Commercial Property Insurance Policy Coverage Forms
Commercial Property Insurance Policy Coverage Forms. The Commercial Property Program includes coverage forms for buildings, business personal property, business income and extra expense, builders risk, tobacco warehouses, and leasehold interest. Each policy consists of a coverage part, common policy conditions, common property conditions, and one of the causes of loss forms.
It must also include a declarations that provides certain information to identify the insured, along with limits and coverage information.
In addition to the declarations and the common policy conditions referred to above, in all commercial property insurance policy coverage forms - each coverage part contains its own specific declarations and conditions. The Commercial Property Program's set of conditions applies to all commercial property coverage parts. In addition, each coverage form has its own specific set of conditions.
However, we start this topic with a discussion of the necessity of insuring to value because of how vital it is to all parties to the insurance contract.
Commercial property insurance policy coverage forms define, limit, and explain what property or property interests are covered by the policy.
Below are some answers to commonly asked commercial property insurance policy coverage forms questions:
- Why Should I Insure To Value In A Commercial Property Insurance Policy?
- What Are Common Policy Conditions In Commercial Property Insurance Coverage Forms?
- What Are Causes Of Loss Forms In Commercial Property Insurance Policies?
Why Should I Insure To Value In A Commercial Property Insurance Policy?
Insuring to value is one of the most basic of all property requirements. The law of large numbers requires adequate insurance values in order to provide an adequate pool of premiums to pay losses. Most losses are less than total losses.
This knowledge tempts property owners to carry less than the full value of the property as a cost savings mechanism. They might be counting on their loss control strategies of their local fire department to control a fire before it completely destroys the property.
Others, more prudent insureds, will carry insurance limits that closely reflect the value of the insured property. This results in insureds paying unequal premiums for similar exposure, which results in uneven contributions to the premium pool from which all losses are paid.
INSURING TO VALUE WITH COINSURANCE
The coinsurance clause is an additional policy condition on many commercial property insurance policy coverage forms and inland marine coverage forms. It is meant to encourage the insured to purchase insurance equal to the value of the insured property.
In order to distribute insurance costs more equitably among all policyholders, the coinsurance clause was developed. The insured agrees to maintain insurance equal to or greater than a given percentage of the value of the property, in return for a reduced rate. The rate is reduced even more when the percentage increases.
The coinsurance clause applies only when a percentage is indicated in the space provided on the declarations. The most common coinsurance percentage is 80%, but other percentages such as 90% and 100% are also available. Most commercial property and inland marine loss costs or rates are based on 80% coinsurance. Additional rate credits are applied when higher coinsurance percentages are selected.
For example, when 80% coinsurance is selected, the insured agrees to carry insurance in an amount equal to at least 80% of the value of the covered property at the time of loss. If the limit carried is less than this percentage, the insured is penalized and must share part of the loss with the insurance company.
In this case, the insured is a coinsurer in the loss with the insurance company. The insurance company is liable for only the portion of the loss that the amount of insurance carried bears to 80% of the value of the property at the time of the loss. The percentage of loss for which the company is liable is expressed by the formula:
C/R x L = A
- C = Limit of insurance
- R = Limit of insurance required which is based on the stipulated percentage multiplied by the value of the property at the time of loss
- L = Amount of loss
- A = Amount for which the insurance company is liable
Under no circumstances will payment exceed the limit of insurance.
Because property appraisals are not usually required when the policy is issued, the burden of insuring to value falls on the insured. The insurance company tries to determine if the insured complies with the requirements of the coinsurance clause through a variety of value estimators, but these are for its internal use only and not for the benefit of the insured.
When a loss occurs, the company determines if the provisions of the coinsurance clause have been met and the extent of the insured's involvement in a loss if they have not. The coinsurance clause on commercial property insurance policy coverage forms considers the value of the property at the time of loss.
It does not matter if the insurance limit was adequate when the policy was issued. If the value of the property increases, the insured must also increase the amount of insurance to comply with the provisions of the coinsurance clause in order to avoid being a coinsurer in case of a loss.
The coinsurance clause percentage selected is not the maximum percentage of a loss that the insured can collect. It represents the minimum amount of insurance that must be carried to fully collect losses. An insured meeting this requirement collects the full amount of any loss, up to the policy limit.
In addition, the coinsurance clause does not limit the amount of insurance that can be carried. The insured can insure 100% of the value of the property so that if a total loss occurs, the insured can collect 100% of the limit.
INSURING TO VALUE WITHOUT COINSURANCE
The coinsurance clause penalty is determined at the time of loss, not when the policy is issued. Many insureds find this requirement very difficult to meet because of fluctuating values or other factors beyond their control. In order to encourage adequate insurance to value, alternative methods have been developed.
Risks with property values that fluctuate during the policy year find making periodic limits changes to comply with coinsurance clause requirements burdensome and subject to error.
Situations may occur where the limit carried is more than needed and premium charges higher than necessary and other time periods when the values are too low so that a coinsurance penalty could be incurred.
One solution used by many insureds is to write commercial property insurance policy coverage forms on a reporting form basis. The insured reports the total values at risk for stated periods during the policy term. The final earned premium is calculated based on the actual values reported.
If the insured sets the provisional limit of insurance high enough to cover the highest or peak periods, adequate limits will be available to protect against being underinsured. The premium adjustment at the end of the policy period matches the premium with the insurance coverage provided.
Reporting form policies are normally written under one of five reporting options:
- Daily values reported monthly
- Weekly values reported monthly
- Monthly values reported quarterly
- Monthly values reported annually
- Monthly values reported monthly
This form imposes a strict duty to comply with the reporting clause in the policy. The insurance company must receive the reports within 30 days after the end of the reporting period stated in the policy. In some cases, 60 days are allowed for only the first month after the insured first writes coverage on a reporting form basis.
The insurance company's liability is limited to the proportion of any loss that the last reported value bears to the value of the property on the date of the report as a penalty for late reporting.
The inland marine builders risk has an unusual reporting method called completed value. When a builder is covering multiple properties, the estimated full value of the property must be reported at the time the building is started. No other reports are required unless changes to that value occur during the build.
Agreed Amount Coverage
Agreed amount coverage modifies the basis for settling losses. In commercial property insurance policy coverage forms with this option, the insured submits a statement of values to the insurance company with its application.
The limit is based on the values shown. The insurance company agrees to waive the coinsurance clause for a specific period of time. Losses are settled based on the agreed amount without any coinsurance penalty.
The liability of the company is limited to the proportion that the coverage limit bears to the agreed value shown on the declarations.
Agreed amount is often used in Inland Marine coverages. Jewelers Block, Fine Arts and Valuable Papers coverage are three forms that often have items based on an agreed amount. However, the values must often be substantiated by current appraisals.
What Are Common Policy Conditions In Commercial Property Insurance Coverage Forms?
NO BENEFIT TO BAILEE
A bailee is a person or entity having proper temporary legal custody of property belonging to others. The property owner, or bailor, has entrusted the property to the bailee for a specific purpose, such as safekeeping, repair, renovation, remodeling, processing, delivery or storage.
The property owner is expecting to receive the undamaged and possibly improved property back from the bailee. A policy condition specifically states that the bailee has no access to the property owner's insurance coverage.
TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO INSURANCE COMPANY (SUBROGATION)
When the insurance company pays a loss it has the right to require the insured to transfer its rights of recovery against others that may be responsible for the loss to the insurance company.
This is very important because the insurance company can legally pursue the parties that caused the loss and demand payment. The insured can waive their rights of recovery by doing so in writing and prior to the loss. It cannot waive such rights after the loss although there are some exceptions.
Coverage begins at 12:01 a.m., standard time, at the named insured's mailing address.
Coverage applies within the United States, its territories and possessions, Puerto Rico and Canada.
The entire policy is void if the named insured intentionally conceals or misrepresents a material fact concerning the coverage provided or the interest each insured has in the property.
The entire policy is void in the event of fraud or any fraudulent act by any insured relating to the insurance coverage provided.
CONTROL OF PROPERTY
The actions or neglect of a person other than the named insured do not affect policy coverage. This applies only if that person was not acting under the direction of the named insured. In addition, actions that breach the contract at one location do not automatically void coverage at another location.
LEGAL ACTION AGAINST THE COMPANY
Until all of the terms of contract have been satisfied, legal action cannot be brought against the insurance company. Such legal action must be brought within two years of the date of loss. The number of years and related issues may vary by state.
From time to time, insurance companies broaden commercial property insurance policy coverage forms coverage or language in policies and endorsements. When this is done without an additional premium charge, the liberalization clause extends the broadened coverage to apply to all policies already in force as of the date of the change.
Because insurance companies usually prepare renewal policies well before the expiration date, the liberalization clause also provides that any liberalization effective within 45 days of the inception date also extends to policies already written but not yet in force.
INSURANCE UNDER TWO OR MORE COVERAGES
The insurance company does not pay more than the actual amount of loss even if two or more different policy coverages apply to it.
A policy is liable for only its proportion of all insurance written on the same basis. If other insurance for the same loss is available under a commercial property insurance policy coverage form written on a different basis, the first policy pays any excess of loss over the amount of coverage in the second policy, whether it can be collected or not.
What Are Causes Of Loss Forms In Commercial Property Insurance Policies?
A commercial lines property coverage form is not complete without a cause of loss form. The causes of loss forms describe what can cause a covered loss and also describe what causes are excluded. One of the three basic forms must be attached to a policy.
If there are multiple property coverage forms on a policy, multiple causes of loss forms can be attached. The cause of loss form number is entered in the Declarations beside the coverage type so that there is no confusion as to which cause of loss applies to which coverage type.
The causes of loss forms are CP 10 10-Causes of Loss-Basic Form, CP 10 20-Causes of Loss-Broad Form and CP 10 30-Causes of Loss-Special Form.
The Causes of Loss-Basic Form covers specific listed causes of loss, each discussed below. The Causes of Loss-Broad Form includes the Basic Forms causes and more. As stated above, the Causes of Loss-Special Form covers all causes of loss except for the ones specifically listed and described as excluded or limited.
Each of these forms may be broadened by adding CP 10 40-Earthquake and Volcanic Eruption Endorsement that provides the earthquake cause of loss. This form is discussed in the Property Insurance - Flood and Earthquake topic.
CAUSES OF LOSS COVERED BY ALL FORMS
The following causes of loss are part of the Causes of Loss-Basic Form and are also included in the Causes of Loss-Broad Form. While not specifically listed in the Causes of Loss-Special Form, each is covered because none is specifically excluded.
Fire and/or Lightning
Both of these causes of loss are covered. Loss by lightning is covered whether or not a fire subsequently ensues. Fire means oxidation of sufficient intensity to produce a visible flame or glow. While there may be destruction, damage or spoilage caused by excessive heat, scorching or blistering, if there is no visible flame or glow there is no fire which means there is no coverage.
Hostile Fire - The fire must be hostile in order for coverage to apply to the loss or damage caused by it.
A friendly fire is a visible flame or glow that starts voluntarily and remains under control in its intended place, such as a fire in a furnace, fireplace or stove. A hostile fire is one that occurs other than where intended or other than where it is supposed to be.
A friendly fire becomes a hostile fire the moment it escapes from its intended area. The policy does not define hostile or friendly fire. The policy simply refers to loss by fire, but this is understood and held by the courts to include only hostile fire.
Note: A number of court cases have upheld the doctrine of friendly fire and found that accidental burning of property within furnaces and other friendly areas is not a risk covered by the fire insurance policy. However, different conclusions have been reached in several court cases in Louisiana, Minnesota, New York and Wisconsin.
Proximate Cause - In addition to loss or damage caused directly by fire or lightning, the policy covers loss caused by other events where fire is the proximate cause.
Proximate means very close in space, time, order or meaning and is the opposite of remote. Proximate cause is defined as the active, efficient cause that sets a series of events in motion that produces a result without any intervention by any force from a new and independent source.
A federal court defined proximate cause as "that cause which, operating in natural and continuous sequence, unbroken by any completely preceding independent intervening cause, produces the results complained of, and without which the result would not have occurred."
All explosion losses are covered. The only ones not covered are those caused by explosion of steam boilers, steam pipes, steam turbines or steam engines and then only if they are owned, leased by or operated under the insured's control.
The form specifies that bursting due to expansion or swelling of the contents of any building due to water, or the rupture, bursting or operation of pressure relief devices is not an explosion within the meaning of the explosion coverage.
Explosions other than those specifically excluded are covered. Coverage applies to explosions involving gases, gasoline, naphtha or other volatiles, of devices using compressed air and similar losses. It is important to understand that only explosion of the vessel containing the steam or water is excluded.
If the explosion originates in the firebox or combustion chamber from accumulated gases or unconsumed fuel, the loss is covered, even if the firebox or combustion chamber is part of the vessel.
In addition, the exclusion applies only to a steam vessel owned, leased by or operated and under the control of the insured. As a result, damage to the property of a tenant in a building is covered if caused by the explosion of a steam boiler in the basement except when the vessel is owned, leased by or operated under the control of the tenant.
In a similar manner, loss caused by an explosion of a steam boiler in a neighboring building is covered.
Windstorm or Hail
There is no requirement that wind attain any minimum velocity. However, there is no liability for loss or damage caused directly or indirectly:
- By frost or cold weather
- By ice, or snowstorm, whether driven by wind or not. The only exception is hail.
- By rain, snow, sand or dust to the interior of any building or to the property inside the building unless wind or hail first damages the roof or walls of the building. If the building is damaged in this way, the policy pays the ensuing loss caused by the rain, snow, sand or dust entering through the openings in the building made by the windstorm or hail.
- To trees, shrubs and plants on a vegetated roof but only when caused by hail.
As an option, losses caused by windstorm or hail may be excluded from the policy, with a corresponding reduction in the basic loss cost or rate.
Coverage applies to sudden and accidental losses due to smoke. It does not apply to damage due to agricultural smudging or industrial operations.
Aircraft or Vehicles
Coverage applies to loss or damage caused by physical contact by an aircraft or vehicle with the insured property or with the building containing the property. Coverage also applies to damage by objects falling from an aircraft or thrown up by a vehicle. Aircraft includes spacecraft and self-propelled missiles.
Loss or damage caused by vehicles owned or operated by the insured is excluded.
Riot or Civil Commotion
Coverage applies for losses caused by riot or civil commotion. Riot is a statutory term and is defined by the laws of each state. A general definition of riot states: "Whenever three or more persons, having assembled for any purpose, disturb the public peace by using force or violence to any other person or to property, or threaten or attempt to commit such disturbance, or do an unlawful act by the use of force or violence, accompanied with the power of immediate execution of such threat or attempt, they are guilty of riot."
Civil commotion can be defined as "an uprising among a group of people that leads to a serious and prolonged disturbance and infraction of civil order but that does not attain the status of war or armed insurrection."
This coverage includes direct loss caused by striking employees while occupying the premises, whether the striking employees acted in a riotous manner or not. Damage caused by persons other than striking employees is covered only if the acts constitute a riot.
Coverage also applies to looting occurring at the same time and place of a riot or civil commotion.
There is no coverage if damage is caused by one or two persons, or by groups acting in a manner not construed as a riot or civil commotion. There is also no coverage under this peril if a group of mischievous children or vandals defaces or damages property.
Coverage applies to loss or damage caused by willful and malicious damage. Losses of this nature are not covered as riot or civil commotion. The following types of property or losses are specifically excluded:
- Glass that is part of the building, other than glass building blocks, or glass making up part of an outside structure or sign
- Outdoor property listed under the windstorm or hail peril above.
- Loss by theft that could follow from vandals damaging the building is not covered. An important limitation is added here that states that damage to buildings caused by burglars breaking into or exiting the building is covered.
- Loss if the building has been vacant more than 60 consecutive days prior to the loss.
Automatic sprinkler systems are one of the most effective devices for controlling fires and reducing the extent of damage. A sprinkler system consists of a series of pipes installed along the ceiling or roof of the entire premises.
They contain water or, if required by a specific occupancy, some other substance, chemical or agent that either extinguishes a fire or controls it until the fire department arrives to extinguish it.
The pipes containing the water or other substances are equipped with special valves or heads that open when the temperature exceeds a pre-set temperature. When the valves or heads open, they release quantities of the extinguishing agent that blanket the area.
The sprinkler system is usually also equipped with an alarm that activates when a sprinkler head opens. To supply the sprinkler system with the required pressure needed to operate properly, a tank containing water may be set up as either the primary water supply or as an auxiliary water supply to supplement water supplied by a municipal water system.
Damage caused by the release of the extinguishing agent from a sprinkler system during a fire is covered under the fire peril. The fire peril does not cover damage due to a discharge from a sprinkler system when no fire occurs. This kind of leakage or discharge can occur under circumstances such as:
- Breaks in the pipes due to freezing
- Sprinkler heads opening due to overheating
- Mechanical damage due to jarring or disturbing the sprinkler system
- Corrosion, faulty valves and leaky tanks
- Malicious tampering with the system
- Improper maintenance
Sprinkler leakage coverage applies to loss or damage caused by leakage or discharge of water or any other fire-extinguishing agent from inside any automatic sprinkler system. It also applies to loss or damage caused by the collapse of tanks making up part of the sprinkler system and hydrants, standpipes, outlets and manual fire protection systems supplied by an automatic sprinkler system.
Note: The damage need not necessarily arise from leakage within the system. As an example, leakage from sprinkler pipes due to condensation is covered.
Under a policy covering a building containing a sprinkler system, coverage applies to damage to the system if the damage results in sprinkler leakage or is caused directly by the system freezing. Coverage also applies to the cost of tearing out and replacing any part of the structure to repair damage to the system resulting from sprinkler leakage.
Automatic sprinkler systems include sprinklers and discharge nozzles, pipes, valves, fittings, tanks and their components, pumps and private fire protection mains.
Coverage applies to loss or damage due to the sudden sinking or collapse of land into underground spaces created by the action of water on limestone, dolomite or similar rock formations. The cost of filling these sinkholes is not covered, and the sinking or collapse of land into man-made underground cavities is also not covered.
This peril or cause of loss includes loss due to airborne blast, airborne shock waves, ash, dust or particulate matter or lava flow from a volcanic eruption. It does not apply to the cost of removing ash, dust or particulate matter that has not caused any physical loss to insured property.
Only losses on or above the surface of the ground are covered and there is no coverage for any related earth movement, even if that earth movement is related to volcanic action. This means that earthquake losses must be insured separately.
Note: All volcanic action damage sustained within a 168-hour period is considered one loss. Any damage sustained after a 168-hour period is considered a new loss subject to the limits and deductibles that apply to each loss.
CAUSES OF LOSS IN ONLY BROAD AND SPECIAL FORMS
The following causes of loss are part of the Causes of Loss-Broad Form but are not included in the Causes of Loss-Basic Form. These causes of loss are also part of the Causes of Loss-Special Form because they are not specifically excluded.
The Causes of Loss-Basic Form covers loss or damage to insured property caused by vehicles or aircraft making physical contact with the property and by objects falling from them. The Causes of Loss-Broad Form covers loss or damage caused by all types of falling objects. The only exceptions are damage to personal property in the open and to property that is within a building, unless the falling object first damages a building wall or the roof.
Weight of Snow, Ice or Sleet
The Causes of Loss-Broad Form covers loss or damage to insured property caused by snow, ice or sleet. Damage to gutters and downspouts is not covered. Also damage to property stored or kept outside the building is not covered.
The Causes of Loss-Broad Form covers the resulting loss or damage due to the accidental discharge of water or steam from the breaking or cracking of any vessel containing water or steam.
If the policy covers a building or structure, it also pays the cost of tearing out and replacing any part of the structure in order to repair the damage to the system or appliance.
There is no coverage for loss or damage caused by continuous leakage or seepage that occurs over a period of 14 or more days. Coverage also does not apply to loss or damage caused by freezing, unless the insured makes every effort to maintain heat in the building or drains the water system if heat is not maintained.
The Causes of Loss-Broad Form pays for the loss or damage caused by the leakage. It does not cover the cost of repairs or replacement of the system itself.
This coverage was formerly included as an insured peril or cause of loss but is now covered under Additional Coverages-Collapse. The Causes of Loss-Broad Form covers direct physical loss or damage caused by the collapse of a building or of part of a building, but only if it actually collapses. There is no coverage for a building that is about to collapse.
The cause of the collapse must be due to one or more of the following:
- Specified perils
- Hidden decay, hidden insect or vermin damage
- Weight of people or personal property, or of rain that collects on a roof
- Use of defective materials or construction methods, but only if the collapse occurs during the construction or remodeling period. If a collapse occurs due to the use of defective materials or construction methods after the construction or remodeling is completed, coverage applies but only in conjunction with an otherwise covered cause of loss.
Note: Some additional limitations apply for specific types of buildings and business personal property.
Additional Coverage-Limited Coverage for Fungus, Wet Rot, Dry Rot and Bacteria
Recent court decisions have forced insurance companies to pay for losses or damage caused by or due to fungus, wet rot, dry rot and bacteria. These losses were not contemplated when the form was drafted so new exclusions have been added to specifically exclude such losses unless the proximate cause of loss is fire or lightning.
This additional coverage has been added to provide a small amount of insurance protection if the proximate cause of loss is a specified peril other than fire or lightning.
CAUSES OF LOSS IN SPECIAL FORM ONLY
This is the last of the three causes of loss forms. The basic and broad forms each list the specific covered causes of loss. The Causes of Loss-Special Form covers risks of direct physical loss or damage except for the causes of loss specifically excluded or to which limited or restricted coverage applies.
This is a significant increase of coverage because the insurance company must prove why a loss is not covered, as opposed to the insured having to show where the coverage is in the policy. Some examples of important coverage increases include:
The Causes of Loss-Special Form covers loss caused by theft of most personal property. This coverage may be excluded by endorsement.
Thawing of Ice or Snow
The Causes of Loss-Special Form covers loss to the interior of the building when caused by ice dam (the melting or thawing of ice or snow on a building).
Property in Transit
Coverage extends to personal property located more than 100 feet from the insured's premises, when in transit while in or on motor vehicles owned, leased or operated by the insured. This does not apply to property in the care, custody or control of the insured's salespersons.
This coverage is subject to restricted causes of loss. Loss or damage to property caused by fire, lightning, explosion, windstorm or hail, riot or civil commotion or vandalism, vehicle collision, upset or overturn is covered.
Theft loss is covered but only if an entire bale, case or package of covered property is stolen. There must be visible marks of forced entry showing on the securely locked body or compartment of the vehicle. This extension of coverage is limited to $5,000 and is an additional amount of insurance.
CAUSES OF LOSS NOT COVERED BY ALL FORMS
The exclusions that follow are part of the Causes of Loss-Basic Form. The exclusions or modifications are the same as those found in all causes of loss forms. Additional and modified exclusions will be examined in the Causes of Loss-Broad and Special sections. These exclusions apply even if they occur at the same time that another loss, that would be covered, occurs.
War and Military Action
Coverage does not apply to loss or damage due to war or military events, including actions taken to resist enemy attack.
Insurrection, Rebellion, Etc.
There is no coverage for loss or damage due to such events, including actions taken by governmental authority in resisting such occurrences.
Loss or damage caused by seizure or destruction of property by order of any governmental authority is excluded. The one exception is for actions taken by governmental authorities to slow or stop the spread of a fire.
There is no coverage for loss or damage caused by the failure or interruption of utility services supplied to the insured premises, if the failure or interruption occurs away from the premises or occurs on premises in property used to bring the utility to the premises. But if loss or damage by a covered loss ensues, coverage applies to the resulting loss. Coverage against loss from off-premises utility interruption or power failure may be purchased for an additional premium.
Nuclear reaction, radiation or radioactive contamination is excluded, regardless of the cause. There is an exception; loss or damage from a fire that ensues is covered.
Ordinance or Law
Coverage does not apply to loss or damage caused by the enforcement of any ordinance regulating construction, use or repair of a building or structure. It also does not apply to demolition mandated by ordinance or law nor to any removal costs relating to demolition.
Loss or damage caused by earth movement is not covered. Earth movement includes earthquake, landslide, mine subsidence or the sinking, rising or shifting of the earth. Losses due to volcanic eruption, explosion or effusion also are not covered.
There are a number of exceptions:
- Sinkhole collapse is the only covered earth movement.
- Losses due to non-volcanic earth movement caused fires and explosions are covered.
- Losses due to volcanic caused fire and volcanic action are covered.
Earthquake insurance may be purchased separately.
There is no coverage for loss due to flood, surface water, tidal waves, overflow of any body of water, or their spray, whether driven by wind or not. In the same manner, there is no coverage for loss or damage by water that backs up from a sewer, drain, sump or water below the surface of the ground that seeps through foundations, walls, floors or paved surfaces, or through basements, doors, windows or other openings. There is no coverage for mudslides, mudflows or any waterborne or mud borne material.
However, if one of these occurrences results in fire, explosion or sprinkler leakage, coverage applies to the resulting loss or damage.
There is no coverage for electrical appliances, devices or wiring damaged as a result of electrical injury from artificial causes. However, if loss by fire ensues, coverage applies for the actual loss or damage caused by the fire.
Damage to such equipment caused by lightning is covered.
Fungus, Wet Rot, Dry Rot and Bacteria
Recent court decisions have forced insurance companies to pay for losses caused by fungus, wet rot, dry rot and bacteria perils that were not contemplated when the coverage form was drafted. In order for coverage to apply as originally intended, damage by fungus, wet rot, dry rot and bacteria is now specifically excluded, unless the proximate cause of loss is fire or lightning in each of the causes of loss forms.
There is no coverage for mechanical breakdown, but there is coverage for loss caused by any resulting covered cause of loss.
Steam Boiler and Other Steam Equipment Explosion
This applies only to water or steam appliances that are owned or under the control of the insured. Coverage will apply for damage that is caused by a resulting fire or combustion explosion.
Leakage From Water or Steam System
Loss caused from such a leakage that has occurred over 14 days or more is not covered. This does not apply to automatic sprinkler systems nor systems damaged by a covered cause of loss.
Neglect to Save and Preserve
If the insured does not take reasonable care to protect and preserve property following a loss, the subsequent damage is not covered.
CAUSES OF LOSS NOT COVERED IN SPECIAL FORM
The opening portion of this section points out that the Causes of Loss-Special Form does not list the covered causes of loss as is done with the basic and broad forms. It covers on the basis of direct physical loss or damage except as excluded or limited. It is therefore up to the insurance company to specifically state what is not covered.
If the form did not include certain special exclusions, it would cover losses or damage from other than a fortuitous event or other situations not generally considered proper subjects for insurance. This is discussed in under The Insurance Contract-Fortuitous Event. As a result, this form contains a series of exclusions that deal with losses that might be considered "costs of doing business" by an insured.
- Wear and tear, rust, corrosion, fungus, decay, deterioration; loss due to inherent defect or inherent vice; smog; release or discharge of contaminants or pollutants; settling, cracking, shrinking or expansion; nesting of insects, birds, rodents or other animals; mechanical breakdown (except elevator collision); rupture or bursting caused by centrifugal force are not covered.
- Loss or damage to business personal property due to marring or scratching, dampness or dryness of the atmosphere is not covered.
- Loss or damage to personal property in the open caused by rain, snow, ice or sleet is also excluded.
Note: Coverage is provided if any of the above inevitable losses result in a specified cause of loss that then results in loss or damage or if breakage of building glass results.
Loss Due To Dishonest Acts Committed
Loss that is due to a dishonest act committed by the insured, its partners, employees, directors, trustees, authorized representatives or anyone entrusted with the property by the insured, whether they act alone or in collusion with others is not covered. However, loss or damage caused by destructive acts, excluding theft, by employees is covered.
Collapse is not a covered cause of loss except as provided in the Additional Coverage-Collapse.
Voluntary Surrender of Property
If the insured or anyone entrusted with property hands over property to another because of a fraudulent scheme or under a false pretense, there is no coverage for the loss or damage of that property.
The following exclusions are commonly referred to as the concurrent causation exclusions because they are excluded only if they occur concurrently with another excluded cause of loss.
- Weather Conditions - Losses due to weather conditions that contribute to a loss excluded by underlying policy provisions are not covered.
- Acts or Decisions - Loss or damage arising from the failure to act or because of decisions or acts by any person, organization or governmental body is not covered.
- Faulty Design, Planning, Etc. - Loss or damage arising out of faulty, inadequate or defective planning or design, workmanship, repair, construction, grading or compaction is not covered. Loss or damage due to maintenance or materials used in repair or construction is also not covered.
LIMITATIONS IN SPECIAL FORM
The following are exclusions but with some coverage provided:
Hot Water Boiler
Other than for explosion, the Causes of Loss-Special Form does not cover loss or damage to hot water heating equipment because of any condition within the equipment.
Rain, Snow, Sleet, Ice, Sand or Dust
There is no coverage for loss or damage caused by rain, snow, sleet, ice, sand or dust to the interior of any building whether driven by the wind or not. However, coverage does apply if the building first sustains damage by a covered cause of loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enter.
Coverage also applies under these circumstances for loss or damage caused by ice dam (the thawing of snow, sleet or ice on the building). On the other hand, loss or damage to building gutters and downspouts caused by the weight of ice, snow or sleet is specifically excluded.
There is no coverage for loss by theft of building materials that are not attached to the building. This does not apply if the building materials are the insured's stock.
Property transferred to a person or place outside the premises by any unauthorized instruction is not covered. Property that is just missing and for which there is no evidence to show what happened to it is also not covered.
This means that a shortage disclosed on taking inventory is not covered unless sufficient information is available to establish or verify a loss under the policy.
Unless Loss or Damage Is Caused By a Specified Cause of Loss or By Glass Breakage, Coverage Does Not Apply To:
- Injury to covered animals. A further restriction states that only the death or the required destruction of an animal is covered. There are no payments for the treatment of injuries.
- Builders' machinery, tools and equipment owned by or entrusted to the insured, except in cases where such property is held for sale by the insured.
- Breakage of fragile articles such as glassware, statuary and porcelains. An exception applies for building glass, containers of property held for sale, or lenses for photographic or scientific instruments.
The policy limits the amount paid for the following property if the cause of loss is theft. These items are covered up to the policy limits for all other covered causes of loss.
- Furs and fur garments - $2,500.
- Jewelry, watches, pearls, precious and semi-precious stones or precious metals or alloys - $2,500
- Patterns, dies, molds and forms - $2,500
- Stamps, tickets and letters of credit - $250
Note: The theft limitations apply to each type of property and is the most paid in any one occurrence for that type of property. An exception exists for jewelry and watches worth $100 or less per item.
Commercial Property Insurance Policy Coverage Forms - The Bottom Line
Commercial property insurance policy coverage forms define, limit, and explain what property or property interests are covered by the policy.
Additional Resources For Commercial Property Insurance
Read up on small business commercial property insurance, including how business property insurance protects your company's building's and/or their contents from damage, destruction, theft and vandalism.
- Apartment Building
- Business Interruption
- Commercial Flood Insurance
- Commercial Property
- Commercial Property Insurance Policy Coverage Forms
- Condo Association
- Contractors Equipment
- Duplex Rental Property
- Electronic Data Processing Equipment
- Equipment Breakdown Protection Insurance
- Homeowners Association Insurance
- Inland Marine
- Jewelers Block
- Manufacturing And Mercantile Rental Property
- Mobile Home Park
- Non-Residential Building Operators
- Office Buildings
- Safeco Landlord Insurance
- Shopping Center & Strip Mall
- Vacant Land
- Vacant Property
- What Are Commercial Property Insurance Endorsements?
Rental property owners, real estate developers and property managers should keep an accurate survey of each property they own or that is in their care. This survey should include inventories of furnishings and equipment at those properties. These documents establish the extent of their insurable interest, facilitate the arrangement and placement of insurance and minimize controversy and confusion if a loss occurs.
Insurance coverage on property, general liability and professional or errors and omissions liability should be arranged and placed for every real estate and rental property risk.
The main goal of any commercial property insurance program is to protect the insured's real and business personal property. Buildings and their contents property usually represents a significant portion of its total assets, regardless of the size of the business. A commercial property program can provide the coverage you need if a loss should occur.
The ISO Commercial Property Building and Personal Property Coverage Form is an insurance industry standard that provides this needed coverage. As a result, it should always be reviewed and used as a benchmark for comparison when evaluating any commercial property coverage form.
This policy treats business personal property as more than just the contents of a building. When there is a limit of insurance on the declarations, property can be covered if inside the building or structure or within 100 feet of the building or premises and either in the open, or even in or on a vehicle.
There are many endorsements available to tailor the ISO Commercial Property Coverage Forms. Some are mandatory for all policies while others are mandatory for specific classifications and types of business. Others are optional and permit a standard form to be customized to meet a specific risk's coverage needs. Endorsements broaden, restrict, delete, modify, or add coverage.
These policies can provide the following additional coverages for small specific limits of insurance: debris removal, preservation of property, fire department service charge, pollutant clean up and removal, increased cost of construction and electronic data.
Minimum recommended small business insurance coverage: Building, Business Personal Property, Business Income and Extra Expense, Employee Dishonesty, Money and Securities, Accounts Receivable, Computers, Signs, Valuable Papers and Records, General Liability, Employee Benefits, Umbrella, Hired and Non-owned Auto & Workers Compensation.
Other commercial insurance policies to consider: Earthquake, Equipment Breakdown, Flood, Computer Fraud, Forgery, Contractors' Equipment, Fine Arts, Cyber Liability, Employment-related Practices, Automobile Liability and Physical Damage, and Stop Gap Liability.