RISK PROBLEMS & SOLUTIONS

PROPERTY ENDORSEMENTS
PART 2

By LeRoy H. Utschig, CPCU, ARM

In last month's column we identified several property exposures that are not automatically covered by the main property coverage forms. Then we identified the form(s) that could be used to properly insure these potential claim situations. We continue this month with several more. Throughout this article, references will be made to forms developed and filed by the Insurance Services Office (ISO), Inc. Any insurer that uses ISO property forms is filed to write any of the endorsements that are mentioned in this column.

In order to more closely identify potential loss situations, we have used fictitious claims examples. None of these examples describes actual businesses or claims situations, but they are representative of the losses that can occur.

Leader store

Many shopping centers have leader stores. A leader store attracts people to come to the shopping center. If it is a strip shopping center with the customers walking outside to go from one store to another, a leader store will be located at either or both ends of the shopping center. Shopping centers where customers walk inside from one store to another also have leader stores. Customers of the shopping center will often shop at one of the leader stores and then walk to the other end of the shopping center to shop at the other leader store. As the shoppers walk past the various smaller stores, some will go into one or more of the smaller stores and buy something. Most times these smaller stores do not, in themselves, draw people to the shopping center. Without the leader stores bringing customers to the shopping center, the smaller stores would not survive.

One of a shopping center's leader stores sustained a substantial fire loss that caused the store to be closed for six months. Because a leader store was closed, the number of shoppers to the center was greatly reduced. One of the smaller stores in the shopping center, Ray's Shoes, Inc., was experiencing a significant reduction in business due to the closing of the leader store. As a fire caused the loss, Ray's Shoes presented a business income claim to its insurer. The business income claim was denied, with the adjuster stating that there was no coverage as the fire damage did not happen at the premises occupied by Ray's Shoes.

When a new agent solicited the insurance for Ray's Shoes, Ray told the new agent about this uncovered loss and that he had been told that there was no way to insure this loss exposure. The new insurance agent told Ray that coverage was available for a business income loss resulting from a loss to any of the shopping center's leader stores. Coverage would be provided by adding Form CP 1508, Business Income From Dependent Properties--Broad Form.

It is worth noting that businessowners policies do not cover business income losses caused by damage to a leader store. I have never seen a businessowners policy from an insurer where the insurer had made its own filing to provide for leader store coverage on a businessowners policy.

Renovations form

Many towns are revitalizing their old business districts. As a part of this process, old buildings are being purchased and substantially rebuilt. Some of these renovations involve removing virtually everything except the exterior brick walls. Then new floors, electrical, heating, air conditioning, plumbing, walls, roof, etc., are put into the old structure. The regular commercial property forms do not have valuation provisions or claim settlement provisions to deal with the dramatic changes in values of the restored old building.

One approach is to use the traditional property forms to cover the structure that remains after much of it has been torn out, and then use a builders risk policy to cover the rapidly increasing values caused by the renovations that are being done. However, there is a problem with this approach. Only totally brand new structures being built from the ground up are eligible for builders risk coverage. In addition, the definition of covered property does not fit what is being done.

Coverage for the old structure that has been gutted can be accomplished by the use of the traditional property form to cover the value of the structure that remains after everything has been removed. Loss protection for the new items being put into the building can be accomplished by using the builders risk form plus Builders Risk Renovations Form, CP 1113. The Builders Risk Renovations Form has the proper wording to modify the regular builders risk form to be appropriate for all of the property values being installed into the structure. This coverage can be written for the owner. An alternative is for the contractor to be named on the policy. Both the owner and contractor can be named on this property contract.

Legal liability

Realty, LLC, owned many commercial rental properties. All of the properties had automatic sprinkler systems. At one of its big city locations, one of the main pipes for the sprinkler system fractured, allowing a large amount of water to pour out. This structure was located on top of a bluff. So much water poured out of the sprinkler system pipe that part of the bluff slid down onto a street located below the bluff. More than 15 truckloads of mud had to hauled away as a result of the sprinkler leakage. This was the small part of the loss. The large part of the loss involved several millions of dollars worth of computer equipment that was damaged by the sprinkler leakage.

Fortunately, the tenant was able to recover for the computer loss from the insurer. Then the tenant's computer insurer subrogated against Realty, LLC. Realty's commercial general liability insurer denied coverage. The denial was based upon the fact that Realty had access to the tenant's area and, therefore, the care, custody and control exclusion applied.

Coverage for this loss exposure can very easily be furnished by using Form CP 0040, Legal Liability Coverage Form. There are no perils listed on the Legal Liability Coverage Form. Any of the basic, broad or special peril forms is attached to Form CP 0040 to complete the policy. My recommendation is to always attach the Special Form CP 1030. While sprinkler leakage might be the loss that we commonly think of as the basis for needing legal liability coverage, there are other losses to consider, too. Another example of a claim that could fall under this coverage is where a building collapsed due to too much water on the roof. The basis of negligence was that the landlord should have had more--and larger--roof drains.

Tenants can damage buildings. A common example is a tenant's truck knocking out a door frame. Another is a forklift knocking out a key roof support. Or there could be a loss when a tenant has a stopped-up lavatory and water runs onto the floor over a three-day weekend.

Whereas damage for losses due to a tenant's negligently causing a fire can be covered by the commercial general liability policy, the three loss examples discussed above--the door frame, the roof support or the water damage from the lavatory--would not be covered by the CGL. The landlord can cover these kinds of losses using forms CP 0040 and CP 1030. Tenants also can use these forms to cover their legal liability for damage to the landlord's building as a result of these kinds of losses.

Vacancy

Ace Realty, Ltd., owned a small shopping center. At one time the shopping center was a thriving business location. However, it had fallen on hard times and there were no tenants in the structure. While there was still some furniture in the building, there was not enough there for anyone to run a business. This situation had existed for about six months before the first loss. The first loss was a fire loss damaging a part of the structure. This fire loss was covered even though the property had been vacant for more than 60 days. The loss was covered, but 15% of the claim amount was deducted due to the building's being vacant.

Shortly after the fire, vandals broke into the structure and did considerable damage. Again, Ace Realty reported the loss to its insurer. This time the insurer's response was different. Ace was told that there was no coverage for the vandalism loss because the building had been vacant for more than 60 days.

Coverage for the vandalism loss would have been provided had the Vacancy Permit, Form CP 0450, been attached to Ace's property policy. In addition to covering the vandalism loss, by attaching Form CP 0450 there would not have been the 15% reduction on the fire loss. Vacancy for more than 60 days suspends coverage for the perils of vandalism, sprinkler leakage, building glass breakage, water damage, theft and attempted theft. Coverage for all of these perils is restored by the use of the Vacancy Permit Endorsement.

Manufacturers' selling price clause

Following a loss to the stock of Ace Manufacturing Firm (AMF), typical loss adjusting valuation would have included the cost of raw stock, labor put into the stock, and the overhead expenses of the manufacturer. As the items were being processed, AMF added additional value sometimes referred to as their markup or profit margin. Once the items had been completely manufactured and put into their shipping area or shipping warehouse, Ace Manufacturing Firm's total markup or profit margin became a part of the cost that AMF would use to develop what it would charge a customer.

Ace Manufacturing Firm had a fire that destroyed about 90% of the goods that it had manufactured and had ready to be shipped. As of the date of the loss, AMF had not sold any of the damaged items. In other words, the damaged units would not have been classified as "sold but not delivered." During the adjustment process, AMF was told that there was no coverage for its markup or profit margin. All of the manufacturing costs were covered. The adjuster also told Ace Manufacturing Firm that the markup or profit margin would have been covered had the items already been sold to customers and were waiting to be shipped.

Manufacturer's Selling Price Clause (Finished "Stock" Only), Form CP 9930 could have been attached to Ace Manufacturing Firm's property coverage. This form amends the normal property loss valuation provision to pay the insured its selling price of the items less any discounts that the insured would usually give to its customers. By using this valuation, the insurer will pay for an insured's "profit margin" because it is part of the selling price. The Manufacturer's Selling Price Clause does not apply to the profit margin on the goods that are still in process at the time of the loss. The profit margin is covered on only those goods that are completely finished and could be shipped to a customer(s).

Market value stock

Throughout the rural parts of the United States, it is common to see grain elevators. Soybeans and corn are two of the commodities stored in these large storage bins. Local Elevator (LE) had thousands of bushels of corn and soybeans stored in its large, tall, round storage bins. LE had paid the farmers for these grains and was now waiting for the price of grain to rise before selling it at a profit. The owners of this particular elevator paid attention to the grain prices on the Chicago Grain Exchange. At the grain exchange, millions of bushels of grain were bought and sold each day, thereby establishing the price at which Local Elevator could sell its grain on any given day. On this particular day, Local Elevator could have sold all of its grain at a profit. However, Local Elevator decided not to sell grain that day, anticipating that the price of grain would go still higher.

That evening, a defective bearing in a large electric motor in one of the elevators malfunctioned. Just prior to the failed bearing's causing the electric motor to completely short out, many sparks were flying out of the motor. These sparks ignited some grain dust which soon ignited the grain, and then all of the dust in the elevator ignited causing a large grain dust explosion. As is typical, the fire department was unable to extinguish the fire. For about seven days the grain smoldered and burned. As some of the grain would burn, other grain would run into the low spot caused where the fire was burning and almost smother the fire. When more grain burned, still more grain would pour into that spot and nearly smother the flame.

Besides the length of time that a grain fire will burn, another distinguishing trait of a grain fire is that there is a lot of salvage from it. Much of the grain will not have any fire damage. Salvage firms will bid on the residual once the fire has been completely extinguished.

After submitting the claim to their insurer, the owners of Local Elevator were told that they would be paid for their handling expenses plus what they had paid for the grain. No payment would be made for the potential profit they would have made had they sold the grain as of the day of the fire. Local Elevator could have been insured for the value established by a market such as the Grain Exchange. This means that the business would have recovered its "profit margin." Attaching Form CP 9931, Market Value - Stock (Not To Be Used For Wines and Distilled Spirits) provides payment for market value of the item(s) provided it is of a kind bought and sold at an established market exchange where prices are quoted and posted. There is a similar endorsement that can be used for wines and distilled spirits operations.

Storage or repairs limited liability

A property form can be used to cover customers' goods while they are in the possession of the insured. Sometimes insureds will pay to have their items stored, and they will pay a storage charge based upon the value that they declare to the firm where they are storing the item(s). As the storage charge is based upon the value they declare, some customers will deliberately, drastically understate the value of the item(s) they are putting into storage or having repaired. The loss valuation provisions of the property form do not adequately deal with this. Based on the normal valuation clauses, the customer would be paid the actual cash value of the item(s). Paying actual cash value could result in paying the customer an amount of money significantly larger than the value(s) declared by the customer.

To prevent "overpaying" customers for their damaged items, Form CP 9942, Storage or Repairs Limited Liability Endorsement can be attached to a commercial property policy. This endorsement states that the loss settlement will be based upon actual cash value or "the value shown on the receipt issued by you to the owner before the loss: whichever is less." As you can see, this endorsement will reduce the amount of loss settlement for those customers who understated their values. Many insureds who have property of others in their care, custody and control are not properly insured. Using the Storage or Repairs Limited Liability Endorsement is a way of providing proper coverage for firms that repair or store customer's items.

Summary

* Leader store coverage can be added to the business income coverage of the smaller stores in a shopping center.

* A renovations form tailors the coverage to suit the situation where a building is being substantially rebuilt.

* The Legal Liability Coverage Form can be used to protect the tenant for damage the tenant does to the landlord's building. It also can be used to protect the landlord for damage the building owner does to the tenant's property.

* A vacancy permit endorsement restores several perils and loss valuation for a firm that is vacant more than 60 days.

* Profit margin on manufactured stock is done by attaching the Manufacturer's Selling Price Clause.

* Covering grains at market value can be accomplished by using the Market Value--Stock Form.

* Storage or Repairs Endorsement amends the property policy to better fit the valuation requirements of customers' goods. *

The author

LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.

Clarification on workers comp combined ratio

An article in the March issue, "Workers comp market heads south," refers to an NCCI estimate of the combined ratio for 1998 workers compensation business. An NCCI spokesperson states that NCCI does not provide estimates of a year's combined ratio figures. NCCI expects to report the combined ratio for 1998 around the end of April.

©COPYRIGHT: The Rough Notes Magazine, 1999