ROUGH NOTES' PF&M EDITORS RESPOND
How does changed exposure affect coverage?
Q I represent a regional mutual insurance company and would like some guidance on how we need to revise our current policy with regard to gas station/grocery/restaurant risks. We have a client who now has a McDonald's franchise at a gas station. What endorsements do you suggest, and how does this affect other insurance provisions in both the CGL and BOP forms?
Here's a bit of additional background.
Aon Risk Services, "at the request of the McDonald's Corporation's insurance department, in concurrence with Oil Alliance Partners, their dealers and jobbers; and in accordance with the contractual agreement, has placed a master policy with a limit of $5,000,000 for each location with no policy aggregate and no deductible with respect to all insureds for the combined McDonald's locations (excluding kiosks) for premises liability only. The master policy concept was adopted to avoid lengthy discussions and costly legal expense in determining who is responsible for the area of the premises where an accident occurs. Coverage includes all common areas as well as the respective demised areas of the location. The policy period is 10-1-97 to 10-1-98."
Aon has prepared certificates of insurance evidencing coverage from 10-1-97 (or the opening of the location), to 10-1-98. The total annualized premium per location is $3,000, shared by McDonald's Corporations or its licensees. Each franchise owner is billed the pro-rated premium as shown on the certificate of insurance and an invoice has been sent. Thereafter the franchise owner is billed annually.
Aon says that with respect to the franchise owner's current package program, the franchise owner is responsible for informing his/her own insurance broker/agent and providing them with copies of the certificate of insurance. The franchise owner and broker/agent must then make sure that all other necessary coverages (including products liability) are added to each owner's individual policy. Further, Aon reminds the owners to monitor coverages closely to avoid duplication of coverage and to obtain proper premium credit for this coverage.
Our questions are as follows:
1. Is a "products-completed operations only" policy a consideration?
2. If we delete all premises coverage, are we then also taking away contractual, host liquor, watercraft, personal or advertising injury, and other such coverages?
3. Is a manuscript endorsement showing Aon/St. Paul's $5,000,000 premises liability coverage as primary insurance a valid consideration? (We are additional insureds, if the lease requires it.)
4. BO 00 09 shows liability coverage on an excess basis, but we wonder how the St. Paul "Other Insurance" clause reads.
5. Is subrogation an issue?
6. Is there anything else we should consider?
Our client has not yet received a copy of the St. Paul policy.
A We must start with our usual disclaimer and place emphasis on it under the circumstances. The Rough Notes Company, Inc., is not legal counsel and we cannot give legal advice. What we can do is offer some things to think about in regard to your questions.
At this point, we can offer only a few items to think about with respect to your concerns.
The key questions at this point are:
* What does the St. Paul CGL cover?
* Is it a "standard" CGL? Is it ISO?
* Is it an ISO derivative and if so, what are the derivations?
* What version of the CGL is in use? (Remember that several changes have occurred in the last few years regarding items such as pollution, defense, etc., so the version in the master policy compared to what your company is providing may have implications.)
* What endorsements have been attached to that master policy? Do they broaden coverages over what you would offer, or are there additional restrictions and exclusions?
* Are you contemplating the issuance of an umbrella? If so, how will your drop-down work? Will the removal of the aggregate violate your minimum limits policy?
Without these answers, you would be hard put to effectively help your insured. The insured has a right to receive a copy of the contract in a timely manner.
You do have some options regarding coverage. The options may include, but are not limited to:
* Manuscripting an endorsement to make your policy excess over the St. Paul master policy.
* Endorsing or tailoring the policy with appropriate deductibles for specific coverages such as a $5 million premises deductible per occurrence (that also excludes defense cost--an SIR would probably be the better bet), a $10,000 fire legal liability deductible, and a $1,000 medical payments deductible.
* Issuing an umbrella policy over the St. Paul master policy making it an excess layer for the premises coverage while dropping down to provide primary coverage on those items, such as products-completed operations and/or any other coverages possibly excluded or not provided in the St. Paul master. (Watch the aggregate issue--what does the umbrella do with that?)
Looking specifically at a couple of your questions, we will start with the first regarding whether or not a products-completed operations policy is an option.
It is an option, but keep in mind that some of the limits of liability on the underlying coverages are not consistent with what the insured has now and what the master provides.
Example: Fire legal in the St. Paul master policy is $10,000 but in your policy it is $100,000. Medical payments coverage in the master policy is only $1,000 versus your limit of $5,000. The insured would have less coverage in some areas should you use this approach. One other thing--Aon may be using a pre-simplification ISO form that has only the sudden and accidental pollution exclusion.
Deleting all "premises" coverage is an option, but the wording would be tricky. It would have to be very clear regarding what is being provided versus what is not.
For example, when is contractual provided and when is it not? When is host liquor provided, at which locations and for which circumstances, and when is it not? It may prove easier just to issue a products-completed operations policy.
A well-written endorsement showing the St. Paul master as primary or first layer and yours as excess or second layer is a good option for all of the coverages or limits mentioned. I would suggest you coordinate with St. Paul in making sure that there are no gaps.
Without knowing the wording of the St. Paul policy with respect to Other Insurance, I would not depend on any existing wording in your own policy. If both have similar provisions, then they both end up sharing losses proportionally. This may not be on what you based your rating structure.
I also would not depend upon having subrogation available to you without knowing a couple of things. First, what kind of contractual agreements has your insured made with respect to its franchise agreements? What does the St. Paul policy state with respect to the subrogation issue--any special wording or manuscript endorsements, etc.? Remember that your insured is now an insured in the St. Paul master policy and without the seeing the policy, you do not know what rights your insured has retained.
Another thing to think about is price or rating. A manuscript endorsement making your policy an excess layer over anything covered in the St. Paul master policy, but primary for anything not covered, may be one possible solution from a wording standpoint. Again, however, without knowing exactly what is in the St. Paul policy, it will be difficult for you to price.
Another item to consider is claims handling. Without being sure when the St. Paul master policy will respond and under what circumstances, there may be delays during claims situations that could result in unwanted complications. Ideally, St. Paul will coordinate and work with you in this effort to provide your insured with proper coverage and claims-handling services.
Q A Statement of Values--CP 16 15, is required when using blanket coverage and/or agreed value coverage on property items. The form lists the building(s) and contents on either a replacement cost or an ACV basis but is not attached to the policy. Since it is used primarily to establish pricing and the total property exposure at a given location, does the statement of values have an effect on claim adjustment? I am specifically concerned with the situation where the "statement of values" has understated the value and when the building values are shown minus any contents.
JOHN HEISDORF, Commercial Underwriting Specialist, West Bend Mutual Insurance Company, West Bend, Wisconsin
A Based upon your question, we actually have three scenarios to think about:
1. Blanket items without agreed value.
2. Blanket items with agreed value.
3. Agreed value without blanket.
Blanket without agreed value
When an insured elects to use a blanket limit for property coverage, the insured is responsible for communicating or designating the items to be covered, the same as when specific insurance is chosen. Blanket does not relieve the insured of such responsibilities. In fact, there is often additional work required. For example, a statement of values--or its equivalent--is necessary. The statement of values (often called a SOV), as its title indicates, is the statement by the insured indicating the items to be covered by the blanket limit. The SOV also provides relevant information on these items. The most commonly used statement of values is the ISO version, CP 16 15. This (or a similar type) form must be completed listing each location and each item at each location that is to be covered by the blanket limit.
Normally, one statement of values is required for each blanket limit set. For example, if each location is blanketed individually, with its own blanket limit applying to each, then a statement of values is needed for every one of the locations. However, it is up to the individual insurer to accept the format of the information provided. The key is to make the intent of the blanket limit clear and unambiguous as to what is and is not to be covered by each blanket limit.
Statements of value must be completed yearly for each annual policy period and are used by the insurer to determine a blanket rate and to underwrite the limits and coverages requested. The information needed in a statement of values consists of description, location, and occupancy of each item of property to be covered including the coverages requested and the 100% values of those items.
The insured or a representative of the insured must sign the SOV (or its equivalent).
Coinsurance applies to the blanket limit in much the same way as it applies to specific insurance, with one very major twist. For specific insurance, the coinsurance computation and validation applies one item at a time. On blanket, it contemplates all of the covered items at once.
What exactly does this mean? Let's look first at specific insurance. Suppose a building is insured for $500,000 at 80% coinsurance, and business personal property is insured at $250,000 also 80% coinsurance. The building suffers a total fire loss to both items. The insured must substantiate the building and business personal property limits and validate the 80% coinsurance requirement.
However, if instead of specific insurance, the building and business personal property were a part of a blanket amount covering 10 locations, there is a lot more work involved. Not only does the insured have to deal with the building and business personal property limits at the location suffering the loss, but also at the other nine locations. The limit and coinsurance of the entire blanket amount must be substantiated.
While the insured may be better protected from a limit standpoint when using a blanket amount, the loss adjustment process may be far more time-consuming than expected or intended.
Another concern when using a blanket amount is that even though all of the values at all of the locations reflect the correct amount at inception, a year of heavy inflation or dramatic change can significantly influence the total amount--especially toward the end of the policy period when the accumulated change is most pronounced.
Further, if most of the items are adequately valued and addressed in the blanket limit but one or two items are significantly off, the overall effect of a coinsurance penalty may dramatically and adversely affect the one location suffering a loss. As was mentioned in the limit setting section, don't forget items such as boiler, computers, property of others, and property away from premises.
So even though a blanket amount may protect an insured for inflationary and minor valuation variances, as we have learned, a blanket amount can be punitive if the overall limit has not been carefully addressed and valued. While a much larger limit is available to pay a loss for any one item, the coinsurance penalty from the cumulative inadequately insured items can severely offset the blanket amount.
In the case of our $500,000 building/$250,000 contents, on a blanket basis of $5 million at 100% coinsurance, the entire limit is available for any one occurrence of loss. The insured does have up to $5 million for a loss of $750,000 (total loss on both building and contents); but if the limit that should have been carried was $10 million instead of $5 million, the insured will still bear a 50% coinsurance penalty.
To answer your two questions when coverage is blanket without agreed value:
1. Does the SOV have an effect on a claim adjustment where the SOV values are understated? Yes, there will most likely be some type of coinsurance penalty.
2. Does the SOV have an effect on a claim adjustment where building values shown and included but no contents are listed? Yes, there is no contents coverage under the blanket limit unless the SOV contains a contents entry for that building at that location.
Blanket items with agreed value
Agreed value coverage is when the insurer and insured have mutually agreed to the value of the property at the time the insurance is issued and the amount of coverage has been set accordingly. Thus, the coinsurance provision is waived by the agreed value, and no penalty is assessed. The agreed value coverage is normally good for one year at a time, and the agreed value does carry its own inception and expiration dates. For each policy period, the agreed limit must be re-set or re-established.
It is up to the insurer or carrier to bear the burden of confirming the limit prior to issuance of the policy. Once issued on an agreed value basis, the insurer cannot normally evoke a coinsurance penalty (at least not in standard property policies), so great care must be taken by the insurer in validating the blanket agreed upon limit at policy inception.
Here is wording from a standard ISO commercial property coverage form regarding the agreed value option coverage:
"AGREED VALUE
a. The Additional Condition, Coinsurance, does not apply to Covered Property to which this Optional Coverage applies. We will pay no more for loss of or damage to that property than the proportion that the Limit of Insurance under this Coverage Part for the property bears to the Agreed Value shown for it in the Declarations.
b. If the expiration date for this Optional Coverage shown in the Declarations is not extended, the Additional Condition, Coinsurance, is reinstated and this Optional Coverage expires.
c. The terms of this Optional Coverage apply only to loss or damage that occurs:
(1) On or after the effective date of this Optional Coverage; and
(2) Before the Agreed Value expiration date shown in the Declarations or the policy expiration date, whichever occurs first."
Review the agreed value coverage carefully to determine if the wording and coverage are standard or a derivative that offers less coverage.
The agreed limit must be kept up-to-date regularly if the insured acquires or adds new locations or sells/removes old ones. Anytime such a change occurs, a new statement of values should be completed and a new agreed value set. The policy must be endorsed accordingly, showing the new effective date of the new agreed limit.
The agreed value will not adequately help or protect if the limit is inadequate to begin with, or if a location is not shown. The insured will still lose what was not covered.
The agreed value coverage generally carries a rate increase of 5% in addition to the rating increase for the blanket coverage. So even though the protection offered by the agreed value protection waives the coinsurance penalty, there is a rate increase to offset the increased coverage.
To answer your two questions when coverage is blanket items with agreed value:
1. Does the SOV have an effect on a claim adjustment where the SOV values are understated? It has very little impact when a loss occurs to one item of many or one of multiple locations as the blanket limit is usually adequate to cover a loss at one location or a portion of the items covered. Remember, no coinsurance penalty may be evoked. If the loss is a total loss to all items on the SOV, then the impact would not be in the claims adjustment process; but the insured would be penalized merely by the fact that an inadequate limit was maintained which would probably not compensate for a total loss.
2. Does the SOV have an effect on a claim adjustment where building values are shown and included but no contents are listed? Yes, there is no content coverage under the blanket agreed value limit unless the SOV contains a specific content entry for that item or that building at that location.
Agreed value without blanket
We have already looked at the agreed value provision above, so to answer your two questions when coverage is agreed value without blanket:
1. Does the SOV have an effect on a claim adjustment where the SOV values are understated? No coinsurance penalty can be evoked. The limit agreed to in the SOV for each item is the amount that will be paid for a total loss.
2. Does the SOV have an effect on a claim adjustment where building values ****are shown and included but no contents are listed? Yes, there is no contents coverage unless the SOV contains a contents entry for that item or that building at that location.
When offering or writing blanket, adding agreed value is considered to be a good practice as it is one method of making sure that there is no bad faith between agent, insurer and insured should claims occur. The downside is that property values must be determined up front, prior to policy issuance. This is important to all parties involved but especially for the insurer.
If the properties involved may fluctuate widely, adding a blanket reporting form may be a good solution. Values can be monitored monthly and may resolve issues of inventory variances for the insured and give the insurer the ability to better monitor the risk. The drawback is, of course, the additional paperwork for all parties. *
©COPYRIGHT: The Rough Notes Magazine, 1998