breakdown Coverage

4. Contamination of Perishable Stock Due to Release of Refrigerant (2002 edition)

There is no coverage when perishable stock is contaminated by the release of refrigerant. The exclusion specifically mentions ammonia but does not limit the exclusion to ammonia.

Related Article: CO 1004 and CO 1005–AAIS Commercial Output Program Spoilage Coverage Parts

5. Furs

Coverage applies to the full value of furs except for the peril of theft. The sub-limit of insurance for theft coverage on furs is $10,000 per occurrence.

Related Article: Furriers Block Policy

6. Glassware/Fragile Articles (2002 edition)

Breakage of fragile articles is not covered. However, there are exceptions:

Related Articles:

AAIS Commercial Fine Arts Coverage Forms

ISO Commercial Fine Arts Coverage Form

Example: There is no coverage on glass statuary knocked to the floor by a customer, but coverage applies to statuary that melts due to the excessive heat of a fire.

7. Jewelry, Watches, and Precious Stones

The only limitation of coverage for jewelry, watches, precious stones, watch movements, pearls, and semi-precious stones is the peril of theft. Theft is covered, but the limit of insurance is subject to a sublimit of $10,000 per occurrence.

The only exception is that items with individual values less than $100 are not subject to the limitation.

Related Articles:

ISO Jewelers Block Coverage Form (Filed)

AAIS Jewelry Dealers Coverage (Filed)

ISO Jewelers Block Coverage Form (Non-filed)

Jewelers Block Policy (Independent)

8. Missing Property

There is no coverage for property discovered to be missing based only on a shortage discovered while taking inventory, as an accounting or bookkeeping transaction or by any other circumstance where no physical evidence indicates what happened to the property. However, there is an exception for property in possession of carriers for hire.

9. Personal Property in the Open

Rain, snow, sleet, or ice damage to property in the open is excluded. However, there are exceptions. This limitation does not apply to mobile equipment or property while it is in the custody of a carrier for hire.

10. Stamps, Tickets and/or Letters Of Credit

This is another theft limitation. Stamps, tickets, and letters of credit are covered for theft, but the loss amount is capped at $5,000 in a single occurrence. Tickets are described as including lottery tickets being held for sale, but other types of tickets are also limited.

Full coverage for this property does not appear to be available under the AAIS program. However, increased coverage is available under the ISO commercial crime program coverage forms and policies.

Related Article: ISO Commercial Crime Coverages Forms Overview

11. Unauthorized or Fraudulent Transfer (2002 edition)

The 2002 edition of this exclusion changes the title from Transfer Property to Unauthorized or Fraudulent Transfer. When covered property is transferred via the computer or is delivered to a person or place, there is no coverage for any loss or damage to the property if the transaction was the result of unauthorized or false instructions, regardless of how the instructions were transmitted (even electronically).

There is an exception when coverage is provided under Coverage Extensions–Fraud and Deceit.

Example: Got Smokes Distributors received a faxed request from Drained Rivers, Inc. for thirty cases of cigarettes. Got Smokes sent the cigarette shipment to the listed location in Anytown, USA accompanied by an invoice. A follow-up invoice determined that Drained Rivers, Inc. was a fictional company. The Got Smokes loss is not covered.

This could potentially be a $21,000 loss.

12. Valuable Papers (2002 edition)

There is no coverage for loss to valuable papers as a result of errors or omissions in copying or processing them. There are no longer any exceptions. In the prior edition, an exception was made for loss resulting by a specified peril or breakage of building glass.

OTHER COVERAGES

1. Collapse (2002 edition)

a. Collapse of a building, structure, or personal property can happen for various reasons. In this Other Coverages section, collapse is covered only for certain perils. If the cause of collapse is not defined in this section, it is excluded.

Coverage for collapse of a building or structure is limited to the following:

 

Example: The following are collapse situations:

  • Coverage applies if carpenter ants eat through roof supports in inaccessible sections of the roof and there was no visible evidence of damage until the collapse occurred.
  • There is no coverage where visible damage to floor joists caused by termites causes the floor to collapse.
  • Coverage applies to collapse of a building under construction when faulty temporary supports fail.
  • There is no coverage when the building collapses six months after the building is renovated because of improperly spaced girders installed during the renovation.

b. Collapse coverage is further restricted for the following properties:

These properties are covered for collapse loss or damage only if the loss or damage is the result of a building or structure collapse. Furthermore, that building or structure collapse must be due to the causes of loss described in 1. a. or due to a specified peril or building glass breakage.

Example: The following situations are intended to clarify the intent of this limitation:

  • Coverage applies when the garage blows over, collapses, and crushes the lawn furniture next to it.
  • There is coverage when the wall of the building beside a dock collapses during a fire and causes the wharf that extends 100 feet into the harbor to collapse.
  • The office building has satellite dishes and antennas on the roof. When the roof collapses due to the weight of ice and snow, the satellite dishes and antennas also collapse. This loss is covered.

c. Collapse is the falling in or caving in of a building or any part of the building. It must be both unexpected and sudden. In addition, the result of the collapse must be such that the building or the portion of the building where the collapse occurred can no longer be occupied in the same manner as it was prior to the collapse.

d. A building or structure, or any portion of the building or structure that remains standing after the rest has collapsed, is not in a state of collapse in the following situations:

·         It remains standing even when evidence is present of bending, bulging, cracking, expansion, leaning, sagging, settling, or shrinking.

·         It is in danger of falling or caving in.

·         It has separated from the rest of the building but remains standing.

NOTE: It is important to remember that just because a building looks like it is about to collapse, or if engineers say it is in imminent danger of collapse, it has not yet collapsed and is not covered.

Example: The loud “crack” disturbs a prayer service at the church on a Sunday morning. A second crack alerts the trustees of the congregation, who 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.

NOTE: It is also important to remember that just because part of a building or structure has collapsed, it does not mean that the remainder of the building is also in a state of collapse.

Example: An interior supporting beam gives way, resulting in the collapse of 1/3 of the roof into the Manweather Warehouse. The supporting beam collapsed because of hidden decay, so collapse coverage applies to the loss. Building inspectors discover that similar problems exist in all supporting beams and condemn the building because it is in imminent danger of collapse.

Manweather submits a claim for the total loss of the building. The insurance company pays only for the 1/3 roof damage since the rest of the building remains standing.

Related Court Case: Imminent Collapse Covered Under Hidden Decay Provision – this ruling is one among many that caused the collapse provision to be rewritten.

2. Tearing Out and Replacing

Water and process piping usually run through walls, above ceilings, and under flooring. This means that in order to find the source of a leak, openings may need to be created in undamaged walls, floors, or ceilings. Insurance coverage doesn’t extend to intentional damage, so all damage caused while searching for the leak would be uncovered if not for this additional protection.

This coverage specifically provides for the tearing out and the replacing of undamaged property, but only if damaged by water, other liquids, powders or molten material is covered, and the building or structure is covered property. Damage to the system itself is not covered. The one exception to damage to the system not being covered for damage is for a fire extinguishing system that is caused either by the discharge of any substance from an automatic fire protection system or by freezing.

Examples:

Scenario 1: 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.

The policy covers the damage to the ceiling caused by the water because it covers the building and business personal property. This particular coverage pays the costs to tear out the second-floor wall to remove and repair the piping. However, no coverage is provided for the cost to repair the damaged pipe itself.

Scenario 2: 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 to the sprinkler system.

WHAT MUST BE DONE IN CASE OF LOSS

1. Notice

The named insured or its agent must give the insurance company prompt notice of the claim, including a description of the property. The insurer must state when it requires a written notice be provided. If the loss is the result of a crime, the police must be notified. In the event of a loss involving a credit card, the credit card company must also be notified.

The policy does not define prompt notification, but any unreasonable delay could be cause for the company to deny the claim because of lack of cooperation.

Example: Jasper noticed that the lock was broken to his storeroom and also noticed that items were missing. He decided not to report the loss at the time but did repair the lock and replace the lost items. One month later, the lock was again broken, but this time, almost all of his stock was removed.

He reported this loss immediately to both the police and the insurance company and also reported the prior loss to both. The insurance company agrees to pay the current loss but denies the first loss due to late reporting.

2. Protect Property

Once a covered loss has occurred, the named insured must take steps to protect covered property from further damage. The insurance company wants to encourage this type of behavior, so it pays for reasonable repairs and emergency measures taken to protect the property against further damage by covered perils. The named insured must keep accurate records of the cost of these repairs. Emergency repair costs also do not increase the limit of insurance.

Example: The following situations are intended to clarify the named insured's responsibilities:

  • The cost of repairs to shutters damaged in the initial phase of a hurricane made by the insured during the eye of the hurricane is covered.
  • When flood causes damage to covered property, the cost of emergency measures to remove water-soaked items for them to begin drying and to start the clean up to prevent mold and mildew is covered when flood is a covered peril.
  • The plastic purchased and installed to prevent rain from entering through the hail-damaged roof is covered.

This condition acts as a strong incentive, while the previously discussed Neglect Exclusion serves as an essential safeguard to ensure accountability. The insurance company encourages the insured to take proactive steps in protecting their property by paying necessary expenses and covering the loss. If the insured chooses not to act, the insurance company may deny coverage if delays result in additional damage.

However, one last point to note is that the insurance company does not cover any anticipatory repairs or emergency actions for a peril that has not yet occurred.

Example: The following situations are intended to clarify what is not covered:

  • The costs to board up windows in advance of a hurricane are not covered.
  • The cost of sandbags used to protect the property from an imminent flood is not covered, even if flood is an insured peril.

3. Proof of Loss

The named insured must submit a signed and sworn proof of loss to the insurance company within 60 days of the insurer’s request to do so. While the named insured is not required to be proactive in submitting information, it should be carefully accumulating the needed information in order to comply with the request for it when it arrives. The proof of loss must include all of the following:

o   The inventory must include detailed quantities, descriptions, costs, actual cash values, and loss amounts.

o   To verify the inventory, bills, receipts, and other supporting documents must be attached.

The proof of loss is the most important document presented to the insurance company, and it should be completed thoroughly and accurately. The fact that it is signed and sworn means any inaccuracies may be considered fraudulent and subject to criminal prosecution. When a fraudulent proof of loss is mailed, it is also subject to federal mail fraud statutes.

4. Examination

The insurance company may request the named insured to undergo an examination under oath as often as reasonably necessary. They can also require that all responses to questions be treated as sworn statements. Additionally, the company has the option to interview each individual involved separately and in private to prevent collusion of stories.

While the named insured has the right to refuse the examination, it is important to note that doing so may allow the insurance company to deny coverage on the grounds of a breach of contract.

Related Court Case: Insured's Failure to Cooperate Relieved Carrier of Its Obligation to Pay Claim

5. Records

To fully assess the scope of the loss, the insurance company may request documentation to support property inventories, valuations, and loss details. This can include tax records, bank statements, digital files, physical documents, and other relevant records. The named insured must produce these records whenever the insurance company requests, as long as the requests are considered reasonable.

Related Court Case: Church Financial Records Held Subject to Review by Insurer

6. Damaged Property

The named insured must show the insurance company the damaged and undamaged property whenever requested, provided the requests are reasonable. Additionally, the insurance company must be allowed to take samples and inspect the property. These samples are crucial for assessing the extent of damage, especially when the loss amount isn't immediately clear.

7. Volunteer Payments

After a loss, the primary objective of the named insured should be to resume business operations as quickly as possible. Meanwhile, the insurer aims to fairly assess the loss to ensure that any potential payment is equitable. The named insured can begin spending money immediately to facilitate the resumption of operations. However, it's important to note that these expenses may or may not be reimbursed by the insurance company.

The named insured cannot create an obligation for the insurer by making payments, assuming liabilities, offering rewards, or incurring any other expenses. The only expenses that the named insured is authorized to incur are those necessary for emergency repairs to protect the property from further damage.

Example: A fire damages Barry’s Burgers in July, and the insurance company investigates the loss. Barry’s is in a college town, and Barry knows he will lose most of his business if he does not reopen when the fall semester begins. He awards repair contracts before knowing the amount of insurance available to pay the loss. While he is able to reopen his restaurant on the day the students arrive, the insurer’s settlement of $75,000 is $15,000 less than what he spent. However, his business will continue while he argues about the $15,000 difference.

8. Abandonment

The insured is not permitted to abandon property to the insurance company without its consent. Because the insurer decides what property it will take, the named insured remains responsible for the damaged property until that decision is made. The insurance company has the right to pay the loss and not take any of the salvage.

 

Example: Lively Lindy’s is located at the intersection of four different gangs’ “turf.” It is heavily damaged as a result of a gun battle between two gangs. The owners are not interested in continuing operations and request a settlement based on the actual cash value. They are interested in leaving town as soon as possible and offer the salvage to the insurance company. However, the insurance company decides not to take the property because of the substantial costs of taxes and demolition, plus the fact that, due to its location, the land is virtually worthless.

9. Cooperation

The named insured must cooperate with the insurance company in performing all acts required by the policy. Lack of cooperation for reasonable requests can lead to the claim being denied.

Related Court Case: Insured Fails to Produce Required Documents Following Fire Loss

VALUATION

1. Replacement Cost (2002 edition)

Replacement Cost is the default valuation in this policy. The policy can be endorsed to Actual Cash Value if desired and will be reflected on the Schedule of Coverages.

Replacement Cost means the expense incurred to repair or replace damaged property with like, kind, and quality property and/or materials. Additionally, the repair or replacement must occur at the same covered location, and operations must remain unchanged.

Reimbursement is limited to the actual amount spent on repairs or replacements, and it is only provided if the damaged property is truly repaired or replaced. The named insured may request the Actual Cash Value upfront and later request replacement cost once the property has been repaired or replaced. However, the request for Replacement Cost must be made within 180 days of the date of loss.

NOTE: Replacement Cost is not the same as market value. Market value is the amount the insured could get by selling the property on the open market.

Ø  Items 3 through 13 in this section are not valued on a Replacement Cost basis.

2. Actual Cash Value (2002 edition)

When Actual Cash Value is selected on the Schedule of Coverages, the value of covered property, except for items 3 through 13 of this section, is valued at its actual cash value as of the date of loss. Actual Cash Value is not a defined term; however, common usage refers to replacement cost with a deduction for depreciation.

Depreciation is not specifically defined. Usually, stock does not depreciate unless it becomes obsolete. Buildings depreciate at different rates; brick and concrete structures tend to decline more slowly than frame buildings. Roofs tend to depreciate faster than the overall building. Some machinery and equipment become unusable or outdated within months, while others can remain useful for many years. Computers generally depreciate quickly. Vehicle depreciation is measured in years and miles, whereas durable construction equipment and forklifts tend to depreciate more gradually.

3. Fine Arts (2002 edition)

Fine arts are valued at their fair market value at the time of loss. Current appraisals and accurate inventories are important in settling fine arts losses. Photographs are important because the condition of an object affects its appraisal value. Registering the fine art can be particularly helpful in the event of a loss.

Related Article: Art Identification and Registration

4. Glass

The value of damaged or destroyed glass includes the cost of safety glazing material, provided the material is required by law, ordinance, or code.

NOTE: This item does not apply to stained glass because stained glass is considered fine art.

5. Hardware (2002 edition)

Example: Regina purchased five top-of-the-line computers for $40,000 each in 2019. They were all destroyed in 2025, and the replacement cost for similar functionality and quality is $10,000 each due to the rapid changes in computer technology.

 

Example: Phil’s computer network was operating at 90% capacity when a covered partial loss occurred. While it was being repaired, Phil had its capacity increased so that following the repair, it was operating at 30% capacity. The insurance company pays only for the repairs that would have returned it to 90% capacity, so Phil must pay the upgrading costs.

6. Software (2002 edition)

NOTE: Remember this policy has a 2002 edition date. Many programs are now accessible through downloads, applications and through the cloud. This valuation does not take into consideration any of those options; however, because their cost would be less than purchasing discs, etc., these options will likely be considered during settlement.

7. Merchandise Sold

Merchandise sold but not yet delivered is valued at its net selling price at the time of loss. The net selling price is the selling price minus all applicable discounts and unincurred expenses.

 

Example: Rick’s Electronics sells some of its televisions to Greg. Their full 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 $25 delivery fee per item. Before Rick can deliver the televisions to Greg, a fire 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 settlement value of the three televisions is $400 each, totaling $1,200.

8. Manufactured Stock (2002 edition)

Stock manufactured by the named insured is valued at the price it would have sold for if the loss had not occurred. The value is reduced by all discounts and unincurred expenses.

Example: Dryden’s Machine Shop’s corner bead stock is destroyed by a covered loss. It would have sold for $25,000, but the standard discount for payments received within 30 days of purchase is 10%. Dryden’s loss is settled for $22,500, reflecting the $2,500 discount for payments received within 30 days of purchase.

9. Pair or Set

Pairs and sets of items hold more value as a complete group than the individual pieces do when separated from their partners. Therefore, if a few pieces from a set are lost or damaged, the overall value reduction of the set is greater than the loss of the individual damaged pieces.

The adjustment in value takes into account a reasonable proportion of the total value of the entire set or individual item. This means that instead of focusing solely on the value of each piece in isolation, the overall value of the set is evaluated. Once this value is established, any loss to one or more pieces is calculated based on their proportional value within the pair or set. It is important that this proportional value is deemed reasonable.

The loss of one piece of a pair or set is never considered a total loss.

Example: The named insured's chess set is valued at $1,000. After a tornado scatters the set, all the pieces are found except for a rook and a queen. Because of the type of wood used in the set, the missing pieces cannot be replaced.

The values of the rook and queen as single pieces are $10.00 and $15.00, respectively, but their proportional value is at least $31.25 ($1,000/32) and probably more because they are larger pieces and therefore more valuable to the set.

10. Loss to Parts

If a covered property item is made of many parts and one of the parts is lost or damaged, only the value of the lost or damaged part or the cost to repair or replace it is paid.

Example: The electric motor is a crucial component of a machine made by a company. Without it, the machine is almost useless. With the motor, the machine's value exceeds the value of just the motor or other equipment without it. When the motor is damaged, coverage applies only to the cost to repair or replace the motor.

11. Tenant’s Improvements (2002 edition)

Coverage applies to both damaged and undamaged tenant’s improvements, which impacts the valuation. The value of both damaged and undamaged tenant’s improvements is replacement cost but only if repaired or replaced at the named insured's expense within 24 months. Coverage for undamaged improvements applies only if the named insured’s lease is cancelled as a result of a covered loss.

If the improvements are not repaired or replaced within the 24 month timeframe, the loss is paid proportionally using the formula provided below: A divided by B multiplied by C, where:

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.

 

Example: On June 1, 2022, Ann enters into a three-year lease for her store space in a mall with a two-year renewal option. She pays $5,000 for improvements that she cannot remove if she were to move out of the space. On June 1, 2025, a fire sweeps through most of the mall, but her store is undamaged.

The mall owner decides to destroy the mall and build a new one. Ann’s lease permits the mall owner to do this. Ann loses all her improvements, and the mall is not being rebuilt in a way that allows Ann to move back in. The loss to her improvements is calculated as follows:

  • A = 365 + 730 = 1,095 days (one year remaining on the lease is left, and there is a two year renewal option)
  • B = 365 X 5 = 1,825 days (the total number of days in the three-year lease plus the two-year option)
  • C = $5,000 (the value of the improvements when installed)

Based on the formula above, 1,095 divided by 1,825 multiplied by $5,000 equals $3,000.

Ann receives $3,000.

Related Article: Improvements and Betterments

12. Valuable Papers (2002 edition)

Valuable papers are valued at their actual cash value as of the date of loss.

NOTE: This valuation may not be acceptable to insureds who have irreplaceable valuable papers. These should be covered under a Valuable Papers and Records policy.

Related Articles:

AAIS Valuable Papers and Records Coverage

ISO Valuable Papers and Records Coverage Form

13. Accounts Receivable (2002 edition)

The value begins with the total of all accounts receivable due. The insurance company then deducts the following from that starting figure:

If the insured cannot establish the actual accounts receivable due, the insurance company determines the average monthly accounts receivable amounts for the 12 months preceding the loss and adjusts for variances in the month of the loss.

 

Example: Jan’s Manufacturing loses its accounts receivable records in a fire. There are no duplicates. Her accounts receivable loss is valued as follows:

Total amount of accounts receivable due based on the average of the prior 12 months.        

$500,000

Jan found three records that were not destroyed.             

    - 30,000

Twelve customers mailed in their accounts based on agreed upon terms.

    - 70,000

Jan calculates her average service charges.         

       -1,000

The average bad debt is 5%.

     -50,000

The value of Jan’s accounts receivable loss                     

   $349,000

HOW MUCH WE PAY

1. Insurable Interest

A named insured is paid no more than that particular named insured’s insurable interest in the damaged property.

 

Example: The following situations illustrate this point:

  • John and Mary are co-owners of a store. Mary buys out John’s interest but forgets to take John’s name off the insurance policy. When the store burns, John cannot collect any of the insurance proceeds because he no longer has an insurable interest in the property.
  • When property is sold under an installment arrangement, only the amounts still owed to the named insured are treated as its insurable interest.

NOTE: If the loss is to the property of others, the named insured has an insurable interest because of its legal responsibility for the property, but the value of that interest may be difficult to establish. There is also no statement regarding the insurable interest requirement for the property owner or the property of others.

2. Deductible (2002 edition)

If a deductible applies, the insurance company pays only loss amounts that exceed the deductible listed on the Schedule of Coverages. The deductible applies to each occurrence and is applied before any coinsurance or reporting provisions are applied.

 

Example:

  • 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 (2002 addition)

Earthquakes and volcanoes are often followed by aftershocks. Because each would trigger a new occurrence and a new deductible application, it is agreed that all activity within a 168-hour period is considered one occurrence and is not limited by the policy expiration date.

Example: A policy period is from January 1, 2024, to January 1, 2025. An initial earthquake shock occurred on December 31, 2024. The insured’s brick veneer falls off following an aftershock that occurred on January 2, 2025. This loss is covered under the January 1, 2024, to January 1, 2025, policy period because it is within 168 hours of the initial shock.

4. Loss Settlement Terms

This is a small item with significant implications because it connects three different sections and clarifies exactly what the insurance company will cover. Although it may be further limited by other terms of this section and any applicable coinsurance penalty, the maximum payment is the lesser of the following:

Once the least of the three has been established, the other items in the How Much We Pay section and the coinsurance penalty, if any, are applied.

Example: Carrie’s building is destroyed. The replacement cost valuation of the building is $1,200,000. The actual cost to replace the building is $1,000,000, due to the concessions on materials that Carrie is willing to make on rebuilding. The policy limit is $900,000. The maximum settlement is, therefore, $900,000 since it is the least of the three.

5. Insurance Under More Than One Coverage

If two or more coverages provided by the form apply to the same loss, the insurance company pays only the actual amount of the claim, loss, or damage incurred. No party will receive duplicate payments because there are overlapping coverages.

6. Insurance Under More Than One Policy

If the named insured has other coverage identical to that provided in this form, the insurance company pays only its proportion or share of a covered loss, based on the proportion that the limit for the coverage under this policy bears to the limits for all coverages provided on the same basis.

Example: Policy #1 has a $100,000 limit and Policy #2 has a $50,000 limit. The loss before application of any deductible is $10,000. Policy #1 pays $6,667 or 66 2/3% of the loss, and Policy #2 pays $3,333 or 33 1/3% of the loss.

If a coverage, other than as described above, applies to a covered loss, the insurance company pays only the amount of loss that exceeds the amount due from the other coverage, regardless of whether the named insured can collect from that other insurance. The maximum the insurance company will pay is the insurance coverage’s limit.

Related Court Case: Other Insurance Clauses Held To Pro Rate Despite Standard and Super Escape Differences

7. Automatic Increase (2002 edition)

The limit on the Schedule of Coverages or the Scheduled Location endorsement is automatically increased every year by the percentage shown on the Schedule of Coverages or Scheduled Location endorsement.

The limit specified on the Schedule of Coverages or the Scheduled Location endorsement automatically increases each year by the percentage indicated on the appropriate schedule.

 

Example: The building and personal property limit of insurance is $1,000,000, and the policy is written for a three-year term. The insured selects an automatic annual increase of 3%. At the first anniversary date, the limit increases to $1,030,000 without an endorsement. At the second anniversary, the limit increases to $1,060,900 without an endorsement.

NOTE: This is not the same as the automatic increase in Insurance Services Office (ISO) coverage forms that provide incremental increases throughout the policy year.

LOSS PAYMENT

1. Our Options

The insurance company has four options. It can do any of the following:

The first two options involve only money transactions. The third one involves the insurance company taking control of the property and making decisions regarding how it is to be repaired, replaced, or rebuilt.

The insurance company is required to notify the named insured within 30 days of receiving proof of loss if it intends to exercise option three. The last option works with the other three options. It explains that the insurance company can decide to take the salvage, but it is an option, not a requirement.

 

Example: Friendly Insurance Company informs Prines Manufacturing that it is exercising the first option regarding the building loss and pays $1,000,000 to enable Prines to rebuild. Additionally, Friendly exercises the first and fourth options concerning Prines' stock, paying $500,000 based on the appraised value and taking the stock to sell as salvage.

2. Your Losses

The insurance company adjusts losses with the named insured. Payment is made to the named insured, unless a loss payee is specifically named on the policy. The insurance company must pay the claim within 30 days of receiving satisfactory proof of loss, provided the amount of loss has been established by either a written agreement with the named insured or an appraisal award with the company.

NOTE: Two important conditional statements are mentioned above. The word “satisfactory” is used with proof of loss. The insurance company can refuse to settle a claim until it considers the proof of loss satisfactory. In addition, the amount of loss must be established and agreed upon. As long as the named insured and the insurance company disagree on the amount of loss, no payment will be made.

3. Property of Others

The insurance company reserves the right to settle losses directly with the property owner or the named insured. If the insurance company pays the named insured, it is the named insured's responsibility to pay the property owner. Once payment is made to either party, no additional payments will be issued. If the owner of the property sues the named insured, the insurance company may agree to defend the insured at its own expense.

OTHER CONDITIONS

In conjunction with the stipulations outlined in the various sections pertaining to the COP coverages, the following conditions also apply.

1. Appraisal

Appraisal is a condition found in all policies and forms that cover property. The process is simple.

2. Benefit to Others

Insurance coverage does not directly or indirectly benefit anyone with custody of the named insured’s property.

Example: Harold's Heat Treating is responsible for the fenders belonging to My Product Manufacturing. They have completed heat treating on 75% of the batch when a loss at Harold's resulted in the destruction of all the fenders. Harold’s seeks coverage under My Product Manufacturing's insurance for the value of the heat treatment performed. However, this claim is rejected because Harold cannot benefit from My Product Manufacturing's insurance. Harold’s must obtain coverage from its own insurance provider.

3. Conformity with Statute

This form automatically conforms to any state law with which it might be in conflict.

4. Control of Property

The coverages provided by the form are not affected by any act or neglect beyond the control of the named insured.

Examples:

  • Increase in hazard: A crack house moves into the space adjacent to the insured's business.
  • Government action to over-seed rain clouds produces high winds and damaging hail.
  • The policyholder is a shopping center tenant, and the building owner forgets to maintain the sprinkler contract.

5. Death

If the named insured dies, the rights and duties of that named insured pass to the party acting as that named insured’s legal representative. If there is no duly appointed legal representative, the party having proper temporary custody of the property has those rights and duties.

6. Liberalization

If a COP form or endorsement is broadened during the policy term or within the six months before the coverage effective date and there is no charge, the broadened coverage applies to this policy.

 

Example: Mindy’s policy is effective August 1, 2024. The insurance company changes the form on January 1, 2025, to eliminate the application of deductibles in cases of total loss, with no change in the premium for the upgrade. Mindy’s building is totally destroyed by a tornado on April 20, 2025. Because of the form revision and the application of the liberalization clause, the deductible does not apply to Mindy's loss.

7. Misrepresentation, Concealment or Fraud

Coverage is rendered void for the named insured and any other insured if, whether before or after a loss, engages in any of the following actions:

NOTE: This is an extremely important condition because insurance coverages and policies are issued in utmost good faith. The insurance company must be able to believe its customer when issuing a policy. On the other hand, such instances have to be material (significant). If a minor item having no bearing on the insurance contract occurs, it would be unfair to allow a loss of coverage merely due to a technicality.

Example: SC Casualty issues a policy to Timothy Limited, which includes coverage for some improvements Timothy has made. The policy indicates that the improvements were made in January 2025. After a loss involving the improvements, SC Casualty discovers that the improvements were made in December 2024. For some reason, Timothy’s owners felt it was important to use a 2025 date instead of the end of 2024. SC Casualty would be justified in making any adjustment in payment due to the month’s difference, but not to deny coverage.

Related Court Cases:

Insured's Material Misrepresentation in Application Warranted Denial of Coverage

Insurer Can Rescind Policy Based On Insured's Material Misrepresentations on Application

8. Policy Period

A loss must be considered covered, and it must occur during the policy period shown on the Declarations to be paid by the insurance company.

9. Recoveries

If the insurance company pays a covered loss and the property is later recovered or those who caused the loss make a payment, the following provisions apply:  

 

Example: Mary’s business is broken into, and $50,000 of property is stolen. The adjustment is complicated because of the theft limitations on certain items and the deductible. Total payment from the carrier is only $30,000.

Two years after the loss, the items are found in an abandoned storage locker, and Mary is notified. She is thrilled and notifies the company. She chooses to keep some of the items and return the payment to the carrier but keeps part of the payment and returns the salvage to the carrier on other items. The company and Mary work together to develop a prorated recovery.

10. Restoration of Limits

Payments made for covered loss or damage do not reduce the limit of insurance available for future losses.

However, there are exceptions. Under Supplemental Coverages–Pollutant Cleanup and Removal and Supplemental Marine Coverages–Virus and Hacking Coverage are both subject to aggregate limits, which means any loss payments made under either of these coverages reduce the limits available to pay future losses, but only for that particular coverage.

NOTE: The restoration of the limit is immediate. This means if a loss occurs and another loss occurs immediately thereafter, but is not proximate to it, the full limits are available for both losses.

Example: A semi-trailer rig driver is distracted, loses control, and plows through the plate glass window at the Plainville Shopping Center. Two minutes later, a tornado rips open the roof at Plainville Shopping Center. These are two separate occurrences, and both losses would be adjusted with full property limits.

11. Subrogation

If the insurance company pays a loss that may have been caused by a third party, it has the right to require the named insured to assign its rights of recovery against the third party to the insurer. The named insured must do everything possible to protect those rights for the benefit of the insurer and must not do anything to impair them. If the insured interferes, the insurer has the right to deny payment.

There is an exception. If the named insured waives its rights of recovery against others in writing before a loss occurs, it also means that the insurance carrier waives its rights of recovery. However, this does not prevent a covered loss from being paid.  

Example: Patricia is renting an apartment over John’s clothing store. Patricia leaves a candle burning in her bedroom when she leaves to run errands. She returns three hours later to find her apartment and the store below on fire. John tells Patricia not to worry because he would never sue her.

Scenario 1: There is no lease in place and no waiver of subrogation prior to the loss. Because of John’s statement to Patricia, he has violated the subrogation condition, and the insurance company may not be required to pay the named insured for this claim.

Scenario 2:  There is a lease in place that includes a mutual waiver of subrogation clauses. John will receive payment even though the insurer cannot subrogate against Patricia because the subrogation waiver was executed in writing prior to the loss.

Related Article: Transfer Of the Rights of Recovery (Subrogation)

Related Court Cases:

Lease Releases Landlord and Tenant

Waiver of Subrogation in Alarm Monitoring Service Agreement Barred Carrier from Recovery

Waivers of Subrogation and Definition of Work to Be Insured Were Ambiguous

Waiver of Subrogation Applies To All Losses

12. Suit Against Us

The named insured cannot sue the insurance company unless it has first complied with all the terms of the coverage form. The action must then be brought within two years of the date on which the named insured first had knowledge of the loss. The two-year time frame may be extended if state law requires it, but to the shortest time permitted by the state.

 

Example: Kathy’s roof was damaged by hail in April 2024. She was unsuccessful in finding a contractor to inspect her damage due to the volume of claims. She decided to wait until the following spring, contacted a contractor who verified the damage and then submitted a claim to the insurance company. The company denied the claim because of the length of time between the damage and the notice.

Kathy responded to this by arguing that she could not file a claim until she knew that a loss actually occurred. The company changed its mind and entered into discussions with the contractor. The company offered $10,000, but the contractor insisted that the cost was $25,000. Since neither was willing to compromise and the two-year time limit was approaching, Kathy filed suit against the insurance company just prior to the April 2026 deadline.

13. Territorial Limits (2002 edition)

Property must be in the United States, its territories and possessions, Canada or Puerto Rico to be covered.

A statement is added that foreign shipments are covered as described in Overseas Transit. The only references made to Overseas Transit in the COP Program are in CO 1282–Overseas Transit and Location and CO 1283–Overseas Transit and Location – Property and Income Coverage endorsements.

14. Mortgage Provisions

The insurance company has specific obligations to the mortgagee named on the policy. If more than one mortgage is involved, losses are paid in the order of precedence.

Insurance for the benefit of the mortgagee remains in effect, regardless of any actions by the named insured that could void coverage. It does not remain in effect if the mortgagee was aware of changes in ownership or increases in hazard and did not notify the insurance company.

The insurance company must provide the mortgagee with at least ten days notice of cancellation if the named insured fails to pay the premium, or 30 days notice if the cancellation is for any other reason. Also, if the insurance company non-renews the policy, it will provide at least a 10 day notice before the expiration of the policy. The insurance company may request that the mortgagee pay the premium if the named insured does not.

If the mortgagee is paid for a loss when the insurance coverage for the benefit of the insured is void, the mortgagee's right to that portion of the mortgage debt transfers to the insurance company. This means the insurance company becomes the mortgage holder for the amount of the loss paid. However, this does not affect the mortgagee's right to collect the remaining amount of the mortgage debt from the named insured.

As an option, the insurance company may pay the mortgagee the remaining principal and accrued interest in exchange for a full assignment of the mortgagee's interest and any other instruments given as security for the mortgage debt. This may be worthwhile to the company if it believes it can earn more interest income on the mortgage in relation to its current investments or can sell the mortgage for a premium.

Example: Lou’s commercial building is insured with Beta Insurance for $500,000. First Guaranty holds a $300,000 mortgage on the property. Lou agrees to a dynamite company moving into the building, and an explosion causes a $100,000 loss. The insurance company denies Lou’s claim because of the increase in hazard exclusion.

Since First Guaranty was unaware of the increase in hazard, Beta pays it the $100,000, and the insurance company takes over $100,000 of Lou’s mortgage. Lou now has two mortgages. One is with First Guaranty for $200,000, and the other is with Beta Insurance Company for $100,000.

Related Court Cases:

Insurer Cancellation Procedures Met Notification Obligations

Cancellation Validated By Proof of Mailing of Notice

Payment of Policy Proceeds to Insured Did Not Relieve Insurer of Obligation to Mortgagee

15. Vacancy–Unoccupancy (2002 edition)

The vacancy or unoccupancy clause restricts coverage by not paying losses caused by theft, attempted theft, glass breakage or sprinkler leakage if, at the time of the loss, the building or structure had been vacant for more than 60 consecutive days. Sprinkler leakage is not subject to this paragraph if the named insured has protected the sprinkler system from freezing.

Coverage is similarly restricted if, at the time of the loss, the property had been unoccupied for more than 60 days. However, the time period can be longer if there is a usual or incidental unoccupancy. In such instances, coverage is not restricted until after the usual unoccupancy timeframe or 60 days have elapsed, whichever is longer.

Example: Summer Time Treats is open for business from March 1 through October 30 every year. It is unoccupied from November 15 through February 15, and the insurance company is aware that this is Summer Time’s regular unoccupancy time period.

Scenario 1: A theft occurs on January 15. Even though it is unoccupied, theft coverage applies because the theft occurs during its regular period of unoccupancy.

Scenario 2: A theft occurs on February 17. The building remained unoccupied beyond its normal unoccupancy. Since the theft occurred 60 days after the building became unoccupied and two days after its normal unoccupancy, the theft loss is denied.

Coverage for any loss by a covered peril, not otherwise excluded in this condition, is reduced by 15% if the vacancy or unoccupancy is as described above.

Vacancy means the occupants have moved, and the building is empty or contains only limited personal property. Unoccupancy means customary activities are suspended, with business personal property remaining in the building.

When a building or structure is under construction, it is neither vacant nor unoccupied, so it is not subject to this restriction.

Related Court Cases:

Extensive Renovation Qualifies Property for Vacancy Clause Exception

Parties Dispute Meaning Of "Occurred"