Chapter 3: covered causes of loss--named perils forms.
The perils covered by the commercial property policy and several other of the insuring forms comprising the commercial property program depend upon the insured's choice of one of the three causes of loss forms.
The basic and broad forms are treated in this chapter; Chapter 4 deals with the special causes of loss form. The basic form covers eleven basic perils, and the broad form adds three perils and one additional coverage-collapse. Under previous commercial property programs, insureds had to purchase separate coverage for the glass in their buildings using form CP 00 15. That form is no longer in use. ISO simplified the underwriting process and the policy by writing coverage on glass under the commercial property form and subject to the perils applicable to other property.
CP 10 10-Causes of Loss-Basic Form
This form provides named perils coverage and is the most limited of the causes of loss forms. Only those perils specifically included in the form are covered and loss or damage must be directly caused by the peril. The covered perils under the basic form are fire, lightning, explosion, windstorm and hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action.
Fire. The named peril forms do not limit the peril of fire, however, courts have long held that fire means a hostile fire, one that has left its intended confines. Hostile fires are contrasted to the friendly fire doctrine. The friendly fire doctrine provides that loss by friendly fires is not insured and that a friendly fire is one that the insured intentionally kindles and that remains in the place it was intended to be. A hostile fire is one that is either not confined to the place intended or one not started intentionally. A minority of courts have expanded the idea of hostile fire to include those that they characterize as excessive, as when a thermostat or other part of a furnace malfunctions and damages either the heating device itself or some other property through extreme heat.
The distinction between friendly and hostile fires applies only to insureds that have purchased named perils coverage. On a special causes of loss form, the doctrine of friendly fire does not apply; coverage is not restricted to named perils but responds to damage unless a specific exclusion applies.
Lightning. As with the peril of fire, the policy does not limit lightning. From the earliest insuring forms lighting has been an accepted corollary of the fire peril.
Explosion. The commercial property policy does not define explosion, so it is subject to broad interpretation. The dictionary defines explosion as "the act of exploding;" "to burst forth with sudden violence or noise from internal energy" or 'to undergo a rapid reaction with the production of noise, heat and violent expansion," or "to burst violently as a result of pressure from within."
Is a Gunshot an Explosion?
The insured is a gun shop covered on a commercial property policy with the basic causes of loss form, CP 10 10. While the store owner was cleaning a gun it accidentally discharged, causing a large hole in one of the interior walls. Although the agent argued that this constituted an explosion, the insurer denied the claim.
The commercial property policy does not define explosion. In the policy's description of the explosion peril, it does, however, include explosion of gases or fuel in a furnace. It also excludes rupture of pressure relief devices. It does not specifically exclude gunshot from the definition of explosion. A definition of explosion is "a large-scale, rapid, and spectacular expansion, outbreak, or upheaval." That is what happened, and the damage to the shop's wall is covered. The important point is that the form does not say it must be the covered property that explodes; it is damage by explosion that is covered.
Both the basic and broad causes of loss forms exclude two types of explosion peril: operation of pressure relief devices and rupture due to expansion of the contents of any structure caused by water. Steam boiler explosion is also excluded under both forms.
Windstorm or Hail. The commercial policy's coverage for damage by windstorm or hail is limited by three provisions that state coverage does not include the following:
1. Frost or cold weather.
2. Ice (other than hail), snow, or sleet, whether driven by wind or not.
3. Loss or damage to the interior or a building or structure (or the property inside) caused by rain, snow, sand, or dust, whether driven by wind or not. In order for such a loss to be covered the building or structure must first sustain wind or hail damage to the roof or walls through which the rain, snow, sand, or dust enters.
Direct Loss from Windstorm
A subject of coverage argument and litigation has been determining what direct physical loss caused by or resulting from windstorm is. Another topic of significant interest following the hurricane season of 2005, which included hurricanes Katrina, Rita, and Wilma, is the relationship between windstorm coverage and flood insurance and what can be covered as wind damage and what is excluded as flood damage. For more on that topic see Chapter 12.
Forms do not define windstorm, so courts are often asked to do so within the circumstances of a particular case. The Arizona Supreme Court said that "a windstorm is a wind of sufficient force to proximately cause damage to the 'ordinary condition of the thing insured.'"
A majority of courts agree that the wind does not need to be the only cause of loss for a loss to be directly related to windstorm. For example, assume damage is not by wind knocking over a covered shed, but from a board picked up by the wind hitting the shed. The rule is that the windstorm must be the proximate cause or the efficient proximate cause of the loss. The minority of courts have followed the rule that any contributing cause to the damage must itself not be excluded by the policy.
Many courts have followed the rule that a direct loss from windstorm occurs when it is shown that the force or strength of the wind caused the damage. Some jurisdictions require that the winds be tumultuous and have the nature of a storm. Courts have also addressed the issue of whether there is direct loss from windstorm when the wind-damaged property was in poor physical condition. Generally, these courts have held that there is covered loss if the windstorm was the proximate cause.
The first part of the exclusionary language reaffirms the policy intent that damage by frost or cold weather is not equivalent to damage by windstorm or hail. However, a windstorm during the winter months that causes damage that is not equivalent to damage by cold weather (e.g., freezing) would be covered.
The policy states that before windstorm or hail damage to the interior of a building is covered, the exterior must suffer damage from wind or hail. Once wind or hail damages the exterior of the building, the policy covers the interior for damage caused by rain, snow, sand, or dust entering the structure. A common type of claim reached by this exclusion is water damage to walls, ceilings, or personal property that occurs during a windstorm but for which there is no apparent source. Sometimes this type of damage results from seepage around window casings or eaves that are of adequate soundness for ordinary weather but not for extraordinary wind events. The argument has been made that absent some kind of damage, temporary though it may be, water would not have seeped through the window or ceiling.
Tarp Blown Off-Damage to Roof?
A business insured under the commercial property policy with the basic causes of loss form contracted to have the roof changed from a flat rolled roof to a metal gable roof. This required the contractor to cut the roof edges to install a new sill plate on the exterior block walls so the new roof trusses could be properly secured. At the end of each day, the contractor covered the edge of the roof with tarps. During construction a windstorm ripped the tarps off the roof and allowed water to enter the building causing damage to contents.
The claim was denied based on the policy language that requires a building to first sustain wind or hail damage to its roof or walls before the policy covers water damage to contents. The insurer's argument is that the tarps used to cover the roof are not part of the roof or walls; because the structure did not sustain damage, there is no coverage for the water damage to the contents.
The basic causes of loss form qualifies the windstorm or hail peril with language that eliminates coverage for loss or damage to the interior of a building or its contents unless the building first sustains damage to its roof or walls through which the rain enters. A standard dictionary defines roof as "the cover of a building;" "material used for a roof"; and "something suggesting a roof: as a canopy of leaves and branches." Absent a specific policy definition, the insurance contract is broadly interpreted in favor of coverage. In this case the tarp was acting as a substitute for the actual roof and was, in fact, the roof at the time of the incident.
In Homestead Fire Ins. Co. v De Witt, 245 P.2d 92 (Okla. 1952), the court ruled that a canvas covering was a roof, A construction company was building an addition to a school. In order to join the new and old sections an opening was left in the roof of the old building. The construction company covered the opening with canvas to protect the old building. A sudden windstorm arose, ripped off the canvas, and rain damaged the interior.
Even though this case preceded the policies of today, it contained similar language that required roof damage before the insurer would cover water damage to the interior or its contents. The court ruled that because the contractors "evidently considered [as] adequate" the canvas that had been placed on the opening, this "brought it within the provisions of the windstorm clause, since except for the action of the wind, the opening was adequately closed." The canvas was a roof. This case has been cited numerous times over the years and has not been overturned.
However, a California appeals court saw things differently in Diep v. California Fair Plan Ass'n., 15 Cal.App.4th 1205 (1993). The court said: "While 'roof' has many different meanings (e.g., roof of the mouth), dictionary definitions are consistent with respect to that which people usually expect to find on top of a building...a roof is commonly considered to be a permanent part of the structure it covers. Roof is not an ambiguous or vague word...the parties to the insurance contract could not have originally intended the result the plaintiff seeks here."
Windstorm or hail is one of three causes of loss that may be removed from coverage by endorsement (either CP 10 53 or CP 10 54). Insurers doing business in areas such as the South Atlantic or Gulf coast often refuse to write wind coverage or write it subject to high rates and large deductibles. In such areas windstorm coverage is available through a catastrophe pool or similar facility administered by a governmental entity. Endorsement CP 10 53 applies the exclusion only to the coverage parts providing direct physical damage coverage. Endorsement CP 10 54 also applies the exclusion to those coverage parts providing coverage for indirect losses: business income, extra expense, and leasehold interest.
Smoke. The term smoke, like fire, is undefined in the policy. Many courts have followed a definition similar to this one from Webster's Tenth New Collegiate Dictionary: "the gaseous products of burning carbonaceous materials especially of organic origin made visible by the presence of small particles of carbon."
At one time, smoke damage referred only to sudden and accidental smoke from the faulty operation of a heating or cooking unit at the insured premises. Damage resulting from smoke from a fireplace was excluded. The current property forms cover sudden and accidental smoke damage from almost any source, except for agricultural smudging (i.e., the use of smudge pots to produce a smoky fire for protecting certain crops from frost and insects) and industrial operations. The commercial property policy excludes smoke damage from these sources because such operations represent constant or constantly recurring exposures. Damage is certain to occur, so there is no insurable risk; there is a certainty of loss.
Courts usually apply a definition of smoke that requires a visible product of combustion. However, in Henri's Food Products Co. v. Home Ins. Co., 474 F. Supp. 889 (E.D. Wis. 1979), the court held that the insured was covered for smoke damage when the outside of bottles of salad dressing stored in a warehouse were contaminated by the vaporization of agricultural chemicals also stored in the warehouse. The court did not discuss its reasoning in any depth, stating simply that it relied on Words and Phrases and Webster's Third New International Dictionary. Perhaps the court relied on the inclusion of vapor among the dictionary definitions.
A court in another case disagreed with the Wisconsin court's opinion.. In K & Lee Corp. v. Scottsdale Ins. Co., 769 F. Supp. 870 (D.C.Pa.1991), the court held, "An unabridged comprehensive dictionary lists every conceivable usage of words, including those that are arcane, archaic, and obscure. While smoke may result from some chemical reactions, the common usage of the term refers to the products of combustion and, more importantly, to matter that is visible."
The term "industrial operations" raises another interpretation issue. A Georgia appeals court said that the term did not to apply to what the court described as a small neighborhood bakery in Georgia Farm Bureau Mut. Ins. Co. v. Washington, 243 S.E.2d 639 (Ga. App. 1978). The insured was a dress shop owner whose merchandise was damaged by smoke that escaped from the faulty exhaust vent of the nearby bakery. The trial court held for the insured, and the court of appeals affirmed with little comment. The trial court held that exclusions and exceptions must be taken more strongly against the insurer and that a layman's reasonable reading of words in an insurance contract-in their plain, ordinary, and popular sense-prevails.
Other than the reference to agricultural smudging or industrial operations, the named perils forms cover smoke damage from any other source as long as the damage is sudden and accidental. There are no other qualifications or limitations with respect to this peril. Thus, even when smoke originates away from the insured premises-at an adjacent building or even at a more distant location-smoke damage is covered.
Aircraft or Vehicles. The aircraft or vehicles cause of loss covers damage done to covered property by physical contact with an aircraft or vehicle. By specific statement this also includes damage done by a spacecraft or a self-propelled missile. It also covers damage from objects that fall from an aircraft or are thrown up by a vehicle although this would not include damage to covered property thrown from a vehicle, as by a vandal. The loss must be caused by an object being thrown up from a vehicle, as by running over the object.
There are many instances in which a vehicle can cause damage without coming into actual contact with the damaged property. From time to time, insureds report losses of the following nature: a truck pulling away from a building to which, unknown to the driver, a chain was attached; a vehicle hitting another object and propelling it into the side of a building; or a vehicle shearing off a water hydrant with resultant severe water damage to property in a nearby building. Due to the peril's requirement of physical contact between the property and the vehicle, these claims are often denied.
However, courts have found coverage under the vehicle peril in situations where, for example, a boom fell off a crane and damaged an insured building. One court stated that "to exclude this loss because contact was only with the boom would be similar to excluding loss caused if a tractor-trailer loaded with piling jackknifed and the projecting piling, but not the trailer, damaged a building. The difference is simply one of degree." The implication is that, in some instances, damage without actual physical contact by the vehicle could be covered even where the policy states that coverage applies only in cases of physical contact.
On the other hand, a court held that no actual physical contact occurred where a truck pulled a cable through a doorway. A boiler on the cable damaged the building. The damage occurred when a barrel that supported a beam or upright to a beam was dislodged, causing the roof to sag eight to ten inches. The insured argued that the term vehicle included every accessory piece of equipment attached to the vehicle. The court found the term was not ambiguous and refused to apply the insured's definition to the construction of the policy.
Perhaps the difference in interpretation between this case and the one in the previous paragraph was the nature of the equipment that caused the damage. Whereas a crane cannot be effectively operated without a boom, so that the boom is an integral part of the machine, a cable is more remotely related to the day-to-day operation of a truck. The question of relatedness to the vehicle is one of degree.
The form further states that damage by vehicles owned by the named insured or by vehicles operated in the course of the named insured's business is excluded.
Riot or Civil Commotion. The common definition of riot, although it may vary slightly among cases and commentators, can be stated as, "Any tumultuous disturbance of the public peace by three or more persons mutually assisting one another in execution of a common purpose by the unlawful use of force and violence resulting in property damage of any kind." Black's Law Dictionary defines riot in a much longer passage, but with the same meaning that a riot is a public disturbance of more than one person.
Generally, the courts have not found coverage where the damage was done stealthily or secretly, meaning that a riot must be a public event. An example is Providence Washington Ins. Co. v. Lynn, 492 F.2d 979 (1st Cir.1974). In this case three inmates of the maximum security section of the Adult Correctional Institution (ACI), Cranston, Rhode Island, set fire to the facility by pushing a burning mop through a tiled roof. The resulting conflagration caused physical damage to the building exceeding $300,000. They performed the act in secret and intended it to stay that way but were caught. The legal argument by the institution was that a felony like arson is a "tumultuous event offending the peace and dignity of the state" and that the consequences flowing from the arson, rather than the act of setting the fire itself, established a riot.
These consequences included evacuation and transport of displaced prisoners, increased security, excitement and activity occasioned by a major fire, and the presumed fear and confusion caused by a blaze in a prison, particularly among those prisoners who were in lockup when the fire broke out. The court did not agree, stating that a clear doctrine of the common law that a stealthy act of destruction is not transformed into an act of riot because upon later discovery of the damage there is a public disturbance
The meaning of civil commotion is more obscure than that of riot and has received less attention from the courts. Some authorities doubt that it is possible to conceive of a case in which a loss would be paid as a civil commotion but would not be covered under a policy or endorsement referring only to riot. In Hartford Fire Ins. Co. v. War Eagle Coal Co., 295 F. 663 (4th Cir. 1924), the War Eagle Coal Company was insured on a property form that excluded loss or damage by civil commotion. The United Mine Workers had been organizing in West Virginia, violence had erupted, and the governor declared martial law. The evidence showed conclusively that a conspiracy of five men blew up the mine property as part of union activity. The insured proved that although there had been disturbances in the area, there had been no disorder at the mine or disturbances until the explosion and fire. The explosions and fire were started secretively at one in the morning. The insurer denied coverage, but the trial court held for the insured and the court of appeals affirmed.
The court quoted the following definition of civil commotion from the legal commentary in Corpus Juris: "An uprising among a mass of people which occasions a serious or prolonged disturbance and an infraction of civil order, not attaining the status of war or an armed insurrection. A civil commotion requires the wild or irregular action of many persons assembled together." The court said that since a serious issue of fact had been raised as to whether the property damage was a consequence of the civil commotion in the general area or was due to the independent initiative of the conspirators it would affirm the lower court's decision.
The policy specifies two events that do constitute a riot or civil commotion: (1) acts of striking employees occupying the described premises, and (2) looting at the time and place of a riot or civil commotion.
Vandalism. Vandalism is the willful and malicious damage to or destruction of covered property. In earlier editions of the commercial property policy the peril was phrased as "vandalism and malicious mischief." Malicious mischief is no longer part of the name of this peril although the definition remains the same as that of vandalism or malicious mischief in earlier forms-willful and malicious damage to or destruction of the insured property. Dropping the term "malicious mischief" has no effect on coverage and simplified the contract language.
Remodeling as Vandalism
A building owner discovered that a tenant, who had a lease agreement for two units, renovated the rental space without the landlord's consent as directed by a condition in the lease. The renovations were discovered from a complaint to the building inspector due to discard of debris. The landlord was cited for renovation without proper permits having been secured and directed to fix the problem by tearing it out.
The landlord made a claim under the vandalism and malicious mischief coverage of his building and personal property form, CP 00 10, with a broad causes of loss form, CP 10 20.
The vandalism peril requires a malicious and willful act. While the remodeling was willful, unless there was malicious intent to cause damage, it would not be considered vandalism. The tenant may have violated the terms of the lease, but that is a legal determination that is not addressed by the policy.
The CP 10 10 10 00 edition revised vandalism coverage in the named peril forms in regard to building glass. Previous editions excluded glass breakage caused by vandalism. An insured was required to purchase the broad form perils, which added glass breakage as an additional coverage, or to purchase the glass coverage form, CP 00 15. Now both named peril forms cover glass breakage from any of the named perils, treat glass as part of the building, and include glass coverage within the limit of liability for the building.
Building damage caused by the break-in or exit of burglars is covered, but other loss caused by or resulting from theft is excluded. Burglary, theft, and other crime coverages are addressed by specialized insurance policies.
Under earlier forms of commercial property insurance, vandalism and malicious mischief coverage was optional. Under the current program, the insured may choose to exclude this coverage via endorsement CP 10 55.
Vandalism is one of six causes of loss (sprinkler leakage, glass breakage, water, vandalism, theft, and attempted theft) for which there is no coverage if the building where the loss occurs has been vacant for more than sixty consecutive days.
Sprinkler Leakage. Under earlier commercial property forms, an insured had to purchase this coverage separately, if desired. It is now automatically part of the policy, and the insured may choose to exclude it via endorsement CP 10 56. Coverage is for leakage or discharge from an automatic sprinkler system, including the collapse of the system's tank, if there is one.
Automatic sprinkler system is a defined term within the context of the sprinkler leakage cause of loss. It refers to an automatic fire protective or extinguishing system. The definition includes sprinklers, nozzles, ducts, pipes, valves, fittings, tanks, pumps, and private fire protection mains. It also includes nonautomatic systems, hydrants, standpipes, and outlets supplied from an automatic system.
If the insured's building is covered property, this cause of loss also pays to repair or replace damaged parts of the system. The policy does not specify what must cause the damage to the system. It states only that repair or replacement of damaged parts to the sprinkler system will be made if the damage is a result of sprinkler leakage or is directly caused by freezing. Therefore, damage to the system itself might be from an uncovered cause of loss, but if sprinkler damage results the sprinkler damage is covered and any damaged parts to the system itself will also be replaced or repaired.
The policy also covers the cost of tearing out and replacing part of the structure in order to repair the system if there has been sprinkler damage that necessitates such tearing out or replacement.
Sprinkler leakage is one of six causes of loss (glass breakage, water, vandalism, theft, and attempted theft) for which there is no coverage if the building where the loss occurs has been vacant for more than sixty consecutive days.
Sinkhole Collapse. Coverage for sinkhole collapse was previously available only by endorsement and only in certain regions of the country where sinkholes occur with some frequency. The provision defines sinkhole for coverage purposes as "loss or damage caused by the sudden sinking or collapse of land into underground empty spaces created by the action of water on limestone or dolomite." The source of the water that creates the sinkhole is immaterial.
Sinkhole Collapse under the Commercial Property Form
The insured building was covered by the building and personal property form with basic causes of loss. The building had a system of pipes that diverted water runoff from the roof into a retention basin. One of those pipes broke, and the water coming out of it eroded the underlying limestone. A sinkhole was created and part of the building slipped into that sinkhole. The claim was denied, citing the exclusion for collapse into man-made underground cavities.
The commercial property form defines sinkhole collapse as the sudden sinking or collapse of land into underground empty spaces. The space is one created by the action of water on limestone or dolomite. The source of the water is not material to the definition. Collapse into underground "man-made cavities" is outside the definition of sinkhole collapse. Thus collapse into a mine shaft or other man-made holes would not be covered.
A standard dictionary defines man-made as "manufactured, created, or constructed by man." Those three very active verbs in the definition preclude the notion that a thing can be man-made by accident. An accidental water spill that causes a building to collapse into a sinkhole is covered. Again, the source of the water does not matter.
This peril does not include the cost of filling the sinkhole itself, nor does it include instances where the ground sinks or collapses into manmade cavities in the earth. This exposure is more appropriately the subject of mine subsidence coverage, which is available by endorsement.
Volcanic Action. Volcanic action coverage was also previously available only on an optional basis by endorsement. This peril is now part of the causes of loss forms and covers damage from the above-ground effects of a volcanic eruption-airborne blast and shock waves, ash, dust, particulate matter, and lava flow. It does not include the removal cost of volcanic ash or dust that has not physically damaged insured property. The earth movement exclusion precludes coverage for damage from the seismic effects of a volcanic eruption. This cause of loss considers all volcanic eruptions occurring within a seven day period (168 hours) as a single occurrence.
CP 10 20-Broad Form Causes of Loss
In addition to the eleven named perils of the basic causes of loss form, the broad causes of loss form, CP 10 20, adds coverage for falling objects; weight of snow, ice, or sleet; and water damage. It also provides one additional coverage, collapse.
Falling Objects. Falling objects covers damage by falling objects to buildings or structures and the inside of buildings or property within buildings if the falling object first damages the roof or an outside wall. Damage by a dropped or falling object within a building, such as a chandelier falling on the table below it or a heavy object accidentally dropped on a piece of furniture, does not come within the scope of this peril.
Falling objects coverage also does not apply to personal property in the open. However, as the aircraft/vehicles cause of loss provides coverage for damage by objects falling from aircraft, if an object falling from an airplane damages personal property in the open, that damage is covered.
Weight of Snow, Ice, or Sleet. The weight of snow, ice, or sleet peril applies to all covered property other than personal property outside of buildings or structures. Earlier editions of CP 10 20 did not cover damage to gutters and downspouts. That language has been removed, thus providing coverage for gutters and downspouts from the weight of snow, ice, or sleet.
Reimbursement for Expenses to Prevent Further Loss
A nursing home is insured on a CP 00 10 with CP 10 20 attached. It was hit by a huge snow storm. Due to the weight of ice and snow the roof was sagging, leaking, and causing worry that a collapse was impending. The management of the nursing home had holes cut in the ceilings to allow water and snow to drop in, relieving the pressure. The roof was already damaged and this was done to prevent further damage-or even a major collapse-to the roof.
The nursing home also hired a contractor to clear the ice and snow from the roof, and, based on the policy's requirement that the insured mitigate further loss or damage, submitted a claim for this expense. The insurer refused to reimburse the insured for this action, the adjuster citing the policy language that such expenses should be submitted for consideration in the payment of the claim. For the part of the loss that the insurer agreed to pay the figure is considerably less than any estimate the insured has received.
The policy obligates the insured to mitigate further loss and agrees to pay the insured for any expenses incurred in that mitigation. The policy says that the insured should submit receipts for that work for consideration in the payment of the claim. That does not mean the insurer will consider whether or not to pay it. The money spent here is just one more item to be included in overall payment of the claim.
The roof could not be repaired without removal of the snow. Again, that also makes the snow removal payable under the policy. It is analogous to removal of a fallen tree from the roof. The roof cannot be repaired until the tree is removed. Likewise, the insured's roof could not be repaired until the snow was removed.
Suppose there were no damage to the roof prior to the decision to act to relieve the pressure of the weight of ice and snow? Would the policy respond to repair the roof? The policy provides for the payment of expense involved in mitigating against further loss to covered property, but without initial damage to the property, this clause in not technically invoked. The preservation of property additional coverage pays for damage to property while being moved or stored temporarily to preserve it from covered loss, but that is not the case here either. Contacting the insurer's loss protection professionals for guidance in the situation would be beneficial.
Water Damage. This provision covers damage done by the accidental discharge or leakage of water or steam when any part of a system or appliance containing water or steam breaks or cracks. The CP 10 20 10 00 edition added an enumeration, carried forward into subsequent editions, of the systems covered: plumbing, heating, air conditioning, or other. Water damage coverage does not encompass leakage or discharge from an automatic sprinkler system, which is the subject of coverage under a separate cause of loss. Nor does it cover discharge from a sump, regardless of what causes the discharge. The form excludes overflow due to sump pump failure or the inability of the sump pump to keep up with the amount of water.
ISO added a provision to the CP 10 20 10 00 edition of the form that also excludes coverage for damage done by water that comes out of roof drains, gutters, downspouts, or similar fixtures or equipment. In its materials ISO says that this change to the policy represents no change in coverage, but it might be argued that it represents a narrowing of coverage. What happens when a roof drain gets clogged and cannot properly remove water from a roof? Under previous forms, the resulting damage would have been covered.
The peril also covers the cost of tearing out and replacing part of the building or structure to repair damage to the system or appliance if the building is covered property. For example, if the accidental discharge was from the sudden rupturing of a pipe in the insured's fire sprinkler system and the system's pipes are within the insured's walls, the cost of tearing out and repairing the walls is covered. The defect that caused the loss or damage is not covered. That would eliminate coverage for the broken pipe itself unless the damage to the pipe was by another covered cause of loss.
The form specifies that it does not cover damage from repeated leakage occurring over a period of at least fourteen days. Added with the CP 10 20 04 02 edition, were mold-inducing hazards as falling under this exception to the water damage cause of loss. Water damage does not include "repeated seepage or leakage of water, or the presence or condensation of humidity, moisture or vapor" that occurs over fourteen days or more.
There is no coverage for plumbing rupture caused by freezing unless the insured maintains heat in the building or structure or has drained the heating equipment and shut off its water supply. Earlier versions of commercial property forms imposed these last conditions on coverage for freezing losses only when the building was vacant or unoccupied. Broad form CP 10 20 makes no such distinction, imposing the conditions with respect to freezing losses regardless of the building's status. Coverage for water damage does not apply after the building has been vacant for sixty days.
Water Damage-Costs to Repair Leak Even if Building Is Undamaged
A pipe burst under the concrete slab of a building insured under the commercial property policy with the broad form causes of loss attached. This break in the pipe caused a loss of water into the ground under the building. The insurer denied the insured's request for coverage for the cost of tearing out and replacing the concrete slab so the broken pipe could be fixed. The denial stated that the policy did not cover this loss because the escaping water ran into the ground and did not damage covered property.
The commercial property policy does, however, cover the costs of tearing out and replacing the slab. The wording of the water damage peril does not require damage to covered property by water before such costs are covered. What it requires is that the damaged system be contained in covered property. In this case, the pipe is part of the system contained within the covered building.
The building coverage insuring agreement also states that the insurer will pay for direct physical damage to covered property caused by or resulting from a covered cause of loss. Destruction of the covered property (the slab) resulted from the covered peril of accidental discharge. Digging up the slab was made necessary by the covered peril. An argument can also be made that the insured was damaged by the increase in his water bill caused by the leaking system.
Exclusions that Apply to Both Named Perils Causes of Loss Forms
Section B of the basic and broad causes of loss forms contains the applicable exclusions. Section B contains three subsections. Subsection one is identical in both forms, with the following exclusions: ordinance or law, earth movement, governmental action, nuclear hazard, utility services, war and military action, and water.
The lead-in language applies concurrent causation language to section B exclusions. Under the efficient proximate cause doctrine, the nonexcluded peril must have been the predominant factor in the loss (e.g., the building was damaged by flood, not the decision of the Army Corps of Engineers to open the dam to stop a build-up of pressure). The concurrent causation doctrine, which arose as a legal concept in the mid-1980s, holds that losses are covered if caused jointly by an excluded peril, such as flooding or earth movement, and some other peril not excluded by the policy, such as negligent construction. As the doctrine developed, coverage began to be adjudicated by courts where the nonexcluded peril played any role in the loss.
Not all states adopted the concurrent causation doctrine, but its development prompted Insurance Services Office (ISO) and insurers filing independent policies to alter property forms in an attempt to avoid recovery in concurrent causation situations.
Another example of concurrent causation is where earth movement causes damage to an insured structure. The commercial property policy specifically excludes earth movement damage, but the insured files a claim stating that the cause of loss was a third party's negligence in preparing the soil under the house for construction, arguably a nonexcluded peril under an policy with a special causes of loss form. Where the concurrent causation doctrine has been accepted coverage would apply. Under the revised concurrent causation lead-in language, the damage would be appropriately excluded as intended.
A provision at the end of the Subsection B.1 exclusions states that the exclusions apply "whether or not the loss event results in wide-spread damage or affects a substantial area." ISO said that it added this language "for the purpose of making this point explicit."
Ordinance or Law. This exclusion eliminates payment for losses arising out of the enforcement of building laws or ordinances, including those that may require the demolition of damaged structures that increase the cost of repairing or rebuilding damaged property. For example, a city's building code may require that any building undergoing substantial renovation or repair after a major loss must be equipped with facilities for handicapped access, or the building code might dictate additional safety features that were not part of the original building. Additionally, the law may require that a building not in conformance with current building codes that is damaged to more than 50 percent of its value may not be repaired but must be demolished and rebuilt. For example, if an insured building were determined to be a 60 percent loss, it could not be rebuilt, and the undamaged portion would have to be demolished. As demolition after loss is not a covered cause of loss, there is no coverage for the cost of demolishing the undamaged portion and removing debris.
The ordinance or law exclusion excludes insurance payment under these forms for the cost of compliance with these requirements. However, the building and personal property coverage form provides a $10,000 of coverage for the increased costs of construction incurred due to the enforcement of a building law (see Chapter 2). The insured may also purchase additional coverage via endorsement CP 04 05 (see Chapter 8).
Earth Movement. Both named perils causes of loss forms exclude all types of earth movement-such as earthquake, landslide, or mine subsidence -other than sinkhole collapse. The basic and broad causes of loss forms specifically include sinkhole collapse as a specified peril. The policy covers ensuing fire or explosion damage.
Generally, the term earth movement applies only to naturally occurring phenomena of a catastrophic nature (e.g., landslide or earthquake). For example, damage to an insured building done by the earth shifting as a result of seismic tremors is readily excluded under the commercial property policy with the basic or broad causes of loss form attached.
Earth Movement Exclusion
The insured's building was situated close to a highway on which the transportation department was doing heavy reconstruction work. Pile driving sent tremors through the earth, cracking walls. The issue is if the earth movement exclusion applies. The earth movement exclusion relates to earth tremors caused by natural forces. Earth movement brought on by an explosion as well as by the action of the pile drivers is of a different nature. The examples of earth movement listed in the exclusion (earthquake, landslide, mine subsidence, or earth sinking, rising, or shifting and volcanic eruption or explosion) provide support that natural causes are the subject of the exclusion. The majority of courts that have considered this issue said the earth movement exclusion relates to earth tremors caused by natural forces.
The earth movement exclusion also eliminates coverage for loss caused by volcanic eruption, explosion, or effusion. However, the policy does cover fire damage occurring as a result of these events. The policy also covers loss attributable to volcanic action-the above-ground effects of volcanic eruption, an insured cause of loss under the basic and broad forms.
Governmental Action. The policy does not cover seizure or destruction of covered property as an act of governmental authority. For example, if the police break down a door or damage walls in executing a search warrant or chasing a fugitive the exclusion is validly applied according to the one court that has decided the issue (see "Damage by Police Action"). It does cover the destruction of property when ordered to prevent the more general spread of fire, if the fire itself would be a covered cause of loss (e.g., if fire authorities burn down a building to create a fire break to prevent the spread of a wildfire).
Damage by Police Action
A health clinic covered under the commercial property broad form suffered damage when a man who was trying to evade capture by the police ran into the clinic and took hostages. Eventually he was forced to surrender by the police, who used tear gas and gunfire. In the process of capturing the fugitive damage was done to both the building and personal property of the health clinic.
The insurance company denied coverage under the governmental action exclusion, which eliminates coverage for loss or damage caused directly or indirectly by seizure or destruction of property by order of governmental authority.
Before examining the exclusion, the existence of a covered peril under form CP 10 20 must be addressed. The one that might apply is explosion; exploding tear gas canisters and bullets contributed to the damage. Smoke damage may be another.
Once a named peril that covers the damage is found an analysis of the application of the exclusion for seizure or destruction of property by order of governmental authority is necessary. The aim of the exclusion is to eliminate coverage for the intentional destruction of property by governmental authority because of some hazard that the property presents, such as when the government orders the destruction of vegetables that are infected with the Mediterranean fruit fly or a building burned down to create a firebreak. The type of loss occasioned by this scenario seems to be outside of the scope of the exclusion.
In this case, the destruction done by the police was incidental to the capture of the fugitive. Bullets that damaged equipment were intended to control the fugitive-they were not fired because the equipment posed any danger to people or property. One would not expect the police officer in charge to state that he ordered the destruction of property. For these reasons, the insured might have coverage under the policy. However, a New Jersey court ruled that damage done to an apartment by the police in conducting a duly authorized search was properly excluded under the governmental authority exclusion, so such damage could also be excluded.
Nuclear Hazard. The nuclear hazard exclusion of eliminates coverage of loss by nuclear reaction, radiation, or radioactive contamination, regardless of the cause. The policy does pay for any ensuing fire loss. Radioactive contamination coverage may be purchased with form CP 10 37.
Utility Services. This exclusion was revised in the September 2007 edition of the form. It now applies both to the failure of power or other utility service (e.g., water, communication, or gas) to the insured premises that originates away from those premises and that originates on premises if on-prenises failure involves equipment used to supply the utility services to the described premises from a source away from the premises. For example, a power plant's turbine suffers mechanical breakdown which results in a shutdown of services or a power outage. That power outage results in food spoilage in the refrigerator at an insured's premises. The commercial property policy does not cover the food spoilage. The exclusion operates regardless of the failure's cause-even if the failure is brought about by a covered cause of loss.
The exclusion addresses situations such as a "brown out" or rolling outage, stating "failure of any utility service includes lack of sufficient capacity and reduction in supply." Loss or damage caused by a surge of power is excluded as well if the surge would not have occurred except for the event that caused the power failure, a change added with the September 2007 edition.
If failure or surge of power or other utility service, results in covered cause of loss, that damage is covered. For example, if heat interruption causes pipes to freeze and rupture, and the broad causes of loss form applies, there is coverage.
If, on the other hand, a lightning strike away from the insured premises knocks out the electrical power at the premises consequential property damage on the premises is not covered. Two examples of such losses are spoilage of refrigerated products or of property-in-process depending on continuous heat or cooling. Though lightning is a covered cause of loss, the underlying agreement is to pay for direct physical loss caused by a covered cause of loss. Lightning that strikes off premises and runs in on a line to cause lightning damage directly on premises is covered under these provisions.
The exclusion provides a description of communication services, which include, but are not limited to, Internet-related services and electronic, satellite, and cellular networks.
War and Military Action. This exclusion applies to three related causes of loss: war (including undeclared or civil war); warlike action by any governmental military force; and acts of insurrection, rebellion, revolution, or usurped power. While no court decisions involving the exact language of the war exclusion clause in the current commercial property form have arisen at this time, decisions involving other, past war exclusion clauses that permit reliable conclusions exist. Courts, following British precedent, generally adhere to a strict doctrine of what constitutes war, allowing the exclusion to be applied only in situations involving damage arising from a genuine warlike act between sovereign entities. The two following cases best sum up the idea that for there to be a war, sovereign or quasi-sovereign governments must engage in hostilities.
In Pan American World Airways, Inc. v. Aetna Casualty & Surety Co., 505 F.2d 989 (2nd Cir. 1974), members of a political activist group from Jordan hijacked an aircraft over London and destroyed the aircraft on the ground while in Egypt. The court said the resulting loss to the aircraft was not due to war within the meaning of the term as used in the exclusionary clauses of the all risks policies covering the aircraft. The court reasoned that since the activist group had never claimed to be a state, it could not be acting on behalf of any of the states in which it existed when the plane was hijacked, especially since those states uniformly and publicly opposed hijacking. The hijackers were agents of a radical political group and not a sovereign government. The court concluded that although war can exist between sovereign states, a guerrilla group or radical political group must have at least some incidence of sovereignty before its activities can properly be defined as war.
In a similar case, Holiday Inns, Inc. v. Aetna Ins. Co., 571 F. Supp. 1460 (S.D.N.Y. 1983), a court ruled against the war risks exclusion for a claim brought by an insured hotel in Beirut, Lebanon. The hotel suffered shelling damage during hostilities. The insurer argued that the conflict in Lebanon involved three clearly defined independent entities, each having the attributes of sovereignty or, at the least, quasi-sovereignty, and that the war exclusion could be applied to deny coverage. The court focused on the faction occupying the hotel at the time of the fighting and concluded that it was not a sovereign entity. The court further stated that even if the group possessed the necessary sovereignty, it was not fighting with another sovereign government at the time of the damage, and therefore, the war exclusion clause could not be invoked by the insurer. While there was some discussion of the war exclusion being applied to the September 11, 2001, hijacking and subsequent crashes into the World Trade Center and Pentagon, insurance adjusters and authorities fell back on the traditional interpretations of war acts, deciding that the terrorists were not a sovereign state making an act of aggression against another sovereign state.
Water. The water exclusion clause, which is in all three causes of loss forms, excludes loss caused by flood, surface water, water that backs up from a sewer or drain, and water underground. Though the exclusionary language is quite broad disputes continue to arise when the language is applied to particular situations. Following the 2005 hurricane season which spawned hurricanes Katrina, Rita, and Wilma, disagreement and litigation arose about how the water or flood exclusion applies in the face of windstorm.
Surface water has traditionally been excluded when it occurs naturally. Thus water from a heavy rain that damages a building is not covered. In Richman v. Home Ins. Co. of New York, 94 A.2d. 164 (Pa. Super. 1953), the court stated that surface water is commonly understood to mean water on the surface of the ground, usually created by rain or snow that is of a casual or vagrant character. Surface water follows no definite course and has no substantial or permanent existence.
Part three of the exclusion (water that backs up or overflows from a sewer, drain, or sump), became considerably more restrictive with the addition of the words overflows and sump in the 1995 edition. Previous editions did not address the issue of overflow. And by not specifically excluding water coming from a sump it was left up to interpretation as to whether a sump is a sewer or drain or part of the plumbing system. Not all insurers adopted ISO's wording in this instance and continue to treat water coming from a sump as an overflow of the plumbing system.
Part four of the exclusion eliminates coverage for water that seeps through underground portions of a building (hydrostatic water pressure) and for water that seeps through other openings, such as doors and windows.
If loss from fire, explosion, or sprinkler leakage results, the policy covers that loss, if caused by water, as described previously.
Fungus Wet Rot, Dry Rot, and Bacteria. Mold damage and insurance coverage for mold related expenses became a frequently disputed and litigated issue in the 1990s. Subsequently, insurers attempted to limit exposure to mold-related claims and have clarified the situation by redrafting insurance policies.
To clarify the policy's position on covering mold damage, a fungus, wet rot, dry rot, and bacteria exclusion was added to the commercial property causes of loss forms in the 04 02 editions. In addition, a definition of fungus was added to the policy's definitions, in both the causes of loss forms, and the building and personal property coverage form: "Fungus means any type or form of fungus, including mold or mildew, and any mycotoxins, spores, scents or by-products produced or released by fungi."
The fungus exclusion eliminates coverage for mold or fungus losses except in two situations-fire and lightning-or as falls under the additional limited coverage for fungus, wet rot, dry rot, and bacteria.
The exclusion covers the presence, growth, proliferation, spread, or any activity of fungus, wet or dry rot, or bacteria. The exclusion does not apply in the following situations:
* When the fungus results from fire or lightning (this addresses the most common claims-related event-mold growing from water used to put out fire); or
* To the extent coverage is provided under the additional coverage -limited coverage for fungus, wet rot, dry rot, and bacteria.
Subsection B.2. Exclusions
Subsection B.2. of each of the causes of loss forms contains several more exclusions. Unlike the subsection B.1. exclusions, these do not contain the concurrent causation language. The basic form has six exclusions in this part, while the broad form has four because two of the six perils excluded by the basic form are covered perils in the broad form (sprinkler leakage and water damage).
Both forms exclude loss or damage from artificially generated electrical, magnetic, or electromagnetic energy that damages, disturbs, disrupts, or otherwise interferes with electrical or electronic wires, devices, appliances, systems, or networks, or such devices, systems, networks, appliances using satellite or cellular technology. Included in the description of electrical, magnetic, or electromagnetic energy is electric current and arcing, electrical charge produced or conducted by a magnetic field, electromagnetic energy pulse, microwaves, and electromagnetic waves. The list is not an exhaustive one.
ISO changed the language in this exclusion in the 06 07 edition. In its explanatory materials, ISO said, "We are updating this exclusion by explicitly incorporating various terms that reflect current understanding of technology with respect to power sources and associated systems, such as electromagnetic energy (including electromagnetic pulse or waves) and microwaves, and the various risks presented by them." The main objective of the exclusion is to address power surges.
Both cover loss or damage from an ensuing fire. For example, if a power surge causes a piece of office equipment to short, damaging the piece of equipment and causing a fire damaging other property, the fire damage is covered but damage to the piece of equipment caused by the surge is not. Fire damage to the equipment is covered.
Both forms also exclude loss from explosion of steam boilers, steam pipes, steam engines, and steam turbines. If such an explosion causes a fire or combustion explosion, that damage is covered. This exclusion emphasizes the special nature of the exposure presented by boilers, heavy machinery, and equipment of that kind. Equipment breakdown coverage is a specialized coverage necessary for insureds with boiler and machinery exposures.
Both forms also exclude mechanical breakdown but will pay for any loss that results from a covered peril. Again, as in the other exclusions in B.2., this exclusion is not subject to the concurrent causation language. Therefore if mechanical breakdown leads to otherwise covered damage, there is coverage. For example, an air conditioning unit suffers a mechanical breakdown and causes the unit to catch fire, burning down the building. The loss to the building could not be denied based on the mechanical breakdown exclusion. The only excludable damage would be the damage to the air conditioner directly caused by the mechanical breakdown. All resultant damage would be covered. However, if the air conditioner were consumed in the fire, that would also be covered.
Application of the Mechanical Breakdown Exclusion A retail business with the basic causes of loss form had a failure in a solenoid switch in the furnace, causing a small fire. The claim was denied citing the exclusion that reads, "We will not pay for loss or damage caused by or resulting from mechanical breakdown" because it was the mechanical breakdown of the solenoid switch that caused the loss.
The mechanical breakdown exclusion's purpose is to prevent the insurer from paying for a maintenance claim. If the insured had found that the solenoid switch was defective, he could not turn to his property insurer and expect payment for a new switch.
The only part of this claim that should be denied is the mechanically unsound solenoid switch itself. The policy does not respond to damage caused by mechanical breakdown. The resultant fire damage is covered. Damage to the solenoid is properly excluded as mechanical breakdown but the fire damage claim that followed is payable because it resulted from a covered cause of loss.
The final exclusion section of both forms excludes certain losses where the following coverage forms are made a part of the policy: business income and extra expense, leasehold interest, and legal liability. These exclusions are treated in the chapters in this book dealing with those forms.
The basic causes of loss form adds one additional coverage, limited coverage for fungus, wet rot, dry rot and bacteria. The broad form adds two, limited coverage for fungus and collapse.
Some time ago, collapse was moved out of the perils section of the policy and set aside as an additional coverage. The broad form covers a building against collapse caused by perils listed. A shift has occurred in this area of insurance law since the late 1980s. Prior to 1990, only a minority of jurisdictions adopted the view that a collapse occurs when there is a serious impairment to the soundness of a building or a portion of a building. This viewpoint does not limit collapse to a complete falling down or reduction to rubble. This is now apparently the majority viewpoint.
For example, in Royal Indemnity v. Grunberg, 553 N.Y.S.2d 527 (1990), the court wrote, "In the view of a numerical majority of American jurisdictions, a substantial impairment of the structural integrity of a building is said to be a collapse." This language has become the test of whether an insurable collapse loss has occurred. The building is not required to fall into rubble to be considered a collapse; instead, if the building is in imminent danger of collapsing, coverage is triggered.
Because of this court decision and others ISO significantly changed the collapse additional coverage. It now includes a definition of what collapse is and is not. Wording is now in place that says collapse is "an abrupt falling down or caving in." This falling down or caving in may be of a building or any part of a building. The result must be that the building cannot be occupied as intended.
The following are not considered collapse under the commercial property policy:
1. A building that is only in danger of falling down.
2. A part of a building that is still standing, even if it has separated from the rest of the building.
3. Any building, or part thereof, that is still standing, even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage, or explosion.
In addition to coverage for the perils of the policy, the form lists the following as covered causes of collapse: hidden decay; hidden insect or vermin damage; weight of people or personal property; weight of rain that collects on a roof; and use of defective materials or methods in the construction or remodeling of a building (but the collapse must occur during the construction or remodeling).
Under the hidden decay and insect damage causes, such decay or damage is not a covered cause of collapse if the existence of the decay or damage is known to an insured prior to a collapse. If listed as covered property, the following are covered against collapse of a building insured under the policy: outdoor radio or television antennas (including satellite dishes) and their lead-in wiring, masts or towers; awnings, gutters, and downspouts; yard fixtures; outdoor swimming pools; fences; piers, wharves, and docks; beach or diving platforms or appurtenances; retaining walls; and walks, roadways, and other paved surfaces.
The policy covers personal property if it "abruptly falls down or caves in"-even if it is not the result of a building collapse. However, the collapse of the personal property must be caused by one of the listed causes of collapse, be inside a building, and not be one of the items listed as covered against collapse (e.g., antennas or gutters).
The form states that collapse of personal property does not include settling, cracking, shrinkage, bulging, or expansion. Any payments for collapse are included within the limit of liability for the covered property.
Limited Coverage for Fungus, Wet Rot, Dry Rot, and Bacteria
In addition to revising the exclusionary language related to mold, ISO added an additional coverage to the 2002 causes of loss forms. Under this additional coverage, the commercial property form provides a limited amount of coverage ($15,000) for the cleanup of fungus, wet or dry rot, or bacteria. If the fungus results from fire or lightning, the policy limit applies. If it results from any of the specified causes of loss, the $15,000 applies. The $15,000 is also available for fungus that results from a flood if the policy contains the Flood Coverage endorsement. As a reminder, the policy defines the specified causes of loss as follows:
2. "Specified Causes of Loss" means the following: Fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage.
a. Sinkhole collapse means the sudden sinking or collapse of land into underground empty spaces created by the action of water on limestone or dolomite. This cause of loss does not include:
(1) The cost of filling sinkholes; or
(2) Sinking or collapse of land into manmade underground cavities.
b. Falling objects does not include loss or damage to:
(1) Personal property in the open; or
(2) The interior of a building or structure, or property inside a building or structure, unless the roof or an outside wall of the building or structure is first damaged by a falling object.
c. Water damage means accidental discharge or leakage of water or steam as the direct result of the breaking apart or cracking of a plumbing, heating, air conditioning or other system or appliance (other than a sump system including its related equipment and parts), that is located on the described premises and contains water or steam.
Additional coverage E provides coverage for three things:
1. Direct damage done by fungus to the covered property;
2. The cost to tear out and replace any part of the covered property in order to get at the fungus; and
3. Testing after either of the first two are complete, if there is "reason to believe" that fungus is still present.
The policy provides $15,000 (within the limit of liability for the covered property) for this additional coverage.
|Printer friendly Cite/link Email Feedback|
|Author:||Hillman, Bruce J.|
|Publication:||Commercial Property Coverage Guide, 4th ed.|
|Date:||Jan 1, 2009|
|Previous Article:||Chapter 2: additional coverages, coverage extensions, and optional coverages.|
|Next Article:||Chapter 4: special causes of loss form (cp 10 30).|