Key Point Review Questions Study 9

Question 1

1) What is the difference between personal and commercial property insurance forms in the risks they encompass?

Answer 1

Personal property insurance encompasses policies for the buildings, contents and related exposures of private property owners. Those policies also include extensions for personal property not used for any commercial purpose.
Commercial property insurance encompasses policies for property and related exposures of business owners operating manufacturing, mercantile, and contracting operations.

Question 2

2) How is personal property insurance more of a commodity than commercial property insurance?

Answer 2

It does not lend itself to the kind of attention given to each commercial risk. It is generally underwritten by broad rules of eligibility. The fact that all insured risks are dwellings gives the class its homogeneity.

Question 3

3) What is the difference between personal and commercial property insurance forms in the language used in wordings?

Answer 3

Habitational policies are written in plain language. Commercial policies have traditionally been written in a formal legal language.

Question 4

4) What is the difference between personal property and commercial forms in the wordings themselves?

Answer 4

The format of the wordings themselves is different. Commercial wordings are generally more modular, with separate forms for each different type of insurance, while habitational policies will include coverage for property, crime, and liability all in one form.

Question 5

5) How do the agreements differ between the insurer and insured in personal and commercial forms?

Answer 5

The agreements between insurer and insured in personal property forms are simpler than their counterparts in the commercial property forms. Habitational policy wordings do not refer to direct loss, indemnity calculation, or insured perils. They say simply that the insurer provides the insurance described in the policy in return for payment of the premium and subject to the specified terms.

Question 6

6) How do the terms defined differ between personal and commercial property?

Answer 6

In commercial forms, terms are defined at the end of the policy and shown in quotation marks wherever they are used in their defined sense earlier in the form. In habitational forms, terms are defined at the beginning of the policy and may not even be shown in quotation marks throughout the text.

Question 7

7) How are exposures treated differently between personal and commercial property insurance?

Answer 7

There are differences in how some exposures are treated. The vacancy exclusion in the homeowners forms differs from the commercial property forms. Another key difference is the flood exposure.

Question 8

8) How does the flood exposure differ between personal and commercial property insurance?

Answer 8

Both personal and commercial property forms exclude flood. But commercial insurers allow their insureds to “buy back” flood coverage by endorsement.

Question 9

9) What are some instances where personal and commercial property insurance can complement each other?

Answer 9

The condominium corporation obtains a commercial property for the building which includes the common areas. The individual unit owners obtain coverage for their units by buying a condominium unit owners form.
Loss involving apartment buildings is another good example.

Question 10

10) How are personal and commercial property insurance similar to the perils they insure?

Answer 10

Commercial wordings insure against many of the same perils we have discussed for habitational policies: fire, named perils, all risks, or multiple perils. Commercial wordings include floater, as well as policy wordings and endorsements.

Question 11

11) How are contents defined under commercial property insurance?

Answer 11

Contents include but is not limited to stock, including packaging and labelling, equipment, leasehold or tenants improvements, the property of others, and all contents usual to the business of the named insured.

Question 12

12) What are the most common wordings that insure commercial property on a broad-form basis?

Answer 12

• The Commercial Building Form (CBF), insuring the building
• The Commercial Property Floater (CPF), insuring stock, equipment and other contents
• The Commercial Building, Equipment and Stock forms (CBES)

Question 13

13) What property is excluded under the Commercial Building, Equipment and Stock Form?

Answer 13

Property excluded are money, and other valuable property, automobiles, watercraft, furs or jewelry, and property vacant for more than 30 days. Loss or damage to any property undergoing some work process is also excluded.

Question 14

14) What perils are excluded under the Commercial Building, Equipment and Stock Form?

Answer 14

Flood and earthquake, Sewer Backup, By-Laws, Inventory Shortage, Pollution, Environmental Perils, Terrorism, Boiler and Machinery Breakdown.

Question 15

15) What coverage is provided for earthquake and flood under the Commercial Building, Equipment and Stock Form?

Answer 15

Separate insurance is generally available for the perils flood and earthquake. Such insurance carries higher deductibles than other property insurance, it also includes definitions of the terms flood and earthquake.

Question 16

16) What is adverse selection?

Answer 16

Occurs when those with higher risks purchase insurance in greater amounts than those with lower risks. Much of insurance law and practice is designed to control adverse selection. Insurers protect themselves from adverse selection by attempting to measure risk either charging more for the higher risks or reusing to cover them at all.

Question 17

17) What coverage is provided for sewer backup under the Commercial Building, Equipment and Stock Form?

Answer 17

Separate insurance may be available from some insurers. In certain areas, insurers will not provide this insurance at all due to the severity of the risk.

Question 18

18) What coverage is provided by by-laws under the Commercial Building, Equipment and Stock Form?

Answer 18

Insurance is available to cover these costs by endorsement to the basic commercial wording.

Question 19

19) What coverage is provided for inventory shortage under the Commercial Building, Equipment and Stock form?

Answer 19

Coverage is rarely available for loss due to inventory shortage.

Question 20

20) What coverage is provided for pollution under the Commercial Building, Equipment and Stock form?

Answer 20

Coverage for a below-ground spill or contamination on the insured’s own property is excluded, but can generally be added back for a small additional premium. In most cases this premium is negotiable.

Question 21

21) What coverage is provided for environmental perils under the Commercial Building, Equipment and Stock form?

Answer 21

Losses arising from these perils are uninsurable.

Question 22

22) What coverage is provided for terrorism under the Commercial Building, Equipment and Stock form?

Answer 22

Separate coverage for terrorism is available for commercial risks. It is usually only through specialty markets. Conditions of insurance can be restrictive, and the premium charged can be substantial.

Question 23

23) What coverage is provided for boiler and machinery breakdown coverage?

Answer 23

Separate insurance is generally available for losses arising from these perils.

Question 24

24) What coverage is provided under the unnamed or temporary locations extension for the Commercial Building, Equipment and Stock form?

Answer 24

The form provides a limited amount of insurance on property while at locations not named on the policy. It is used to insure property that is occasionally off premises, such as files an employee takes home from work. It can also cover an unplanned overflow of stock or equipment stored off-site.

Question 25

25) What coverage is provided under the transit extension for the commercial building, equipment and stock form?

Answer 25

The CBES form extends to cover property while in transit to or form the insured’s premises. The extension is generally intended to afford a limited amount of temporary or contingent insurance.

Question 26

26) What coverage is provided under the Salesman’s samples extension?

Answer 26

The CBES form also extends coverage to property in the custody of sales representatives at unnamed locations and while in transit. Limits for insurance are generally very small. There is no coverage for samples left in a vehicle overnight.

Question 27

27) How does valuation apply to commercial property forms?

Answer 27

The amount of insurance should reflect the valuation basis, typically replacement cost or actual cash value, on which claims will be settled under the policy, on which claims will be settled under the policy, as well as the likely effects of certain other features of the policy or risk itself on the value of the claims settlement.

Question 28

28) What is co-insurance and what formula is used to calculate it?

Answer 28

It requires an insured to carry insurance equivalent to at least a specified minimum percentage of the value of the property or else become a coinsurer for a given loss.
Amount of insurance carried/minimum amount of insurance required X Amount of loss

Question 29

29) What is the Stated Amount Insurance Clause, and how is it used?

Answer 29

It encourages insureds to maintain a minimum amount of insurance, specified in dollars rather than as a percentage of actual cash value or property insured. The insurer establishes this minimum, or stated amount occasionally 90 percent, but most often 10 percent of the valued reported by insureds.
At policy inception and every renewal the insured submits a signed statement of values, prepared by accountants and supported by appraisals. In return, the insurer agrees that no coinsurance penalty will be applied to any loss.

Question 30

30) How are blanket limits used in commercial insurance?

Answer 30

A commercial insured may be allowed by its insurer to cover all of its property with a blanket limit instead of specifying individual limits for each type of property. A blanket limit can be set by combining the coverage at a single location, or at multiple locations, into a single limit for property of every description or contents of every description.

Question 31

31) What insurance solutions exist for commercial businesses that have wide swings in the stock of their business?

Answer 31

Two common ways to solve a challenge of fluctuating stock is insuring on a stock reporting basis or making use of a Peak Season Endorsement.