By Donald S. Malecki, CPCU

One of the more fascinating aspects of a career in insurance and risk management is in understanding the products currently being offered and in being able to answer some of the more challenging questions posed by customers.

Unfortunately, this is not easy to do. If standard policies were the only ones available, as once was the case, it might be easier to accomplish these objectives. However, since a growing number of insurers offer their own versions of policies and creative attorneys are coming up with "off-the-wall" interpretations of policy provisions, there is never a dull moment in this business.

One thing about independently filed forms is that, while they may contain subtle differences, many include the same provisions of the standard forms of the American Association of Insurance Services and Insurance Services Office. This enables those who want to understand the coverages available to use the standard forms as "benchmarks" in comparing and contrasting the forms of competitors.

Just recently, an insurance agent called with a property insurance coverage question. He said he had exhausted all of his available resources in trying to find an answer and decided to farm out his question to others who might at least provide some direction.

He has a client whose leased business premises was substantially damaged by fire. Since the client did not maintain business income coverage, and he had many business and personal financial obligations to meet, he decided to set up shop at an office trailer located down the street on his friend's vacant property. The trailer was on blocks and had been vacant and situated at that location for several years. Because occupancy was going to be for a temporary period, he was given permission to conduct his business from the office trailer for a small rental charge.

As fate would have it, he again sustained a loss within a matter of days when someone broke into the trailer, vandalized his business personal property, and set fire to it. At this point, without any other options, he wondered if the property insurance he had on his permanent business location could also apply to this temporary location.

Hunting for coverage

In referring to his ISO Building and Personal Property (BPP) Coverage Form, subject to the Special Causes of Loss Form, he noted that he might have had coverage for loss to his stock had the office trailer been located within 100 feet of his permanent location. (The Building and Personal Property (BPP) Coverage Part CP-12 Ed 1.0 of AAIS contains the same distance restriction.)

In enlisting the aid of his insurance agent, the insured asked if any other part of the policy might grant him some coverage. The agent pointed out that the applicable BPP Coverage Form offered an extension of property off premises while temporarily at a location the insured does not own, lease, or operate.

It was pointed out that since the insured was paying a small rental charge, the condition that the location not be leased could be challenged. Furthermore, the extension offered only $10,000. (The AAIS BPP Coverage Parts offers the same extension and money restriction.) In addition, this extension applies to the named insured's existing covered property, and not to newly acquired property. In this scenario, the property was all newly purchased, because the business personal property at the other location had been virtually all destroyed.

The only other alternative was the coverage extension dealing with newly acquired or constructed property. This extension, insofar as the named insured's business personal property was concerned, offers three coverages. Business personal property including property the named insured newly acquires:

* located at any location acquired by the named insured, other than at fairs, trade shows, or exhibitions;

* located at the named insured's newly constructed or acquired buildings at the location described in the Declarations; or

* located at the described premises.

(The BPP Coverage Part offers to cover the named insured's business personal property at locations the named insured acquires [not newly acquires], other than fairs or exhibitions. The time period is limited to 30 days from the date of such acquisition or the named insured reports the acquired location to the insurer, subject to a maximum of 10% of the limit shown for business personal property but not exceeding $100,000.)

Considering that these extensions offered a maximum of $100,000, the named insured was elated about the prospects of obtaining some recovery of his loss. While there was a period of coverage restriction of 30 days within which to notify the insurer, this was no problem, given that the loss occurred within days of his relocation.

For a businessperson who was bordering on bankruptcy, the only alternative was to get his agent involved in trying to obtain some coverage. The agent therefore began his quest of inquiring about the meaning of "newly acquired." Does that term, he questioned, connote some permanency, or could it be argued to also encompass the temporary possession of property?

While it was a good question, no one had good answers. The conclusion, in frustration, was it might cost the amount of the extension, if not more, to determine the answer; and the named insured could ill afford to do that, considering the chances he could lose.

Pioneering for coverage

Many policyholders will litigate issues whatever the cost. When they do this and the outcome is favorable, other policyholders may be able to capitalize on the court decisions. This is tempered with the caveat that many issues go into a court case and the facts--while similar--may be not be the same. Yet, one or more cases to convince a stubborn claims person might be helpful.

It is unknown how many times the foregoing scenario has arisen and how they have been resolved. One such court case with similar facts but with what appears to be a nonstandard property coverage form was recently decided favorably for the named insured by the Court of Appeals of Georgia in the case of Southern Trust Insurance Company v. Dr. T's Nature Products Company, 584 S.E.2d 34 (2003).

In late 2002, Dr. T's, a manufacturer of animal and insect repellent, was constructing some racks in its leased warehouse and needed to store some of its products on a temporary basis until the racks were completed. The lessor of the leased warehouse offered Dr. T's the use of two coolers in a warehouse located across the highway from the present facility. Since both parties agreed it would be a temporary location, its use by Dr. T's was without charge.

In less than 30 days after Dr. T's moved in, 64 pallets of its product and 10-1/2 pallets of displays, a fire totally destroyed the building and Dr. T's contents. When Dr. T's submitted its claim of $101,520 to its property insurer, coverage was denied based on an extension clause entitled "property off premises," which read: You may extend the insurance provided by this Coverage Form to apply to your Covered Property, other than 'stock,' that is temporarily at a location you do not own, lease or operate.

The insurer maintained that this extension controlled because, although Dr. T's was using the warehouse temporarily and did not own, lease, or operate it, coverage still did not apply, because the extension did not apply to stock. Not taking no for an answer, Dr. T's then turned to another coverage extension titled "newly acquired or constructed property," which provided that: "You may extend the insurance that applies to Your Business Personal Property to apply to that property at any location you acquire other than at fairs or exhibitions." Under the terms of the policy, "Your Business Personal Property" includes stock.

The trial court ruled for coverage, holding that the central issue was whether Dr. T's had acquired the warehouse across the highway where the stock had been stored in order to bring it under coverage. The trial court then found, as a matter of law, that the meaning of the word "ACQUIRE" was the time of taking possession of the storage warehouse. Clearly, the trial court said, Dr. T's gained possession of the warehouse when the lessor gave it permission to use the space and Dr. T's transferred its stock to that location.

The trial court stated that, while both parties understood that the arrangement was temporary, the policy did not address whether the newly acquired property must be temporary or must be permanent to qualify for coverage. Failing to meet the burden of showing that the loss came within the exclusion of its "property-off-premises" subsection, the insurer was required to pay the loss. The Court of Appeals affirmed the trial court's decision.

Some observations

Based on the policy wording in the case in question, it is somewhat different from both the AAIS and ISO Building and Personal Property Forms, because neither of those two refers to stock. In fact, the only reference to "newly acquired" in the ISO coverage form is in the title of the extension. The body of the ISO extension refers to business personal property at any location acquired by the named insured, whereas the extension of the AAIS coverage part refers to at locations you acquire.

Specific reference to fairs or exhibitions as not qualifying as acquired property also adds fuel to the fire from the standpoint point of the policyholder. (These references also apply to the AAIS and ISO forms except the latter also lists trade shows.) One therefore could argue that by referencing fairs, exhibitions, and trade shows, permanency is not a condition precedent of an acquired property requirement, since all three connote temporary facilities more so than permanent ones.

Neither the AAIS nor the ISO BPP Forms mention "stock" within these two extensions, unlike the case in question. While that term was not questioned, its meaning in property policies has been questioned a number of times. One of these cases is Green Lawn Systems, Inc. v. American Economy Insurance Co., 620 So.2d 1990 (Dist.Ct. App. FL), which grew out of a dispute over the theft of materials for an irrigation system to be installed at a construction site.

The only part of the building and personal property coverage form that applied to this loss situation was under the "property-off-premises" extension. To obtain coverage, the named insured had to prove that its property was other than stock, because this extension applied only to covered property, other than "stock" that was temporarily at a location the named insured did not own, lease, or operate.

To show that the defined term "stock" was ambiguous, the insured first pointed out that the defined term's reference to merchandise, which was undefined, could mean through the use of a dictionary, "goods bought and sold in business." The next step was for the insured to reason that, since it was not in the business of selling merchandise to the public, its items of property were not stock.

As a matter of interest, the ISO BPP Coverage Form CP 00 10 with edition dates of October 1990 and 1991, along with the June 1995, contained a reference to "stock" in its extension titled "property off-premises." Although "stock" is a defined term of both the ISO and AAIS forms, it does not appear with the extension of either such form. *

The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.