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Lesson 2: property coverage and perils.


After completing this lesson, you will be able to:

* Understand and discuss direct physical loss as the BOP's property coverage trigger

* List and explain the four elements that must be present in a loss to come under the BOP's property coverage

* Describe the BOP property coverage for buildings and structures

* Describe the BOP property coverage for business personal property

* List the kinds of property not covered under the BOP

* Explain the concepts of special and named perils property coverage

* List and describe the twelve named perils of the BOP Named Peril Endorsement

* List and explain the property exclusions in the BOP

Key Terms

Consequential loss--Damage not a direct result of a covered peril, and thereby not covered, but a by-product of the damage, i.e., food spoilage after lightning damage to a freezer unit.

Covered cause of loss--An occurrence causing damage for which insurance coverage is provided, i.e., fire is a covered cause of loss in the BOP; flood is not.

Direct physical loss--The direct result of a damaging occurrence. The destruction or damage to an electric box on the premises by a lightning strike is direct physical loss. Damage arising as a loss of power because of the damage to the electric box is not.

Named perils coverage endorsement--A BOP program endorsement that converts coverage from special, or open perils, to specific causes of loss, or named perils.

Peril--A damage-causing event that may or may not be covered under an insurance policy; i.e., fire (covered), lightning (covered), flood (generally not covered).

Premises--The site insured or to be insured. Includes buildings, structures, and appurtenant owned property.

Special coverage form--The unendorsed BOP is on an open perils, or special coverage basis, meaning that all direct damage caused by a covered cause of loss to covered property is covered, unless otherwise specifically excluded (contrast to named perils coverage).

Businessowners Policy Property Coverage

The current version of the Insurance Services Office (ISO) BOP is written on an open perils or special property policy, a change introduced with the 2002 policy, simplifying the approach of predecessor BOP versions. Until then, the insured chose between a standard (named perils) or special (open perils) policy, designated respectively BP 00 01 and BP 00 02. This revision is primarily because the vast majority of BOPs are written on the special policy and this simplified administration. However, in situations that warrant it (either because of price or underwriting considerations), named peril coverage is available by adding the Named Perils Endorsement, BP 10 09, to the policy.

The unendorsed BOP provides direct physical loss coverage from any incident or occurrence that is not otherwise limited or excluded. The exclusions that pertain to coverage are discussed elsewhere in the lesson.

Property covered by the BOP is specifically described on the form's first two pages in provisions A.l.a. and A.l.b. Covered property is buildings and business personal property. Coverage applies to these two categories if a limit of insurance is indicated in the declarations section where premises insured and property and liability limits are stated. A separate provision specifically describes the types of property not covered in section A.2.

Coverage Trigger

Coverage is triggered by direct physical loss to covered property at the premises described in the declarations. The loss must be caused by or result from a covered cause of loss, such as fire. Damage could be caused by fire, or result from fire, such as water damage caused by fire fighting efforts or smoke residue resulting from the fire.

Coverage Elements

The BOP property insuring agreement sets forth which types of property are covered and which are not. This insuring agreement requires that four elements be present in order for coverage to attach.

1. The loss must be direct physical loss, meaning a direct consequence of a particular, and covered, peril. This requires tangible damage. Examples of direct physical losses include a building totally or in part damaged by fire, a windstorm blowing shutters off an office building, or vandalism involving spray paint damage to a wall. Direct physical loss is distinguishable from indirect or consequential loss, which is not covered (although some consequential losses are covered under the additional coverages section of the policy, as shall be seen).
   Indirect or consequential losses result from a direct physical
   loss but are not caused directly by the insured peril.
   A simple example of a consequential loss is spoilage of
   food in a freezer. A fire damages the freezer, causing it
   to fail. The food inside defrosts and spoils. The damage
   to the freezer is by fire, but the damage to the food is
   not; it was damaged by change in temperature, or bacteria
   growth, but not by fire. It did not burn, so damage
   was not directly caused by the insured peril of fire.

   Other examples of indirect losses include loss of business
   income and the incurring of extra expenses as
   the result of a direct physical loss. For example, a fire
   destroys a covered office building. The direct physical
   loss is the destruction of the building. The loss of
   operational income during the reconstruction period is
   an indirect or consequential loss that results from the
   fire; it is a consequence of the fire.

   Business losses that result from market conditions or
   obsolescence factors, which are incurred in the normal
   transaction of business, are not covered. Examples
   include reductions in the value of real estate caused by
   market conditions or loss due to the functional obsolescence
   of a building or a technologically outdated
   computer. Such operational, or business risk, losses are
   not covered under any part of the policy.

2. The loss must be to covered property. Covered property is described in the policy. Certain property is specifically listed as not covered. What property is covered--and is not--will be reviewed in the lesson.

3. The loss must occur at the described premises specified in the declarations. Limited off-premises coverage is provided under the coverage extensions.

4. The loss must result from a covered cause of loss. Since property coverage is based on special perils coverage, any cause of direct physical loss is covered unless specifically excluded

or limited. The BOP can be converted to specified perils basis by attaching the Named Perils Endorsement (BP 10 09) to the policy.

Covered Property

This section describes what types of property are covered.

Buildings and structures. Buildings and structures at the premises described in the declarations are covered. Common examples of buildings insured under the businessowners form include office and apartment buildings. Structures are objects that are attached to the ground at the premises described in the declarations. If a structure is not scheduled on the endorsement, there is no coverage for that property. Structures may include swimming pools, garages, storage buildings, or outbuildings used to service the premises. Both buildings and structures must be listed in the declarations or they will not be covered.

It is important to clearly describe the property that is to be insured in the declarations. For example, if a policy is written for 100 Main Street apartment building with a limit of $1 million, but there are detached garages, outbuildings, a swimming pool, or other structures not indicated, and a tornado missed the main building but did $250,000 in damage to structures, no coverage would apply even though limits were sufficient. Therefore, an adequate declarations page might show that insurance applies to an apartment building, a garage, and a detached storage building--all at 100 Main Street.

Completed additions to an insured building are specifically included in covered property. They are automatically covered by definition. However, once the addition is finished, the amount of building coverage should be increased to reflect the added value or a coinsurance problem may arise.

Fixtures are covered property. These are items attached to a building that cannot be removed without affecting the value or aesthetics of the structure. Examples of fixtures include intercoms, public address systems, or permanently installed blinds. Also included in this category are outdoor fixtures, which include such items as lights, flag poles, parking stops, mailboxes, and signs.

A building's machinery and equipment are also covered property. Examples of machinery and equipment are built-in scales, pulleys, refrigerated lockers, and air-conditioning or heating equipment. Unlike the fixtures category, machinery and equipment must be permanently installed to be eligible covered property.

Personal property owned by the named insured in an apartment, rooms, or common areas furnished by the insured as a landlord is covered. Examples include appliances that are not considered part of the building--such as free-standing stoves and refrigerators--as well as furniture and other personal property normally found in an apartment or in common areas.

Other types of personal property owned by the named insured and used to maintain or service the buildings, structures, or premises are also covered. This category includes property such as snowplows, lawn mowers, fire extinguishers, outdoor furniture, floor coverings, and appliances used for refrigerating, ventilating, cooking, dishwashing, or laundering.

Alterations and repairs. If no other insurance policy is in place and applies (such as a builders risk policy or another commercial policy) to additions under construction, alterations, and repairs to buildings and structures, then the BOP provides coverage. As noted previously, the value of any additions should be added to the building coverage limit upon completion, or an underinsurance problem may develop.

Also if not covered by other insurance, the businessowners policy provides coverage for materials, equipment, supplies, and temporary structures located on or within 100 feet of the described premises used for making an addition, repair, or alteration to buildings or structures. For example, if a building supply truck delivers materials on, or adjacent (within 100 feet) to the businessowner's insured property, coverage applies to the building materials as long as they are to be used for alterations or repairs to insured buildings or structures.

This coverage (for building materials) applies only to materials slated for use with existing buildings and structures. If the insured is constructing a new building or structure, this coverage does not apply. In those cases, the insured should secure a separate policy to cover the exposure.

Business Personal Property

Business personal property is the property other than buildings and structures owned by the insured and used in the insured's business. Unless otherwise stated, this can be anything from stock and inventory, furniture or office equipment, or a table radio.

Covered business personal property includes business personal property if located in, on, or outside the building, in the open, or in a vehicle within 100 feet of the premises. As with building materials, the business personal property is covered even if located off the premises subject to the 100-foot limitation.

Property of others in the insured's care, custody, or control is also covered. This refers to bailee's coverage for businesses that take possession of property that belongs to others, such as dry cleaners, tailors, engravers, and watch and jewelry repair shops. These businesses are considered legally to be bailees.

Coverage is not just for the property item, but for any processing expense put in by the insured; for example, labor and parts incurred to repair an item, such as a watch. If the watch is worth $500, and the insured has put $100 worth of labor and parts into repairing the watch prior to a covered loss, the insured would recover $600, $500 for which the insured would be liable to the customer, plus $100 in labor or parts the insured expended.

Tenant's improvements and betterments (I&B) are fixtures, alterations, installations, or additions made a part of the building or structure that is occupied but not owned by the insured, such as a tenant of a shopping mall who has the business entrance customized in a way that incorporates the I&B into the building permanently. Examples of improvements and betterments include permanent changes such as the construction of interior walls, built-in shelving, or electrical fixtures paid for by the tenant-insured.

Coverage applies if the improvement or betterment was acquired or made at the tenant-insured's expense and it cannot be legally removed. The phrase "was acquired" means that any improvement and betterment that is acquired at the tenant's expense is covered under business personal property. Once the improvements are made, they become the property of the landlord. If the landlord paid to have them installed, they should be insured under building coverage, not business personal property.

If the business has leased property (for example, copiers and computers), coverage is also provided for that property under the business personal property coverage.

Exterior building glass is also covered property under the BOP. Exterior building glass owned by the tenant-insured or exterior building glass in the care, custody, or control of an insured tenant is covered. In addition, since interior building glass is no longer limited as it was under previous editions of the BOP, interior glass is now covered in full. This is a broadening of coverage over previous versions.

Property Not Covered

Property for which there is no coverage under the BOP is specifically listed in section A.2 of the BOP's property section. Most of the property listed represents generally uninsurable property (land, for example) or property more appropriately insured under other policies, such as aircraft, automobiles, motor trucks, and other vehicles subject to motor vehicle registration.

The list of property not covered includes:

* loss of money and securities and loss caused by employee dishonesty;

* contraband (illegal or prohibited goods) or property in the course of illegal transportation or trade;

* land (including land on which the property is located), water, growing crops, or lawns. Eligible feed or grain stores that sell supplies geared to the agricultural community would have coverage for certain property as stock;

* other types of outdoor property, including fences, radio or television antennas (including satellite dishes), and lead-in wiring, masts or towers, signs (other than signs attached to buildings), and trees, shrubs, or plants. An exception applies to outdoor property listed in the outdoor property coverage extension and to outdoor signs in the optional outdoor signs coverage.

The policy coverage extension for outdoor property provides limited coverage for outdoor fences, radio and television antennas (including satellite dishes), unattached signs, trees, shrubs, or plants including any debris removal expense if the loss is caused by fire, lightning, explosion, riot and civil commotion, or aircraft. In this case, the policy will pay up to $2,500 but not more than $500 for any one tree, shrub, or plant;

* watercraft (including motors, equipment, and accessories) while afloat. However, coverage does apply if the watercraft, motors, equipment, and accessories are on a trailer, in storage, or in dry dock.

The BOP 2002 version added two categories of property not covered. The first is business papers--accounts, bills, food stamps, other evidences of debt, accounts receivable, or valuable papers and records.

The second category is computers that are permanently installed or designed to be permanently installed in any aircraft, watercraft, motor truck, or other vehicle subject to motor vehicle registration. The inclusion of this category of property not covered reflects the increased prevalence of computer equipment that is being installed in various vehicles. Computers while held as stock are not subject to this limitation.

The current version--2006--added electronic data as a property not covered category. This addition reflects the increased prominence of computer technology as an integral part of business operations. Coverage for computer data is provided under Additional Coverages, discussed in Lesson 3.

BOP Property Perils--Special and Named Perils_

The businessowners coverage form is written on a special property coverage form basis. The current businessowners form provides open perils coverage, meaning that any direct cause of loss is covered unless otherwise excluded. (The property coverage exclusions are reviewed elsewhere in this lesson.) Special form (open peril) policies place the burden on the insurer to show that a specific exclusion applies, while under named peril coverage, it is the responsibility of the insured to show a specific insured peril caused the loss. As the vast majority of BOPs are written using the special form, ISO simplified the BOP program to offer only one version, special form BP 00 01.

However, the BOP may be endorsed to provide named perils property coverage by adding Named Perils Endorsement, BP 10 09, to the policy. Under the Named Perils Endorsement, coverage applies to a list of specified perils that cause loss to covered property.

The following are the named covered causes of loss listed on the form:

Fire is not further defined within the policy, but has generally been defined as "combustion sufficient enough to produce a spark, flame or glow." Fire involves the consumption of material. For example, if property is scorched, blistered, or discolored by extreme heat, no fire has occurred since there was no consumption of material. This is an excellent illustration of the difference in coverage between the Special form and the Named Perils form. Fire is a named peril, and fire means consumption of material. Scorched or blistered property has not been burned, and hence would not be covered under named perils coverage, where it would be under open perils, or special coverage.

Lightning is another peril not defined in the policy. It is considered to be naturally generated electricity from the atmosphere and does not include artificially generated electricity, such as that produced by a utility company, or arcing caused by an electrical short. The difference between naturally generated electricity (lightning) and artificially generated electricity (electricity from a power plant or from electrical arcing or power surges) is important since their applicability may affect coverage.

Explosion. Coverage is provided for damage caused by an explosion caused by gases or fuels within a furnace or any fired vessel or within the flues or passages through which the gases of combustion pass. The named perils endorsement and the special coverage form program were designed to cover this type of explosion.

Coverage for explosion arising out of large equipment or machinery, such as boilers, is a different matter, however, and in commercial property coverage is the subject of boiler and machinery or equipment breakdown insurance. Loss or damage was caused by a rupture, bursting, or operation of pressure relief devices (such as when a valve from a steam boiler ruptures), is not covered under the BOP. This type of exposure is not covered under either the named perils endorsement or special coverage form. Coverage for these more hazardous kinds of exposures can be purchased as optional mechanical breakdown coverage. This optional coverage closely resembles the ISO equipment breakdown coverage form.

Likewise, rupture or bursting due to expansion or swelling of the contents of any building or structure caused by or resulting from water is also excluded. For example, if a storage container expands and ruptures due to an accumulation of water, no coverage would apply under the explosion peril.

Windstorm or hail. Underscoring that insurance coverage is intended for fortuitous or accidental events, the windstorm or hail peril covers damage from those events but not including damage from natural exposure to certain elements. For example, roofing shingles will become frayed and worn due to the interaction of frost, cold, snow, and sleet on their surface. This damage is normal deterioration and usually becomes evident as the roof ages. In such cases, no coverage would apply for the deterioration under either the named peril endorsement or special property coverage form.

Additionally, there is no coverage for damage to the interior of a building (e.g., walls, wallpaper, and paint) or property inside a building (e.g., furniture) from windstorm or hail whether by rain, snow, sand, dust, or otherwise, unless the wind or hail first damages the roof or walls of the building. Wind breaking a window, subsequently allowing property in the building to become damaged, meets this qualification, as a window is part of a wall.

Smoke. Smoke damage that is sudden and accidental is covered. For example, a gas forced-air-furnace may cause a puff back of smoke requiring walls to be cleaned and painted. Similarly, smoke from a fireplace may damage walls if the flue is not opened while a fire burns. Specifically excluded under this peril is smoke damage from agricultural smudging or industrial operations. For example, if a nursery uses smudge pots to keep its plants protected from the frost, and the resultant smoke damages the insured's building or contents, coverage does not apply. Likewise, coverage does not apply if smoke discharged from a smokestack causes damage to property.

Aircraft or vehicles. The aircraft or vehicles peril provides coverage for physical damage by contact between an aircraft, spacecraft, self-propelled missile, or vehicle--or an object thrown up by a vehicle--and covered property. Common examples of covered losses include damage to buildings or personal property caused when an auto crashes into a business or when rocks are thrown up by a vehicle's tire. This cause of loss also includes loss or damage by objects falling from an aircraft or contact with a falling aircraft or other listed item.

However, no coverage applies if the damage is caused by or results from vehicles owned or operated by an insured in the course of the named insured's business.

Riot and civil commotion. The terms riot and civil commotion are not defined in the policy. Riot is typically held to mean three or more persons assembled together with a common purpose of causing a public disturbance and, by acting together to execute their purpose, by force, resisting authority, and by use of force, creating some measure of fear. Civil commotion also is not defined but is typically considered an uprising of citizens. Included under this peril are the acts of strikers occupying a described premise, or citizens reacting violently to some event. For example, if strikers take over a plant and intentionally destroy property, coverage is provided under the riot and civil commotion peril, as would be windows broken by rioting citizens.

Similarly, looting that occurs at the time and place of a riot or civil commotion is also covered. Although looting is in effect theft, which is not covered under the named perils endorsement, coverage is afforded in these circumstances due to the nature of riot or civil commotion.

Vandalism. Vandalism is the willful or malicious damage to or destruction of covered property. It requires intent and motive, but the intent does not have to be toward a specific person and the motive can be the doing of the act itself. For example, a delinquent going down an alley spray-painting randomly, hitting cars, garages, garbage cans, and tools without intending damage to specific property would meet the intent and motive test. Vandalism does not include theft. Damage done by vandals is covered, but not theft of items those same vandals may take.

Affecting the vandalism peril, under this form's vacancy provision coverage for vandalism is suspended after a building (if owner occupied) or the rented unit (if tenant occupied) is vacant for more than sixty consecutive days before loss or damage occurs. When the policy is issued to the owner of a building, the building is considered vacant unless at least 31 percent of its total square footage is rented or not being used to conduct customary operations. When the policy is issued to a tenant, it is considered vacant when the unit or suite leased to the tenant does not have enough business personal property to conduct customary operations.

Sprinkler leakage. If a sprinkler system leaks, accidentally discharges, or its tank collapses, there is coverage for damaged covered property. Coverage applies to the loss of the sprinkler system itself. The same vacancy provision limitations that apply to vandalism apply to sprinkler leakage.

Sinkhole collapse Damage caused by the sudden sinking or collapse of land into underground empty spaces created by the action of water on limestone or dolomite (a sinkhole). This does not apply to loss or damage caused by earthquake or mine subsidence. These are separate perils that may be insured by endorsement or through the purchase of a separate insurance policy.

Coverage does not apply to the cost of filling the sinkhole. So, if an insured building falls into a collapsed sinkhole, coverage would apply for the building. However, if a sinkhole merely collapsed with no damage to insured property, there would be no coverage for the cost to just fill in the sinkhole. And there is no coverage for filling sinkholes that are discovered before collapse. In addition, coverage does not apply to settlement of earth caused by voids created by underground mining. These are man-made underground cavities and, as such, are excluded. This is the appropriate subject of mine subsidence insurance.

Volcanic Action. Airborne blasts or shock waves, and resulting volcanic ash, dust matter, or lava flow caused by a volcanic eruption are covered. Coverage does not apply to damage by actual earthquake or tremor. For example, a volcanic eruption (tremors, land shocks) that causes damage to property is not covered. If, however, a volcanic eruption causes volcanic action such as airborne shock waves breaking windows, or ash, dust, or lava flow that causes damage to property, coverage applies.

Mere cleanup of volcanic ash is not covered. This cause of loss does not include the cost to remove ash, dust, or particulate matter that does not cause direct physical loss or damage to covered property. For example, if volcanic ash falls onto a building or onto one's personal property, no coverage applies unless the ash causes a direct physical loss.

This provision limits all volcanic eruptions that occur within any 168-hour period (seven days) to a single occurrence, so that a single deductible would apply to all damage that is caused during the 168 hours. If desired, coverage for the perils volcanic eruption and earthquake can be added to the policy by use of the earthquake endorsement.

Transportation. This cause of loss applies to covered property in the course of transit and covers business personal property for collision, derailment, or overturn of vehicles; the stranding or sinking of vessels; and collapse of bridges, culverts, piers, wharves, or docks. Transportation losses that take place off the premises are subject to the property off-premises limitation of $5,000. However, money and securities, valuable papers and records, or accounts receivable while in the course of transit are not covered; they are specifically excluded from the $5,000 coverage extension for personal property off-premises.

Property Coverage Exclusions

The BOP contains a section of exclusions that are applicable to property coverage. Although the BOP contains a specific section of coverage exclusions, we have already seen that exclusionary language can appear in various places in the policy. For example, the named peril of smoke is limited by a statement that smoke from agricultural, smudging or industrial operations is not included in the smoke peril.

At the same time, coverage may be found in exclusionary language; for example, earth movement loss is specifically excluded, but the provision gives back coverage in the event that earth movement causes fire.

The exclusion section is led off by the statement that the insurer will not pay for loss or damage caused directly or indirectly from any of the excluded occurrences. Furthermore, loss or damage is excluded regardless if any other cause or event contributes concurrently or in any sequence to the loss. This is to avoid concurrent causation situations, where it might be argued that a covered cause of loss contributed to an otherwise excluded cause of loss. For example, damage to insured property may not solely be caused by flood (excluded), but might actually or in part be caused by the decision (not excluded) of the Army Corps of Engineers to open flood sluice gates to relieve pressure on a dam, flooding homes in the valley.

The 2002 BOP form introduced the sentence, "These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area." The addition of this sentence is to eliminate the holding of some courts that the policy exclusions apply only to catastrophic events, thereby providing coverage for noncatastrophic events. For example, neither earth movement (a noncatastrophic event) nor earthquake (a catastrophic event) is covered. This lead-in language reinforces the policy's original intention that neither catastrophic nor noncatastrophic events that arise from the excluded perils are covered.

Ordinance or Law. Sometimes damaged property is more costly to repair or replace after a major loss because of building ordinances or regulations that were not in place at the time of original construction, such as using certain earthquake-proof standards and materials or adhering to Americans with Disabilities Act (ADA) building access requirements.

This exclusion eliminates coverage for loss caused by any ordinance or law regulating the construction, use, or repair of any property or requiring the tearing down of any property, including the cost of removing its debris. Although limited coverage is provided elsewhere under the businessowners policy (i.e., $10,000 for increased cost of construction), that amount is generally inadequate to meet the exposures faced by many businesses. For example, if a building is severely damaged by a fire and new ordinances or laws (e.g., American with Disabilities Act) require the redesign of stairways to accommodate wheelchairs, only $10,000 is available. Similarly, if the local municipality requires that a building is to be torn down after a partial loss (condemned and demolished), higher limits of coverage would also be needed. Higher limits of insurance to meet these and other similar exposures are available by purchasing the Ordinance or Law Coverage endorsement.

Earth Movement. Under the predecessor BOP versions, earth movement included earthquake; landslide; mine subsidence; or earth sinking, rising, or shifting. The 2002 form introduced a broadened definition of earth movement by also excluding events related to earthquake or landslide. In addition, the term mine subsidence was clarified to include man-made mines whether or not mining activity has ceased.

Earth sinking, a term added with the 2006 version, addresses soil conditions. Specifically included in the exclusion are soil conditions that cause settling, cracking, or other disarrangement of foundations or other parts of realty. Soil conditions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil, and the action of water under the ground surface. By exception, sinkhole collapse is covered.

Fire or explosion damage that results from earth movement is covered. This is the following fire concept introduced previously. It applies to several of the policy's exclusions. For example, if an earthquake damages a building no coverage applies. If, however, the earthquake causes the building to shift off its foundation, causing a natural gas line to ignite an explosion and a subsequent fire to occur, coverage applies to the subsequent explosion and fire damage. The initial damage caused by the earthquake to the foundation is excluded.

Governmental Action. This exclusion eliminates coverage for loss of or damage to property caused by governmental action, seizure, or destruction. By exception to this exclusion, coverage applies to loss or damage to property caused by or resulting from acts of destruction ordered by governmental authority and taken at the time of a fire to prevent its spread. For example, if the DEA (Drug Enforcement Administration) or the IRS (Internal Revenue Service) seizes and/or destroys property, coverage does not apply. If, however, a governmental authority (fire or safety department) orders a building destroyed in order to create a fire stop to halt the spread of fire, coverage applies to the destroyed building.

Nuclear Hazard. The nuclear hazard exclusion eliminates coverage for loss or damage of property caused by nuclear reaction, radiation, or radioactive contamination of any type. Fire that results from these excluded perils is covered. For example, if a property is contaminated by the discharge of radioactive material, no coverage applies. If, however, radioactive material causes a fire, the resulting damage caused by the fire is covered.

Power Failure. This exclusion eliminates coverage for loss or damage of property caused by the failure of power or other utility services supplied to the described premises, if the failure occurs away from the described premises. For instance, if an electrical transformer is struck by lightning several miles from the described premises, no coverage applies. The exclusion does not apply to power failure that originates on the insured premises.

If, however, the failure of power or other utility service results in a covered cause of loss, any ensuing damage is covered. For example, if the power service were interrupted off premises and, because of this interruption the insured's sprinkler system froze and broke, any damage caused by the broken sprinkler system (including subsequent water damage) would be covered.

The exclusion does not apply to loss or damage to computers and computer data. This exclusion is an exception to the exclusion that grants coverage for computers and electronic media and records if caused by power failure. Under the 1997 form, this coverage was activated by endorsement. The inclusion of this exception under the 2002 form represented a broadening of coverage over the previous version.

War and Military Action. This exclusion eliminates coverage for loss or damage of property caused by war and military action. At the time of the World Trade Center terrorist acts in 2001, this exclusion was widely reviewed, with the result being an affirmation that acts of war involve engagements between sovereign nations or countries.

Water. This exclusion eliminates coverage for loss or damage of property caused by water. Under this exclusion, water means flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not; mudslide and mudflow; and water that backs up or overflows from a sewer, drain, or sump. It also includes water under the ground surface pressing on, flowing, or seeping through foundations, walls, floors or paved surfaces, basements, whether paved or not, or doors, windows, or other openings. For example, if heavy rains cause a river to overflow its banks and water to enter a building through its walls, doors, windows, or sewers, no coverage would apply. Coverage for this peril is available under a flood policy.

Water damage is also excluded if water backs up through a basement floor drain or if it is underground and exerts pressure on, or seeps through, foundations, walls, floors, basements, doors, windows, or other openings.

By exception to this exclusion, coverage is provided for property if water damage results in fire, explosion, or sprinkler leakage. In that case, the damage caused by the fire, explosion, or sprinkler leakage is covered. For example, if floodwater damages a building, no coverage applies. If, however, floodwater causes the gas line to break causing a fire, coverage applies to the ensuing fire damage.

Certain Computer-Related Losses. Although computer equipment is covered under business personal property for covered perils, the policy excludes loss to computer equipment, application software, electronic media or records, or any computerized parts caused by failure, malfunction, or inadequacy of computers to recognize and interpret dates or times. For example, a computer system may control the time that a machine should turn off. If the computer fails to recognize the appropriate time, and the machine is damaged from the overheating, there is no coverage. Also excluded is advice, consultation, evaluation, inspection, installation, maintenance, repair, replacement, or supervision provided to determine the problem.

Electrical apparatus. This exclusion eliminates coverage for loss of or damage to property caused by artificially generated electrical current, including electric arcing that disturbs electrical devices, appliances, or wires. For example, if a rodent gnaws through electrical wiring causing an electrical short (i.e., artificially generated current) and that electrical short damages a telephone system or similar electronic device, no coverage applies. Similarly, if the insured is making electrical repairs and causes an electrical short that damages equipment, no coverage applies.

By exception to this exclusion, coverage is provided for property if the electrical short (artificially generated electrical current) causes fire damage. For example, if a rodent's gnawing on electrical wiring or the insured's incompetence in conducting repairs causes an electrical short that sparks a fire, coverage applies to the ensuing fire damage.

Consequential Losses. This exclusion eliminates coverage for various types of consequential loss. For example, a hurricane whips through several states. Because so many businesses are damaged, contractors are not able to repair a business for six months. Even though the damage to the property is insured on the businessowners policy, the lost-opportunity cost of not being able to use the premises would not be added to the amount paid.

Damage due to smoke, vapor, or gas from agricultural smudging or industrial operations is excluded.

Steam Apparatus. The explosion of steam boilers, steam pipes, steam engines, or steam turbines is not covered, but a fire or combustion explosion involving this type of property would be covered. Also, by exception to this exclusion, coverage is provided for damage caused by explosion of gases or fuels from within a furnace. Subsequent fire damage caused by this peril is also covered.

Frozen Plumbing. If the insured either fails to maintain heat in the building or structure, or fails to drain equipment and shut it off if heat is not maintained, and pipes freeze, no coverage will apply to the loss. If the insured maintains heat in the building or structure, or attempts to drain the system and shut off the water supply and the plumbing system freezes, coverage applies.

Dishonesty. This exclusion eliminates coverage for loss or damage resulting from dishonest or criminal acts by the named insured or the named insured's partners, members, officers, managers, employees, directors, trustees, authorized representatives, or anyone to whom property has been entrusted.

False Pretense. The false pretense exclusion eliminates coverage where the insured has been tricked out of property or voluntarily gives possession to another, who then converts it. For example, if an individual impersonates a customer and convinces one of the insured's employees to release a customer's property to the imposter, no coverage would apply.

Exposed Property. This means that no coverage applies to property exposed to rain, snow, ice, or sleet in the open (meaning outdoors). Consequently, coverage would apply to exposed personal property indoors.

Collapse. Collapse is excluded unless it falls within the definition of collapse as set forth in the additional coverage section (discussed in Lesson 3). If collapse results in a covered cause of loss, coverage applies. For example, if a collapse causes a gas line to erupt and a fire ensues, coverage applies to the ensuing fire damage.

Pollution. No coverage applies to loss or damage caused by a discharge, dispersal, seepage, migration, release, or escape of pollutants unless the discharge, dispersal, seepage, migration, release, or escape is itself caused by a specified cause of loss.

Neglect. Damage caused by the insured's failure to use all reasonable means to save and preserve property, resulting in further damage at and after the time of loss, is excluded from coverage.

Other Types of Loss. This group of exclusions eliminates coverage for property losses due to normal use and/or lack of care by the insured.

Errors Or Omissions. This exclusion eliminates coverage in the event an insured makes an error or omission in programming, processing, or storing data in any computer operation or in processing or copying valuable papers and records. By exception to this exclusion, coverage will apply to any ensuing loss caused by fire or explosion.

Installation, Testing, Repair. This exclusion eliminates coverage in the event an insured makes an error or deficiency in design, installation, testing, maintenance, modification, or repair of the insured's computer system, including electronic media and records.

Electrical Disturbance. This exclusion eliminates coverage in the event of an electrical or magnetic injury, a disturbance, or an erasure of electronic media and records, except as provided under the coverage extensions. Thus, the $10,000 on premises and $5,000 off premises limits for valuable papers and records and accounts receivable under coverage extensions applies, but electrical or magnetic injury, disturbance, or an erasure of electronic media and records is excluded. By exception to this exclusion, electrical or magnetic injury, disturbance, or erasure of electronic media and records coverage is granted if the direct loss or damage is caused by lightning.

Weather Conditions; Acts or Decisions; Negligent Work. If weather conditions, acts or decisions, or negligent work cause damage or loss, no coverage applies, absent a covered cause of loss.

Business Income and Extra Expense. This exclusion applies solely to the additional coverage provisions for business income and extra expense. It eliminates coverage for any extra expense or increase in business income loss caused by a delay in rebuilding, repairing, or replacing the property or in resuming operations due to interference at the location by strikers or other persons. It also applies to any suspension, lapse, or cancellation of a license, lease, or contract, except if the suspension, lapse, or cancellation is directly caused by the suspension of operations. In that case, such losses that affect business income during the period of restoration are covered. All other consequential losses are excluded.

Accounts Receivable. Damage or loss to accounts receivable caused by alteration, falsification, concealment, or destruction of records to conceal a theft or fraudulent act, such as wrongfully giving or taking money, is excluded.

Self Review Test

1. The BOP policy is available as open perils coverage solely.

a. True

b. False

2. Which is not an element that must be present in order for property insurance to attach under the BOP?

a. The loss must be direct physical loss.

b. The loss must occur at the described premises.

c. The loss must be a consequence of a covered cause of loss.

d. The loss must be to covered property.

3. The BOP covers all buildings and structures at an insured address.

a. True

b. False

4. Which is not a covered cause of loss under the BOP named perils endorsement?

a. Sinkhole collapse

b. Water damage

c. Earthquake

d. Windstorm and hail

5. The war and military action exclusion would prevent coverage for the type of terrorist act involved in the 9/11 World Trade Center incident.

a. True

b. False

Self Review Answers

1. The BOP policy is available as open perils coverage solely.

b. False

Although the BOP form is on open perils basis, the policy can be converted to specific or named perils via the Named Perils Endorsement.

2. Which is not an element that must be present in order for property insurance to attach under the BOP?

c. The loss must be a consequence of a covered cause of loss.

To be covered, loss must be direct physical loss occurring at described premises to covered property by a covered cause of loss. Consequential loss is not covered.

3. The BOP covers all buildings and structures at an insured address.

b. False

The BOP covers specifically listed buildings and structures at premises described in the policy declarations.

4. Which is not a covered cause of loss under the BOP named perils endorsement?

c. Earthquake

Sinkhole collapse, water damage, and windstorm and hail are all named perils under the named perils endorsement. Earthquake is an excluded cause of loss.

5. The war and military action exclusion would prevent coverage for the type of terrorist act involved in the 9/11 World Trade Center incident.

b. False

To be an act of war, two sovereign nations or countries must be involved.
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Publication:Businessowners Policy Explained
Date:Jan 1, 2007
Previous Article:Lesson 1: Businessowners Policy (BOP) explained.
Next Article:Lesson 3: additional coverages and coverage extensions.

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