Chapter 4 - Broadening the Contract Part 1

Question 1

What are the conditions for replacement cost for commercial insurance?

Answer 1

1) must be made promptly
2) must be on same site or adjacent site
3) pmt will be limited to the cost of replacing, repairing, constructing, or reconstructing (whichever is less), on the same site with new property of like kind and quality and for like occupancy
4) settlement will be made only when the work is completed and then for no more than AVC of work
5) all other insurance covering the same perils and same interest, must have same replacement cost provisions
- if insured fails to meet any of these conditions, the loss will be paid in ACV

Question 2

Explain automatic reinstatement.

Answer 2

• in the past, the insuring agreement used to oblige insurer to reimburse insured for value of insured prop damage/destroyed by insured peril
• however, with multiple losses, the earlier losses may have exhausted the amt of ins, leaving insured unprotected
• reinstatement was not automatic
• until finally, insurers agreed to reinstate amt of ins automatically after claims pmts, at no additional premium, and modify their policies accordingly

IBC WORDING
Loss under (any item of) this policy shall not reduce the applicable amt of ins. It has 2 important features:

1) amt of insurance remains unchanged throughout policy period, even if losses are paid
2) if insured cancels policy after a loss, even one equal to full amt of insurance, the insurer must return premium on short-rate basis

Question 3

Define stock.

Answer 3

• may be understood as goods an merchandise that the insured manufactures or acquires that are usual to insureds business
• or that the insured is obligated to keep insured or for which the insured is legally liable

Question 4

Describe how named and unnamed locations are dealt with.

Answer 4

• with more complex circumstances, such as businesses with local distribution warehouses in diff parts of prov/country, a somewhat diff approach is often needed
• a policy with a declaration form is used
• this form ensures that stock will be fully covered, up to the peak values stated (even if risk fluctuates) for a premium that reflects no more than the values actually at risk
• throughout policy period, insured must periodically report to insurer ACV at each location
• encourages realistic info from insured about values

Question 5

What are the features of a declaration form?

Answer 5

• incorporates a schedule with an address and a provisional amt/limit of ins for each location
• insurer charges a deposit premium but adjusts it at the end of initial policy period and each renewal period
• to calculate, the insurer first sets a premium rate for each location
• then insurer applies the rate to provisional limit for location to determine premium for that location
• total of premiums for all locations is then discounted by a percentage to determine deposit premium
• also provides for unknown locations the insured may use during policy period
• insured must provide details of location, usually comes to light when values are reported for it
• a certain amt of ins automatically applies to it, but no deposit premium is charged
• automatic amt may be too low, so insured must specify amt and date location was first used
• insured may then charge additional deposit premium, pro rated for remaining part of policy period

Question 6

How does the calculation of additional or return premium work?

Answer 6

1) at the end of the period, the sum of all values that were reported for each location is divided by # of reports to determine avg value at each location
2) then earned premium for each location is determined by applying appropriate rate to avg value

3) sum of all earned premium is then compared with deposit premium paid
- if total earned premium is greater than deposit, insured is charged additional premium for the difference
- if earned premium is less than deposit, premium refund is allowed to insured

Question 7

How do they encourage insured’s cooperation in regards to named and unnamed locations?

Answer 7

• the insured must report true values on required dates for this type of policy to work
• 2 clauses are usually included in this form

1) if insured fails to report values as required, the premium adjustment at tend of term will use provisional amt of insurance for a given location in place of any values not reported during policy term
2) gives insurer the right to verify true value at location on the date to which a report of values relates

Question 8

What common additional perils are issued on a basic fire policy formerly known as extended coverage?

Answer 8

1) explosion (beyond basic fire policy cov)
2) impact by land vehicle/aircraft
3) riot, vandalism, or malicious acts
4) smoke
5) leakage from fire protection
6) windstorm/hail

• the additional of perils does not change the amt of insurance or property insured
• insurers will charge additional premium for added perils because there are more possibilities of a claim under the policy
• this additional charge is included in total rate for each item of prop
• basic fire policy terms apply to all perils covered in contract, but may require additional terms

Question 9

Explain explosion as EC.

Answer 9

• broadens explosion cov automatically included in BFP
• additional perils combine with BFP
• exclusions for one peril does not modify the other additional perils or BFP cov

FIRST SET OF EXCLUSIONS

1) steam vessels
2) chemical recovery boilers
- present greater than avg explosion hazard but can be added by endorsement
3) pressure vessels or piping
- any pressure vessel/piping with internal working pressure exceeding 15 PSI, except manually portable gas cylinders
- ex) hot water boilers used for heating buildings or compressed air storage tank
4) domestic water heaters
- internal working pressure ranging up to 100 PSI
- need boiler and machinery cov
- but insurers may amend exclusion to make an exception for domestic water heaters having a diameter not exceeding 24 inches
5) machinery breakdown
6) pressure tests
- equipment not covered, but resulting damage is
7) gas turbines
- explosion, rupture, bursting

SECOND SET OF EXCLUSIONS

1) electric arching
2) pressure tests
3) safety devices
- exclusion applies even if device bursts or ruptures accidentally

Question 10

Explain impact by aircraft, spacecraft or land vehicle under EC.

Answer 10

• expands coverage and also limits coverage with exclusions
• expanded to cover not only for impact by air/spacecraft but also impact by any part of it or any contents should they become separated and fall to earth

EXCLUSIONS

1) repetitive impact not covered
- many minor scrapes over time insured doesn’t repair, eventually leads to vehicle requiring repairs

2) loss to vehicles
- applies to vehicles, air/spacecrafts insured under policy
- its not uncommon for insurers to extend def of equipment to include MV not licensed for highway use
ex) forklift

3) aircraft or spacecraft being moved
- when being taxied or moved inside/outside a building
- moved means on the ground

Question 11

Explain riot, vandalism, and malicious acts under EC.

Answer 11

• restores cov excluded in the BFP
• riot is now covered & overrules exclusion in BFP
• riot is expanded to include assemblies of strikers and locked-out employees
• peril allows for insured to claim for damages caused by rioters, even fire caused by them
• courts have ruled that theft is a malicious act and insurers will usually exclude it

Question 12

Define riot.

Answer 12

• an act or threat of violence by one or more persons who are part of an assembly of 3 or more persons
• that might give rise to damage to prop or injury to persons

Question 13

Explain smoke coverage under EC.

Answer 13

• covers only smoke damage from sudden, unusual, and faulty operation of any stationary furnace
• that is the operation of a furnace must be deficient in all these ways at once
• cumulative damage from smoke emitted repeatedly over time is excluded

Question 14

Define smoke.

Answer 14

• smoke due to a sudden, unusual, and faulty operation of any stationary furnace.

Question 15

Explain leakage from fire protective equipment.

Answer 15

• covers loss arising when substances leak or discharge accidentally from fallen, broken, or frozen fire protection equipment on insured or adjoining premises
• is essential that this equipment is in good working order as it is frequently material to acceptance and rating of risk
• comes with a property protection systems clause

Question 16

Define leakage from fire protection equipment.

Answer 16

• means the leakage or discharge of water or other substances from within the equipment used for fire protection purposes for the “premises” described on dec page or for adjoining premises and loss/damage caused by the fall or breakage or freezing of such equipment

Question 17

Explain windstorm or hail peril.

Answer 17

• damage may be caused by both windstorm and hail during one storm
• loss arising from either or both of its constituent perils
  (damage must be attributable to one or other)
• for windstorms to apply, force of wind must be strong enough to be considered a storm

EXCLUSIONS
1) damage to interior of building/contents is ONLY covered if damage occurs at same time as and results from an opening caused by windstorm/hail

2) losses due to other causes that might have had wind or windstorm as a contributing factor
ex) roofing not installed properly

REMOVAL OF WINDSTORM DEBRIS

• extension that relates to cost of removing windstorm debris
• applies to the cost to remove debris of insured prop that results from loss/damage by an insured peril
• it will not indemnify for costs of removing debris of prop that is not insured under policy

Question 18

What are the other additional perils available?

Answer 18

1) falling object
- refers to object striking exterior roof or walls of building
- usually included in a package of add perils

2) glass breakage
- usually insured under all risks or separate rider
- glass riders include a schedule that specifies # of plates, size and location of each plate and sometimes limit of liab
- details of insured lettering, ornamentation, tape and foil may also be included
- blanket - all exterior glass may be printed instead or words to that effect
- coverage may be acquired by endorsement for breakage of any glass that is part of an insured building and for a stated limit, any one occurrence
- limit per occurrence is usually small, $250 is common

3) water damage
i) water escape
ii) sewer back up
- cov must be purchased separately
iii) flood

4) Collapse
- includes collapse due to weight of ice, snow, sleet
- excludes earth movement of any kind
- coverage is usually extended to include structural damage to a building insured or containing property insured caused by weight of ice, snow, sleet whether actual collapse has occurred

Question 19

Explain water escape.

Answer 19

1) freezing of a heating, plumbing, or AC system
- covers cost of repairing damage to system itself caused by freezing
- includes cost of tearing out and replacing section of wall to repair plumbing

2) escape of water from a plumbing, heating, AC system
- no coverage for cost of repairing system itself (except for freezing), but resulting water damage will be covered

3) escape of water from a public watermain

EXCLUSIONS

1) freezing of any part of a system not in a building where heat is maintained during heating season
- excludes damage to system itself and resulting water damage
ex) turning heat off during winter

2) water escaped from a sewer, sump, septic tank, eavestrough or downspout

3) losses that occur while a building is vacant or in the course of construction (even if permission was given)
ex) renovating and not turning water off

Question 20

What are the exclusions listed under flood?

Answer 20

1) water that backs up through sewers, sumps, septic tanks, or drains

2) water below ground
- including water that puts pressure on or flows, seeps, or leaks through sidewalks, driveways, foundations, walls, basements, or other floors
- or through doors, windows, or other openings

Question 21

Define flood.

Answer 21

• when added as a peril to a fire policy flood generally means:
  waves, tides, tidal waves, and the rising of, breaking out or the overflow of any body of water, whether natural or man made

Question 22

What does a body of water include?

Answer 22

• watercourse, dam, or reservoir but would not include ordinary surface water from heavy rainfall or rapid snowmelt