Chapter 1 Introduction to Commercial Property Insurance Flashcards
Categories for use of buildings
- Residential
- Non Mercantile (offices, apartments, churches)
- Mercantile (business that sell products/services)
- Manufacturing / Industrial
Three Ways to Insure Commercial Property
- Scheduled Basis (Only property specifically identified on policy is insured)
- Property of Every Description (POED) (insures building, stock, equipment under single limit)
- Blanket (All Property) - used when more then one location. Insures all property a single limit
Building as described on Declarations Page includes
- Fixed Structures - warehouse/detached garage/pole sign/perimeter fence
- Additions & Extensions in contact with building (enclosed walkway)
- Permanent fittings and fixtures attached to part of building (wall to wall carpeting, fire and burglar alarm system, heating, plumbing and A/C
- Materials used for maintenance & normal repair including cleaning supplies and extra lumber and shingles kept as replacement for minor repair (not used for major renovations)
- Trees, plants and shrub inside building for decoration when insured owns buildings (but not for sale)
Stock as described on Declarations Page includes
- Merchandise of every description usual to insured’s business
- Packing Material & Advertising Materials
- Property of Others is insured only when:
a. similar to that insured by the policy
b. insured under obligation to keep it insured
c. insured legally liable for it
Equipment as described on Declarations Page includes
- Contents usual to insured’s business other than building or stock
- Similar property of others (rented or leased photocopier, computers, telephone, coffee service)
- Property of Others when:
a. insured is obligated to keep such property insured
b. is liable for its loss - Tenants Improvements (carpeting, wall paneling, security system, electrical system, etc) - Normally these items are insured under building, but when the owner is a tenant, the insurer agrees to cover them under Equipment.
Three Methods of Determining Insurance Values
- Actual Cash Value - Cost to repair or replace less depreciation
- Replacement Cost - Property repaired or replaced in lieu of depreciation
- Book Value - Not useful for determining value for insurance, it is the value which property has depreciated for taxation purposes.
Five Approaches to Determine ACV
- Formula cost approach method - replacement cost is applied and depreciation is applied either using
a. Straight Line Depreciation
b. Plateau Accelerated Depreciation (High depreciation first few years and then levels out (e.g. computers & printers) - Market Value Direct Sales Approach - ACV is based on building value before and after loss less value of land
- Income Approach - Used for rental properties. ACV based on potential future income
- True Value to Owner - When value to owner is greater than value depreciated by insurer
- Broad Evidence Rule - use all 4 ways
Types of commercial policies
- Basic Fire
- Fire and Extended Coverage
- Named Perils
- Broad Form
*if above policies are inadequate, these 4 types be combined to form a manuscript policy (custom policy)
Two methods used by insurance companies to reduce exposure
- Reinsurance - Insurer transfers risk to another insurer, sharing premium and losses with policy controlled by one primary insurer
- Subscription policy - No primary insurer, each insurer negotiates with broker separately, policy services are provided by the Lead company (either the insurer with highest % of risk or first approached)
Reasons for insuring on subscription basis
- Line of business too specialized
- Insurer may not wish to expose that particular type of risk to reinsurers
- Insurer may not wish to be exposed to a single large loss
- Broker may want to share a good account with more than one insurance companies
What is the basis for Minimum Retained Premium?
To help recoup cost of underwriting in case policy is cancelled
Define Indemnity Agreement Clause
Indicates how insurer will pay claims. Insured will receive lest of:
1. ACV
2. Interest of insured
3. Amount of insurance specified on Declarations page
* In the case of multiple insureds, the insurer is only liable up to the amount of insurance purchased
Define Deductible Clause
Refers to the amount of loss insured will bear before receiving payment from insurer. The most common deductible is Occurrence Basis deductible.
Define Occurrence Basis
Only one deductible is charged for all property damaged in a single occurrence.
Define Co-Insurance Clause
To penalize insureds who do purchase enough coverage (80% ACV).
This clause only applies to partial losses.
Waiver of Co-Insurance
Clause is waived when losses are minimal, specifically when:
1. loss not greater than 2% amount of insurance
2. not greater than $5000
Stated Amount Co-Insurance
Helps insureds avoid a penalty in the event of a partial loss. To qualify for this option, Insured must:
1. File a statement of values to insurer each year
2. Values must be for 100% of the value of insured property (verified by an appraiser or other accepted method)
3. Values must be maintained throughout the year
Define Exclusions Clause
Includes Property Excluded and Perils Excluded. Used to exclude loses resultant from uninsurable acts such as:
1. Acts of Violence - War, nuclear explosion
2. Catastrophic Losses - Flood, Earthquake
3. Property usually covered by other policies - Automobiles, money and securities
4. Losses which can be controlled by insureds - Damage caused to property insured is working on
5. Losses which are not common but require addition premium to insure - buildings under construction
Define Permission Clause
Insurer will automatically grant permission for these 3 things (the insured DOES NOT need to notify the insurer):
1. Concurrent insurance
2. Additions Alterations or Repairs
3. To do work, keep & use materials usual to the insured’s business
Define Breach of Conditions Clause
Coverage is denied when insured breaches a condition. However there is an exception when:
1. Loss was not caused by or contributed to the breach (Turning off a fire extinguishing system would be a breach of condition but would not be used to exclude coverage of theft)
2. breach of condition outside insured’s control (sprinkler went off in portion rented to a tenant)
Define Reinstatement Clause
Insurer agrees to give the same amount of insurance as prior to a loss
Define Subrogation Clause
When insurer has paid a claim for a loss caused by a third party, it is entitled to collect that loss from the responsible party. However, the insurer will not exercise this clause in case of third party having “insurable interest” (e.g. mortgagees)
Define Property Protection System Clause
Ensures property protection systems (burglar alarms, sprinkler, fire detection systems) are operational at all times. Insured is obligated to inform insurer immediately when:
1. they know of a problem with the system
2. they have cancelled or not renewed a maintenance or monitoring contract
3. Police have suspended service (as a result of too many false alarms)
Define Premium Adjustment Clause
Refunds a portion of the premium when too much insurance is purchased for “stock”. Claims must be made no later than 6 months after expiry. Claims must be presented on Premium Adjustment Form showing ACV of stock on last day of each month
Define Verifications of Values Clause
To allow insurer to inspect premises at a time reasonable to insured in order to verify:
1. that values are reasonable and exist
2. values on hand at the time of a previous loss
3. the existence of any other policies that would participate in the payment of loss
*This right exists one year after termination of policy
Define Valuations Clause
Outlines methods used to establish how claims to property will be paid.
Payment methods:
1. unsold stock: ACV at time of loss
2. sold stock: selling price less any discounts
3. property of others insured is working on and has in their control: ACV + any work and material insured has put into it
4. tenants improvements: ACV at time of loss
Define Special Basis of Settlement Clause
- Tenant’s Improvements - improvements will belong to tenant for the term of the lease and then after will revert to owner of the building. There are two types of loss settlement:
a. When property is rebuilt/replaced with due diligence: ACV
b. When property is NOT rebuilt/replaced with due diligence: Less favorable amount based on formula (months remaining on lease x cost of improvements) - Loss of records - blank value only, plus cost to copy from duplicates or originals.
Define Property of Others Clause
For property belonging to others (e.g. customers) the insurer can choose to settle with either the insured or the owner of the property
Define Locked Vehicle Warranty Clause (name the 4 provisions)
For coverage provided for theft of an automobile, the following provisions must apply:
1. vehicle in which property is located will be in a “fully enclosed metal body”
2. doors and windows will be “securely locked”
3. show “visible signs that force” was used
Define Misrepresentation (Statutory Condition)
A false description of property or misrepresentation of a material fact at the prejudice of the insurer.
If insurer is able to prove misrepresentation lead to a loss, the insurer can void the policy. An insured may also be denied coverage for failure to disclose any “Material Changes” (e.g. change from natural gas to wood burning stove)
Define Material Fact
A fact that would cause the insurer to either decline insurance or ask for an increased premium before accepting the risk
Facts Material:
- Matters inherit in property insured (existence of other insurance, previous claims, cancellations, vacancy, use of premises)
- Moral hazards (number of mortgages, bankruptcy)
Facts not Material:
- Facts easily obtainable by insurer (what type of business for which insurance is being requested)
- Facts that can be discovered upon inquiry (things found on an application form)
- Facts which would lessen the risk to the insurer (insured has a nightwatchman on duty)
Define Notice to Authorities
Insured has duty to notify police when a criminal act has occured
Define Sue And Labour
Insured must pursue reasonable means to recover lost property
Define No benefit to bailee
Insured will not receive coverage when bailee is responsible for the loss
Define Pairs & Set
Lose 1 earring, insured will get 50% of the value. Item not lost will continue to have value
Define Parts
Insurer is only responsible for the cost to repair or replace the lost or damaged part
Define Condition
Policy term that requires the insured to do or not do something
Define Warranty
A promise by the insured that certain things are as they are represented to be and will remain so.
