The manufacturer's output policy (MOP) has been available for over 40 years, but it was not widely used because its $5,000 minimum premium was considered to be prohibitively large. In addition to the perceived minimum premium problem, many insurers would use MOPs only on manufacturers. Today, many insurers are issuing their own version of a MOP, and the eligibility has been expanded to include most commercial clients.
The purpose of this article is to present coverage features that are common to many manufacturer's output policies as well as some typical optional coverages. As there is no standard, industry-wide MOP, you may find that the MOPs you use have more features or fewer features than what we will discuss here. Most likely, you also will find higher or lower limits for some of the coverages than those presented in this article. We will identify features as a means for you to compare with the features of your own contract.
Much of this material is drawn from forms promulgated by the American Association of Insurance Services (AAIS). AAIS refers to its contract as a Commercial Output Policy (COP). From a practical standpoint, AAIS's COP is essentially the same as the more traditionally named MOP.
MOPs are property coverage contracts. Typically they will insure buildings, business personal property and time element coverages on a blanket basis. Risks of direct physical loss are the insured perils. While flood and earthquake coverages usually are not automatically included in the coverage, these perils can be added by endorsement.
MOPs have the ability to put different deductibles on various perils. A typical example is coverage for flood. Flood insurance can be purchased from the National Flood Insurance Program. At the time this article is being written, the National Flood Insurance Program's limit for commercial properties is $750,000. My understanding is that no private insurer is allowed to compete with the federal program. Hence, you might expect a MOP to be issued with a $750,000 deductible applying to the flood peril.
Earthquake insurance for an account might have a $50,000 deductible. All of the other perils might have a $500 deductible.
Time element
AAIS uses three coverage options as its starting point when providing time element coverages.
Option #1: Earnings rents, and extra expense
Option #2: Earnings and extra expense
Option #3: Rents and extra expense
Earnings coverage on the AAIS forms is essentially the same coverage as ISO's Business Income with Extra Expense form.
The operation of a building ordinance or law can increase the amount of time it takes to restore a firm to operating condition. You might expect that a MOP does not cover this exposure. Should the MOP you use not cover the loss caused by the operation of ordinance or law, use an endorsement to add this coverage to the time element protection.
Some MOPs provide 30 days of extended period of indemnity coverage to the time element protection. This contractual feature addresses the loss an insured experiences after the damage from a loss has been repaired. An insured will be back in operation but it will take some time until an insured regains its pre-loss level of business activity. Many insureds need coverage for more than 30 days. Extended period of indemnity coverage for time periods such as 90, 180 or even 365 days can be endorsed to the MOP.
Dependent location income
An insured may suffer a loss as a result of a supplier's loss. Other times a loss may result from a loss suffered by a key customer of the insured. Shopping centers typically have leader stores that draw customers to the shopping center. If a lead store(s) sustains a loss, the stores that are too small to draw customers on their own also will experience reduced income. Still another dependent location situation is where a firm other than the insured makes a product for the insured's customers. Your insured would experience a loss should one of these independent suppliers be unable to deliver products due to an accidental loss such as a fire. Loss of earnings coverage can be added to a MOP for losses at leader locations, key suppliers, key customers and independent manufacturers.
Valuable papers coverage is included in some MOPs but not in others. The typical insured needs this coverage. Valuable papers would need to be endorsed onto the MOP for most accounts. If valuable papers already are covered for a typical limit of $50,000, the limit may need to be increased for many insureds.
Brand or label coverage
Sometimes goods are damaged by a loss but still are O.K. to use. An example is a warehouse full of canned vegetables such as peas and corn. The cans already have the paper labels on them. A sprinkler leakage loss damages the labels on thousands of cans. However, the contents have not been damaged. The vegetable firm does not want the canned items to be sold under its main trade name. This loss will consist of relabeling the cans (these are the ones on the top shelf in the supermarket) with labels for a lower grade of vegetables (an example might be the store brand of vegetables). Coverage for the relabeling and selling the items at a reduced price can be covered by a brands and labels clause. Some MOPs will automatically cover the brands and labels exposure while for others it will need to be endorsed to other insurers' MOPs.
Consequential loss
A firm had a loss damaging some of its refrigeration equipment. As a result, the state's food inspectors declared that thousands of dollars worth of food in freezers had to be thrown away even though the food had not been damaged. Consequential loss is the name for that sort of loss. Some MOPs do not cover this at all while others provide coverage with a modest limit. For any firm that has cold storage of anything, my recommendation is that an adequate limit of consequential loss protection be provided.
Exhibition coverage
Property at fairs and exhibitions presents extraordinary loss exposures. Some of the transit exposure is the responsibility of the insured, but more commonly it is the responsibility of common carriers. Exhibitors might not be able to set up their own displays. The setup work will be done by the firm(s) authorized to do setup for the particular exhibition center. There might be a significant amount of temporary wiring that is not properly done.
You may recall the McCormick Place fire in Chicago decades ago where faulty wiring burned the entire place, including exhibitors' equipment, to the ground. The exhibitors were manufacturers displaying mining and road construction equipment. Several of the pieces of equipment that were destroyed were one-of-a-kind prototypes. Exhibitors need protection for this loss potential. The cost for this coverage is modest. While several MOPs provide exhibition coverage, others do not. Regardless of what a particular MOP does with exhibition coverage, be sure to have your MOP provide an adequate amount of coverage.
Ordinance or law
Many firms own buildings that do not comply with today's building codes. When they have a loss, they may not be able to rebuild the damaged building. Or, they may experience needing to spend extra money to bring the property up to today's building codes. Typical exposures involved are the value of the undamaged part of the building; the cost of demolishing the undamaged part of the building; the cost of hauling away the undamaged part of the building; and increased cost of construction to either modernize the old structure or build a new structure. Not all of this expense is covered automatically by most MOP forms. I believe that every commercial structure faces this loss potential and that ordinance or law coverage should be endorsed to every MOP.
Boiler explosion
Suppose a manufacturer's air conditioning system suffers a serious breakdown. The manufacturer presents a claim to its MOP insurer and is very surprised when the insurer declines to cover the loss stating that there is no breakdown coverage. Both loss prevention inspection work, as well as coverage for breakdown, can be provided by using a boiler and machinery damage insurance policy. I am unaware of any MOP that covers machinery breakdown. A boiler and machinery form can be used both to secure the loss control services and to provide protection against a very broad array of perils not covered by a MOP.
Computer coverage
Insureds using a MOP also must consider what coverage is needed for their computer exposure. For example, let's imagine a computer loss situation involving a tool and die business. The business uses many computers to run the dozens of machines it uses to make dies and tools. Besides having individual computers driving individual machines, it also has several computer networks in the office. It had taken the business about two years to install the computers, and getting them to function properly required the services not only of the computer company but also an independent computer service firm. Many thousands of dollars were tied up in the computer system.
Everything went fine until the first spring thunderstorm when lightning struck an electrical substation about a mile from the firm. First there was low voltage, then no power, followed by a power surge. This all happened so quickly that the surge protectors on the computer system did not have time to react. However, the computers noticed the difference in the flow of electricity. Many circuit boards, memory systems, as well as other computer hardware, were damaged. The operating software systems also were affected.
Because it had complete offsite duplicate records that were updated every hour, 24 hours per day, the tool and die company expected to be back in operation in a short time. However, there was a shortage of computer parts and the software damage was quite extensive. They turned this loss in to the insurer. The adjuster for their MOP declined their claim stating that their MOP provided no coverage for this type of loss. If you cannot endorse the MOP to cover losses to computer-related equipment and supporting software, you can use a boiler and machinery damage coverage form to cover this type of loss.
Transportation
Transportation coverage is provided by every MOP that I have seen. Some of them provide transportation coverage for an amount equal to the entire MOP limit. Other MOPs have a specified transportation limit. You will need to be concerned about the transportation limit if there is one specified in the MOP you are using. For example, one account in South Dakota refurbishes airplane parts. It needs a $2 million limit. The issue is to be sure that the limit is adequate.
An increasing number of firms are doing business with European and Pacific Rim businesses. Shipments can originate in the United States or in a foreign country. There are no fixed rules of commerce in these transactions. Some American firms rely on their own insurance to protect losses they might incur to goods damaged in transit. Identifying transit exposures requires knowing when the title to the goods transfers from the seller to the buyer. Goods can be shipped free-on-board (f.o.b.) origin or f.o.b. destination. If the United States firm is shipping an item and the title to the goods transfers to the foreign buyer immediately upon leaving the USA shipping dock, the goods are being shipped f.o.b. origin and the United States firm has no interest in the shipment.
However, sometimes the United States firm ships goods specifying that the title to the goods transfers to the foreign buyer when the goods arrive at the foreign firm's receiving dock. This is an example of goods being shipped f.o.b. destination. In this case, the United States firm is responsible for any damage to the goods while they are in shipment.
Some United States firms import goods. If imported goods are being shipped f.o.b. origin, the United States firm is responsible for damage to the goods while in transit. If goods are shipped to the United States on an f.o.b. destination basis, the foreign shipper is responsible for goods damaged during shipment. In this case, the United States firm does not need to insure the goods while in shipment.
There are times when it may be unclear to the United States buyer whether the goods being shipped from a foreign country are being shipped f.o.b. origin or destination. The MOP needs to be checked to determine if incoming and outgoing shipments to foreign countries are protected. If not, the importer has two choices. One choice is to endorse export and import shipments to the MOP. If the importer is unable to do that, it will need an ocean marine open cargo policy to protect against damage to incoming and outgoing foreign shipments.
Summary
* Manufacturer's output policies provide broad coverage on a blanket basis to a wide range of commercial properties.
* Flood and earthquake can be added.
* Transit is automatically covered, but you need to be sure the limits are sufficient.
* Foreign shipments might need to be endorsed to the MOP or you might need to purchase ocean marine open cargo coverage to protect against this exposure.
* Verify that there is computer coverage for power fluctuation damage.
* Is consequential loss covered?
* Are dependent property losses protected?
* Should brand and labels coverage be added to the MOP?
* For firms that go to exhibitions and trade shows, is there an adequate limit and coverage for this exposure?
* Does your MOP include coverage for the ordinance or law exposure or does this coverage need to be added by endorsement?
* Does time element coverage need to be amended to provide coverage for some time after the loss while the business regains its pre-loss level of business activity?*
©COPYRIGHT: The Rough Notes Magazine, 1999