Mind the Gap
Understand property endorsements to better serve your clients
It’s easy for new producers to become overwhelmed with all the property endorsements that are offered by insurance companies. Spoilage, peak season, additional debris removal, inflation guard, ordinance or law—the list goes on and on.
Some of these endorsements are easy for a client or prospect to reject because they understand the coverage and believe that they don’t have an exposure. Other endorsements are easy for a client to reject because they simply don’t understand the coverage.
Spend some time speaking with your insurance company underwriters and/or equipment breakdown specialists to learn more about the coverage offerings that are available to your clients.
Two categories of property endorsements are extremely important for new producers to understand: utility services coverage and equipment breakdown coverage. Don’t make the mistake of not selling these coverages because of a lack of understanding by you or your client!
The issues
Let’s assume you have a new business prospect who is a florist. I’m sure you have a number of insurance companies that can easily write this on a BOP for a minimal premium. Seems simple enough, right? As one famous college football analyst likes to say, “Not so fast, my friend!”
What happens if one of the refrigerated floral display cases suddenly goes out due to a mechanical breakdown? Is the display case covered? What about the flowers in the case?
Not if the coverage is written on an unendorsed ISO Businessowners Coverage Form or on an ISO Commercial Property Form paired with Causes of Loss—Special Form.
The Businessowners Coverage Form (BP 00 03 07 13) and the Causes of Loss—Special Form (CP 10 30 09 17) have identical exclusions that state the policy will not provide coverage for losses caused by:
(6) Mechanical breakdown, including rupture or bursting caused by centrifugal force.
Now we know we need to address this specific situation in the policy. But what if the refrigeration system in the floral display case was fried due to a power surge?
Again, both forms exclude this particular scenario and will not cover losses stemming from:
Artificially generated electrical, magnetic or electromagnetic energy that damages, disturbs, disrupts or otherwise interferes with any:
(1) Electrical or electronic wire, device, appliance, system or network
So, we’re zero for two at this point. One more situation: What if an off-premises power failure caused the refrigeration unit to stop working and the flowers in the display case died as a result?
You guessed it. This isn’t covered either. The language in these coverage forms excludes losses caused by:
The failure of power, communication, water or other utility service supplied to the described premises, however caused, if the failure:
Originates away from the described premises.
The forms also clarify that “failure of any utility service includes lack of sufficient capacity and reduction in supply.” Therefore, we aren’t going to find any type of useful coverage carve-back here.
Why it matters
These are very real situations that are easy to overlook if you aren’t careful and don’t fully understand your client’s exposures and needs. While these are straightforward examples, you can certainly imagine how larger and more complex commercial accounts can be susceptible to the aforementioned exclusions.
“Dirty power,” which is a term for momentary power problems, can also damage sensitive electrical equipment and can lead to lost time and revenue for businesses.
Robert Crouch, a senior machinery and equipment specialist with The Cincinnati Insurance Companies, provides insight into “dirty power.” He says to think about how often LED displays on kitchen ranges, coffee makers, alarm clocks, etc., go out in your home due to a momentary power failure. Take that same situation and apply it to a business setting that uses process-related production and/or sophisticated electronic equipment. The results can be disastrous.
Crouch states that “Over 50% of our equipment breakdown claims are from power surges, which wreak havoc on circuit boards, motherboards, drive boards, and other sensitive electronic equipment.”
As technology continues to evolve and works its way into just about everything we do, it’s not hard to imagine a potential power surge claim for any type of commercial account you encounter.
How to fix the problem
The two types of Utility Services endorsements are a great place to start. The first endorsement, Utility Services—Direct Damage (Form CP 04 17 10 12), covers direct physical loss to covered property caused by an interruption in:
- Water supply;
- Communication supply; or
- Power supply.
In the case of communication supply and power supply, the insured can choose whether to include coverage for overhead transmission lines.
Let’s go back to our last two claim examples at the florist. If the client had Utility Services—Direct Damage endorsed onto the policy, the flowers would indeed be covered due to the off-premises power failure.
The other claim example (power surge) could also potentially be covered, as there are no exclusions or limitations in the ISO Utility Service—Direct Damage form. Since the form is silent, you could gamble that coverage would be granted. However, you would be better served checking with your insurance company first or seeking another endorsement that properly addresses this situation.
So, let’s assume that your florist has one of these claims and the loss is covered. Are you off the hook? Not yet.
If a florist has no flowers to sell, then it is going to lose income, correct? That’s where Utility Services—Time Element (CP 15 45 06 07) comes into play. This endorsement addresses the same three areas that the Direct Damage form addresses, but it addresses them from a business-income and extra-expense standpoint. Your client will be pleased if you can replace her lost flowers, but she won’t be entirely happy unless you replace her lost income as well.
Finally, what about our first claim example, where a mechanical breakdown was the cause of the loss? The Utility Services—Direct Damage form won’t cover that, so we need to have an Equipment Breakdown endorsement to the property form or a standalone Equipment Breakdown policy to address that exposure.
ISO provides an Equipment Breakdown Protection Form (EB 00 20 08 08), but you’ll also find that insurance companies tend to have their own versions of this coverage. These variants can be extremely broad. For example, one Equipment Breakdown endorsement in the marketplace not only covers damaged equipment, but also provides coverage for:
- Business Income and Extra Expense
- Data Restoration
- Expediting Expenses
- Fungus, Wet Rot, Dry Rot and Bacteria
- Hazardous Substances
- Off Premises Equipment Breakdown
- Public Relations Expenses
- Service Interruption
- Spoilage
Spend some time speaking with your insurance company underwriters and/or equipment breakdown specialists to learn more about the coverage offerings that are available to your clients.
I have seen firsthand the benefits of Equipment Breakdown coverage, as a power surge damaged our building’s HVAC equipment several years ago. Over $46,000 was paid out as a result.
The premium for these coverages can vary, as sometimes the Utility Services endorsements can be pricey. However, by comparison, Equipment Breakdown can be purchased for as little as $40 a year with some carriers. Again, check with your carriers to learn more about their pricing.
In any case, you’ll do your clients a service by familiarizing them with these coverages and letting them decide whether they want to purchase the insurance. The worst possible thing you can hear after a claim is, “I didn’t know I could buy insurance for that. If I’d have known I would have bought it!”
The author
Marc McNulty, CIC, CRM, is vice president of insurance operations at The Uhl Agency in Dayton, Ohio, and has been with the agency for 15 years. He divides his time among sales, marketing, technology and operational duties. Marc also serves as chairman of NetVU’s Young Professionals Chapter. You can reach Marc at marcmcnulty@uhlagency.com.
