Chapter 6: Property Insurance

Chapter 6: Property Insurance www.mrisoftware.com

Objectives • Discuss the coverage provided under a typical named perils wording mentioning exclusions and any special features; • Name and describe some policy wordings that are commonly used; • Discuss what is required to underwrite and rate property risks; • Briefly describe how coverage is provided for farms.

Introduction • Property policies can be classified according to the perils insured by them. • Named perils: list the specific perils insured such as on a Fire & Extended Coverage (EC) form or any variation of such a form. • All-risk: covers all perils except those excluded in the wording. • The correct form to use is dependent upon the businesses objectives, condition of property, its use and overall value and what the underwriter is willing to offer.

Property Policies • Four Parts (Basic Framework) of the Property Policy: • Declarations (or Schedule) • Wordings • Statutory Conditions where laid down by statute law, usually the Insurance Act of a Province. • Quebec: they are called General Conditions. • Endorsements (as applicable)

1. Declarations (or Schedule) • Key information unique to the risk appear in the Declarations • It is important to be able to identify the named insured. • Sole proprietorship – name of the owner and name of the business they operate. • D/B/A = • O/S (O/A) = • Large corporations with subsidiaries and affiliate companies it must be determined whether one policy will insure the entire risk or whether certain entities will have to be isolated and insured individually. • Blanket coverage

1. Declarations (or Schedule) • In addition to identifying the insured, the other items usual to a Declarations page include: • Property insured and it’s address; • Occupancy of the building or use of the insured object; • Any loss payees other than the insured;

1. Declarations (or Schedule)

2. Wordings • Each insurer is likely to have its own versions of the standardized named peril and all risk policy forms. • A suitable standard policy wording (also called “printed” policy) is appended to the Declarations. • Manuscript wordings: specially drafted as a joint effort of the insurer and insured. • Advantage: Insured has a policy that provides the precise coverage needed. • Disadvantage: Insured loses the legal advantage of w when they participate in make the contract wording.

2. Wordings • Over the years many special policy forms have been developed to cover risks with distinctive needs. • E.g. Condominiums, Builders Risk, Etc. • Producer must ensure that the minimum requirements for coverage are met. • Insuring agreement or indemnity agreement promises to pay the insured for direct loss or damage to property as long as what happens falls within the parameters outlined in the policy wording. • Sets out the terms for the amount to be paid in the event of a loss.

3. Statutory Conditions (General Conditions in Quebec) • Set out in the Provincial Insurance Acts and must be a part of every fire policy issued in the common law provinces and apply to most property policies • If omitted Acts provide that they are to be read into the policy. • Quebec: General Conditions • Quebec Insurance Acts permits some deviation in certain areas of these forms. • Both sets of conditions are reproduced in Pgs. 6-8

4. Endorsements • Not all policies have endorsements • Should be reviewed carefully • Some broaden coverage (additional coverage requested) • Some limit coverage (underwriter deemed necessary) • Some endorsements are standard and will be reviewed later

Commonly Used Wordings • Institutions such as schools and hospitals and other risks are written on named peril forms. • All-risk insurance such as Commercial Property Floater ( ) and Commercial Building Form ( ) are also used. • Printed wordings comprise mainly: • Descriptions of the property insured including its location, detailed definitions of building, equipment, etc. • Standard clauses which • Widen the coverage, for instance, the permissions clause • Control the way the coverage operates, e.g. the coinsurance clause.

Commonly Used Wordings • Practical Points: Obtain copies of those policy wordings used by the companies you do business with. • Read wording with two objects in mind: • Coverage and Restrictions • Essential underwriting information. • Certain insurances, such as Automobile, Accident and Sickness, and Life, require written applications by law. • A properly completed and signed application is invaluable. It provides rating and underwriting information and helps with disputes.

Printed Wordings • There may be variations but main features are generally as follows: • Retail Store Form – covers building and contents of retail stores ( not widely used). • Mercantile Building and Contents – small businesses where retail store form does not apply. • Package Policies – Many businesses under (a) and (b) can be insured under package policies which include coverages such as liability, crime and business interruption. • Building and Contents – used for larger risks that have only “incidental” stock to cover.

Printed Wordings • Building, Equipment and Stock – Also used for larger risks where stock is part of the business. Two versions: • Non-sprinklered: with or without coinsurance (usually 80%) • Sprinklered: normally calls for 90% coinsurance • Stock Insurance – May vary throughout the year. • Two version of adjustable stock plans: • Monthly reports of values • Premium Adjustment

Stock Insurance • Monthly report of values: • Reports of values are done regularly (usually monthly). • Premium paid initially on 75% of insured limit. • End of the year the value reports are averaged. • The actual premium due is calculated on the average value and the insured pays extra or gets a return. • Coinsurance is 100%. • Disadvantage: Small firms may not be able to make regular reports

Stock Insurance • Premium Adjustment option: • Allows the insured to adjust premium after year-end but does not penalize them if they do not do so. • This form has a deposit of 100% of the premium compared with 75% under the first plan. • Good for small firms unable to make regular reports of value • Not penalized by late reporting. • Adjustable stock plan “Stock Form (with Premium Adjustment Option)”.

Stock Insurance • Peak Season Endorsement – increases the stock coverage at specified times by set amounts and the premium is paid on this basis. • Should be reviewed from time to time but this is often the best basis for a small risk. ALL Printed Wordings: • Deductibles are common in property insurance. • Possible to save premium by increasing deductible amount • Is it worthwhile? Advise clients of deductibles and make sure they are suitable. www.mtv.com

Named Perils • Named perils names the perils insured. Basic coverage referred to as Fire and EC. • Standard Named perils wordings typically available for building, equipment and contents exposures are: • F • I • R • E • S • L • W

Named Perils • Fire or Lightning • Explosion – heating and steam boilers are not covered • Impact by aircraft, spacecraft or land vehicle – damage caused by vehicles owned or under the control of the insured or employees is not covered. Damage by someone else’s truck could be covered. • Riot, Vandalism or malicious acts – loss or damaged cause by work stoppage or interruption is excluded. • Smoke – only includes smoke from a sudden, unusual and faulty operation of a furnace. The effects of cumulative damage are excluded.

Named Perils • Leakage from fire protective equipment – includes leakage from sprinklers but also a few other instances. • Windstorm or Hail – interior damage covered only if these perils first damaged the exterior of the building. Damage cause by surface water is excluded. • Additional perils may be provided such as water escape from a plumbing system, accidental rupture or freeze up of a plumbing, heating or air conditioning system and theft. • Extremely important to check actual wording used. Definitions change and extensions may be added that will change coverage. • Additional coverage when a loss occurs. • Property temporarily removed and Debris removal.

Exclusions • Every policy contains a number of exclusions. Typical exclusions found in a basic named perils form are: • Damage to electrical devices, appliances or wiring • Process heat • “War” and “Near war” • Nuclear incident, explosion or radioactive contamination. • Money, bullion, securities, stamps, tickets, tokens, evidences of debt and title.

Exclusions • Automobiles, watercraft, amphibious or air cushion vehicles, spacecraft, trailers and attached motors or other accessories (Miscellaneous types of property). • Vacancy and unoccupancy – no coverage on property at locations that the insured knows are vacant, unoccupied or shut down for more than 30 consecutive days. • Any loss due directly or indirectly to any bylaw or other law.

Property Insured • Types of property to be insured must be identified and the appropriate option chosen: • Building • Contents of Every Description (COED) • Property of Every Description (POED) • Property in transit • Cash and Securities • Business Interruption • Extra Expense

Property Insured • Specialty coverage for Boiler and Machinery • Details vary between companies – Definition of building, equipment and stock – see Named Perils form reproduced in text. • In this text: • Building – additions and extensions, permanent fittings and fixtures, items required for maintenance and building services. • Equipment – all contents usual to the insured’s business including furniture, fittings, fixtures, machinery, tools, utensils and other appliances. • Tenant’s improvements – to building covered under equipment sections if insured does not own building.

Property Insured • Stock – merchandise of every description plus packaging, wrapping and advertising material, including similar property belonging to others which the insured is under an obligation to insure or for which they are legally liable. • Enquire about situations where client may hold stock for others or send their property away – do not rely on others insurance. • Contents of Every Description – includes stock and equipment as defined in Commercial Building, Equipment and Stock form. • Subject to same limitation as property. E.g. Money and securities are excluded and require special insurance.

Actual Cash Value • Standard fire policy – insurer will pay the actual cash value of property destroyed subject tot the amount of the insured’s interest in the property and limited to the sum insured. • What is Actual Cash Value (ACV)? • Cost to replace with new items less physical depreciation (wear and tear) • Note: • The cost of a new machine at the time of destruction is the starting point not how much was originally paid • Physical depreciation not “book” or account depreciation • “White Elephants” – little value

Replacement Cost • Endorsement for Replacement Cost may be added to policy. • SEE COPY OF WORDING ON PG. 22 • Same site or an adjacent one can be deleted (good idea) • Note the exclusions in clause 5 of the wording as well • Replacement cost insurance • Make sure you know the basis on which losses will be paid and what conditions apply (if not replaced may only get ACV).

Records • Coverage on records including books of account is limited to value of blank books and the cost of reproducing the information they contain from source data. • No cover for the cost of “reworking” the information. • Need a Valuable Papers policy. • Similar comments apply to media, (software) for electronic data process and electrically controlled equipment.

Coinsurance • The premium for property insurance is usually charged on the amount insured at so much per $100. • E.g. Building insured for $250,000 at a rate of $1 • Premium = $2,500 • Based on the assumption $250,000 is full value of the building. • Most losses are not total losses. • People know this and mistakenly believe they need to insure less. • This is why co-insurance clauses have been put into many policies.

Coinsurance • SOLUTION • If at least a specified percentage of the full value is not covered the insured will be penalized by recovering only part of their loss. • Insured shares in loss if coinsurance requirements are not met. • Common requirement of coinsurance is 80%. • If the insured covers at least 80% of full value they are paid up to the full amount of the policy. • If they insure less than 80% they get a percentage of what they insured.

Coinsurance • Example • $200,000 Building with 90% co-insurance clause • Total Value =$200,000 • Coinsurance requirement = $180,000 (90% of 200,000) • Loss = $50,000 • If insured bought: Paid out:

Homework! • $300,000 Building with 80% co-insurance clause • Coinsurance requirement = ???? • Loss = $75,000 • What is the payout if the insured bought: • $75,000 of insurance? • $150,000 of insurance? • $275,000 of insurance? • What is the payout if the loss is $300,000 and the insured bought: • $300,000 of insurance? • $350,000 of insurance?

Coinsurance • Sometimes the insured can choose to cover on co-insurance or not • If the insured chooses co-insurance they may get a discount on the premium • But sometimes co-insurance is compulsory • Coinsurance either encourages or requires the insured to cover close to full value by imposing a share of the loss on them. • In the event of a full loss it is always best to be insured to value as even if the co-insurance requirement is met, if the limit of insurance is not enough the insured will have to pay out of their own pocket.

Stated Amount • Issue with co-insurance – Inflation! • – the insured makes a statement at the start of the policy year to the insurance company setting out the 100% value of the property insured (usually requires evidence of value through method such as an appraisal). • Once accepted the policy is written for this amount and Stated Amount Clause is attached. • As long as the stated amount (expressed as a dollar amount, not a percentage) is maintained no coinsurance will apply. • Effective for one year, after a new statement must be filed.

Remember • Whatever clauses you have on the policy you should: • Cover 100% of value all the time • Warn insured that if they do not insure to value, they may have to pay part of the loss themselves.

Endorsements and Extensions of Coverage • Bylaws • Older buildings erected before higher building standards are allowed to stand, but if they need to be rebuilt they may need to conform with current regulations. • “Non conforming” buildings may have to be torn down and rebuilt • Can involve heavy additional expense • Increased cost of construction due to bylaws is excluded under standard policy.

Endorsements and Extensions of Coverage • Bylaws • Coverage is provided for the following: • Value of undamaged portion of buildings (that can no longer be used); • Demolition and debris removal cost of undamaged portion of buildings; • Increase in cost of construction or repair. • All three are needed to provide proper coverage. • Sum insured may need to be increased and it is not easy to obtain estimates of increased construction – consult local authorities and building contractors.

Endorsements and Extensions of Coverage • Consequential Loss – Cold Storage • Property policy covers physical damage, not losses consequent to physical damage. • One type of consequential loss that can be covered by endorsement on property is Consequential Loss Assumption Clause – Cold Storage. • Applies to spoilage of refrigerated stock caused as a consequence of the first loss (fire to the refrigeration system). • E.g.

Endorsements and Extensions of Coverage • Inflation – Automatic Increase Clauses • Increases sums insured to help combat the effects of inflation • Increases are linked to specific indices. • Other clauses may provide for a fixed percentage increase on buildings or equipment at stated intervals. • NOT a substitute for a review of values at renewal.

Endorsements and Extensions of Coverage • Personal Property of Officers and Employees • Cover for personal property of officers of the insured, and employees. • Coverage is qualified as follows: • It is available at the option of the insured, • It does not apply if the owner has insurance, unless the insured has an obligation to insure or is legally liable. • Can extend coverage to visitors or others who are not officers. • Option as the value may not be large or sufficient to pay insureds loss in full.

Endorsements and Extensions of Coverage • Tenant’s Improvements • Sometimes called improvements and betterments – improvements to the building made or acquired by the tenant. • Belong to the tenant (while lease inforce) but cannot be removed and become property of the landlord. • Loss settlement method: if the tenant repairs or replaces the improvements with diligence and dispatch the amount expended is covered not exceeding the ACV (or RC if this basis is bought). • If not carried out, the amount payable is a proportion of the original cost based on the time the lease has run compared to the time between the date the improvements were made and expiry of the lease.

Endorsements and Extensions of Coverage • Blanket Coverage • Available on a names perils or all risk form. • A single amount covers all property with very few restrictions. • Another type of blanket insurance is where a single amount covers all locations (perhaps, anywhere in Canada or U.S.A.) • If property is often moved from one location to another this may be an advantage. • Average rate will be set based on the exposures at each location • Coinsurance applies (requiring a statement of values) • Transportation risks?

Underwriting and Rating – Information Required • Name, Address, Business, Location of property and Amount to be insured • Following is needed for underwriting and rating: • Heating methods • Business and processes • Fire Protection • Length of time in business

Rating • “Flat” Rating – Smaller Risks • Simple risks, like a small office, rates are provided by insurer and premiums calculated by producers. • Insurer Rating – More Complex Risks • Complex risks are rated by insurers on the basis of information (as above, obtained by the producer) and sometimes inspection by the insurer. • Rates provided by Insurers’ Advisory Organization of Canada (IAO) may be taken as a starting point. • Rating can be very flexible.

Submission of Risks to Insurer • Prepare submissions carefully • Take photos, clear up questions and get complete information from the start. • Mention if the premises are well kept, good “housekeeping”, updates, etc. • Make it easy for the underwriter to accept the business at the rate you want. • Keep a copy of the details supplied for future reference. • Help from field inspectors and underwriters can be valuable, get to know them.

Farms • Detailed application is required which brings out the features of the particular farm. • Includes a provision for house and contents • Commonly used clauses include: • Rebuilding Clause – Deferred Payment • More than two-thirds of the value of the building is damaged, the insurance company will pay initially only 50% of the total. • To collect the remainder the insured must actual rebuild within nine months of the loss and within 200ft of the damaged building. • Special wordings for special types of farming

Farms • Commonly used clauses include: • Extended Coverage • Divided into two parts. • Applies to the farmers dwelling and contents • The rest of the farm • Chief difference between EC for dwelling and contents and that for the remainder of the farm are: • Explosion coverage for the dwelling and contents is wider, • Rupture or escape of water from heating, plumbing or A/C systems and falling objects are only covered for dwelling and contents, • The windstorm or hail coverage differs.

Other Farm Coverages • May be added by endorsement or written separately. • Farm Machinery and Equipment Floater • Mobile machinery and equipment against all risks anywhere in Canada or the U.S.A and subject to 80% coinsurance. • Larger items are listed and there is an unscheduled amount for miscellaneous smaller items subject to a limit on any one item. • Livestock • Accidental death or necessary destruction (arising from named perils or all-risks) plus theft in either case. • Animals are usually insured by class (e.g. pigs, cattle, horses) • 80% coinsurance applies.

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Chapter 6: Property Insurance