The author
Typically it is accounts with large, fluctuating inventories that need and use reporting form policies. While small accounts certainly can use reporting forms, many smaller businesses will not use them because of the additional work that they require and the small amount of premium that would be saved. Only businesses that can give a prompt, accurate report of their values should use reporting forms. Severe penalties apply to any business that does not give accurate and on-time reports of value.
Insureds that have large inventories with fluctuating values are the typical prospect for reporting form policies. My experience includes using reporting forms on a sawmill, a lumber yard, and a mercantile account with seven locations. Let's look at a few examples using fictitious businesses--one which uses a reporting form correctly and the others where mistakes are made.
Reporting form correctly handled
Large Drug Store, Inc., which uses a reporting form, has a policy limit of $3 million. It reports values of $2 million, $2.2 million and $1.8 million for the three months prior to the loss. Its loss totals $2.7 million. The reports have been accurate and on time and the loss is within the policy limit. Hence, the entire loss of $2.7 million is paid.
It is noteworthy that the amount recovered is in excess of the last values reported. This is how all reporting forms function when on time and accurate reports of values have been reported by the insured.
Lowest rate on lowest possible limit
By using the reporting form, Large Drug Store, Inc., availed itself of coverage for 100% of its values, paid the lowest rate (100% coinsurance rate), and did not pay for any amount of insurance that it did not have. It paid for its actual exposures without being underinsured or overinsured at any time during the period of the reporting form coverage.
With a reporting form policy, at the inception date a deposit premium is paid based upon 75% of the limit shown on the contract. At the end of the policy year, the reports of value are totaled and divided by the number of reports to get an average value. If the average values are less than the 75% estimate, premium is returned to the client. Should the average values be more than the 75% estimate, the insured will need to pay an additional premium.
Incorrect values reported
In another example, Department Store, Inc., purchased a reporting form with a $5 million limit. Its last report prior to a $1.2 million loss was for an amount of $3 million. While the report of values was on time, the amount reported was incorrect. A value of $4 million should have been reported. As only 3/4ths ($3 million/$4 million) of the correct values were reported, Department Store, Inc., received 3/4ths of its $1.2 million loss or $900,000.
The business knew it was getting the lowest possible rates and that it was to report accurate values. In similar cases courts have consistently stated in their opinions that the insured knew that understating values would result in lower premiums and that the lower report of values was a deliberate act of a knowledgeable insured. Therefore, the penalty(ies) will apply.
Here is the applicable wording from ISO's Value Reporting Form, CP 13 10:
If your report of values...shows less than the full value of the Covered Property at that location...we will pay only a proportion of the loss. The proportion of loss payable...will not be greater than the proportion determined by the values you reported...divided by the value of Covered Property at that location.
Late report
Large Hardware Store, LLC, has a policy limit of $4million. In April, it reports values of $2 million for the month of March and does not report any values after that. The next report of values (for April) is due by the end of May. In September, six months after the report had been filed, Large Hardware Store sustains a total loss. As there had been no reports of value since the $2 million value was filed, (values were to be reported every 30 days), the maximum the insured can collect is the last values reported. Hence, the insured collects $2 million, of a $4 million loss. Again we refer to ISO's Form CP 13 10 for the exact verbiage:
If at the time of the loss or damage you have failed to submit:
Any required report of value after the first required report: We will not pay more for loss or damage at any location than the values you last reported at that location...
No reports filed
Light Manufacturing, Ltd. (LM), purchases a $2.5 million limit on its reporting form. Even though the need to report accurate values on time was discussed with Light Manufacturing, both at the time the insurance proposal was made and at the time the policy was delivered, LM does not submit any reports of values to the insurer. Four months into the policy period, Light Manufacturing sustains a partial loss of $1 million. As no reports of value had been made since the inception of coverage, Light Manufacturing receives 75% of its loss (.75 x $1 million) or $750,000.
ISO's Form CP 13 10 provision regarding loss payment when no reports have been filed reads:
If at the time of loss or damage you have failed to submit: The first required report of values: We will not pay more than 75% of the amount we would otherwise have paid.
Furniture and fixtures part of reporting form
Modern Foods, Inc., has a vast amount of computer capacity. It uses the latest in computer scanners at its checkout counters and uses the scanners to log in all incoming shipments of food. While the main purpose of the computer is to keep track of the customer profiles of all of its patrons, it also keeps track of the amount of stock in the store on a minute-by-minute basis as the sales of food are scanned into the computer at the checkout counters. Hence, it is very easy for Modern Foods to report its stock values on a timely basis once per month. It simply reports the stock values shown on the computer's final reading of the day on the last day of the month.
After having a large loss, Modern Foods is surprised to learn that it is being penalized for not reporting full values. Accurate and timely reports of stock had been made each month. However, when the adjuster quotes the coverage part of the reporting form policy to Modern Foods, the problem becomes apparent. Furniture and fixtures had not been excluded, nor had they been insured under another insurance policy. Modern Foods's reporting form covered damage to all of the furniture and fixtures and other contents in the store! As the reporting form covered the furniture and fixtures, the furniture and fixtures value should have been included with the report of stock values.
ISO's business personal property coverage lists a number of items that are covered by the contract. All of these items should be included in the values reported to the insurer. A correct report will be the sum of the business personal property owned by the insured plus the value of stock the business has. Typically, once per year, a business will determine the total value of its business contents items for everything other than stock. Actually, this would probably be a value used when determining the firm's balance sheet values. Here is an abbreviated version of the actual wording from ISO's Form CP 00 10 that is a part of most commercial property insurance programs:
We will pay for direct physical loss or damage to Covered Property... furniture and fixtures; machinery and equipment; "stock"; all other personal property owned by you and used in your business; labor, materials or services furnished by or arranged by you on personal property of others; your use interest as tenant in improvements and betterments; and leased personal property for which you have a contractual responsibility...
Builders risk reporting forms can be used to provide insurance on builders risk exposures. As with the regular property form, a builders risk reporting form is used by those accounts that have fluctuating exposures. If the policy limits are adequate and accurate, and on-time reports are filed, the builders risk reporting form will pay an entire loss without any penalties. The advantage to this form is that it produces the lowest rates, not overinsuring nor underinsuring the values at risk.
Late reports
Reports of values are due within 30 days every month. There is a penalty in the event the insured has filed one or more reports and then fails to file report(s) within the required 30 days. If the reports are late, the maximum that an insured can collect is the value last reported.
Insurance Services Office's Builders Risk Reporting Form, CP 11 05 clause relative to late reports reads:
If, at the time of the loss you have failed to file with us reports of value as required, we will not pay more than the value stated in the last report filed before the loss.
No reports filed
The most severe penalty applies in those situations where an insured does not file any reports of values. In the absence of any filed reports, there is no coverage. The contract clause states that the most that the insurer will pay is the actual cash value as of the inception date of coverage. Typically, at the inception date of builders risk coverage, there is no value as the coverage should start on the same day that the construction commences. As there usually is no value as of the inception date, the policy will pay nothing. This is the actual clause from the Builders Risk Reporting Form:
If, at the time of the loss: You have not filed any reports, we will not pay more than the actual cash value as of the inception date of this Coverage Part.
False value reported
As with all reporting forms, there is an honesty clause. A penalty applies in the event of an insured's lying or sending in false statement(s) of value. Per the contract, a builders risk reporting form will penalize an insured to the same extent that the insured understated its values. In other words, if the insured understated values by 37%, 37% of a loss will not be paid. This is the actual wording from Form CP 11 65, Builders Risk Reporting Form:
Full Reporting. We will not pay more for any loss than the proportion of values last reported before the loss bears to the actual cash value of the Covered Property on the effective date of the report.
Summary
* Reporting forms have some very good features as well as severe pitfalls for the firm that does not comply with the contract provisions. The lowest possible property rate, the 100% coinsurance rate, is used when computing reporting form premiums.
* Typically, the policy limit is set higher than the largest values the firm has during the policy year. As reports of values are reported, the values can be monitored to determine if the reported values are approaching the policy limit. The policy limit then can be raised if reported values are approaching the policy limit.
* As the account pays a premium based upon the average values it actually has during the policy period, the policyholder will not be paying for any more insurance than it actually needs.
* Any insured that sends in erroneous reports (understated values) will, at the time of a loss, be penalized to the extent it misrepresents values on its report(s).
* Some insureds send in a report(s) of value and then fail to furnish any more reports of value. In this scenario, the maximum the insured can collect is the last values reported by the insured.
* For all practical purposes, a builders risk reporting form provides no coverage if an insured fails to submit any reports.
* The insured who understates values on a builders risk reporting form will be penalized to the extent that the report is in error.
* With a builders risk reporting form, when some reports have been filed but the latest report is late, the maximum that the insured can recover is the value(s) last reported to the insurer.
* A penalty also applies when an insured has failed to send in any reports of values. When no reports of values have been reported, an insured can receive payment for only 75% of the amount of its loss. *
The author
LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.
©COPYRIGHT: The Rough Notes Magazine, 1998