Risk Management

Don't get comfortable

ISO property forms to be altered in 2008

By Donald S. Malecki, CPCU

It seems like virtually every year, insurers introduce changes to their insurance contracts, some good and some not so good—from the perspective of the insurance buyer. This year is no exception. Along with the changes made by insurers to their independently filed forms are the amendments to the commercial property coverage forms being introduced by the Insurance Services Office (ISO).

As is typically the case, some changes could be considered as clarifications, some as broadening features, and others as limitations. One limitation being introduced by ISO this year was discussed in our November 2007 column titled “Bye-bye-agreed value?” That article examines the use of margin clauses in relation to blanket property insurance, which can be labeled as a limitation.

Starting off the New Year on the bright side, it would be appropriate to discuss—first, at least—those changes effective in August 2008 in most jurisdictions that can be more appropriately labeled as welcome ones. These changes may very well appear earlier than the target date as part of the independently filed forms of insurers.

Fire department services charges

It is difficult to pinpoint how long municipalities have been charging for fire department services charges. What is known is that these charges have become especially prevalent within the past couple decades. The news media are full of accounts of ordinances being passed throughout the United States and Canada for the purpose of making a fire department service charge. In fact, Rough Notes’ esteemed and long-time columnist, Roy C. McCormick, wrote an article in the March 2001 issue on this very subject.

Some of these ordinances are amusing. One such law in a city in Michigan proposed charges of: $250 for auto fires; $300 for truck and train fires; $400 for hotel, commercial establishments and manufacturing plants; and $400 for aircraft fires. These charges are viewed as “extra” ones because the taxes charged by municipalities are used to implement and make ready these services. An extra charge is necessary to activate emergency responses.

The current fire department service charge provision of standard ISO commercial coverage forms provides a maximum of $1,000 for the named insured’s liability, if called upon to pay for a fire department’s service charge. The subject of coverage, of course, has to be covered property from a covered cause. Such charges, furthermore, must have been assumed by contract or agreement prior to loss, or required by local ordinance. No deductible is applicable.

This provision is being amended to permit a higher limit. In other words, following reference to the $1,000 limit, this provision will include the statement “unless a higher limit is shown in the Declarations.” It may be a while before ordinances are passed to increase fire department charges in excess of $1,000. This maximum, however, needs to be watched so that a higher limit can be purchased if necessary.

Of course, there is nothing to prevent someone from suing the insured for more than the stated coverage limit. One such case, in fact, is the City of Amsterdam v. Lam, et al., 703 N.Y.S. 2d 606 (2000). The city sued the insurer providing the property insurance to recover the costs of extinguishing an arson fire at an industrial complex.

This case is unclear as to the amount sought by the city, but the policy did cover a fire department service charge of $1,000. The city sought compensatory and punitive damages on the theory that issuance of the policy for amounts far exceeding the value of the property induced the insured to commit arson.

The insurance agent actually falsified information about this covered location, and the insurer did not conduct an inspection—arguing that it was discretionary, since any inspections were for its own benefit. The conclusion was that city could not recover anything, given the nature of the fire loss.

Business income—rental value

To say it is difficult to improvise when writing rental value coverage for a landlord’s benefit is truly an understatement. Given that it is so common for a landlord to require loss of rental income in rental and lease agreements, one would think an appropriate form would long have been available. The time has finally come.

A new endorsement now available to accommodate such requests is titled “Business Income—Landlord As An Additional Insured (Rental Value). It is used in connection with Business Income (And Extra Expense) Coverage Form and Business Income (Without Extra Expense) Coverage Form.

The endorsement requires a description of the rented premises, the additional insured’s (landlord’s) name, mailing address, appropriate causes of loss form, the applicable business income coverage form, the limit of insurance and coinsurance percentage. It is not necessary that any other business income coverage be purchased by the named insured.

In fact, this endorsement states that the amount of payment made to the additional insured under this endorsement will be deducted from the named insured’s business income loss. What this means is that what is paid to the additional insured would not be payable to the named insured as a continuing normal operating expense.

The advantage of this endorse-ment is that the landlord is paid its rental charge following a covered loss. Prior to the introduction of this endorsement, coverage was on an honor system; that is, when loss occurred, the loss of rental income coverage promised to be purchased would be paid to the tenant who would in turn pay the landlord. This endorsement, therefore, eliminates an important step.

Building glass

It is relatively uncommon today for tenants to be required to cover glass in buildings they may rent or lease. But there still are exceptions, particularly when buildings are comprised of many glass windows, exterior glass panels and other building glass works.

What has made it difficult to cover glass that becomes the obligation for the tenant to cover, is that the method for doing so has been complicated ever since ISO withdrew Glass Coverage Form CP 00 15 in 2000. To make it easier for tenants confronted with the obligation to cover building glass, ISO has introduced an endorsement titled “Building Glass—Tenant’s Policy.” It is available with the Building and Personal Property Coverage Form, and Standard Property Policy.

Outdoor signs

Self-standing signs—i.e., those not attached to buildings—have not been considered as covered property, barring those covered by the Outdoor Property Coverage Extension of appropriate coverage forms. Such signs under this extension have been covered but only for loss by fire, lightning, explosion, riot or civil commotion, or aircraft. If better coverage is desired against more causes of loss, an inland marine form would be advisable. On the other hand, coverage for attached signs has been limited to $1,000 per sign in any one occurrence and for any covered cause of loss.

With the latest changes, reference to signs in the Property Not Covered, and Extensions Outdoor Property are revised. The words “signs (other than signs attached to buildings)” are specifically being removed.

For Building and Personal Property Coverage Form CP 00 10, Condominium Association Coverage Form CP 00 17, Condominium Commercial Unit-Owners Coverage Form CP 00 18 and Standard Property Policy CP 00 99, the most the insurer will pay for loss or damage, whether the sign is attached or detached, is $2,500 per sign in any one occurrence.

For Builders Risk Coverage Form CP 00 20, the limit for signs attached to a building is $2,500 per sign in any one occurrence.

Additional insured—building owner

One of the areas of confusion over the subject of additional insured status is property insurance. Many people who have come to learn the advantages of additional insured coverage in relation to liability insurance also request the same coverage with property forms. With some exceptions, insurers have not been accommodating with additional insured endorsements under their property forms.

Part of the reason is that being an additional insured on a property coverage form that makes reference to “you” and “your” in its provisions might mean that an additional insured is without coverage. That was the recent experience of a project owner who wanted to be an additional insured on a contractor’s builders risk policy.

An endorsement was issued to this policy showing the project owner as an additional insured. The problem was that none of the provisions of that policy mentioned “additional insured” or even “insured.” All of the provisions, instead, referred to “you” or “your,” which applies solely to the named insured. The additional insured, in the final analysis, could have ended up with very little, if that, in the event of an otherwise covered loss.

Another problem is that many people, including lawyers and the courts, get the terms “additional insured,” “additional named insured” and “named insured” confused. Some think that when an additional insured is named on the policy, that person or entity becomes an additional named insured. That, of course, is not true. To be an additional named insured, a person or organization has to be a named insured in addition to the first named insured shown in the declarations.

In light of the fact that some real estate leases require that the owner be shown as an additional insured on the tenant’s commercial insurance, accommodation has been made for many years to cover the owner under the tenant’s commercial liability policy with the issuance of the endorsement titled “Additional Insured—Managers or Lessors of Premises CG 20 11.

No additional insured endorsement, however, has been available with respect to the property coverage. Undoubtedly because of the many requests to do so, ISO has introduced a new endorsement and has revised an existing one.

The new endorsement is titled “Additional Insured—Building Owner CP 12 19.” What is confusing about this endorsement is that it references such building owner as a named insured, rather than, as the endorsement title confirms, an additional insured. However, considering that this endorsement applies solely to the Commercial Property Coverage Part and Standard Property Policy, this reference may be of no significance, although it might lend to some confusion if the endorsement is ever involved in any litigation.

When issued, this endorsement (CP 12 19) confirms that the building owner is a named insured at the building identified on the endorsement. In fact, what is necessary to complete this endorsement is the premises number, building number, if more than one is involved, the building description, the name of the building owner and address. Coverage, however, is limited solely to the building(s) identified and described in the endorsement.

The endorsement that is revised to take into consideration cases where the building owner desires to be a loss payee is titled “Loss Payable Provisions CP 12 18.” One of the changed provisions applies to insurable interest. Thus, this endorsement newly states that the applicable limit of insurance is not increased. Moreover, the insurer will not pay any loss payee more than its financial interest in the covered property, nor the applicable limit on the covered property.

Other changes

A number of other changes are being introduced. Some of the more significant ones, some conveying primarily limitations, will be discussed in future issues of this column.

Among the changes taking effect in August of this year are a new product errors exclusion, amendments to the Utility Services Exclusion, and Time Element—Civil Authority. *

The author
Donald S. Malecki, CPCU, has spent 48 years in the insurance and risk management consulting business. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.