9.3 - Commercial Property Broad Form: Limits of Insurance Flashcards
“replacement cost value (RCV)”
the current market value of the cost to replace the lost or damaged insured property
“coinsurance clause”
-a distinct section or provision in an insurance policy that requires an insured (property owner) to carry separate insurance for a specified amount stated in the policy to be eligible for full coverage. If there is insufficient coverage, the insured must pay part of the loss
Commercial Property Broad Form - clauses and conditions, and limits of insurance to be reviewed
> the insured property clause;
the five extensions to the limit of insurance
-temporary locations
-newly acquired buildings
-newly acquired contents
-property in transit
-property in the custody of sales representatives
the coinsurance clause
-insured’s circumstances or preferences that are considered are the effect of insuring on a blanket basis or with individual limits, the selected valuation form (ACV or RCV), and how to treat stock insurance when the values fluctuate widely throughout the policy term
Commercial Property Broad Form - Limits of Insurance
-insured determines the limit of insurance to be carried, in conjunction with experts such as builder appraiser or accountant
-rates and premiums are calculated with the assumption the values insured correspond with the actual risk value
-agents and brokers can assist by using a building valuation system or other calculating system
-insurance is possible on a number of designated items - building, equipment, stock, contents, and all property, each of which is defined in the CPBF wordings - provided that an amount of insurance is shown against that item on the policy declaration page
-“contents” includes equipment and stock, and “all property” is a blanket category that includes building, equipment, and stock
-insured select the relevant category most appropriate to their individual circumstances
-in addition, insureds can add a limited amount of coverage under any of 5 extensions provided that an amount of insurance is shown against that item on the policy dec page
Commercial Property Broad Form - Extensions
-CPBF wording generally extends to include small, specified limits (or small percentages of the limit carried on contents) on exposure common to many business risks:
-temporary locations
-newly acquired buildings
-newly acquired contents
-property in transit
-property in the custody of sales representatives
-limits for these extensions are generally in addition to, and not part of, the limit of insurance selected for building or contents
-for the coverage to apply, the limits selected for each extension must be shown on the policy dec page
Commercial Property Broad Form - Extensions
- Temporary Locations
-this extension provides a limited amount of insurance for contents while at location not named in the policy
-principally it is used to insure property that is occasionally off-premises, such as files or a laptop computer that an employee takes home from work, or to insure goods at an exhibition or trade show
-it can also cover an unplanned overflow of stock or equipment that is stored off-site
-many insurers will include this extension at little or no premium charge
-because it is unforeseen or infrequent, this exposure cam be easily overlooked
-if the use of temporary locations becomes a more frequent occurrence, or the limit of insurance required increases, the insured may be well advised to add another named location to the policy
Commercial Property Broad Form - Extensions
- Newly Acquired Locations
-there are two similar extensions involving newly acquired locations - buildings at newly acquired location, and contents at newly acquired locations
-both provide insurance in the amount specified on the dec page for property within Canada for a period of 30 days, or the date when the newly acquired location is added to the policy, or the policy expiry date, whichever occurs first
-the limit on a newly acquired building may need to be more substantial than insurers are inclined to give, the insured should therefore advise the insurer of any newly acquired building when it is purchased or built rather than relying on this extension
-the extension for contents at a newly acquired location are more likely to be or use to an insured, intended to insure a limited amount of contents at a new location for a short period of time
-for example, the insured is renting new office space that is currently empty, and only after the office furniture supplier has delivered the furnishings does the insured advise the insurer, so this extension for contents at newly acquired location could provide coverage for the period from the furniture’s arrival to the insured’s advising the insurer
Commercial Property Broad Form - Extensions
- Property in Transit
-this extension provides insurance for property while in transit to or from the insured’s premises while within Canada and the continental US
-generally intended to afford temporary or contingent insurance for a limited amount
-if the transit exposure represents a major portion of the risk, separate coverage can be arranged
-insureds with occasional displays at exhibitions or trade fairs may find the combined extensions for transit and unnamed locations sufficient to insure their exposures
Commercial Property Broad Form - Extensions
- Property in the Custody of Sales Representatives
-this extension insures contents in the custody of the sales representatives while in transit and at unnamed locations within Canada and the continental US
-limits of insurance are generally very small, and there may be no coverage for samples left in an unattended vehicle
-the wording usually includes a locked vehicle warranty specifying that, for there to be coverage, the contents must be in a fully enclosed compartment, the doors must be locked and windows closed, and there must be visible evidence of forcible entry into the vehicle
-this coverage might be useful to an insured whose salespeople have a limited quantity of samples of literature with them when visiting clients
Commercial Property Broad Form - Valuation - ACV or RCV
-ACV - most often understood as the cost (at the time of loss) of replacing the property, less any depreciation to it
-some occasions when insuring on ACV is the better choice such as when some of the property is obsolete and/or would not be replaced in the event of a loss
-insurers also may not be willing to offer replacement cost coverage on older buildings or equipment
-RCV is the amount it would cost to repair or replace the particular article with a new item of like kind and quality without taking depreciation into account
-RCV has the benefits of obtaining new property following an insured loss, however, the limit is calculated on the value of the new item so the premium is correspondingly higher, as well, the standard RCV clause requires that the building be reconstructed on the current site (Same site clause)
-most insurers understand that it is not always feasible for insureds to rebuild on the same site and will agree to remove this requirement on request at no cost
-Replacement cost value of the building should also factor in all of the costs in replacing the structure after a loss including the cost of demolishing and removing damaged portions of the structure and the soft costs (engineering work for rebuilding)
-historic or heritage buildings may need to be insured by high-risk insurance markets since the value of a historic building is difficult to determine, and it should be appraised by an independent professional to ensure an adequate limit of insurance due to the increased costs involved in replacing with materials and construction methods that best reflect the original build
-the insured can either purchase a policy that will reimburse losses based on the historically accurate construction required by the designation, or be personally responsible for the extra costs of reconstructing the building to these standards
Commercial Property Broad Form - Valuation - Coinsurance
-coinsurance clause is to ensure that insureds comply with their responsibilities to insure to value
-insureds are encouraged to carry adequate amounts of insurance on their property by requiring them to bear a portion of every loss if they are underinsured
-each coinsurance clause contains a provision stating what adequate insurance is, and this may be expressed either as a percentage of the value of the property, or as a specific amount
formula:
(actual amount of insurance / required amount of insurance) * amount of loss = amount insurer will pay
-coinsurance calculation done at the time of loss, not when policy is made effective so insureds should avoid minimizing values for insurance purposes
-coinsurance penalties do not apply when there is a total loss - clients reimbursed the total amount insured and then responsible for any shortfall themselves
-policies can be written on a stated amount coinsurance basis, in this case, the insured provides the insurer with a signed, written statement, known as the statement of values, attesting to the values of all property to be insured, which must be done annually and values supported by an appraisal, so if the insured insures to the values declared, no coinsurance penalty will be applied to any losses
“statement of values”
the information required when a single rate is to cover more than one item or building. To determine a correct average, the rating bureau requires that the policyholder to give the value of each separate risk and its contents
Commercial Property Broad Form - Valuation - Blanket Limits
-if insurer agrees, the insured may have the option of insuring all property on a blanket limit instead of having individual limits for each type of property
-this can be done by combining the coverage at a single location, or at multiple locations, into a single property of every description (POED) limit and insuring as “all property” on the policy dec page; or using a contents of every description (COED) limit and insuring as “contents” on the policy dec page
-POED limit combines building and contents insurance together in one limit, which can be advantageous to the client who owns or uses multiple locations, and has property regularly moving from one location to another, so since the limit applies to all locations, this avoids the problem of temp underinsurance at any one location as a result of a sudden influx of stock or equipment
Commercial Property Broad Form - Valuation - Fluctuating Values
-some businesses by their very nature have wide swings in the value of stock - ex. retailers, manufacturers, and distributors that sell seasonal goods
-2 common ways to reflect the fluctuations are insuring on a:
>stock reporting basis; or
>peak season endorsement
Commercial Property Broad Form - Valuation - Fluctuating Values
- Stock Reporting Basis
-stock reporting basis - policy is issued for the highest anticipated value of stock on hand, and a reporting clause is used to adjust the premium
-Insured maintains sufficient coverage while only paying premiums for the actual values at risk
-Deposit premium is charged (commonly 75% of the limit) the insured files a report of values according to the policy terms (usually monthly, quarterly or annually) and the premium is adjusted at year-end
Example:
-max value $500,000
-insurer calculates the deposit premium based on 75% of the $2000 annual premium for $500,000 = $1500
-reports values monthly
-end of year premium is adjusted based on the values that was actually at risk and premium adjustment notice is generated for the additional or return premium due
