Insurance Services Office's (ISO's) changes to various commercial property and cause of loss coverage forms were highlighted in the previous post. The five new commercial property endorsements and 13 revised property endorsements are outlined in the following sections.

Newly Filed Commercial Property Endorsements

Building Glass - Tenant's Policy (CP 14 70): Lease and rental agreements often require the tenant to insure the building's glass even when not required to provide coverage for the entire building. This new endorsement allows the tenant to more specifically insure only the glass. Previously, the insured purchased building coverage and limit it to glass by notation on the declaration page; creating a problem with the agree value loss settlement option. The new CP 14 70 corrects the valuation problem and simplifies the coverage process.

Limitation on Loss Settlement - Blanket Insurance (Margin Clause) (CP 12 32): This optional endorsement is available for attachment to any commercial property policy insuring real and/or personal property on a blanket basis. The endorsement serves to limit the amount of coverage at a specified location or for a specific type of property to the amount provided in the schedule of values multiplied by a defined percentage. For example, if the schedule of values indicates that a particular building has a replacement cost of $100,000 and the CP 12 32 endorsement indicates a margin of 115 percent, the maximum amount of coverage available for that building is $115,000 ($100,000 x 115%). The same calculation applies to any property insured on a blanket basis if this endorsement is attached.

Deductibles are always subtracted from the total amount of the loss, not from the amount of coverage available; this principle includes property insured using the CP 12 32 margin clause endorsement. As an example, assume the building in the example from the above paragraph suffered a total loss of $130,000 with a $10,000 deductible. The maximum the insured could ever be paid based on the example policy's 115 percent margin is $115,000. The deductible is subtracted from the $130,000 loss not the $115,000 maximum limit. Applying this principle results in $120,000 eligible for coverage, however, since the insured is limited to $115,000, the $5,000 difference comes out of the insured's pocket. Of course, this example assumes no coinsurance violations.

Coinsurance penalties are based solely on the blanket limit, not on a per building basis. The amount of loss is multiplied by the coinsurance penalty (calculated in the traditional manner) and the deductible is subtracted to develop the total amount payable. Continuing with the above example, assume the total limit for all buildings is $500,000 and the insured carries $400,000. Blanket coverage requires the insured to carry 90 percent insurance to value to meet coinsurance requirements. The insured should have carried $450,000 but only carried $400,000; all losses will be reduced by the 11.1 percent coinsurance penalty (Did/Should). Thus the above loss would be calculated as follows:
• Amount of loss: $130,000
• Times the Coinsurance penalty: 0.889 (Did/Should or $400,000/$450,000)
• Equals (penalty amount): $115,570
• Minus the Deductible: $10,000
• Equals Total Payment: $105,570

The insured will be out of pocket $24,430 for this loss (derived from a combination of the coinsurance penalty and the margin percentage).

A small rate credit is given when this endorsement is attached. The credit is based on the margin percentage chosen according to ISO.

Business Income - Landlord as Additional Insured (Rental Value) (CP 15 03): A tenant may be required by the lease agreement to provide business income loss of rents coverage for the benefit of the landlord. The CP 15 03 was created as a means to meet this requirement. This can be attached to both the Business Income coverage forms (CP 00 30 and CP 00 32).

Additional Insured - Building Owner (CP 12 19): As the name suggests, this endorsement allows the tenant to add the building owner as an additional insured regarding the building coverage. Used when the tenant is responsible for providing building coverage.

Discretionary Payroll Expense (CP 15 04): Used with both business income forms (the CP 00 30 and the CP 00 32), this new endorsement allows the insured to cover the payroll expenses of specified individuals or classes of employees for the entire period of restoration or a set number of days (the days do not have to be sequential) whose services are not necessary to resume operations.

Both business income forms (CP 00 30 and CP 00 32) state that business income loss will be calculated based in part on payroll expenses of employees "…necessary to resume operations." An employee may not be NECESSARY to the resumption of operations, but the insured may still want to provide coverage for that employee for economic or any other reason. The payroll of an employee not necessary for the resumption of operation is considered "discretionary."

Revised Commercial Property Endorsements

Only the revisions to each of these forms are outlined below. Neither the purpose nor the coverage specifics of the endorsements are provided.

Civil Authority Changes (CP 15 32): A time element endorsement that allows modification of the one mile and/or four-week limitations contained in the revised commercial property policy language.

Business Income Changes - Beginning of the Period of Restoration (CP 15 56): Allows the insured to eliminate the 72-hour waiting period by reducing it to 24 hours or no waiting period. Revision of this endorsement resulted in the withdrawal of the CP 15 55 (Business Income Changes - Time Period).

Outdoor Signs (CP 14 40): Allows the insured to increase the sign coverage limit (policy provides $2,500). The revised commercial property policy extends open perils coverage to all signs, this form is no longer used to change the covered perils.

Condominium Commercial Unit-Owners Optional Coverages (CP 04 18): This endorsement allows the insured to identify the specific unit or units to which these coverages apply.

Loss Payable Provisions (CP 12 18): Added the option to name the building owner as a loss payee. Remember, the newly introduced CP 12 19 allows the insured to name the building owner as an additional insured.

Ordinary Payroll Limitation or Exclusion (CP 15 10): The revised form specifies that it is not necessary for the number of days covered by the endorsement to be consecutive. Thus, it does not have to be 90 consecutive days.

Windstorm or Hail Percentage Deductible (CP 03 21): New wording confirms that the endorsement does not negate the commercial property policies water exclusion.

Windstorm or Hail Exclusion (CP 10 54): Exclusion can now be made location specific.

Vandalism Exclusion (CP 10 55): Exclusion can now be made location specific.

Sprinkler Leakage Exclusion (CP 10 56): Exclusion can now be made location specific.

Business Income From Dependent Properties - Broad Form (CP 15 08): The revised endorsement explicitly clarifies that highways and other means of transportation are NOT miscellaneous locations.

Utility Services - Direct Damage (CP 04 07): This commercial property endorsement was altered to dovetail with the new exclusionary wording found in the commercial property policy and cause of loss form. The revised wording removes the qualifying statement that the utility service property be located off premises.

Utility Services - Time Element (CP 15 45): This time element endorsement was altered to dovetail with the new exclusionary wording found in the commercial property policy and cause of loss form. The revised wording removes the qualifying statement that the utility service property be located outside a covered building.

Conclusion and Following

This and the previous post highlighted changes to the commercial property policy made effective 12/08. Readers may want to get copies of the forms for a more specific view of the changes.

This Wednesday we will begin a series on Business Income coverage. All aspects of business income will be detailed beginning with the need for coverage, moving into how to complete the business income worksheet and how to calculate the correct coinsurance percentage. After that, all the aspect of this most important yet greatly misunderstood coverage will be detailed.