THIS ISN’T FAVORITE CLIENT BEHAVIOR
We should be able to operate in the insurance realm under a safe set of assumptions. First, our customers should want proper protection. Second, they should be served by insurance professionals using their skills to assist in evaluating coverage needs. Third and finally, when a customer becomes a client, they should be willing to pay for it. There is a practical consideration for businesses that wish to cover property that has fluctuating value, such as goods and inventory. Property coverage is effective when policy limits reflect its value. It can be messy when the alignment between the two amounts is poor.
Below takes you to a case where a serious valuation problem arose. You may be surprised by the court’s position on how a loss should be handled.
An importer and wholesaler of clothing carried a reporting form policy on its inventory which was warehoused in its own facilities. A value reporting provision in the contract read:
“….The Assured shall keep an accurate record of all property covered under this endorsement and render monthly reports on the 15th day of each month or as soon thereafter as may be practicable of the actual cash values at risk at each location as of the last day of the previous calendar month and to pay premiums thereon when due….”
The insurer agreed to increase the amount of insurance to $1.5 million and did so just two weeks before a fire destroyed the clothing. The insured’s claim for the full $1.5 million was rejected by the insurer. Instead, the business was paid approximately $647,000, the amount reported four months before the fire. There had been no other report in the interim.
The insured sued the insurer for breach of contract, contending that the quoted provision entitled it to indemnity up to the policy limits. The insurer said that the reporting provision limited coverage to the value most recently reported before the fire.
The trial court agreed with the insurer’s argument and granted its motion for summary judgment. The insured appealed.
The appeal court noted the fact that the insurer took no action, such as cancellation, when the insured failed to continuously make monthly reports. Instead, the insurer increased the limit of insurance substantially just two weeks before the fire.
Of even more importance, the court found that the policy’s value reporting provision, unlike that in many reporting form policies, neither limited liability to “the amounts included in the last report of values….filed prior to the loss” nor imposed a proportional liability limit.
Accordingly, the judgment of the trial court was reversed in favor of the insured and against the insurance company.
Filippo Industries, Incorporated, Plaintiff-Appellant v. Sun Insurance Company Of New York, Inc. Et Al., Defendants-Respondents. California Court of Appeal, Division Seven. No. B082604. June 26, 1995. CCH 1995 Fire and Casualty Cases, Paragraph 5342.
We All Need To Be Clear About Our Stuff!
Retailers and wholesalers are particularly prone to volatility in the amount of merchandise on hand. Insurance coverage with static limits would undergo a constant cycle of providing either far too little or far too much protection. In such cases, insureds should embrace any method that would allow them to share information with its insurer about merchandise exposed to loss throughout a policy period. The court dispute above mentions a popular and practical method for handling changing levels of business personal property, a reporting form.
Here is a discussion of Insurance Services Offices Form CP 13 10, Value Reporting Form. It is from our commercial property section of PF&M Analyses found in Advantage Plus.
BUSINESS PERSONAL PROPERTY INSURANCE LIMITS OPTIONS
Retail and wholesale operations and manufacturers purchase business personal property coverage to protect their equipment and inventory. It is very important to establish an appropriate limit so that the amount of property on hand at the time of the loss is sufficient to cover the loss and satisfy any coinsurance requirements. It is also important for the premium to not be excessive.
- Option 1: Insure for a limit equal to the highest value expected.
If the limit selected is for the highest value anticipated during the year, it is adequate regardless of when a loss occurs. However, the insured may pay a high price for that protection because the values throughout the rest of the year may be considerably lower.
- Option 2: Insure for a limit equal to the average value expected.
If average value is used to determine the limit, the insured still pays a high premium but the limit may not be adequate to cover a total loss. The insured could be over insured most of the time and underinsured at the time of loss. Coinsurance penalties may come into play if a loss occurs when values are higher than the average limit selected.
- Option 3: Insure for a limit equal to the lowest value expected.
In this case, the premium is lower, but the insured has a major out-of-pocket expense if the loss occurs during any other inventory period. In addition to not having sufficient limits in case of a total loss, a coinsurance penalty must also be considered. The insured could decide to insure on a no-coinsurance basis. However, it loses the benefit of the premium credit for insuring on a coinsurance basis, package discount application and having access to certain coverage extensions that are not available when limits are not at 80% coinsurance.
- Option 4: Request regular endorsements to change limits.
The insured can establish the limit needed as of the inception date and then notify the agent to increase and decrease limits throughout the year. This option is expensive because it involves considerable attention and clerical effort on the part of the insured, the agent, and the insurance company. In addition, this approach is subject to errors in limits and dates. However, it does have the benefit of having the proper limits in place at the time needed.
- Option 5: Use the Peak Season Endorsement.
After the insured selects a limit that is sufficient most of the time, the attachment of a peak season endorsement allows it to vary those limits during selected time periods. The insured establishes the higher limits and time periods as needed, based on its knowledge of its business cycles. While this approach is flexible, the amount of coverage needed at the time of loss may not be adequate if the limit or dates selected are incorrect. In addition, the insured’s premium charge may be higher because the limits needed were not as high as expected (or the dates that higher limits were needed were set too long).
- Option 6: Use a Value Reporting Form.
This option matches the premium with the exposure and the insured purchases only the amount of coverage needed. However, the insured must be aware of its responsibilities and the potential penalties before using this form and approach. This analysis is of the Insurance Services Office (ISO) CP 13 10–Value Reporting Form but this approach also applies to most value reporting forms.
HOW THE REPORTING FORM MEETS THE INSURED’S NEEDS
If the insured wants to only pay for the coverage needed at the time of loss, the reporting form is the best choice. The insured selects the highest limit anticipated to be needed in the coming policy year. A deposit premium is charged based on 75% of that limit. That high limit is the limit for the entire year and, therefore, available to pay for any loss that may occur. At the end of the year, the insurance company calculates a premium based on the reports provided by the insured throughout the year. If the premium is higher than the 75% deposit the insured pays the additional premium but if it is less, the insurance company returns the premium. This way, the insured pays only for the limits needed.
The reporting method is not one size-fits-all. The insured has many options. The insured chooses the type of personal property it will report, the way it will provide reports, and the reporting interval or frequency. All or just a portion of covered business personal property can be reported. Other property can be covered on a specific basis. In many cases, the insured covers all other business personal property on a specific or coinsurance basis and reports only inventory. The insured reports the specific property on the report along with the inventory figure when it uses this approach.
Because of the many options available, the option selected must be documented and reporting made in accordance with that option. As an example, if a specific property is not to be reported, it must be clearly identified as such. Otherwise, mistakes happen, there is confusion, and penalties are applied.
With Greater Coverage Comes Greater Responsibility
Reporting forms do create an additional coverage obligation for insurers. It takes more effort to monitor and document a coverage flow rather than establishing, essentially, a stated limit. The sufficiency of the latter only requires periodic changes (generally at a policy’s renewal).
Regarding the insured, the chief obligation is adhering to the reporting process used to amend their business personal property protection. They begin by selecting an option to secure the benefit of more accurate coverage and fairer premiums. Next, the benefits are preserved by making reports on time and in the required manner. It could be said that the reporting obligation is an extension of another part of their commercial property coverage.
Here is a discussion of the Insured’s Duties In The Event Of Loss provision from Gordis on Insurance found in Advantage Plus.
INSURED’S DUTIES IN THE EVENT OF LOSS
The conditions discussed above explain the duties of the insurance company. On the other hand, this condition imposes a series of requirements on the insured. They are triggered after a loss occurs. Some of these duties fall to the insured even though the insurance company does not demand they be completed. Others need be done only if the company demands or requires it.
Duties of the Insured Even When No Request Is Made:
- Protect property from further loss. The insured is expected to act prudently, as if there were no insurance on the property. Examples are protecting openings, drying out the building and property and lubricating machinery. Any expense incurred by the insured for such actions may be included in the proof of loss for an insured occurrence.
- Separate damaged property from undamaged property.
- Put the property and the premises back in the best possible order.
- Notify the police or law enforcement authorities if a crime has been committed.
- Give immediate written notice of loss to the insurance company.
- Furnish a complete inventory of damaged, destroyed and undamaged property. This includes detailed quantities, costs, actual cash value and the amount of loss claimed.
Duties of the Insured Only When Requested By Company:
- Furnish verified plans and specifications of any destroyed or damaged building, fixtures and machinery.
- Display all remaining property.
- Submit to examination under oath.
- Produce all books of accounts, bills, invoices and other vouchers for examination and permit copies of such records to be made.
- Furnish a proof of loss within 60 days of its being requested. The proof of loss form is provided by the insurer. It contains a series of statements signed and sworn to by the insured. Some of the items that must be included are the time and origin of loss, the interest of the insured and all others in the property, the actual cash value of each damaged or destroyed item, and the total amount of loss. Others include any encumbrances on the property, details on any other insurance carried, any changes in title to the property since policy inception as well as any changes in the use, occupancy or location of the property. The final information needed is identifying the building occupants and describing their operations and whether the building was situated on leased ground.
Assessment Is Critically Important
Naturally, a key element of correctly determining coverage needs is assessing exposures. An accurate and completed application is an important first step in gathering details. Of course, the information could be insufficient. Further, applications are only good once a potential client makes a purchase decision and you often have to develop full information on prospects.
What may be particularly helpful is to approach clients and engage them in probing their operations. It is a shared process between the client and an insurance professional. It succeeds when the expert on the applicable business (client) is assisted by the party (insurance professional) who recognizes exposures related to that business. Did someone say, we could use a questionnaire?
Here is an excerpt from the Clothing Stores business personal property section in the Commercial Risk Survey found Advantage Plus.
Category: Retail Stores Risk: Clothing Stores
PROPERTY – BUSINESS PERSONAL PROPERTY
Premises # _______ Building # _______
Describe the business personal property.
Do the applicant’s business personal property values fluctuate? ___ Yes ___ No
If yes, is the fluctuation ___Monthly ___Seasonal (from_________ to _________)
Is the applicant’s business personal property:
Highly flammable: ___ Yes ___ No
Susceptible to severe damage from: ___Smoke ___ Heat ___ Water ___ Temperature
Do any other occupancies in this building present a significant exposure hazard to the applicant? Examples are explosion, fire or chemical hazards but are not limited to just them. ___ Yes ___ No
If yes, describe.
Would the applicant’s business personal property be damaged if the off-premises supplied heat, light or power failed? ___ Yes ___ No (If yes, answer the following:
Describe what would be damaged and how quickly.
How is the heat, light, or power transmitted to the applicant?
Will alarms sound or will other notification if power fails or shuts off? ___ Yes ___ No
Are backup generators available? ___ Yes ___ No
Are detailed records kept of all of the applicant’s inventory, machinery, fixtures, or equipment, including their purchase date and price? ___ Yes ___ No
Does the applicant label and assign inventory numbers to all items? ___ Yes ___ No