Several weeks ago, MyNewMarkets.com posted a two-part series regarding coverage gaps and selling to those gaps. “Gaps That Sell” and “Three Homeowners’ Policy Gaps that Sell” detailed the different levels and classifications of coverage gaps, how to plan for those gaps and specific homeowners gaps of which agents need to be aware. This post is the first of a three-part series expounding on the theme of using coverage gaps to sell; but rather than specific coverage gaps, these three posts focus on endorsements to the commercial property, commercial auto and commercial general liability policies every insured should consider or avoid (in the case of the CGL article).
Three key commercial property endorsements are discussed in this first installment, the: 1) Additional Covered Property endorsement (CP 14 10 or state-specific form); 2) Additional Building Property endorsement (CP 14 15); and 3) Joint or Disputed Loss Agreement (CP 12 70). Obviously these are not the only commercial property endorsements valuable to a specific insured, but these are three every insured should consider.
Additional Covered Property Endorsement
The commercial property policy contains a list of “property not covered” within the form itself. Among the list of excluded property exists several property types or real and personal property the insured (and possibly even the agent) may assume is covered by the policy but is not. Examples include building foundations, underground pipes, flues or drains and fencing (this is not a complete list of excluded property, just a sample).
Some excluded property can be added back to the list of “covered property” via the Additional Covered Property endorsement. Two broad versions of the form are available from ISO – based on the state in question:
- The CP 14 10. This is essentially a blank form allowing the insured to specifically list the property they wish to remove from the “property not covered” list and include as covered property; and
- ISO State-specific endorsements. Two examples are N.C. (CP 14 11) and Va. (CP 14 12). In forms such as these, several types of real and personal property are taken from the list of “property not covered” within the unendorsed coverage form and listed on the endorsement. The insured chooses which property it desires to include as “covered property” and indicates that choice by placing an “X” in the box next to that property class.
Any removal of property from the “property not covered” list and its endorsed inclusion on the “covered property” list is, of course, subject to underwriter approval – regardless of which version of the form is used.
Interestingly, some of the real property and costs found on the “property not covered” list is often included when the building’s replacement cost is calculated, yet excluded at the time of loss. Foundations and the cost of excavations, grading, filling and backfilling are good examples. These values and costs are excluded, but the building cannot be rebuilt unless these activities are done.
Foundation can be severely damaged by certain causes of a loss (especially fire); the cost to tear up, remove and replace the damaged foundation can be expensive. The unendorsed commercial property policy excludes these costs from coverage. And before the new/replacement foundation can be laid, the land must be graded, possibly even requiring some excavation. These costs, too, are excluded in the unendorsed CPP. Using the Additional Covered Property endorsement to cover just these two otherwise excluded expenses make the endorsement a near must-have for insureds responsible for insuring the building. Just remember to include these values/costs in the building value.
Other key real property normally excluded from coverage which can be added back under these endorsements include: exterior fencing, retaining walls, underground pipes, flues or drains, underground tanks, bulkheads, pilings, piers, wharves, docks, bridges, roadways, walks, patios and other paved surfaces. Some personal property also can be moved to the “covered property” list by use of the Additional Covered Property endorsement including: vehicles or self-propelled machines (including watercraft and aircraft) and animals.
Nearly every insured in need of real property coverage should consider this endorsement to extend the definition of “covered property.” Building owners and tenants required to provide building coverage can greatly benefit from this endorsement. Agents should use the list of “property not covered” as a tool to help them manage the client’s insurance risk. Combined, the exclusionary list and the endorsement can be used like a checklist to confirm that all the insured’s exposures have been discovered and discussed.
Additional Building Property
Is a particular piece of insured property considered “building” or “business personal property?” Unless the intent is made clear up front the answer might be subject to interpretation following a loss. The unique purpose of the Additional Building Property (CP 14 15) endorsement is to specifically cover property that can be considered either real or personal property as “building” to avoid gray areas at the time of loss.
“Permanently installed machinery and equipment” is defined as part of the “building” within the CPP. “Machinery and equipment” is listed also under the definition of “business personal property.” The difference is obviously the term “permanently installed.” However, what constitutes permanent installation? Does it mean bolted to the floor or wall such that removal would cause damage to the building proper? What about equipment that is bolted to “real property” (making it real property by definition) but can be removed easily leaving no signs of damage after some minor repair?
A few examples might include a pipe organ in a church; semi-permanently installed equipment, chairs and tables bolted to the floor in dental and medical offices; and production machinery simply bolted to a concrete floor to keep it from vibrating out of place. Although not an all-inclusive list, this provides an example of the gray area of “permanently installed.”
Another potentially fuzzy loss is loss to real property improvements and betterments made by the tenant in a leased space. The definition of business personal property extends to include the tenant’s “use interest” in their improvements and betterments; but what about the value of the improvements and betterments if, as is likely the case, the tenant has to pay to replace the improvements and betterments following a loss?
“Completed additions” are included within the CPP’s definition of “building.” This term theoretically encompasses improvements and betterments but not explicitly. Better to specifically endorse the policy to include tenant’s improvement and betterments as “building” than depend on an interpretation after the loss.
Anytime property can be covered as “building,” the insured should take the opportunity. The reason, the rate is lower for building than for business personal property. Another reason to consider this endorsement is coverage limits. If the insured considers and includes some property under the building limits, yet the insurance carrier considers it business personal property when adjusting the loss, there may be a coinsurance penalty. Of course this problem can be fixed by using blanket limits.
To activate coverage in the Additional Building Property (CP 14 15), the insured lists the building number, the premises number and describes the property to be defined as “building.” The endorsement states that the property listed in the schedule is considered part of the “building” coverage and is no longer considered “business personal property.”
Most insureds have property that could be considered either real or personal property; use this endorsement to remove any question or debate that may arise following a loss.
Joint or Disputed Loss Agreement
Use and discussion of this endorsement is based on the presupposition that the insured has in place equipment breakdown coverage (formerly known as boiler and machinery). Every insured has an equipment breakdown exposure and should buy the protection.
A detailed discussion of equipment breakdown coverage is outside the intended scope of this article; however, it must be noted that equipment breakdown protection fills several cause of loss gaps present in the commercial property policy. Examples include loss to equipment (such as HVAC and telephone equipment) caused by power surge, explosion of steam pipes, boilers, etc and other such loss or damage.
When there is a CPP and a separate equipment breakdown policy in place there is the possibility that one loss can encompass and trigger both coverage forms. With two carriers involved, there is the possibility that any loss payment will be delayed as the carriers attempt to piece together the incident and decide which carrier should pay the bulk of the claim. This is where the Joint or Disputed Loss Agreement comes into play.
The Joint or Disputed Loss Agreement (CP 12 70) simply requires the CPP and equipment breakdown carrier to pay the insured for the disputed loss as soon as the policy provisions are met (filing of a proof of loss, agreement on the insurable amount of damage, etc.) without holding the insured hostage while the carriers debate the amount of each carrier’s liability for the loss. The form requires both carriers to pay half of the disagreed upon loss and then arbitrate between themselves after the insured has been indemnified.
Once the insured has been made whole, the insurance carriers continue their arbitration until two out of three arbitrators agree on the split of liability. The insurer found the most liable must reimburse the other carrier the difference between the 50 percent already paid and their actual liability, plus liquidated damages. Liquidated damages are developed by multiplying the highest prime rate in effect on the day the agreement is invoked by 1.5. That percentage rate is applied during the period of arbitration (“period of Liquidated Damages”).
For the insured to benefit from the provisions of the Joint or Disputed Loss Agreement, BOTH the CPP and the equipment breakdown policy must contain this provision; either by endorsement or by inclusion in the form. Commercial package policies must generally be endorsed while many equipment breakdown forms include the wording in the policy language. Regardless, both forms must contain this provision. A simple way to avoid the problem is to use a combined commercial property/equipment breakdown policy.
The two most important property coverages every insured should purchase may be Business Income and Ordinance or Law protection. Beyond those, these three detailed commercial property endorsements should be considered for every insured.
Commercial auto coverage is the focus of the next installment. Four commercial auto endorsements every insured should consider are detailed in the coming post.