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Lesson 5: conditions.

Objectives

After completing this lesson, you will be able to:

* List the Common Policy, Commercial Property, Loss, and Additional Conditions

* Explain the inspection and surveys condition

* List the insured's duties after a loss

* Explain an insurer's four options for paying a claim

* Explain how vacancy affects the policy's coverage

Key Terms

Bailee--One who is charged with the care of the property of another. For example, a garage is a bailee of a customer's (bailor's) car (the bailment) and a jeweler is a bailee of customer's jewelry while in for repair or appraisal. There are various standards of care that a bailee must meet, depending upon whether the bailment is gratuitous or a bailment for hire (paid).

Liberalization--A broadening of coverage without an added charge to the insured.

Subrogation--The insurer's right, after payment of a loss, to collect from the ultimate wrongdoer (the party causing the loss).

Four different sets of conditions apply to a commercial property policy. Two of those are separate forms attached to the policy: the Common Policy Conditions form IL 00 17, and the Commercial Property Conditions form CP 00 90.

The other two sets are within the building and personal property coverage form (CP 00 10). They are the Loss Conditions and the Additional Conditions.

Common policy conditions form IL 00 17 contains six conditions that must be incorporated into any CP policy. They apply to all the policy's coverages. Most of these common policy conditions are restatements of provisions, modified in varying degrees, that have been standard features of property policies since the advent of the standard fire policy. These conditions are:

A. Cancellation,

B. Changes,

C. Examination of your Books and Records,

D. Inspection and Surveys,

E. Premiums, and

F. Transfer of Your Rights and Duties Under This Policy.

Common Policy Conditions (IL 00 17)

The cancellation condition states that the named insured may cancel the policy at any time by notifying the insurer in writing. The insurer may also cancel the policy at any time with appropriate written notice mailed to the insured. Cancellation for nonpayment requires a ten-day notice; for any other reason, thirty days. When the insurer cancels, the amount of return premium is figured on a prorata basis. All notices of cancellation must be sent to the first named insured.

Cancellation is one area that varies greatly from state to state. States may have amendatory endorsements pertaining to cancellation that should be checked to discover the exact cancellation provisions applicable in that state.

The changes condition allows changes in the terms of the policy only by endorsement from the insurer. The first named insured is the only insured that may request a policy change.

The examination of your books and records condition allows the insurer to audit the insured's books and records that relate to the policy. The examination or audit may be made during the policy period or any time within three years after the policy period ends. Related records may involve finances, safety, inventory, and so on.

The inspection and surveys condition gives the insurer the right to conduct inspections, surveys, and reports. It does not impose any obligation on the insurer to carry out such inspections and surveys.

It allows the insurer to recommend changes to the insured with reference to the risk exposures that the insured faces.

This condition is not a warranty from the insurer that the insured's operations are safe or healthful. Nor does it warrant that the insured is in compliance with legal requirements that may pertain to those operations. This disclaimer also applies to any rating, advisory, or similar organization making inspections under the policy.

An example of how the inspection and surveys condition could be called into play--and the subsequent need for the disclaimer--happened in 1977. The Beverly Hills Supper Club in Northern Kentucky burned and 165 people died in the fire. As the investigation proceeded, it was discovered that the property insurer had recently inspected the building. Based on this inspection, some plaintiffs' attorneys attempted to hold the insurer and Insurance Services Office (ISO) liable for the deaths and injuries sustained in the fire. The courts, however, did not allow the suit to go forward.

The premium condition specifies that the first named insured is responsible for paying the policy premium. It also calls for any return premiums to be sent to the first named insured.

The final common policy condition, transfer of your rights and duties under this policy, requires the insurer's written consent in order to transfer the insured's rights and duties under the policy to another person. The only time the written consent of the insurer is not needed is when the named insured dies.

At that point his rights and duties transfer to the named insured's legal representative, while acting within the scope of duties as legal representative. Until the legal representative is appointed, anyone having proper temporary custody of the named insured's property has the rights and duties of the named insured but only with respect to that property.

Commercial Property Policy Conditions (CP 00 90)

In addition to the common policy conditions, there are commercial property policy conditions that are found on form CP 00 90, which is attached to the Commercial Property policy.

The concealment, misrepresentation, or fraud condition voids coverage if, at any time, the named insured commits a fraudulent act relating to the policy. Some examples of such acts are:

* Misrepresenting the use or occupancy of the building, such as stating the premises are an office when the building is used for chemical manufacturing.

* Misrepresenting the value of destroyed equipment to boost insurance recovery. In such a case, not only would the exaggerated value of the property be declined, but there would be no coverage at all, based upon the fraudulent act of the insured exclusion.

* Misrepresentation of material facts by any other insured.

Such an act, before or after loss, voids coverage. "Void" does not mean that the policy is cancelled or suspended, but that the insurance contract between the insurer and insured is deemed not to be in effect. In contract terms, since there was no actual "meeting of the minds" in the formation of the contract, no contract came into being.

The control of property condition provides that acts or neglect by any person not under the direction or control of the named insured will not affect coverage.

The second part of the control of property condition states that a breach of any condition at one or more locations does not affect coverage at any location where the breach does not exist at the time of loss. For example, a breach of the vacancy condition at one premises does not affect coverage at a second insured location.

The insurance under two or more coverages condition recognizes that more than one coverage in a policy may apply to a loss. However, the policy will not pay more than the actual amount of the loss or damage.

In order to bring suit against the insurer, the terms of the legal action against us condition requires that the insured must first fully comply with all the policy terms. The insured must bring the suit within two years following the loss or damage--not two years after a formal denial of the claim.

If the insurer liberalizes the policy (that is, broadens or adds coverage) without any corresponding premium increase, the revisions automatically apply to the insured's policy. This provision applies to any liberalizations adopted by the insurer during the policy term or forty five days prior to the inception date.

For example, the commercial property policy provides $250,000 for a newly acquired or constructed building. If an insurer increases the coverage amount to $300,000, without increasing the premium, then all existing policyholders would receive the $300,000 coverage limit.

The purpose of the commercial property policy is to protect the insured's property. It provides no coverage for the benefit of others to whom insured property may be entrusted. This is contractually stated in the no benefit to bailee condition.

For example, the insured owns a restaurant. She sends employees' uniforms and tablecloths out to be laundered. If these items are damaged while at the laundry, the owner of the laundry cannot look to the restaurant owner's commercial property policy for coverage.

The commercial property insurer will probably settle with its own insured. However, it still retains the right to recover its payment from the laundry.

The other insurance condition spells out how a loss is handled if the insured has other insurance subject to the same plan, terms, conditions, and provisions of the commercial property coverage form. If this is the case, any loss will be prorated between the policies. If the other policy does not cover the same plan, then the CP policy provides coverage in excess of the amount due from the other insurance, whether such insurance is collectible.

The commercial property policy covers losses that commence during the policy period and within the coverage territory. The policy period is shown on the declarations page. The policy defines the coverage territory as the United States (including territories and possessions), Puerto Rico, and Canada.

The subrogation condition defines the insurer's subrogation rights. Often an insurer pays its insured for property that was damaged by someone else (for example, the laundry that damaged the restaurant's tablecloths in the previous comment on the no benefit to bailee provision). This subrogation condition transfers the action an insured may have against a culpable party to the insurer once the insurer has paid the loss. The insurer then can pursue the ultimate wrongdoer to recover the amount it paid to the insured.

At any time prior to a loss, an insured may waive, in writing, possible recovery rights against anyone. However, once a loss has occurred, the insured may waive those rights against only:

* someone insured by the same policy as the named insured;

* a business that the insured owns or controls (or owns or controls the insured); or

* a tenant of the named insured.

Conditions that Operate in Case of a Loss

In addition to the common policy conditions and the commercial property conditions, the commercial property policy contains a set of conditions that operate in case of a loss.

The first loss condition is abandonment. The insured may not simply abandon damaged property to the insurance company. The insurer has the right to the salvage value of property for which it makes total payment but cannot be compelled to take damaged or destroyed property.

The second loss condition, appraisal, provides a method to settle differences between insured and insurer regarding the valuation of damaged property or the amount of the loss.

In this event, each party selects its own appraiser. Then, the two appraisers select an umpire. If the appraisers cannot agree on an umpire, they may request that the umpire be chosen by a judge of a court having jurisdiction. The appraisers then separately value the property and set the value of the loss. If the appraisers are unable to agree, the matter goes to the umpire. A decision agreed to by any two of those three is binding on both parties.

Each party must pay its own appraiser. The costs of the umpire and of the appraisal process are shared equally.

Even if the claim does go to appraisal, the insurer reserves the right to deny the claim upon further investigation. This underscores the fact that the appraisal process is to determine valuation of property, not coverage under the policy.

The Insured's Duties in the Event of Loss condition lists eight things that an insured must do in the event of loss or damage under the policy. The policy specifies that the insured must:

1. Notify police if a law was broken.

2. Send the insurance company a prompt notice of loss, including a description of the property.

3. Provide a description of how, when, and where the loss or damage took place as soon as possible.

4. Protect the covered property from any further damage and keep track of the expenses necessary to protect the covered property for consideration in the settlement of the claim.

5. Compile an inventory of damaged and undamaged property if the insurer so requests.

6. Allow the insurer to inspect the property, including the insured's books and records.

7. Submit a signed, sworn proof of loss if requested within sixty days after the insurer's request.

8. Cooperate with the insurer in the investigation or settlement of the claim.

The loss payment condition gives the insurer four options for paying for a covered loss:

1. The value of the property. The insurer will determine the value of the damaged property "in accordance with the Valuation Condition" (to be discussed shortly).

2. The cost to repair or replace the damaged property. Any insurance recovery for any extra costs due to the operation of building or zoning laws is excluded.

3. The insurer may take the property at an agreed or appraised value.

4. The insurer may repair, rebuild or replace the property with "like kind and quality." This option also excludes any extra costs due to the operation of building laws.

The recovered property condition provides a method for loss readjustment in case stolen property is recovered. The insured has the option to return the amount of any claim payment in return for the original item. The insurer cannot require the insured to return the payment and take back the recovered property. Recovery expenses and any necessary repairs to the property are borne by the insurance company up to the applicable limit of liability.

The vacancy condition of the commercial property policy has two parts. The first defines the term "building" for both an owner-occupant and a tenant. The second describes the manner in which losses to a vacant building are handled.

For a tenant, the form defines a "building" as that portion rented or leased to the tenant. The tenant's portion is vacant when it does not contain enough business personal property to conduct normal business.

A "building" for the owner or general lessee is the entire building. The policy states that a building is vacant in this case if the insured does not rent at least 31 percent of the floor space to others, or if the insured does not use at least 31 percent of the floor space for its own operations.

The second part of the vacancy condition describes how losses are handled when the building has been vacant for more than sixty consecutive days. There is no coverage for damage caused by vandalism, building glass breakage, water damage, theft or attempted theft, or sprinkler leakage (unless steps have been taken to protect the system against freezing). Payment for any other covered loss is reduced by 15 percent.

The commercial property policy typically covers loss to covered property at actual cash value, with four exceptions:

1. If the insured meets the coinsurance requirement, the policy covers any loss under $2,500 at replacement cost.

2. The policy covers stock at its selling price less any applicable discounts and normally incurred expenses.

3. The policy will replace damaged glass with safety glass if required by law.

4. Tenants improvements and betterments are adjusted at ACV, if repairs are made promptly.

Additional Conditions

The commercial property policy contains two additional conditions:

1. coinsurance and

2. mortgageholders.

The principle of coinsurance has long been a source of confusion for insureds (and even for many in the insurance business). This principle says that in exchange for a reduced rate, the insured must agree to maintain a specified relationship between property values and the amount of insurance (for example, 80 percent).

For example, a building with a value of $1,000,000 must be insured for at least $800,000. An insured that agrees to carry this amount of coverage may get a rate of fifty cents per thousand dollars of coverage. Also, any partial losses will be adjusted at 100 percent of value. However, if the insured chooses to carry only $400,000 of coverage, that rate might jump to seventy-five cents or a dollar. And, the insured will receive only 50 percent of the amount payable for a partial loss.

The Mortgageholders condition spells out the rights and duties of any mortgageholders that are named in the declarations.

In the event of a claim, any listed mortgageholder receives payment for losses as interests may appear. The insured must be in compliance with all coverage terms. Even if foreclosure proceedings or similar actions have begun on a building that suffers a loss, a mortgageholder may collect a loss payment.

Further, even if the insurer denies a claim to the insured due to the insured's actions or lack of compliance with the terms for coverage, the mortgageholder may still collect. The mortgageholder must pay any premium due and submit the appropriate proof of loss.

Additionally, a mortgageholder must notify the insurance company of any known change in ownership, occupancy, or increase of hazard. When these conditions are satisfied, all terms of the building and personal property coverage form become applicable to the mortgage holder.

Self Review Quiz

1. What are the four types of conditions associated with the Commercial Property Policy?

a. Common Policy, Commercial Property, Loss, and Inspection

b. Commercial Property, Loss, Inspection and Additional

c. Additional, Cancellation, Loss, and Common Policy

d. Common Policy, Commercial Property, Loss, and Additional

2. The inspection and surveys condition, which states that the insurer does not warrant the insured's operations are safe or healthful, also applies to any rating, advisory, or similar organization making inspections under the policy.

a. True

b. False

3. If an insurer liberalizes a policy by increasing coverage without any corresponding premium increase, which of the following is true?

a. The revisions automatically apply to policies written within the past 45 days.

b. The revisions automatically apply to all insureds with similar policies.

c. The revisions only apply if approved by ISO (Insurance Services Office).

d. The revisions apply to all policies upon policy renewal.

4. In case of loss an insurer may examine the insured under oath, either by oral or written examination.

a. True

b. False

5. If a loss payment has already been made at time stolen property is recovered, the insured:

a. Is required to return the payment and take back the recovered property

b. May retain the property after reimbursing the insurer for recovery expenses and any necessary repairs

c. May return the claim payment in exchange for the recovered property, but must pay for recovery and repairs

d. May return the claim payment in exchange for the recovered property; the insurer pays for recovery and repairs within liability limits

Self Review Answers

1. What are the four types of conditions associated with the Commercial Property Policy?

d. Common Policy, Commercial Property, Loss, and Additional

There are four types of conditions associated with the Commercial Property Policy: Common Policy, Commercial Property, Loss, and Additional Conditions.

2. The inspection and surveys condition, which states that the insurer does not warrant the insured's operations are safe or healthful, also applies to any rating, advisory, or similar organization making inspections under the policy.

a. True

This condition, which also states that the insurer does not warrant the insured is in compliance with legal requirements that may pertain to those operations, does indeed extend to rating, advisory, or similar organizations making inspections under the policy.

3. If an insurer liberalizes a policy by increasing coverage without any corresponding premium increase, which of the following is true?

b. The revisions automatically apply to all insureds with similar policies.

The liberalization condition states that if an insurer broadens or adds coverage without any corresponding premium increase, the revisions automatically apply to all existing policyholders.

4. In case of loss an insurer may examine the insured under oath, either by oral or written examination.

a. True

The CP form states that the insurer may examine the insured under oath, a term that courts have held encompasses both oral and written examinations. The insurer may examine insureds separately and out of the presence of other insureds.

5. If a loss payment has already been made at time stolen property is recovered, the insured:

d. May return the claim payment in exchange for the recovered property; the insurer pays for recovery and repairs within liability limits

The recovered property condition provides the insured the option to return the amount of any claim payment in exchange for the original item. The insurer cannot require the insured to return the payment and take back the recovered property. Recovery expenses and any necessary repairs to the property are borne by the insurance company up to the applicable limit of liability.
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Publication:Commercial Property Policy Explained
Date:Jan 1, 2010
Words:3458
Previous Article:Lesson 4: causes of loss--special form.
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