By Diana L. Kowatch, CPCU, AU, AAM, CPIW
The Businessowners Policy (BOP) has been a part of commercial insurance for almost 25 years. We have watched it evolve from a simple, designated premises, limited-peril contract into the comprehensive, sophisticated package policy for small businesses that it is today. Now the BOP is undergoing yet another metamorphosis which will expand its eligibility and add split-rating features--propelling it to yet another level of applicability to today's commercial insureds.
Why change the BOP yet again? Because the insurance industry--producers, insurers, and insureds alike--asked for it. Based on this input from the industry, the Insurance Services Office (ISO) has made a number of significant changes. Many of the changes are in the area of what size and type of risks are eligible for the BOP Program. Other changes are worthwhile enhancements.
Finally, the ability to rate the property and liability separately is the sensible approach to the newly eligible contracting classes. Split-rating for contractors has been added accordingly.
ISO filed the changes to the BOP Program based upon a January 1, 1997, effective date. The affected forms and endorsements bear an 01/97 revision date. Recently, announcements were made of the first group of 29 states to approve the BOP revisions. Most have accepted the January 1, 1997, effective date (see December issue "PF&M Companion," page 36).
Changes to the eligibility criteria
Two major increases have been made to the eligibility criteria that should result in a large number of new insureds becoming eligible for the BOP Program. These two changes are:
--the increase in the maximum area from 15,000 square feet to 25,000 square feet for mercantile, services, office and wholesale risks; and
--the increase in the gross sales limit from $2 million to $3 million.
These changes apply to both the existing and new classes of eligible risks with the exception of restaurants. The restaurant classes that are eligible for inclusion in the BOP Program have different criteria--the square footage limitation is 7,500 and maximum gross sales are capped at $1 million.
All other categories and classifications (non-restaurants) are subject to the increased square footage and gross sales criteria.
The increase to 25,000 square feet is an interesting change. A 25,000-square-foot building is fairly significant. At 25,000 square feet a grocery store may be considered a supermarket, or a retail store may be considered a superstore by some insurers and may have individual company eligibility limitations.
Although the gross sales cap was bumped up from $2 million to $3 million, the disparity between the sales by square foot may be so great that many risks will still not be eligible for the new BOP Program.
Looking at the restaurant requirements, capping the gross sales at $1 million may eliminate many of the good, clean, well-managed limited-cooking and fast-food chain operations. The result may be a BOP Program with a higher number of restaurants that may not be as well controlled or well-run. Adverse selection may be an important factor to consider.
If one of the goals of the new eligibility criteria is to offer consistency between coverages offered by insurers, (thus reducing coverage gaps when competing and pricing,) the program may, instead, produce the opposite result. The type, size, and classes of business that may now be put into the BOP Program have become so broad that insurers who currently deviate with an insurer-specific BOP Program will continue to do so while others who offer the straight ISO BOP may find themselves in a position where they now feel the need to develop their own product.
Four new categories of classes are now eligible for the BOP. They include: 1) contractors; 2) limited cooking and fast-food restaurants; 3) convenience stores with gasoline pumps, and 4) laundry or dry cleaning operations.
Let's explore the eligible classes for each of the new categories.
Contractors
The new classes for contractors are listed below, showing the general liability classification description, followed by the general liability class code in parentheses after each. Again, this category is subject to the limitations of 25,000 square footage and $3 million in gross sales.
* Air Conditioning Systems or Equipment--dealers or distributors and installation, servicing or repair (91111)
* Appliances and Accessories--installation, servicing or repair--commercial (91150)
* Appliances and Accessories--installation, servicing or repair--household (91155)
* Carpentry--construction of residential property not exceeding three stories in height (91340)
* Carpentry--interior (91341)
* Carpet, Rug, Furniture or Upholstery Cleaning--on customer's premises (91405)
* Ceiling or Wall Installation--metal (91436)
* Concrete Construction (91560)
* Door, Window or Assembled Millwork Installation--metal (91746)
* Driveway, Parking Area or Sidewalk--paving or repaving--includes tennis courts (92215)
* Dry Wall or Wallboard Installation (92338)
* Electrical Work--within buildings, no burglar or fire alarm installation work (92478)
* Fence Erection Contractors (94276)
* Floor Covering Installation--not ceramic tile or stone (94569)
* Furniture or Fixtures Installation--in offices or stores, whether portable, metal or wood (95124)
* Glass Dealers and Glaziers--sales and installation (13590)
* Heating or Combined Heating and Air Conditioning Systems or Equipment--dealers or distributors and installation, servicing or repair--no LPG equipment sales or work (95647)
* House Furnishings Installation--not otherwise classified (96053)
* Insulation Work--plastic--excluding formaldehyde (96408)
* Insulation Work--organic or plastic in solid state--excluding asbestos or formaldehyde (96409)
* Insulation Work--mineral--excluding asbestos (96410)
* Interior Decorators (96611)
* Landscape Gardening--no spraying, tree removal or excavation (97047)
* Lawn Sprinkler Installation (new class--A new general liability code is required for this classification but ISO had not assigned one at press time.)
* Masonry (97447)
* Metal Erection--decorative or artistic (97650)
* Painting--exterior--buildings or structures--three stories or less in height--NOC (98304)
* Painting--interior buildings or structures (98305)
* Paper Hanging (98344)
* Plastering or Stucco Work (98449)
* Plumbing--commercial (98482)
* Plumbing--residential or domestic (98483)
* Refrigeration Systems or Equipment--dealers, distributors, installation, servicing or repair--commercial (98636)
* Roofing--residential (98678)
* Septic Tank Systems--cleaning (98805)
* Siding Installation--not over three stories (98967)
* Sign Painting or Lettering--inside of buildings--no spray painting (99003)
* Tile, Stone, Marble, Mosaic or Terrazzo Work--interior construction (99746)
* Window Cleaning (99975)
Restaurants
The restaurant category is open only to those facilities that have limited cooking, or are the fast-food type. ISO provides the following definition for "Limited Cooking Establishments":
"Limited cooking establishments are those where foods are prepared cold or cooked using appliances which do not emit sufficient smoke or grease laden vapors so as to require a complete restaurant or commercial exhaust system in compliance with NFPA Standard 96. Examples of permitted cooking appliances are electric sandwich grills, toasters, warming ovens, roller warmers, infrared snack warmers, microwave ovens, domestic ranges, pizza ovens. No grilling, open broiling, deep fat frying, roasting, barbecuing, solid fuel cooking, e.g., mesquite, charcoal or hardwood, or other processes capable of producing grease-laden vapors requiring an exhaust system are permitted."
Additional limited cooking
eligibility requirements
Limited cooking risks have additional eligibility requirements that are somewhat different from fast-food establishments. They are:
1. The total floor area cannot exceed 7,500 square feet.
2. Seating capacity may be of no greater than 75.
3. The risk may be with or without table service.
4. Alcohol sales can be beer or wine only--no other liquor sales are allowed. The sales of beer and wine may be no greater than 25% of total gross sales.
5. No bar or cocktail service is permitted.
6. If there is any catering service or service involving serving of food away from the insured's premises, it must not exceed 10% of total gross sales.
7. No seasonal operations are permitted. Seasonal operations are defined as risks that are closed for more than 30 consecutive days.
8. The risk must comply with NFPA Standard #101 Life Safety Code for places of assembly dealing with location, type and capacity of exits, seating capacity and spacing, lighting, and handrails.
9. The maximum gross sales limit is $1 million.
ISO has also defined fast-food establishments as follows:
"Fast-food establishments may include 'limited cooking' type appliances plus only the following processes capable of producing grease-laden vapors requiring an exhaust system: grilling, enclosed broiling, deep fat frying, roasting or barbecuing. Open broiling and solid fuel cooking, e.g., mesquite, charcoal or hardwood, are not permitted. All cooking must also be in compliance with National Fire Protection Association (NFPA) Standard #96."
Here is a quick, abbreviated look at the NFPA Standards #96:
1. The risk must have an automatic extinguishing system that covers the hoods, ducts and all of the surfaces of the grills, ranges, deep fat fryers and broilers.
2. The risk must have a current contract for semi-annual inspection and maintenance for the automatic extinguishing system, hood and ducts.
3. The risk must have a manual release on the doors or entry and exit ways, in the path of exit from the cooking area.
4. System temperature settings of systems with detectors must be set at specified levels.
5. Specific types of portable fire extinguishers (which are described in NFPA Standard #96) must be made available in the kitchen, and compatible extinguishing agents are required in the hood and duct fire protection system.
6. All deep fat frying units must be equipped with separate maximum limit controls that will shut-off the fuel source when the temperature reaches the level described in NFPA Standard #96.
7. Minimum clearance standards are set in NFPA Standard #96 for the distance between the hood, duct, and any combustible construction.
The following additional eligibility requirements apply to fast food establishments:
1. No more than 7,500 square feet in total floor area is permitted.
2. Seating capacity may be no greater than 150.
3. No waitress or table service is allowed.
4. There may be no bar or cocktail service.
5. Alcohol sales can be beer or wine only; no other liquor sales are allowed. Any sales of beer and wine can be no greater than 25% of total gross sales.
6. If there is any catering service or service involving serving of food away from the insured's premises, it must not exceed 10% of total gross sales.
7. No seasonal operations are permitted. Seasonal operations are defined as risks that are closed for more than 30 consecutive days.
8. The risk must comply with NFPA Standard #101 Life Safety Code for places of assembly dealing with location, type and capacity of exits, seating capacity and spacing, lighting, and handrails.
9. The maximum gross sales limit is $1 million.
The new restaurant classes are shown in the box at the right.
Remember, even though a risk is otherwise eligible, any building occupied in whole or in part by a manufacturing or non-eligible processing risk, cannot be placed in the BOP Program. Nor can restaurants at places of amusement. So independently owned cafeterias, concession stands or restaurants located in a building with a manufacturing, amusement, or non-eligible processing risk, are not eligible.
For those restaurants that also have either a playground, whether indoor or outdoor; or an amusement area (which includes mechanical rides, other play equipment, or more than two amusement devices such as video games, pinball machines or other similar devices,) there will be an extra charge made to the liability coverage. However, the amount of charge is up to the individual insurer.
Convenience stores with gasoline pumps
Newly added to the eligible categories of risks within the BOP Program are convenience stores with gasoline pumps.
ISO has provided a definition of convenience store as follows:
"A convenience food/gasoline store is an establishment:
a. Where the primary activity is the retail sale in limited amounts of a variety of canned goods, dairy products, prepackaged meats and other grocery items (newspapers, magazines, refreshment items, cigarettes, beer, wine and novelties may also be sold); and
b. Which also provides for the sale of gasoline."
Only one additional eligibility requirement applies to this class of risk. It is in addition to the overall BOP Program eligibility requirements as follows:
* gasoline sales may not exceed 50% of the total gross sales;
* no automobile service or repair operations;
* no car wash operations;
* no propane or kerosene tank filling operations; and
* no restaurant occupancies.
Two classes are available under convenience/food stores. One class is with gasoline and the other is without:
* Convenience Food Stores--54136
* Convenience Food/Gasoline Stores -09321
Laundries and dry cleaners
The final new category added to the BOP eligibility is laundries and dry cleaners. One eligibility criterion is "less than three pick-up stations." This category has two classes of eligibility. They are as follows:
* Laundries and Dry Cleaning Stores that use petroleum solvents and have less than three pick-up stations (Class Code 09501). Petroleum solvents include Stoddard type solvents and other combustible hydrocarbon solvents.
* Laundries and Dry Cleaning Stores that use synthetic solvents and have less than three pick-up stations (Class Code 09521). Synthetic solvents include Perchloroethylene as well as other synthetic solvents.
Property of Others--Bailees
Under the new version of the BOP, some wording changes have been made to the coverage for property of others. Under A. COVERAGE, 1. Covered Property, b. Business Personal Property, there is coverage for:
". . . (2) Property of others that is in your care, custody or control; but this property is not covered for more than the amount for which you are liable, plus the cost of labor, materials or services furnished or arranged by you on personal property of others;"
Note that the term "legally liable" has been removed, thus making this coverage more of a direct physical damage coverage and not a legal liability issue.
Coverage enhancements
In addition to adding new classifications and increasing the eligibility of the BOP Program, a number of coverage enhancements have been made to the protection offered. These enhancements are program-wide and apply to all classes. There are two types of enhancements. The first are basic coverage enhancements that have been built into the program itself. The second are optional coverages that may be purchased for additional premium.
Basic coverages
A quick recap of the major enhancements made to the basic program with no additional premium are listed below. Bear in mind that these are only the most significant. Included are:
* a provision for full exterior glass coverage on all floors of the building;
* an increase in the limit for newly acquired personal property from $10,000 to $100,000 per location;
* the inclusion of $5,000 accounts receivable coverage;
* the inclusion of $5,000 valuable papers coverage; and
* the inclusion of either the lesser of $5,000 or 5% of the building limit for increased cost of construction due to ordinance or law; and
* the provision of an additional increased liability limit option of $2 million.
Basic coverage enhancements applicable to contractors only:
Three coverage enhancements have been made that apply to the contractors category in order to make the BOP Program comparable to most artisan contractor policies currently available. These enhancements include:
* $5,000 for portable tools.
* $5,000 for contractors' equipment.
* aggregate liability limit of twice the occurrence limit.
Optional coverages
The following enhancements may be purchased for additional premium:
* the provision of a new option for contingent business income;
* the provision for higher limit on both accounts receivable and valuable papers coverages over the $5,000 basic limit automatically included;
* removal of the $100,000 limitation on EDP coverage;
* the provision of an option for loss caused by utility services equipment failure;
* the provision of more options for money and securities crime protection coverage;
* the provision of options to increase forgery crime coverage;
* now available as an option is professional liability coverages for funeral directors, hearing aid stores, opticians, beauticians, barbers, printers, and small-animal veterinarians;
* the provision to increase the hired auto liability/non-owned auto liability optional limits to $2 million to match the underlying;
* the provision to add coverage for partnership liability to multistate endorsement BP 04 04, Hired Auto Liability and Non-Owned Auto Liability.
Property deductible
Currently, the ISO Commercial Property Program has a minimum property deductible of $500. Effective with the new January 1997 revisions, the minimum or basic deductible in the BOP Program has been increased from $250 to $500 accordingly to match and be compatible with the other ISO commercial property coverages.
A buy-back option is available to return the deductible to $250.
Please note that this is a coverage reduction and that, as with all coverage reductions, it is important to make sure that insureds currently using the ISO BOP Program are properly notified upon renewal.
In addition to the change in the basic property deductible, optional windstorm or hail percentage deductibles are now offered. The percentages that may be selected are 1%, 2%, and 5%.
With these new changes and the addition of the contracting category, the rating basis will change some. For all classes other than contracting classes, there is no change in the indivisible, one premium, rating basis. However, for contractors, a new split-rating concept has been devised, similar to that of other commercial package programs, where the property and liability portions of an account have a different rating and exposure basis.
Property will be based upon the value or dollar amount of the covered property, and the liability rating basis will be based upon the insured's payroll.
A multitude of other form and coverage changes have been made to both the property and liability sections of the BOP Program. These changes are consistent with the January 1996 revisions to the commercial general liability program and the June 1995 revisions to the commercial property program. Detailed analysis of these changes is contained in PF&M Analysis Service as well as prior Rough Notes magazine articles. Feel free to contact us for more information.
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The newly eligible restaurant classes are:
* Cafeteria Style or Buffet--fast-food
* Cafes--fast-food
* Cafes--limited cooking
* Coffee Shops or Coffee Bars--limited cooking
* Concession Stands/Snack Bar--fast-food
* Concession Stands/Snack Bar--limited cooking
* Chicken--fast food
* Delicatessens and Sandwich Shops--fast food
* Delicatessens and Sandwich Shops--limited cooking
* Donut Shops--limited cooking
* Drive-ins/Service in car--fast- food1
* Drive-ins/Service in car--limited cooking1
* Drug Stores--fast-food
* Drug Stores--limited cooking
* Hamburger/Malt Shops--fast-food
* Hot Dog Shops--fast food
* Ice Cream and Yogurt Stores--limited cooking
* Mexican Style--fast-food
* Oriental Style--fast-food
* Other Ethnic Style--fast-food
* Pizza Shops--fast-food
* Pizza Shops--limited cooking
* Roast Beef--fast-food
* Salad Bars--limited cooking
* Seafood--fast-food
* Take-Out-Only Restaurants--no on-premises consumption of food--fast-food2
* Take-Out-Only Restaurants - no on-premises consumption of food--limited cooking2
1 When Drive-ins/Service in car and any other eligible restaurant classifications apply, rate and code the restaurant as Drive-ins/Service in car.
2 When Take-Out-Only Restaurants and any other eligible restaurant classification apply, rate and code the restaurant as Take-Out-Only Restaurants--no on-premises consumption of food.