More Insureds Need Spoilage Coverage

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by Christopher J. Boggs, CPCU, ARM, ALCM

Spoilage coverage is most commonly thought of in relation to restaurants and other such establishments. But the need for spoilage coverage goes far beyond food-based risks; in fact, there is a myriad of risk types that need the protection offered by the Spoilage Coverage (CP 04 40) endorsement.

To effectively recognize a spoilage exposure first requires knowledge of the breadth of coverage provided by the CP 04 40. Coverage provisions found in the Spoilage Coverage form are discussed in the upcoming paragraphs.

Self-Contained Coverage – Sort Of

Although the Spoilage Coverage endorsement is attached to the commercial property policy, in some respects the CP 04 40 can be viewed as a self-contained policy. The endorsement specifically defines and narrows the breadth of covered property and goes on the limit the causes of loss available for that “covered property” to two named perils. Additionally, the endorsement is subject to its own limit and deductible.

Covered Property
Only “perishable stock” located at the premises described on the declarations is extended coverage in this endorsement; no other type of property is protected within its wording. “Perishable stock” is defined to mean personal propertyMaintained under controlled conditions for its preservation; and Susceptible to loss or damage if the controlled conditions change.”

Just a review of the definition of “covered property” opens up the broad realm of possible risk types in need of spoilage coverage.

Covered Causes of Loss
The CP 04 40 limits protection to two named causes of loss: 1) Breakdown or Contamination; and 2) Power Outage. One or both can be chosen when building the coverage (it’s better to combine the two). Each is defined by Insurance Services Office as follows:

  • Breakdown or Contamination means: 1) change in temperature or humidity resulting from mechanical breakdown or mechanical failure of refrigerating, cooling or humidity control apparatus or equipment, only while such equipment or apparatus is at the described premises; and 2) contamination by the refrigerant.
  • Power Outage means change in temperature or humidity resulting from complete or partial interruption of electrical power, either on or off the described premises, due to conditions beyond your control.

On the surface the protection extended from these definitions appears very limited; however, the effective coverage is actually quite broad in relation to the purpose of the endorsement. The endorsement protects the insured against the financial consequences of direct loss to listed personal property damaged or made unusable by: 1) nearly any change in temperature; or 2) contamination caused by a release of a refrigerant (which might be considered a pollutant otherwise).

Simply, the deductible applicable to the underlying property coverage form is not applicable to the spoilage endorsement. The insured can choose to use a deductible lower, the same or higher than the deductible found in the underlying property coverage.

Compared to Equipment Breakdown Coverage

Could an equipment breakdown policy be used in place of the Spoilage Coverage endorsement? A reasonable question; however, there are limitations in an equipment breakdown policy that make it an ineffective substitute for the CP 04 40.

Equipment breakdown (EB) forms define a covered loss as a “breakdown” to “covered equipment.” Initially this appears rather broad, but the definition of “breakdown” severely limits the coverage for perishable stock when compared to the spoilage coverage endorsement.

“Breakdown” within the EB forms is defined as: “…direct physical loss that causes damage to ‘Covered Equipment’ and necessitates its repair or replacement.” The key phrase in this definition is, “and necessitates its repair or replacement.” If the power just goes out or the equipment just wears out (this is not direct physical damage), any resulting spoilage loss is not covered; there must be some actual physical damage to equipment for the coverage to apply.

Protection provided by the spoilage coverage endorsement does not require that the equipment sustain physical damage necessitating repair. It only requires a failure or a power outage. Review the above definitions from the spoilage coverage form.

Another possible issue with depending on an EB policy to provide spoilage coverage is that spoilage is not automatically provided. To acquire spoilage coverage, the must be a limit chosen or the value of the raw material must be included in the limit of coverage and “Included” entered next to Spoilage on the EB’s declaration page.

Equipment breakdown forms cover a lot of gaps in the protection present in commercial property policies using the special cause of loss form; however, EB should not be used as a substitute for the spoilage coverage as it is severely limited in its scope in relation to what triggers coverage. Insureds should consider using EB in conjunction with spoilage coverage to assure the broadest protection.

Two Major Spoilage Coverage Policy Provisions

“Selling price” and the presence of a “refrigeration maintenance agreement” are the two remaining major policy provisions found in the spoilage coverage form. Neither grants nor limits coverage. The “selling price” provision alters the valuation of the covered property falling a loss; and the “refrigeration maintenance agreement” wording alters the rating and ultimate price of the coverage.

Selling Price
Property covered by the spoilage coverage endorsement is valued using the same valuation method applied to personal property in the underlying commercial property policy. However, insureds do have the option to alter the method of valuing its covered property (“perishable stock”) following a covered loss by choosing the “selling price” option.

As its name suggests, this option changes the valuation method to the amount for which the insured was selling the product. Any applicable discounts and usual expenses (i.e. commissions) are subtracted from the selling price to arrive at the final value (to assure that the payment does not violate the principle of indemnification).

If the selling price option is chosen, the insured must consider that value when choosing the limit of coverage. Although there is no coinsurance penalty, the insured should be fully protected.

Refrigeration Maintenance Agreement
Insureds can receive a 25 to 33 percent rate credit on the Breakdown/Contamination coverage, depending on the insured’s classification, for having in place a refrigeration maintenance agreement. The rate credit does not apply to Power Outage coverage (if chosen).

Essentially, a refrigeration maintenance agreement is a contract between the insured and a refrigeration service or maintenance company. The agreement must be maintained in full force for the entire policy period else there are extreme consequences in relation to the coverage; the spoilage coverage form states: “You must maintain a refrigeration maintenance or service agreement. If you voluntarily terminate this agreement and do not notify us, the insurance provided by this endorsement will be automatically suspended at the involved location.”

If the insurance carrier discovers the cancellation of a maintenance agreement following an otherwise covered loss, they have the contractual right to deny coverage for failure to comply with policy provisions.

Policy Exclusions

Only five exclusions applicable to the underlying policy’s property cause of loss form cross over to apply to the spoilage coverage endorsement. These are: earth movement, governmental action, nuclear hazard, war and military action and water.

There are, however, five additional exclusions that apply specifically to this coverage endorsement. The policy reads: “We will not pay for loss or damage caused by or resulting from:

  • The disconnection of any refrigerating, cooling or humidity control system from the source of power.
  • The deactivation of electrical power caused by the manipulation of any switch or other device used to control the flow of electrical power or current.
  • The inability of an Electrical Utility Company or other power source to provide sufficient power due to:
    1. Lack of fuel; or
    2. Governmental order.
  • The inability of a power source at the described premises to provide sufficient power due to lack of generating capacity to meet demand.
  • Breaking of any glass that is a permanent part of any refrigerating, cooling or humidity control unit.

Examples of Spoilage Exposure Risks

One simple question can pinpoint those risks that have a spoilage exposure. “If you experience an extended loss of power, will any of your stock be destroyed, made unusable or die?” The answer may reveal spoilage exposures where not previously considered. Common and uncommon examples of risks with a spoilage exposure include:

  • Restaurants and all manner of food service risks;
  • Bakeries;
  • Ice cream stores (and mobile operations);
  • Fruit and vegetable retailers;
  • Cheese stores;
  • Grocery stores, convenience stores, butchers, etc.;
  • Florists and greenhouses;
  • Pharmaceutical operations;
  • Food processing plants;
  • Cigar stores;
  • Tropical fish stores;
  • Blood banks (and like operations);
  • Laboratories; and
  • Cold storage warehouses.

Obviously, this is not an all-inclusive list of risks with a spoilage exposure, but this may prove that there are a lot of insureds with a spoilage exposure needing this coverage.

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  • December 2, 2009 at 2:18 pm
    Pennsylvania Agent says:

    Very timely article.

    I just had to explain the first exclusion “The disconnection of any refrigerating, cooling or humidity control system from the source of power.” to a client.

    I think most people assume stupidity is a covered cause of loss, like it is in many coverage forms, but if you accidentally unplug a unit; and lose lots of expensive food as a result; not covered!

  • February 6, 2013 at 12:35 am
    Jennifer Lynch says:

    As stated on the top of the CP 04 40 form – the endorsement ‘modifies’ the Bldg and Bpp Coverage Form (CP 00 10). How then should or would it affect the BI/EE form CP 00 30? The CP 00 30 points to ‘covered causes of losses in the declarations page-assuming they mean, basic, named or open/all risk perils. Since Power Outage is now a covered cause of loss for ‘food/refrigerated items’…how might a bi/ee claim be affected? Yes, this question is a result of good old Sandy!

  • July 23, 2014 at 1:38 pm
    Robert Minichini says:

    Anyone know where I can purchase stand-alone spoilage coverage?

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