Chapter 7: Property Insurance (Continued)

Chapter 7: Property Insurance (Continued)

Objectives • Discuss the coverage provided under a typical all-risks policy mentioning exclusions that apply and any special features; • Discuss how leases affect insurance needs; • Name and describe certain specialized coverages for distinctive exposures.

All-risk Policies All-risk policies: do not specify certain perils, rather all types of losses are covered except for those excluded. • than named perils – often called Broad form wording. • Typically insure all risks of direct physical loss or damage and lists perils and property excluded. • Close look at exclusions required – some similar to named perils but there are a lot more of them. • Should cover at least what the named peril form does and more but should compare policies to see what coverage is broader. • MAKE NO ASSUMPTIONS!!!

All-risk Policies All-risks policy is expected to cover certain major perils that are not included in the basic named perils form: • Theft – perils such as burglary. Not theft by employees. • Water Damage – only certain kinds of water damage are covered. • – very little available for marine shipments.

Perils Excluded • Earthquake and Flood are excluded but can be added back by endorsement. • Influx of water from natural sources whether it seeps in through walls or backs up through drains is excluded (seepage into basements). Damage to the interior caused by rain, sleet or snow is covered only if the building is damaged by a peril that is otherwise not excluded. • Exclusions found on named perils form are found in all risks form as well.

Perils Excluded • Other perils that are typically excluded: • Centrifugal force, mechanical or electrical breakdown – B&M • Atmospheric changes, rust or corrosion, marring, scratching or crushing. • Smoke form agricultural smudging. • Delay, loss of market, loss of use. • Employee Dishonesty – requires fidelity. • Snowslide, landslide and earth movement. • Settling, expansion, contracting, moving, shifting or cracking unless concurrently and directly caused by a peril not otherwise excluded.

Perils Excluded • Some of these losses are considered Trade Losses – they are expected as the cost of doing business: • Loss of weight • Damage by rodents or insects • Inevitable losses – not insurable, example is wear and tear.

Property Excluded • Wide coverage provided by all-risk is tempered by excluding and limiting certain property. • Coverage limited for growing plants, trees, shrubs and flowers in open to named perils with exclusions. • Coverage limited for animals, fish or birds to named perils and theft. • Coverage limited for furs, fur garments, jewels, jewellery, costume jewellery, watches, pearls, precious and semi-precious stones and pre-recorded video tapes to name perils except when the item is less than $1,000.

Property Excluded • Property insured under Marine Insurance and property while waterborne only covered in connection with land transportation. • Property on loan, rental, or property sold by the insured under a deferred payment plan is excluded with some exceptions. • Property in the custody of a sales representative is only covered if an amount is shown on the Declarations page. • Property illegally acquired, kept, stored, or transported is excluded.

Commercial Property Floater (CPF) • Essentially a “contents” form and covers stocks, equipment and tenants improvements. • Applies at specified locations of the insured, at newly acquired premises (for a restricted period), and elsewhere in transit, limited to Canada and the Continental U.S.A. excluding Alaska. • All risks subject to various exclusions typical for all-risks policy. • Co-insurance clause (90% requirement in this form) • Deductible is required. • Detailed application is usually required.

Commercial Building Form ( ) • Covers building and corresponds to the CPF for contents • Designed for commercial building as well as office buildings, apartment blocks, churches, hospitals and other non-mercantile risks. • Available in all-risks or named perils forms. • Application available – use where possible.

Commercial Building, Equipment and Stock – Broad Form • Offers advantages of a single all-risk wording to insure a building, its equipment and stock where coverage is required on both building and contents. • Can be used to insure a building only (building owner renting premises) or • To insure only contents (equipment and stock) for a building being conducted in a rent premises. • Intended for retailers, wholesalers, distributors and similar non-manufacturing commercial risks (combines CPF and CBF).

Leases • Ask to see leases and examine them if the client occupies leased premises or rents out all or part of the premises. • Main features you should look for are the following types of clauses: • Tenant’s Insurances: tenant must have certain insurances and provide a certificate of insurance or other evidence that coverage is in force. • Landlord’s Insurances: states what insurance the landlord will carry • Repairs: sets out the tenant’s responsibility for repairs to the building. • Other requirements

Tenant’s Insurances • Important to check the certificate of insurance or policy. • Landlord – check these from the tenant • Tenant – arrange for these and show to the landlord • Insurance may be on the leased building and/or contents. Building insurance may be required to be in the name of landlord and subrogation against the tenant may be waived. • Make sure all requirements are met (named perils or all risk, ACV or RC, parties to be insured). • Unusual insurance terms (“ ” – nearest practical coverage is windstorm). • Point out in writing what coverage has been arranged.

Landlord’s Insurances • Landlord usually arranges coverage for building. • Tenant may still be liable if sum insured is not enough to pay the entire damage or loss is caused by uninsured peril. • Later discussion – Tenant’s legal liability insurance can be arranged to provide coverage against both shortage of sum insured and deficiency in the perils insured.

Repairs and Amendments • Repairs • Requirement for repairs should be reviewed against coverage on building to avoid gaps. • Only cost of repairing or rebuilding the property following its damage or destruction is insurable. • Amendments to Lease • If lease has awkward or unreasonable requests it may be possible to persuade landlord to alter the lease. • Supervise the drafting of new wording and make sure it fits coverage.

Builders’ Risk (COC or Course of Construction) • Insurance applies to the structure being erected and materials to be incorporated (steel, timber). • Occupied building are not covered – permanent insurance is required. • Make arrangements in advance to be effective on handover or occupation date. • Make sure there is no gap in coverage – is boiler and machinery needed, business interruption? • Obtain a copy of the construction contract.

Builders’ Risk (COC or Course of Construction) • Amount of insurance is usually based on (building project is insured for the full estimated competed value from the start of construction). • Value of risk may include items not provided by general contractor (E.g. elevators and boilers). Make sure these are covered by builders’ risk policy. • Some contractors items are covered as they are used for a particular job but equipment and tools are not. • Equipment floater to insure equipment and tools on an annual basis should be obtained by the contractor.

Builders’ Risk (COC or Course of Construction) • Written for the period required to finish the work, but can be extended for additional premium. • Increase policy amount if costs run over budget. • All-risk is desirable, as construction involves special hazards not covered by named perils such as: • Collapse • Theft of materials • Transportation

Builders’ Risk (COC or Course of Construction) • Exclusions in the all-risks policy are: • Dishonesty of employees (Fidelity required) • Faulty material, workmanship or design (resultant damage is covered) • Penalties and fines under the construction contract (E.g. late completion) • Most waterborne transit, all airborne transit.

Builders’ Risk (COC or Course of Construction) • Deductible is usual • All interests should be covered (Owner, general contractor and subcontractors). • Blanket cover for all projects may be best if contract is involved simultaneously in a number of jobs. • Contractors’ Installation Floater is available – thought of as a “mini” builders’ risk policy. • Minor construction, reconstruction and alteration by small or medium sized contractors.

Valuable Papers and Records • Coverage for these is limited by the Records clause in Building, Equipment and Stock form. • Only insure cost of blank books plus the cost of copying from source material, but not the cost of reworking. • Valuable papers fills this gap. “Valuable papers” is misleading. • Books, papers, files, maps, drawings, deeds, mortgages, etc. • Coverage is all-risks and applies at specified premises (can extend). • Usual limit is 10% of limit of insurance or $5,000 whichever is less.

Valuable Papers and Records • EXCLUSION: loss due to electrical magnetic injury, disturbance or erasure of electronic recordings, except by lightning. • Money and securities are also excluded. • Premium reduction for records kept in fire-resistive receptacles (safes or filing cabinets) when premises are not open for business. • Copies of records stored off-premises – need for this insurance can be reduced or eliminated. • Available on reporting or non-reporting basis and not subject to coinsurance.

Account Receivable • Accounts receivable policy covers the risk of replacing records destroyed by insured peril and reconstituting these records. • Also pays collection cost in excess of normal and even interest on loans to tide the insured over when collections are delayed. • All-risks • Similar to Valuable papers in that receptacles and copies can provide the insured with options for coverage/premium. • EXCLUSIONS: Does not cover losses due to bookkeeping errors, nor attempts to conceal wrongful acts by disposing of, damaging or altering records. • Available on reporting and non-reporting basis. NO coinsurance.

Office Contents Floater • Non-standard form and coverage varies between insurers. • Where office risk is incidental to the main exposure as in a mercantile business coverage can be included in a CPF. • All-risks and covers a designated office but insures for limited amount at other premises or in transit. • Limited amounts for money, valuable papers and extra expense. • Coinsurance of 80% or 90% generally required and usually a deductible, $200 or more any one claim.

Electronic Data Processing (EDP) • Assume that each business or professional client probably uses a computer and will need coverage. • Coverage needed on computer hardware and software. • Ordinary policies do not normally exclude, but do not provide adequate coverage (Special coverage needed). • EDP items are subject to various perils not covered by typical all-risks such as: • Equipment breakdown • Air conditioning failure • Electrical damage.

Electronic Data Processing (EDP) • Business Interruption Insurance is limited - damage to media or programs to 30 consecutive days or the time for which coverage is provided following damage to other property (whichever is more). • Special coverage is essential for proper protection. • Still developing and forms are not standard. • Often includes the following features: • All-risk coverage with few exceptions (flood and earthquake usually covered) • Equipment breakdown, air conditioning failure and electrical damage are covered. (See pg. 23 – power failure not covered) • Damage to equipment and media/data during processing is covered.

Electronic Data Processing (EDP) • Basis of settlement is ACV but replacement cost can be bought. • Media/Data coverage is usually the cost of repairing or replacing. • Coinsurance of 80% usual for equipment but not media/data • Most EDP include extra expense and BII is an option. • Neither is subject to “30 consecutive days” limit • Extra expense is not restricted by monthly limits on the amount payable as are regular extra expense policies. • Other coverages the EDP package may provide: • Valuable Papers • Accounts Receivable

Leased Equipment • EDP equipment leases should be examined • May state that owners insure the equipment and subrogation against lessee is waived, giving the lessee full benefit of the insurance. • Client should request waiver – otherwise insurance should be arranged to cover legal liability for damage. • Policy should be all-risks Mini-computer Policies • Intended for insureds with limited value. • Many features of the packages but may be subject to restrictions. E.g. sums insured for additional coverages such as extra expense.

Differences in Conditions (DIC) • Covers the difference in conditions (i.e., the extra coverage) between a fire and EC policy (FEC) or named perils policy and all risks policy (AR) • Widens coverage but does not increase the sum insured. • Most common method of writing – use all-risk policy and state that it does not cover the perils insured by the insured’s policy (the named perils policy). • All-risk policy can be done but occasionally the DIC is better. • As not required to be full amount of FEC, it is not subject to coinsurance and can be less expensive than a full all-risk policy. • Some insures may not be willing to provide all risk.

Difference in Conditions (DIC) • Flood and Earthquake (EQ) are normally excluded but both can usually be added for additional premium, subject to special deductibles. • Remember the Business Interruption (BII) exposure and insure accordingly. • Deductible required (may be higher than FEC).

Difference in Conditions (DIC) • Required Underwriting information: • Likelihood of earthquake • Flood exposure • Transportation details • Max. value of any one shipment or conveyance; • Max. likely value at any one location e.g. loading area; • Owned trucks or common carrier; • Radius of operations (other provinces or countries); • Safeguards such as alarms. • Burglary details (alarm system or guards) • Loss experience

Earthquake Zoning Map Courtesy of: Oglivy Insurance http://ogilvy.ca/fr/seisme/

Flood Exposure Map Courtesy of: Government of Alberta

Questions??? www.thirdyearabroad.com

Chapter 7: Property Insurance (Continued)