Protecting Your Business

Table of Contents

Basics of Property & Casualty Insurance 4

1.1 Purpose of Insurance 4

1.2 Types of Risks 4
1.3 What Produces Risks? 4
1.4 Loss 5
1.5 Examples of Hazards 5
1.6 Accident vs. Occurrence 6
1.7 Deductibles 6
1.8 Managing Risks 6
1.9 Rules 7
1.10 Insurable Interest 7
1.11 Indemnity Insurance Contracts 8
1.12 Types of Insurers 8
1.13 Legal Parts of a Contract 9
1.14 Parts of the Insurance Contract (D-I-C-E) 9
1.15. Legal Terms & Definitions 10
1.16 Agency Law 12
1.17 Insurance Company Functional Departments 13
1.18 Types of Agents 13
1.19 Tort Law – The Law of Legal Wrongs 14
1.20 Insured 14
1.21 Mortgage Rights 15
1.22 Underwriting 15
1.23 Loss Ratios 16
1.24 Field Underwriting 16
1.25 Corporate Underwriting 16
1.26 Fair Credit Reporting Act 17
1.27 Deposit Premium/Audit 16
1.28 Policy Delivery & Service 17

Business Risks & Insurance 19

2.1 Background Issues 19

2.2 Working with Risk Management 19
2.3 The Application Process 22
2.4 Insurance Policy Issues 23

Property Insurance Definitions & Terms 24

3.1 Introduction to Property Insurance 24

3.2 Indemnity 24
3.3 Replacement & Actual Costs 24

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 Protecting Your Business

3.4 Limit of Liability 25

3.5 Coinsurance 25
3.6 Settlement Formula 26
3.7 Extensions of Coverage 27
3.8 Additional Coverages 27
3.9 Pair & Set Clause 27
3.10 Cancellation 28
3.11 Appraisal 28
3.12 Assignment 28
3.13 Subrogation 28
3.14 Pro Rata Liability (Other Insurance) 29
3.15 Arbitration 30
3.16 Nonrenewal 30
3.17 Vacancy/Unoccupancy 30
3.18 Right of Salvage 30
3.19 Abandonment 30

Property Insurance – Commercial Lines 31

4.1 Overview 31
4.2 Introduction 31
4.3 Commercial Property Covered 31
4.4 Property Not Covered 32
4.5 Additional Coverage Form 32
4.6 Causes of Loss Forms 34
4.7 Earthquake Form 35
4.8 Builders Risk (New Construction) 36
4.9 Indirect Loss Coverages 36
4.10 Commercial Package Policy (CPP) 38
4.11 Businessowners Policy (BOP) 38
4.12 Boiler & Machinery Insurance 40
4.13 Marine Insurance 42
4.14 Flood Insurance 44
4.15 Watercraft Insurance 45

Business Interruption Issues 47

5.1 Overview 47
5.2 Business Income Coverage Form 47
5.3 Policy Expiration 48
5.4 Important Policy Definitions 48
5.5 Business Income Coverage 49
5.6 Types of Business Interruption Coverage 49
5.7 Coinsurance Issues 49
5.8 Resumption of Business 50
5.9 Profits Insurance 50

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 Protecting Your Business

Commercial General Liability Policy 51

6.1 Overview 51
6.2 Coverage Triggers 51
6.3 Claims 51
6.4 Coverages 51
6.5 Coverage A: BI & PD Liability, Coverage B & C 52
6.6 Other Liability Coverages 56

Crime & Employee Dishonesty 60

7.1 Overview 60
7.2 Coverage Forms 61
7.3 Declarations Page 62
7.4 Crime Insurance Policies 62
7.5 Once a Crime is Discovered 63
7.6 Multiple Coverage 63
7.7 Recovery of Stolen Property 64
7.8 Right to Recovery 64
7.9 Valuation of Money 64
7.10 Disagreement in Value 65
7.11 Theft & Disappearance Insurance 65
7.12 Employee Dishonesty 65
7.13 Crime General Provisions 65
7.14 Fidelity Bonds 66

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 Protecting Your Business

1 Basics of Property & Casualty Insurance

1.1 Purpose of Insurance

The purpose of insurance is to spread risk amongst others and

is intended to provide a practical solution to economic uncer-
tainties and unexpected losses.

1.2 Types of Risks (uncertainty of loss)

1. Speculative Risk: This risk implies that an individual could

not only have the potential of improving his/her financial posi-
tion but also has the potential to being placed in a worse finan-
cial position by losing something. The best example for specu-
lative risk is GAMBLING. Therefore, insurance policies will
NOT protect speculative risks.

2. Pure Risk: On the other hand, this risk is what insurance is

all about. It covers losses only and does not imply that the in-
sured can “make money” after a covered loss. The goal of in-
surance is to place the insured back to his/her financial position
just prior to the loss. Obviously, life insurance can’t replace the
deceased, but instead, will help provide financial stability to the
family or loved ones of the deceased.

1.3 What Produces Risks?

1. Hazards: These are things that might cause a peril, which

creates the risk, which leads to a loss. As an example, an indi-
vidual has heart disease (hazard) which causes a heart attack
and the person dies.

2. Perils: A peril is the immediate, specific cause of a loss.

Using the above example, the hazard (heart disease) gave rise
to the potential cause of death, which is the heart attack,
(known as a peril) that eventually causes the actual loss
(death), and therefore creates a claim on the life insurance pol-
icy.

• Policy Perils

♦ Property and casualty insurance policies are writ-

ten in one of two ways concerning the perils cov-
ered. The first are named perils and the second
type known as all risk or open perils.

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 Protecting Your Business

◊ Named perils lists the specific perils that it will

cover. Obviously, in order for the insured to
collect, the specific loss must be covered or
the insured will not recover.

◊ On the other hand, an all risk or open perils

policy covers all risk of loss or all perils except
those that are specifically excluded.

1.4 Loss

Loss is an unintended or unforeseen reduction or destruction of

financial or economic value. If an insured’s building burned to
the ground, this event would be considered a total loss because
the value of the ashes would be drastically different than the
value of the home before the loss.

• Direct Loss is a loss, which occurs directly through an

“unbroken chain of events” as a result of an insured
peril. This is done without any intervening cause.

• Indirect or consequential loss is a loss or damage,

which results from a hazard or peril, but the loss was
not actually caused by that hazard or peril. These are
losses, which result from the actual physical loss itself.

♦ Example: a fire burns a clothing store to the

ground. The direct loss from the fire peril would
be the total destruction to the building and its con-
tents. The indirect loss from the fire peril would be
the inability of the clothing storeowner to conduct
business following the fire loss.

1.5 Examples of Hazards

• Employee hates his employer and “wants to get him.” (Mo-

rale Hazard) This is an attitude problem!

• An individual decides to burn down someone’s home.

(Moral Hazard)

• Physical Hazard - These are physical, tangible items that

can create a peril. Examples can include piles of oily rags,
bad brakes, no brakes, slippery falls due to wax, skate
board on the stairs etc.

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1.6 Accident vs. Occurrence

Property and casualty contracts are usually written in two ways:

1. Accident-basis

An accident is a sudden unexpected, unforeseen event re-

sulting in financial loss.

Example: Man falls on a cracked sidewalk. A truck hits a

car. Lightening strikes a house causing a fire.

2. An Occurrence

An occurrence is a sudden, unexpected unforeseen event

resulting in financial loss including repeated and continuous
exposure to conditions.

Example: Industrial waste gradually pollutes a river. An

insured worker gradually becomes ill due to repeatedly
handling asbestos on the job.

1.7 Deductibles

In order to avoid minor claims, companies usually write de-

ductibles into their property contracts. This means that the in-
sured must pay some portion of the loss. Just like in health in-
surance, the insured will pay the deductible first and then the
insurance company will pay the remainder of the claim within
covered limitations.

1.8 Managing Risks

The following are ways that risks can be “managed”.

1. Avoidance: If you avoid doing something, like not driving

an automobile, you will avoid the possibility of a loss involving
an automobile.

2. Assumption: Instead of purchasing insurance you decide to

assume the risk by self-insuring. An example of this would be
declining fire insurance for your home. If the house burns
down, you will not be reimbursed for the loss as you assumed
it.

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 Protecting Your Business

3. Transfer: This choice is what insurance is all about and is

the most common way to manage risks. Transfer the risk to the
insurance company and have the insurance company pay for
any losses.
4. Sharing: While you transfer most of the risk to an insurance
company you may have to share part of the losses. Examples
of this would exist in health, auto and casualty insurance
through the use of deductibles and co-insurance requirements.

5. Reduction: Examples of risk reduction is the installation of

smoke detectors, sprinkler systems, burglar and fire alarm sys-
tems and the use of air bags in autos. Some insurance com-
panies offer special rate reductions when you have some of
these.

1.9 Rules:

1. Law of Large Numbers: Actuaries look at similar type

losses using large numbers of incidents. The word Homoge-
neous defines this process. With a large enough pool of risks,
an insurer can predict with reasonable accuracy the number of
claims it will have during any given time.

2. The loss must be accidental in nature and not done with

the intent of creating a situation just to “collect the insurance
proceeds”.

3. The loss must be significant when compared to the initial

cost of the policy. As an example: Your death benefit is
$1,000,000 and the annual premium cost is $1,000. The loss,
represented as the death benefit, is significant when compared
to the cost ($1,000 a year). This is also known as an aleatory
contract. Another way to say this is, the premium is less than
the company agrees to pay in the event of a loss.

4. The loss must be measurable and due to chance, out-

side the control of the insured.

5. The loss must be caused by a non-catastrophic cause,

which means the following situations would usually be elimi-
nated from policy coverage; Insured persons in the National
Guard while in a “War Zone or in a Foreign Country Police Ac-
tion”.

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 Protecting Your Business

1.10 Insurable Interest

In order for the insurance company to pay a claim the insured

will have to establish that an insurable interest existed between
the insured and the subject of the insurance. As an example, if
the insured had placed a claim for the loss of a stolen vehicle,
the insured will have to establish that he/she owned or leased
the vehicle, prior to the insurance company paying on the
claim. The following represents the rules surrounding an insur-
able interest with property and casualty insurance.

1. An insurable interest must exist at the time of loss.

2. An insurable interest will exist if a loss of property will result

in a financial loss to that individual.

3. Examples of someone having an insurable interest is;

• person owning property

• person having a lien on the property
• person living on the property
• person owed money by the owner
• banker (mortgage holder)
• family

1.11 Indemnity Insurance Contracts

All property and casualty insurance contracts are contracts of

indemnity and their purpose is to make the insured “whole
again” or pay he/her back. The purpose is to put the insured
back in the same financial positions as he/she was prior to the
insured loss.

1.12 Types of Insurers

Stock Company Insurers: Owned by shareholders just like

shareholders of AT & T and General Electric. Shareholders
share the profits of the company when and if a dividend is de-
clared. This type of dividend represents profits, not a return of
invested capital.

Mutual Company Insurers: The owners of this company are

the policy owners, not shareholders. Policy owners may receive
dividends, but unlike a stock company dividend, the dividends
represent a return of premium, which is based on factors, which
will be discussed later.

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Non-Profit Service Organizations: Examples include Frater-

nal Organizations such as the “Royal Elk of Palatine”, HMOs,
PPOs and Blue Cross and Blue Shield.

Reinsurers: These companies insure insurers by accepting

the transfer of a portion of or all of the risks, which the original
company has insured.

1.13 Legal Parts of a Contract

1. The Offer: The insurance company, through its agents, will

attempt to solicit invitations for offers (THEY DO NOT MAKE
THE OFFER) through advertisements, telephone calls and
conversations. The prospect makes the offer by filling out
the application and submitting it to the insurance com-
pany.

2. Acceptance: After the insured submits the application and

the initial premium is paid, it is up to the insurance company to
accept the offer by issuing the policy.

3. Consideration: All parties in all contracts must provide

some form of consideration (something of value) to make the
contract valid. The insured pays the premium while the insur-
ance company makes a promise to pay a covered claim in the
future. A contract in which one party, the insured pays some-
thing, and the other party, the insurance company, promises to
do something in the future, is known as a Unilateral Contract.

4. Contract must be for a legal purpose. As an example,

you can’t buy a policy with the intent to kill the insured to collect
the proceeds.

5. Parties must be competent and understand all the

terms: If your prospect only understands a foreign language,
you must provide a means to interpret the terms of the contract
or there won’t be a valid contract.

1.14 Parts of The Insurance Contract (D - I - C - E)

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Part I - Declarations

• Name and address of insured/owner

• Subject of insurance (i.e. Individual life insurance)
• Policy period dates
• Premiums and rates
• List of coverage

Part II - Insuring Clause

• Describes the obligations of the insurance company.

• Package policies provide individual insuring agreements
for each covered form
• Described are the perils covered and risks assumed

Part III - Conditions

• Describes what both the insured and insurer must do in

regard to their rights and duties.

Part IV - Exclusions

• If the insurance company is going to exclude any type

of coverage it must be specifically listed in the exclu-
sion part of the insurance policy contract or it cannot be
excluded.

1.15 Legal Terms & Definitions

1. Warranty: Provision in the insurance policy that pledges

that a certain condition does or does not exist. (i.e. “No
heart disease problem”)

2. Concealment: Failure to disclose a MATERIAL FACT that

the underwriter, if had known, would not have issued the
policy.

3. Binder: A temporary contract of insurance, oral or written,

offered by an insurer pending issuance of the policy. It is
usually written for a period of 30 or 60 days and remains in
force for that period unless canceled or a permanent policy
is issued or refused by the insurer.

Example: You purchase a new car, call your insurance

agent and the agent tells you that your are covered.
This is an example of a binder.

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4. Misrepresentation: A false statement made by the insured

such as indicating that he/she doesn’t smoke when in fact
the prospect smokes three packs a day. Remember, all an-
swers to all questions asked on the insurance application
are considered representations. If an answer is not true it
would be a misrepresentation.

5. Policy Riders: Riders can only be added to an existing pol-

icy and they modify coverage by adding to, or taking away
policy coverage.

6. Aleatory Contract: A contract in which values are ex-

changed for unequal values.

7. Unilateral Contract: All insurance contracts are unilateral

as one party, the insured, pays the premium and the other
party, the insurance company, makes a promise to pay in
the future if the insured/owner submits a valid claim or
wants to surrender the policy. (Act for a promise)

8. Adhesion Contract: All insurance contracts are contracts

of adhesion because they are written and printed by the in-
surance company and the courts, if an ambiguity exits, will
decide in favor of the insured if any changes to the policy
were handwritten or typewritten. These will prevail over the
original printed terms. If asked, handwritten changes will
prevail over typewritten changes.

9. Executory. One of the parties to the contract has duties,

which are unfulfilled but still needs to be done.

10. Waiver: Giving up of a known right.

11. Estoppel: The legal term used when an insurance com-

pany is denied it’s right to challenge in court a claim be-
cause, by its actions waived a previous rule.

12. Errors & Omission Insurance: Professional liability insur-

ance in which the insurer will defend lawsuits covered by
the policy for insurance producers.

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13. Certificate of Insurance: This is a document that evi-

dences the existence of insurance coverage.

• In property insurance a certificate of insurance may be

used to demonstrate the existence of a master policy
which provides protection for more than one person.

Example: A condominium association may have a

master property insurance policy insuring the build-
ings in a condominium complex. Certificates may be
issued to each member as proof of their insurable in-
terest.

• In casualty insurance a certificate of insurance is gen-

erally issued to demonstrate proof of liability coverage
for a specific location or project.

Example: A contractor may be required by the prop-

erty owner to provide proof of general liability insur-
ance for his/her work.

14. Proximate Cause: An act through an unbroken series of

events that can be determined to be the immediate or actual
cause of the loss.

Example: Everyone eating catfish in a restaurant gets

ill. Even though these patrons did something else after
leaving the restaurant, the fact is that they were served
food, which was the proximate cause of the injury (sick-
ness).

15. Endorsement: A form added to an insurance contract,

which modifies the underlying coverage.

1.16 Agency Law

Licensed insurance producers will be representing an insur-

ance company and as such are mandated to follow certain
rules of agency law. These rules are as follows;

1. Express Authority: The agent is told exactly what to do.

An example of this is giving the agent specific authority to
collect premiums from the insured.

2. Implied Authority: While the agent isn’t told specifically

what to do it would be okay if the actions of the agent would

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 Protecting Your Business

be acceptable as a reasonable business practice. A good

example of this is when the insurance company supplies a
receipt book for the agent but doesn’t specifically tell the
agent he/she has authority to collect premiums. It would be
obvious to a reasonable person that the insurance agent
had the authority to collect the premium.

3. Apparent Authority: This is the toughest to identify. It

may appear that the agent has authority because of certain
actions by the agent, and then an innocent third party relies
on these actions.

i.e. After an insurance producer is terminated by an insur-

ance company for lack of production, the agent continues
to sell policies. By the way, the insurance company failed
to collect any of the forms, business cards and applica-
tions, which the agent had. The agent collects a premium
and properly follows the conditional receipt rules (to be dis-
cussed later) and the proposed insured dies. Will the com-
pany have to pay the claim after normal underwriting?
Maybe! We’ll leave this up to the courts but this is a good
example of the use of Apparent Authority because the pro-
posed insured had no idea that the agent was terminated
because the agent had all the “right” materials.

1.17 Insurance Company Functional Departments

• Sales: Markets insurance products

• Actuarial: Responsible for keeping the company finan-
cially sound by scientifically arriving at death benefit tables,
payout options etc.
• Underwriting: Responsible for appropriate risk selections,
reviewing all applications, sending for needed additional in-
formation such as property inspections etc.
• Claims: Collects and pays claims
• Administrative: Issues policies, billing, policy changes,
reinstatement of policies etc.
• Others: Legal, advertising, data processing, public relations
etc.

1.18 Types of Agents

Agents always act in a Fiduciary Capacity, which means they

must always use utmost care in handling clients and client
transactions.

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• Independent Agents: Contracts with several insurance

companies.
• Captive Agents: Can only represent one company (i.e.
Allstate)
• General Agent (GA): Gets a geographical area and re-
ceives overrides for agents writing a particular insur-
ance company policy in that area.
• Direct Writing Companies: Insurance company owns
the business and have their own employees contact
customers directly.

1.19 Tort Law - The Law of Legal Wrongs

1. Intentional Act: Insurance company will not cover this type

of claim. An example may be when a beneficiary intentionally
murders the insured.

2. Negligence: Failure to do what a reasonable person would

do under similar circumstances. Was there a legal duty to act
or not to act? Was there a breach of that duty? Was there in-
jury or damage to another person? Was the act the proximate
cause of the damages? If all the questions can be answered
with a yes then a case for negligence can be made and typi-
cally insurance will pay for the covered losses.

• Strict or Absolute Liability: It doesn’t matter what or who

caused the wrong. The party doing the act is strictly re-
sponsible for the results. (i.e. contractors who dynamite
buildings - people who have tigers as pets and the tigers
attack curious children)

• No-Fault Insurance: This is a modification of no-fault in-

surance as it exists in some states such as New York. It
preserves the right to sue another party under certain cir-
cumstances unlike true no-fault insurance, which doesn’t
allow any lawsuits.

1.20 Insured

The insured is defined in every property and casualty policy. A

party not specifically named as an insured has no legal right to
recover directly under a policy even if that party has an insur-
able interest in the insured property at the time of loss. Keep in
mind, however, that it is possible for a person not specifically
named in the contract to still have recovery rights in the event

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of loss such as a guest staying at your house. This guest is

covered for specific types of loss under dwelling and home-
owners forms.

Duties of the insured

• give notice of claim immediately (written or by tele-
phone)
• prevent further loss as reasonably possible
• separate damaged from undamaged property to deter-
mine loss
• inventory the loss
• prepare a proof of loss which is required by the insurer
within a reasonable time period, usually 60 days
• make all books and records pertaining to the loss avail-
able to the insurer

Duties of the insurer

• respond to the insured’s claim in a timely fashion
• evaluate the claim
• treat the insured fairly
• provide repair or replacement cost

1.21 Mortgage Rights

The mortgagee (bank/lender) has an insurable interest in mort-

gaged property. The mortgagee must be given an opportunity
to file a proof of loss etc. under the policy if the insured fails to
do so.

Additionally, the mortgagee is given 10 days written notice of

cancellation or nonrenewable if the insurer decides to cancel or
not renew the policy.

If the insured fails to provide proof of loss, a mortgagee has 60

days from receiving notice of the failure to file such a proof of
loss to file the loss themselves.

1.22 Underwriting

Underwriting is the process by which prospective insureds are

reviewed or examined for their acceptance or rejection. The
purpose of underwriting is to pool similar pure risks, not dissimi-
lar ones so that losses can be predicted with a degree of accu-
racy. (Avoid adverse selection) Premiums can be determined
accordingly.

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1.23 Loss Ratios

A loss ratio is the numerical description of the relationship of:

1. An incurred loss is a loss which has occurred during a

specific period of time such as a calendar year; and

2. Earned premium is premium which has been allocated

to an insurer’s loss experience, general expense and
profit.

The loss ratio formula can be written as follows:

incurred losses
Loss Ratio =
earned premiums

If an insurer’s incurred losses are greater than

the amount of earned premium, the insurer is
losing money. In short, loss ratios are numeri-
cal indicators of the quality of an insurer’s un-
derwriting.

1.24 Field Underwriting

Insurance producers have the initial responsibility for evaluating

or field underwriting specific business. Insurance producers
are the first representatives of an insurer to come in contact
with a prospective insured. If a producer feels that a prospect
does not fit within an insurance company’s underwriting guide-
lines he/she must inform the company of same and detail the
reasons and possible solutions.

1.25 Corporate Underwriting

The proposed insured’s application will be reviewed by the in-

surance company underwriters to determine whether there is
an insurable risk, whether there is an insurable interest and
whether the property is insurable.

Factors looked at by underwriters

• inspection reports
• motor vehicle reports
• credit reports

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1.26 Fair Credit Reporting Act

This federal act helps insure that applicants for insurance are
treated in a fair, accurate and confidential manner. It is the
producer’s responsibility to explain the terms of this Act. The
signed forms will give the underwriters authority to investigate
the proposed insured further if they deem it necessary.

The Act also provides consumers with an opportunity to find out

information that an investigative agency has used about them
and to whom such reports have been made.

1.27 Deposit Premium/Audit

A deposit premium (initial premium) is a tentative charge

made at the beginning of certain policies and reinsurance
agreements, to be adjusted when the actual earned charge has
been later determined.
An audit is the verification of books or accounts to determine
their accuracy.
A premium computation method of deposit premium and
audit is used in a variety of commercial property and liabil-
ity contracts.

Audit premiums are due and payable on notice. If the sum of

the advance and audit premiums paid for the policy term is
greater than the earned premium, the insurer will return the ex-
cess to the first named insured.

The important concept to remember is that a deposit premium

is required for many commercial insureds which is based on an
estimate of their risk exposure (payroll or receipts). Thereafter,
the insurer will compute the earned or final premium for the au-
dit period in question.

1.28 Policy Delivery and Service

Delivering the policy not only means that the policy is physically
delivered to policy but that the issued policy is the same as the
one that was applied for. It is always best, just like in life and
health insurance, to personally deliver the policy. Personal de-
livery allows you to review the policy terms with the insured to
avoid any misunderstandings and confusion. It can also allow
you to ask for referrals.

Service of the policy for you client should include the following;

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• Maintaining of accurate records

• Advising your clients of anything that should mandate
the updating of their policies
• Help clients file claims
• Review existing coverages

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 Protecting Your Business

2. Business Risks and Insurance

2.1 Background Issues

Dating back hundreds of years, basic risks such as fire, bur-

glary, robbery and more have continued and business owners
need a way to transfer risks from them to an insurance com-
pany. While names have changed, the results have not.

However, in todays world and while going into the 21st. century,
business owners need to be even more cognizant of different
types of potential risks. Some additional concerns should in-
clude the following;

♦ Sexual harassment
♦ Computer theft
♦ Product liability
♦ Carpal tunnel syndrome due to increased use of com-
puter terminals
♦ Employee law suits
♦ Etc

Part of risk management is the recognition of these and other

types of risk as well as their impact upon the business owners
business. Many businesses have hired risk management per-
sonnel to start asking “what if” questions and the probable solu-
tions. Part of risk management is the identification of expo-
sures to financial loss and selection of methods to manage
those exposures.

Consider all of these situations and the potential negative re-

sults from ignoring them.

2.2 Working With Risk Management

Using Your Financial Statement

Taking a look at a business financial statement one will find a

balance sheet which represents a snapshot in time of every-
thing a business owns and it’s liabilities of what it owes.

One of the major items found on a balance sheet is the inven-

tory on hand as well as acquired property. The assets of most
importance will be;

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♦ Buildings
♦ Equipment
♦ Plant
♦ Notes Receivable
♦ Accounts Receivable

The liabilities of major interest will be;

♦ Short term debt

♦ Accounts Payable
♦ Leases
♦ Long term debt

I must point out at this point that one must use caution when
using a balance sheet as this record is not updated on a daily
basis. Also, inventories, receivables and Payables may fluctu-
ate on a seasonal basis so accurate record keeping is a must.

The other type of important financial report is the income

statement, also known as a profit and loss statement. This re-
port tracks the flow of income and payments in and out of the
business. This type of report is even more important when the
business has experienced any type of business interruption
problems.

As with other types of potential insured losses, the losses must

be fully documented so accurate financial records are impera-
tive. Without good documentation the insurance company may
not pay the entire claim.

Inspections

Seeing the exposures for yourself will have more impact then
looking at a pile of reports. On-site inspections will certainly
provide any current potential exposures and will help in the risk
management evaluation.

Many insurance companies will actually provide on-site inspec-

tions with recommendations for risk improvement at no addi-
tional cost to the business owners. This service is often pro-
vided as a “no cost” service when purchasing an insurance pol-
icy. When purchasing Boiler and Machinery coverage insur-
ance companies evaluate and inspect the equipment prior to
writing the policy.

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 Protecting Your Business

These inspections actually benefit both the insured and the in-
surer for all the reasons stated above.

Risk Retention

Risk retention by the business owner is important when dealing

with small dollars and low risk issues. In order for an insurance
company to insure a risk there must be an opportunity for the
insurance company to make a profit. Therefore, small and or
predictable losses do not warrant insurance coverage. Busi-
nesses should retain small losses and predictable losses and
instead include them as a cost of doing business.

Managing Risks

As pointed out and discussed in Chapter One, Section 1.8, the

following are ways that risks can be managed;

1. Avoidance
2. Assumption
3. Transfer/Insurance
4. Sharing
5. Reduction

Very often these methods are either ignored or not thought of

by business owners. These methods can end up as an eco-
nomical way to manage the cost of risk.

Starting a Risk Management Program

Once sources of potential losses have been identified and the

business owner has decided that action is necessary a program
needs to be implemented. Any one or a combination of the
above ways to manage risks should be chosen.

In addition, the frequency and severity of the risks identified

must be tracked and understood. Types of risks are related to
certain types of businesses. A risk identified in one industry
may not be a problem in a business participating in a different
industry.

High Tech Risk Areas

As I alluded to before, it is important for todays business owner

to understand and grasp some of todays high-risk computer ar-
eas. Some of these high-risk areas include, but are not limited

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 Protecting Your Business

to, loss of computer data, theft of computer data, software

bugs, software viruses and more.

In this modern age, insurers can actually provide insurance

coverage, which will reimburse the business owner for ex-
penses, associated with recreating lost data files if the loss was
caused by a covered event.

Concerns With Risk Management

A business owner must fully evaluate the benefits and costs of

any risk management decision. The successful risk manage-
ment program is one that balances the need for expensive loss
control equipment and insurance coverage with the limited re-
sources available for risk management activities.

2.3 The Application Process

Once the business owner concludes that insurance needs to be

purchased in order to transfer some of the identified risks
he/she must fill out an insurance application.

I know you remember our conversation in Chapter One about

who makes the offer to purchase insurance. That’s correct, the
applicant is the one who makes the offer to the insurance com-
pany. Logically, the insurance company is under no obligation
to accept the offer from the applicant, but if they do then they
accept by issuing the policy.

As all insurance contracts are aleatory in nature, parties will be

exchanging unequal values. The applicant pays a premium to
the insurance company while the insurance company will prom-
ise to pay for any covered claims. Of course, there may be a
chance that the insurance company will never have to pay any
claims but the insured will still have to pay the premium.

Once the insurance company receives the application it will be

forwarded to their underwriting department to determine if there
is an insurable risk and acceptable exposure. Guidelines differ
from company to company. Keep in mind that the underwriting
process is the last defense against insuring unreasonably high-
risk applicants.

The underwriters will apply the law of large numbers under

which the insurer knows from experience approximately how

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 Protecting Your Business

many policies will suffer a loss and how severe the losses will
be.

One way to accept some risk and to transfer risk to other insur-
ance carriers is by reinsurance. This practice is generally not
made known to the insured as its up to the policy insurer to pay
any claims and to recover amounts that are due the primary
carrier. The practice of using reinsurers is quite common when
involved with higher risk and or higher requested benefits by
the applicant.

2.4 Insurance Policy Issues

As discussed in Chapter One, an insurance policy is a contract

between the owner of the policy and the insurance company.
With business insurance it is typical to use ISO Forms. ISO
(Insurance Services Office) is an industry organization that
evaluates the needs of most policyholders and drafts policy
forms to accommodate their needs.

As insurance was never intended to wish away all risks, but

rather a means for businesses and individuals to transfer away
the uncertainty of events such as fire. Insurers now offer cov-
erage for nearly any random event either through common poli-
cies such as Commercial General Property and Commercial
General Liability policies or through additional coverages called
endorsements that can be added to standard policies.

In the next chapter we will take a look at some definitions and

terms used in property insurance so as to be able to under-
stand the specific insurance coverage, rules and applications
available for the business owner.

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 Protecting Your Business

3. Property Insurance Definitions & Terms

3.1 Introduction To Property Insurance

Property insurance is purchased to cover real property (land)

and or personal property (property other than land) against loss
or damage from covered perils.

This first section will help introduce you to terms and definitions
dealing with property insurance. Some of these terms were al-
ready reviewed in chapter one, but, as they are important we
will review them again.

3.2 Indemnity

All property and casualty insurance contracts are contracts of

indemnity and their purpose is to make the insured “whole
again”, not to profit. The purpose is to put the insured back in
the same financial positions as he/she was prior to the insured
loss.

3.3 Replacement and Actual Costs

Replacement Cost (RC)

This is the exact amount of money needed to replace damaged

or destroyed property at the point the loss occurred with one of
like kind and quality. As depreciation is not a factor, this repre-
sents a departure from indemnity rules.

Actual Cost Value (ACV)

Actual cost represents replacement cost less depreciation.

Example: If a chair were destroyed in a covered loss and

settlement were to be made on an ACV basis, the cost of
the chair in today’s market place would have to be deter-
mined first and then a deduction would be made that repre-
sents depreciation.

However, if the same chair were destroyed and the policy

provided for RC then no deduction would be made for dep-
recation.

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 Protecting Your Business

Reality provides us with the fact that buildings insured un-

der property contracts usually are insured on a replace-
ment cost basis as they usually increase in value over time
while contents of the building are usually covered under a
ACV basis because of depreciation.

3.4 Limit of Liability

This is the maximum amount the insurance company is obli-

gated to pay for any loss as specified in the insurance contract.
This limit will govern settlement decisions. In most cases, the
insurance company will never pay more than the face amount
of the contract, which is the coverage as listed in the declara-
tions part of the insurance contract.

Types of limits

1. Split limits: This provision provides separate payments for

losses sustained from limits for bodily injury, property dam-
age and per individual while offering a greater payment for
“all individuals’ in an occurrence.

2. Aggregate limits: Maximum overall limit for the entire policy pe-
riod.

3. Combined single limit: Offers maximum coverage and is

less restrictive to an individual loss then split limits. This will
apply on a per occurrence basis.

3.5 Coinsurance

Coinsurance is found in many property policies in order to re-

quire policyholders to carry adequate insurance on their prop-
erty. A coinsurance clause is an agreement between the in-
surer and insured in which;

• the insurer agrees to provide a reduced premium rate

for coverage;

• the insured agrees to carry a specified percentage of

the replacement cost of the building

A typical coinsurance clause of a property policy will state that

an insured has to satisfy an 80% level. This means that the in-
sured must carry insurance equal to at least 80% of the value
of the insured property.

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 Protecting Your Business

If the coinsurance clause is satisfied, partial losses will be paid

in full. If the coinsurance clause is not satisfied, partial losses
will be subject to a penalty payment.

3.6 Settlement Formula

Formula:

Amount of Insurance Carried ( I )

x Loss ( L ) = Settle-
ment ( S )
Amount of Insurance Required ( R )

Example #1:

Market value of an insured building is $200,000

Coinsurance % = 80%
Loss = $40,000
Amount of Insurance = $ 160,000

Let’s work out the numbers!

$160,000 x $40,000 = Settlement ($40,000)

$160,000

As the amount of insurance carried is the same as the amount re-

quired, the $40,000 loss will be paid in full.

Example #2:

Same facts as in example #1 except the amount of insurance carried

is $120,000 instead of $160,000.

$120,000 x $40,000 = Settlement ($30,000)

$160,000

Example #3:

Same facts as in example #1 except the building burns down and is

totally destroyed. Would the insured receive the full value of the
building of $200,000?

Of course not! The insured will never receive more than the applica-
ble limit of liability, in this example $160,000.

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 Protecting Your Business

Settlement Rules
• The amount paid cannot exceed the limits of the insurance
policy
• The amount paid cannot exceed the actual amount of the
loss
• The amount paid cannot exceed the dollar amount deter-
mined by the coinsurance formula

3.7 Extensions of Coverage

If an insured satisfies the coinsurance clause he/she may elect to

provide a certain amount of his/her coverage to property not normally
covered by the policy as extensions of coverage.

Examples:
• Personal property of others
• Outdoor property
• Newly acquired property
• Constructed property
• Papers and records
• Off premises property

3.8 Additional Coverages

Additional coverages provided under a property policy that are

in addition to the main coverages. Some examples of addi-
tional coverages include the following;
• Reasonable repairs
• Removed property
• Removal of debris
• Loss by forgery
• Trees shrubs and plants

3.9 Pair and Set Clause

This clause in a policy will explain how a claim should be han-

dled when one item of a pair or set is damaged. Loss to one
item of a pair or set does not constitute loss to the entire pair or
set.
The following options may be used;

1. Pay the difference between the actual cash value of the

property before and after the loss or;

2. Repair or replace any part to restore the pair or set to its

value before the loss

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 Protecting Your Business

3.10 Cancellation

Either the insured or insurer may cancel provided coverage.

Each property and casualty policy details the reasons for which
the insurer can cancel the policy. Of course these reasons
must be in compliance with individual state laws.
While the insurance company must give some specified written
notice required by the state, the insured, on the other hand, can
request immediate cancellation, without any notice.

If the insurance company cancels the policy any unearned

premium will be returned on a pro rata basis. There is no al-
lowance for deductions such as service fees. This allows the
insured to get back all of the money which has not been used
or applied to premium cost.

If the insured cancels the policy any unearned premium will

be returned on a short rate basis (with deductions made for
servicing the policy, etc.) With the short rate basis the insur-
ance company can recoup some of the costs of underwriting
and policy processing.

3.11 Appraisal

When and if both the insured and the insurer cannot agree on a
settlement amount each is required to obtain an independent
appraisal and share in the cost of an umpire to settle the dis-
pute. The decision of the umpire is final and binding. The is-
sue here is the amount of settlement not whether coverage ex-
ists or not.

3.12 Assignment

This is the transferring of some or all of the rights from one

party to another. Assignment of rights and coverages is not
permissible under property contracts without the written con-
sent of the insurance company. As an example, owners of a
home cannot transfer his/her homeowner’s insurance policy
when selling the home.

3.13 Subrogation

This is the process which allows the insurance company, after

paying its insured for a loss, to step into the shoes of the in-
sured as stipulated in the insurance contract in order to recover

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 Protecting Your Business

from third parties any recoverable loss which was reimbursed

by the insurance company to the insured.

Subrogation reminds us that the idea of collecting twice for the

same loss is not allowed under the doctrine of indemnity.

Example: An insured sustained $2,000 property damage to

her auto as a result of a rear end hit. The insured could decide
to collect for this damage under her collision coverage and col-
lect the amount of the loss less any deductible. Then the in-
surer assumes the insured’s right of recovery against the re-
sponsible third party for the full $2,000. If the insurance com-
pany was not allowed to go against the third party then the in-
sured would collect an additional $2,000 amounting to making a
profit on the incident.

3.14 Pro Rata Liability (Other Insurance)

When more than one insurance company is used to insure a

piece of property, pro rata liability rules will apply. This is done
in keeping with the doctrine of indemnity. The formula to estab-
lish settlement contributions is as follows;

Company Coverage Amount x Loss = Amount Company

Total Amount of Insurance Will Pay

Example: Paco, a hard working author, purchases a retreat

home in upstate Wisconsin. As a writer, Paco needed plenty of
seclusion. Unfortunately, with seclusion comes a number of
problems such as a lack of fire hydrants on every corner. Paco
attempted to purchase a full coverage insurance policy for his
$300,000 home from Lake in the Hills Insurance Company.
Unfortunately, the Lake in the Hills insurance company would
only provide insurance for $150,000 (Policy A). Paco then went
to the Elgin Insurance Company and picked up a policy (Policy
B) for the remaining $150,000.

What would happen if there is a $50,000 loss? Will both com-

panies pay the $50,000? Well, we know for sure that both
companies won’t pay the $50,000 because of the doctrine of
indemnity. Let’s take a look at what the companies will pay un-
der pro rata liability;

Policy A = $150,000 x $50,000 = $25,000

$300,000

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 Protecting Your Business

Policy B = $150,000 x $50,000 = $25,000

$300,000

Total Settlement = $50,000

3.15 Arbitration

This is a process in which insurance companies usually settle their

differences when one company subrogates against another. Dur-
ing this process all parties agree to be bound.

3.16 Nonrenewal

This is the act of terminating an insurance policy after the specified

policy period. Nonrenewal is a notice given by the insurance com-
pany to the insured indicating the intention not to renew the policy
upon the normal termination date.

3.17 Vacancy/Unoccupancy

Vacancy refers to a building, which is unfurnished, and not being

used as a dwelling or for a business.

Unoccupancy refers to a building, which is furnished, but not being

used as a dwelling or for business.

Insurance policies treat these differently so make sure you under-

stand the differences and analyze the questions carefully.

3.18 Right of Salvage

When an insurance company settles a claim it owns a right of sal-

vage. The insurance company can reduce its losses in the matter
by selling the salvage to a salvage dealer. It may determine
whether or not property will be repaired, replaced or cash will be
provided. In situations where an insured property is not completely
destroyed, the insurance company may take possession of it and
receive its salvage value when it has replaced or has made a cash
settlement to the insured party.

3.19 Abandonment

An insured cannot be allowed to abandon the insured property and

then demand from the insurance company to be paid in full. The
insurance company, by contract, has the right to settle the loss by
payment or repair or outright replacement of the property involved.

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 Protecting Your Business

4 Property Insurance - Commercial Lines

4.1 Overview

Commercial lines property forms are designed to address the

various property related insurance needs of businesses. In this
chapter we will review commercial property coverages with the
Commercial Building and Personal form, insurance for busi-
nesses through the use of the Causes of Loss forms, Business
Income and Extra Expense forms to provide coverage against
indirect or consequential business losses, Commercial Pack-
age Policy (CPP) permitting commercial insureds to package
their own coverages and finally a commercial package de-
signed for small businesses, the Business owners Policy, policy
for manufacturing and other commercial risks, the Boiler and
Machinery Policy.

4.2 Introduction

Protection extends to businesses that own and occupy their

own premises or to businesses that rent or lease space. Busi-
nesses who lease tend to make expensive alterations or im-
provements in order to occupy a premises for a particular pur-
pose. This investment needs to be protected through insur-
ance.

Businesses have an insurable interest in buildings and equip-

ment including fixtures, machinery, furniture and inventory. Im-
portant considerations also include consequential or indirect
losses due to interrupting a business’s ability to earn money
because of a direct loss.

4.3 Commercial Property Covered

Building: All buildings, additions and extensions to the build-

ings as well as permanent fixtures

More than one building or structure may be described in the

commercial property declarations. Notice that coverage applies
to more than just the building itself-building additions, perma-
nently installed fixtures and equipment, and property used to
service the building or premises such as fire extinguishing

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 Protecting Your Business

equipment and ventilating systems are covered as part of build-

ing coverage.

Business Personal Property: Personal property of the in-

sured used in business to include the following; (other than real
property)

• furniture
• fixtures
• machinery
• equipment
• inventory
• all other property used in the business
• labor, materials or services on personal property of oth-
ers including property in the insured’s care and custody
and property located in or on the building described in
the declarations or within 100 feet of the premises
• leased personal property may also be covered but only
if you have a contractual obligation to insure it and it is
not otherwise insured under the coverage for personal
property of others.

4.4 Property Not Covered

As the Commercial Building and Personal Property coverage

form contains relatively broad definitions of the types of prop-
erty covered, it is necessary to review what it will not cover:
• valuables
• animals
• automobiles held for sale
• bridges and roadways
• contraband
• cost of excavations and grading
• foundations of buildings
• land
• pilings and docks
• property covered under other coverage
• growing crops
• personal property while airborne or waterborne

4.5 Additional Coverage Form

• debris removal
• expenses as a result of preservation of the property
• fire department service charge ($1,000 maximum)

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 Protecting Your Business

• pollutant clean up and removal ($10,000 per policy period)

Coverage Extensions

80% coinsurance would apply under which the insured may

have the following extensions of coverage;

• newly acquired or constructed property

This property is covered up to 25% or a maximum of
$250,000 per building. This applies to new buildings being
constructed on the insured premises and buildings ac-
quired at a location other than the insured’s premises to be
used for the same purpose as the insured’s building or
warehouse.

There is a 10% or $100,000 maximum of personal property

applied up to 30 days to cover business personal property
at a newly acquired location.

• Personal Effects

A maximum of $2,500 will be paid for loss of personal ef-

fects of the insured’s officers, partners and employees.
This coverage applies to all personal property, which could
include a calculator, coat, briefcase etc.

• Valuable Papers

Up to $1,000 at each described premises can be applied to

the cost of researching, replacing or restoring lost informa-
tion. This can include the existence of magnetic media.

• Property Off-Premises

Insured property other than stock damaged or destroyed by

a covered peril but will not apply to property in a vehicle, in
the care or control of the insured’s salesperson or at any
fair or exhibition. Maximum coverage is $5,000.

• Outdoor Property

A $1,000 maximum can be applied for outdoor property ex-

tensions such as outdoor fences, antennas, signs, trees,
shrubs and plants destroyed by fire, lightning, explosion,
riot or aircraft. There is maximum of $250 per plant or
shrub.

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 Protecting Your Business

4.6 Causes of Loss Forms

Basic Form provides coverage against the following perils;

• fire
• lightning
• extended coverage (EC)
• vandalism and malicious mischief (VMM)
• sprinkler leakage (automatic sprinkler system)
• sinkhole collapse (collapse into underground empty
spaces)

Broad Form perils

• the Basic perils above

• breakage of glass
• falling objects
• weight of snow, ice or sleet
• water damage (accidental discharge or leakage from a
system or appliance)
• building collapse

Special Form perils

• all risk or open perils except as excluded

Common Exclusions

• ordinance or law
• earth movement
• governmental action
• nuclear hazard
• off-premises services (power failure)
• war
• water (including flood)

Special Form Exclusions

Do not try to memorize the following exclusions. Just try and

understand why they are exclusions. Remember, all property
will have some wear and tear and as it is foreseeable, it is not
insurable.

• artificially generated electric current

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 Protecting Your Business

• delay or loss of use of market

• smoke or gas from industrial or agricultural smudging
• such cause of loss from;
◊ wear and tear
◊ rust and corrosion
◊ smog
◊ settling, cracking etc.
◊ insects, birds and rodents
◊ mechanical breakdown
• explosion of steam boilers
• continuous leakage of water over 14 days or more
• water leaks from plumbing, heating, air conditioning
caused by freezing unless the insured attempted to
maintain heat in the building or the insured drains the
equipment and shuts off the water supply if the heat is
not maintained.
• dishonest or criminal act by the insured, any partners,
employees etc.

4.7 Earthquake Form

Coverage

Coverage is provided against earthquake, volcanic eruption

and explosion. This coverage includes damage caused by
shocks within 168 hours after policy expiration if shocks began
during the policy term. Volcanic activity is also covered and will
include lava flow, ash and airborne shock waves. Earthquake
only coverage is not available

This is a named peril form used to add optional coverage for

two additional causes of loss-earthquake and volcanic eruption.
Since the scope of the coverage being provided is narrowly de-
fined, this form has fewer exclusions than the other forms.

The earthquake form is divided into four major sections:

A. Covered causes of loss

B. Exclusions
C. Limitations
D. Deductibles

Additional Exclusions

It should be noted that there are two exclusions, which are

unique to the earthquake form. Losses due to fire, explosion,

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 Protecting Your Business

tidal wave, flood and other causes will not be covered even if
resulting from an earthquake or volcanic eruption.

Deductibles

For all coverage forms except business income and extra ex-
pense coverages, the earthquake deductible will be a percent-
age of the insured property’s value. The applicable percentage
must be stated in the declarations, and will be applied sepa-
rately to (1) each building or structure, (2) the contents of each
building or structure, and (3) personal property in the open.

4.8 Builders Risk (New Construction)

This policy is written for a period of one year usually on a com-

pleted value basis. A condition called “Need for Adequate In-
surance” underscores the importance of accurately estimating
the final value of the building by placing a virtual 100% co-
insurance requirement on the contract. If the actual completion
value is higher than the insurance completion amount, then any
paid losses are lowered by the resultant difference in value ver-
sus actual coverage amount (i.e. the building ends up with a
value of $200,000 but was only insured for $100,000. Any loss,
which is less than total is paid at only a 50% rate by the insur-
ance company)

Coverage begins when construction starts and it stops;

• when the purchaser accepts the property

• 90 days after construction completion
• upon occupancy or intended use of the building
• when the interest of the insured in the property stops
• if the builder abandons construction with no intention of
completion

Coverages include the building being constructed, foundation,

fixtures, equipment used to service the building, materials and
supplies intended to be placed into the building which are within
100 feet of the premises.

4.9 Indirect Loss Coverages

Because the loss caused by the interruption of business may

far surpass the actual physical loss to property, this exposure

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 Protecting Your Business

has been addressed through the development of several con-

sequential or indirect loss coverages.

Business Income Coverage

This is also known as time element coverage, which pays for

the loss of income over a period of time which, results from a
direct physical loss. The Business Income Coverage Form
covers this loss of income due to the interruption of business by
an insured peril during the period of restoration.

The loss of income refers to the net income or pretax profit (be-
fore income taxes) that a business would have earned plus
normal continuing operating expenses, including payroll.

In order for Business Income Coverage to apply, the interrup-

tion of business must be caused by direct physical damage to
property at the described premises.

The period of restoration begins on the date of the actual

physical damage to the insured property and ends on the date
when the property should be repaired with reasonable speed
and similar quality.

Additional Coverages

Extra Expenses

These expenses are necessary to continue a business in

operation. An example can include renting temporary of-
fices to continue the business so as to reduce further
losses.

Civil Authority

Under this coverage the policy is extended to cover loss of

business income and extra expense for a period up to two
weeks caused by a action of civil authority.

Alterations and New Buildings

This coverage provides for the actual loss of business in-

come due to direct physical loss by a covered peril to new
buildings, alterations, machinery, equipment, supplies used
in construction, alterations or incidental to the occupancy of
new buildings.

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 Protecting Your Business

Extended Business Income

This automatically extends the period of restoration up to

another 30 consecutive days to cover additional loss of
earnings as long as the insurance policy limits have not
been exhausted.

4.10 Commercial Package Policy (CPP)

Policies containing a single coverage part is a monoline policy

while a policy containing two or more coverage parts qualifies
as a package. The new package approach is intended to sim-
plify and standardize the process of assembling policies.

To qualify as a Commercial Package Policy, a policy must con-

tain the Common Policy Declarations From, the Common Pol-
icy Conditions Form and two more of the following coverage
parts:

• Boiler and machinery

• Commercial auto
• Commercial property
• Crime
• Farm
• Inland Marine
• Commercial general liability
• Pollutant liability
The cost of extracting pollutants from land or water
is another additional coverage if the discharge, dis-
persal, seepage, migration or escape of the pollut-
ants is caused by a covered cause of loss.
• Products Liability

Property coverage forms establish the conditions for coverage

and describe the types or kinds of property insured. Each cov-
erage form is designed to insure specific types of property or
losses. Coverage forms identify the subject of the insurance,
describe coverages, additional coverages and optional cover-
ages, and state exclusions and conditions.

4.11 Businessowners Policy (BOP)

This is a policy designed for small and medium sized apart-

ment, office and mercantile risks as an alternative to the Com-

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 Protecting Your Business

mercial Building and Personal Property Coverage Form. Ten-

ants of offices and stores can insure business personal prop-
erty. As BOP is a complete package policy by itself, it is not at-
tached to some other coverage or package.

The following processing and service type businesses are also

eligible for coverage;

• appliance dealers
• bakeries
• barber shops
• funeral homes
• printers
• photographers

On the other hand the following businesses would not be eligi-

ble;

• service stations
• auto repair centers
• contractors
• bars
• household personal property
• places of amusement
• wholesalers
• banks and other financial institutions

The BOP is a multi-peril policy including basic property and

liability coverages. If needed, there are optional coverages that
can be used to custom design a policy for the small business.

Property coverage can be written on either a standard or spe-

cial form. Most coverages of the two forms are identical except
for “covered causes of loss”. The standard form is like the ba-
sic coverages found in other commercial forms while the spe-
cial form is all risk coverage. Optional coverage is available to
include burglary, robbery, money, securities, outdoor signs, ex-
terior grade floor glass, mechanical breakdown and employee
dishonesty.

Eligibility is available for the following risks:

1. Apartment buildings to include mercantile, service or

processing occupancies not in excess of 15,000 square
feet and incidental offices. Residential condominium
associations are eligible.

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 Protecting Your Business

2. Office Buildings not higher than 6 stories and limited to

15,000 square feet. Office condominium associations
are eligible.

3. Mercantile Risks with gross sales not exceeding $1

million and having no more than 15,000 square feet of
space. Incidental storage buildings or occupancies in
connection with an eligible risk and not exceeding
15,000 square feet are eligible.

4. Service and Processing businesses with gross sales

not exceeding $1 million and having no more than
15,000 square feet in total floor area and incidental
storage facilities not exceeding 15,000 square feet.

Businessowner liability coverage form protects against loss

from bodily injury, property damage and for personal and
advertising injury.

4.12 Boiler and Machinery Insurance

The Boiler and Machinery policy can be written by itself or in

conjunction with a broader commercial lines property coverage.
If written on a specific basis, each boiler or machine to be in-
sured is listed and described in a schedule, which is then at-
tached to a policy. If written on a blanket basis, all boilers and
machines of a certain class are insured. Emphasis of this type
of policy is prevention. Prevention of losses are a result of fre-
quent boiler inspections which are carried out by trained engi-
neers.

Coverage

Covered property means any property that the insured owns, is

in the care, custody or control of the insured and for which the
insured is legally liable. The policy promises to pay for direct
damage to covered property by a covered loss. Covered
causes of loss are accidents to machines shown in the Declara-
tions. An accident is defined as a sudden and accidental
breakdown of the insured boiler or machine necessitating repair
or replacement of the boiler or machine. An accident does not
include any of the following;
• wear and tear
• depletion
• deterioration

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 Protecting Your Business

• depletion
• corrosion
• erosion
• leakage of a valve
• breakdown of tubes
• breakdown of electronic computers
• breakdown of structures or foundations supporting the
boiler or machine
• the functioning of any safety device
• explosion of gas or unconsumed fuel within the furnace
or any of its passageways

Expediting Expenses

This coverage reimburses the insured for any reasonable extra

expenses involved in making temporary repairs and of expedit-
ing the repair of the damaged property. Examples can include
employee overtime and the extra cost of express shipments.
Policy limit is $5,000.

Defense, Settlement and Supplementary Payments

This policy will pay all cost of legal fees, interest on judgments
and premiums for appeal bonds as is customary for liability in-
surance coverages. The amount paid by the company under
this coverage is in addition to the face amount of the policy.

Inspection Service

The company provides periodic inspections of the insured boil-

ers and machines as a free service. These inspections often
detect dangerous conditions that can prevent accidents from
happening. If an inspection detects an unsafe condition the
unit can be shut down.

Small Business Boiler and Machinery Policies

The Basic Form may be written for the following small busi-
nesses having insurable boilers and/or machines valued at no
more than $5 million.
• apartment buildings
• churches
• motels
• hotels
• office buildings
• garages

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 Protecting Your Business

• retail stores
• schools
• banks
• restaurants
• nursing homes
• theaters
• funeral homes

Expanded Benefits

The Broad Form expands the eligibility requirements for insur-

able risks to include much smaller boilers, refrigerator units, air
conditioning systems and other mechanical or electrical equip-
ment used for the maintenance or service of the premises.

4.13 Marine Insurance

Ocean Marine Insurance

Oldest form of property insurance which provides property cov-

erage in the event of a marine loss to the hull (ship itself), cargo
(freight), loss of income and protection and indemnity (liability
insurance).

Inland Marine Insurance

This is an outgrowth of Ocean Marine Insurance where cover-

age was extended to loss from movable property that is trans-
ported on land. Some of the risks that may be covered are;
• imports
• exports
• domestic shipments
• bridges and tunnels
• instrumentalities of transportation and communications
• personal property floater risks
• commercial property floater risks

Personal Floaters

Written on an all risk or open perils basis. A floater is coverage

on property that moves from one location to another. Most per-
sonal floaters limit the insured’s settlement to actual cash value
at the time of loss or the cost to repair or replace the property in
question. The following perils are excluded from coverage;

• wear and tear from ordinary use

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 Protecting Your Business

• war
• mysterious disappearance
• loss of market due to delay in delivery
• flood
• earthquake
• dishonesty of employees

In order to form a policy, the following floaters must be attached

to the personal inland marine floater;

1. Personal Property Floater: (PPF) This policy covers

all of the insured’s unscheduled personal property,
worldwide on an all risk basis. Specific or scheduled
items of personal property can be covered on an en-
dorsement basis.

2. Personal Articles Floater: (PAF) This covers all risk

protection from physical loss or damage on certain
specified classes of property. This is a separate policy
but it is similar to the scheduled personal property en-
dorsement that is added to homeowners policies. Typi-
cal property which may be insured under Personal Arti-
cles Floater include: Fine arts, Jewelry, furs, cameras,
musical instruments, silverware, golf equipment, binocu-
lars, microscopes, personal furs, stamp collection, coin
collection and any other item valued at $100 or more.
An appraisal is necessary before the article is insured
which must contain a detailed description and a value of
the property.

3. Personal Effects Floater: (PEF) This policy is for indi-

viduals who want to have unscheduled all risk coverage
for their belongings while traveling or on vacation. The
policy is designed only for property that is normally car-
ried by travelers. There is no coverage when the prop-
erty is being stored, is in the home, or when the insured
is not traveling. A policy can be purchased for each trip,
or be a permanent form of insurance for the who travels
constantly. Excluded from coverage are such things as
automobiles, bicycles, motorcycles, boats, securities,
money, tickets, passports and valuable papers.

Commercial Floaters

These floaters can be written on a scheduled or blanket basis

for named perils or all risk of loss. There are numerous com-

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 Protecting Your Business

mercial floaters designed for every conceivable segment of the

business market. Examples of some commercial floaters would
include;

• Physicians and Surgeons Equipment (medical equip-

ment)
• Radium
• Salesperson’s samples
• Installation risk (individual business’ interest in the
property it owns and intends to install for purchase)
• Contractor’s equipment (off the road heavy equipment)
• Accounts receivable (inability from collecting debts)
• Electronic data processing (businesses owning, renting
or leasing data processing equipment)

Bailees

These are individuals who have temporary custody of the prop-

erty of others for the purpose of performing some types of ser-
vice to the property such as repairing, cleaning etc.
Some commercial property floaters are designed to cover the
liability of bailees while holding the property of others such as a
Jeweler’s Block Policy, Furrier’s Customers Policy and Bailees’
Customers Policy.

Transportation Insurance

These policies insure individuals with insurable interests in

goods shipped by rail, air or land. Policies are designed for the
owner of the goods in question as well as the individuals who
ship them.

4.14 Flood Insurance

Neither personal nor commercial lines property contracts pro-

tect insureds against flood damage. The National Flood Insur-
ance Program (NFIP) is a federal program enabling property
owners to purchase flood insurance in return for their commu-
nity’s adherence to a flood plan.

Any owner of property in an approved community is eligible for

flood insurance. A building and its contents, residential and
commercial may be insured under the Flood Program with the
following exceptions;

• livestock

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 Protecting Your Business

• roads
• gas and liquid storage tanks
• wharves, piers and bulkheads
• growing crops
• motor vehicles

In the event of loss, the insured must notify his agent who will
then notify the NFIP.

National Flood Insurance sponsored by the Federal Govern-

ment, by way of the National Flood Insurance Act of 1968, of-
fers flood insurance to homeowners and businesses. Flood
losses are generally EXCLUDED from most policies. The
plan is only available to those persons who live in communities,
which have met the plan requirements and have instituted land
use and water control measures. The communities must pro-
vide these improvements before their inhabitants can buy in-
surance. A flood is described as a temporary, partial or com-
plete inundation of normally dry land areas by either an over-
flow of inland or tidal waters, an unusual and rapid accumula-
tion or runoff of surface waters, mudslides and mudflows.

Flood insurance has a $500 deductible and there are two plans
available, Basic and Regular.

4.15 Watercraft Insurance

Since a homeowner policy offers only small protection against

the loss of the watercraft, a separate policy package is neces-
sary. Important points to remember are property and liability
protections are needed by the insured, limited property and li-
ability coverages are available under the Homeowners Pro-
gram; more, under the Boat-owners Policy; most, under the
Yacht Policy. There are three types available, which are based
on need;

1. Outboard Motor and Boat Insurance: This covers the

physical damage exposure to boats. This policy is writ-
ten under the all risk inland marine floaters.

2. Watercraft Package Policies: This combines property,

liability and medical payment coverage on an All Risk
Basis. This is also known as a boatowner policy.

3. Yacht Policy: This is Ocean Marine Insurance and is

usually written as a business policy because of the

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 Protecting Your Business

general use of yachts in business. The policy is de-

signed to insure yachts, sailboats and inboard motor
boats used solely for private pleasure purposes. Cov-
erage is written on an all risk or named perils basis. The
two basic coverages are;

• Damage to the hull (physical loss) collision liability

insurance is included for the damage done upon a
collision.

• Protection and indemnity, which protects against

bodily injury and property damage not otherwise
covered under the damage to the hull policy.

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 Protecting Your Business

5. Business Interruption Issues

5.1 Overview

Some business situations are not cut and dry. Let’s suppose
you are the owner of a thriving training company. In your cor-
porate office is an inventory of workbooks, computer programs,
video and audiotapes as well as computer and telephone
equipment. One night there’s a fire, which totally destroys your
corporate office, and everything is lost including your business
records and computer data.

While you have insurance for your company you finally realize
that with the total destruction of all of your records you are ba-
sically out of business.

The contractor you hired to rebuild your physical building tells

you it will take about nine months to rebuild. What about that
income stream that you are used to? How will you survive
while the rebuilding takes place?

The loss of income is known as an indirect loss and at times

can easily exceed the amount of physical losses sustained.
This important issue concerns itself not only with the loss of in-
come experienced but how long will it take to reestablish the in-
come. Time element coverages make up the most important
group of consequential loss coverages. The term “time ele-
ment” means that the amount of the loss is directly linked to the
time it takes to repair, rebuild or restore the damage property.

Business interruption insurance is designed to cover many of

the costs associated with temporary loss of access to office
space, customer traffic or the ability to satisfy customer needs.

5.2 Business Income Coverage Form

Coverage applies to the actual loss of business income sus-

tained due to the suspension of the business operations and to
any other expenses sustained to minimize the loss of business.
The suspension of the business must be the result of a direct
physical loss or damage to the property at the business loca-
tion.

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 Protecting Your Business

This type of insurance protection applies to losses and ex-

penses related to an interruption of normal business opera-
tions.

The period of restoration begins on the date that the direct

physical loss to property occurs and it ends on the date that the
damage is repaired. While speed of repair is not necessarily
required, the insurance company may limit the period of cover-
age if “reasonable speed” is not used.

5.3 Policy Expiration

What would happen if while the business is being rebuilt the in-
surance policy expires? Well, expiration of the policy will not
cut short the period of restoration. The period of restoration
does not include any increased period required due to any law
regulating construction, use or repair or any other activity re-
lated to same.

5.4 Important Policy Definitions

Rental Value

Rental value means total anticipated rental income from tenant

occupancy of the described premises, all other charges which
are the legal obligation of tenants but which would otherwise be
the business owner’s obligations and the fair rental value of any
portion of the premises occupied by the business owner.

Insurance Benefits

The maximum the insurance company will pay for any loss in
any one occurrence is the limit of insurance listed in the decla-
rations portion of the insurance contract.

Business Income

The business income form includes five types of coverages.

Four of these are identified as additional coverages but these
do not increase the limit of insurance. The coverages are as
follows;
♦ Business Income
♦ Extra Expense
♦ Civil Authority
♦ Alterations and New Buildings
♦ Extended Business Income

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 Protecting Your Business

5.5 Business Income Coverage

This type of coverage pays the actual losses of business in-

come. Business income is defined as net income (net profit or
loss before income taxes) plus continuing operating expenses.
Gross revenue is not covered because many expenses such as
utilities may be discontinued while the business is shut down.
Continuing expenses such as taxes and rent are covered be-
cause the net profit or loss is what is left after continuing ex-
penses are paid. If the revenue to cover continuing expenses
is not replaced, it reduces the net income.

The purpose of the business income coverage is to restore the

business owner to the position that would have existed had
there been no disruption of operations.

5.6 Types of Business Interruption Coverage

There are three options available for the business income cov-
erage that applies. One or more options may be selected if
coverage applies at different locations.

Option 1 – Business income coverage including rental

value
Option 2 – Business income coverage other than rental
value
Option 3 – Rental value coverage exclusively

If an individual owned a building occupied by tenants, and if a

direct loss results in a loss of rental income, the lost rental in-
come could be covered as a business income loss.

If a person is an owner/occupant of a building, and if a direct

loss makes the building uninhabitable and makes it necessary
to rent alternative facilities, the rent could be covered as an ex-
tra expense. There could also be a recovery of rental income
as a business income loss. As a tenant with a direct loss that
makes the premises uninhabitable and a lease that requires the
tenant to continue paying rent, the rent at a temporary re-
placement facility could be covered as an extra expense.

5.7 Coinsurance Issues

Business income coverage is usually written with a coinsurance

requirement. This coinsurance only applies to the business in-

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 Protecting Your Business

come coverages, not to extra expense coverage. The amount

of insurance required to be carried to satisfy the coinsurance
condition is the coinsurance percentage multiplied by the sum
of the net income and all operating expenses that would have
been earned by operations during the current policy year that
had no loss occurred.

An appropriate coinsurance percentage for this type of insur-

ance can be 50% and is not unreasonable for business income
coverage. In effect, it provides full coverage for six months,
certainly time enough for most businesses to restore full opera-
tions.

5.8 Resumption of Business

An insured business has the obligation to resume operations as

quickly as possible. The insurance company will not pay for
loss of business income caused by loss or damage to media
and records after the longer of:

♦ 60 consecutive days after the date of direct

physical loss or damage, or

♦ the period, beginning on the date of direct loss,

necessary to repair, rebuild or replace with rea-
sonable speed and similar quality property other
than media or records, which suffered loss or
damage in the same occurrence.

5.9 Profits Insurance

Businesses may purchase insurance to cover the risk of lost

profit on finished merchandise or goods. When finished stock
is damaged or destroyed, the direct loss will be settled on the
basis of actual cash value (ACV) or the manufacturer’s re-
placement costs for the materials.

The difference between the recovery amount and the price at

which the finished goods could have been sold is therefore at
risk.

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 Protecting Your Business

6. Commercial General Liability Policy

6.1 Overview

This is liability insurance for most types of commercial or busi-

ness exposures. The Commercial General Liability Policy is
part of the Commercial Package Policy and can be sold in con-
junction with other coverages or can be purchased independ-
ently. There are many different coverages available under the
CGL policy, each designed for a particular type of exposure.
Under a CGL policy the named insured, spouse, partners, offi-
cers, directors and shareholders, and SPOUSES if acting within
the scope of business as well as employees, managers or any-
one acting with authority within the business can be covered.

6.2 Coverage Triggers

Occurrence means an accident, including continuous or

repeated exposure to substantially the same general harm-
ful conditions. This requires notification promptly when a
situation occurs which may lead to liability. Covers Injury
or Damage done during the policy period.

Claims Made requires the insured to notify the company as

soon as practical which must include the nature and loca-
tion of any injury or any damages which arose from the oc-
currence. Covers claims made during a policy period.

Covered Territory includes all parts of the world if the in-

jury or damage basically arises out of goods or activities of
a person whose home base is in the United States, its terri-
tories and possessions.

6.3 Claims

A claim by a person or organization seeking damages will be

deemed to have been made when notice of such claim is first
received and recorded by any insured or the insurer.

6.4 Coverages

The Commercial General Liability Policy provides the following

three coverages on an occurrence or claims made basis;

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 Protecting Your Business

• Coverage A - Bodily Injury (BI) and Property Damage (PD)

Liability

• Coverage B - Personal and Advertising Injury Liability

• Coverage C - Medical Payments

6.5 Coverage A: BI and PD Liability, Coverage B and C

Coverage A

Coverage A is for bodily injury and property damage liability. This

includes premises and operations liability, products and completed
operation liability, contractual liability.

Property damage means physical injury to tangible property, in-

cluding resulting loss of use of that property as well as loss of use
of tangible property that is not physically injured.

Under Coverage A the company will pay any sums that the insured
becomes obligated to pay because of BI and PD. Liability expo-
sures covered under A include;

• premises and operations

• products and completed operations
• contractual liability for insured contracts (incidental con-
tracts)

Other liability exposures such as fire legal liability, nonowned wa-

tercraft are also covered. The policy will pay those sums that the
insured becomes legally obligated to pay as damages because of
bodily injury or property damage to which the insurance applies.
The insurer has the right and duty to defend any suit seeking those
damages.

Exclusions

Coverage A does not apply to BI and PD caused by;

• expected or intentional acts

• work related
• automobile, aircraft or watercraft activities
• dram shop (liquor liability)
• personal property of others in the insured’s care
• discharge of pollutants
• war

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 Protecting Your Business

• assumption of liability by contract

• transportation or use of mobile equipment
• property damage to the insured’s product or work
• property damage to impaired property
• loss, cost or expense incurred by the insured for the recall
of a product because of a known or suspected defect

Coverage B - Personal and Advertising Injury Liability

This coverage will pay those sums which the insured is legally obli-
gated to pay for damages, due to personal injury or advertising in-
jury. Coverage applies to personal injury if it arises out of the con-
duct of the insured’s business. Personal injuries are not covered if
they result from the insured’s personal life.

Personal Injury includes malicious prosecution, libel, slander, false

arrest, defamation of character, unlawful eviction or entry and viola-
tion of the right to privacy.

Advertising mistakes can result in exposure to vast sums of liabil-

ity due to improper advertising. An injury which can be labeled an
advertising injury is one which is created due to one or more of the
following;

• stealing the advertising ideas or style of another

• copyright, title or slogan infringement
• written or oral publication material violating a person’s pri-
vacy rights
• oral or written publication leading to slander or libel of a per-
son or of his/her organization’s goods, products or services.

Coverage B Exclusions

When the insured;

• knows the oral or written publication is false

• has published material which is the focus of a personal in-
jury claim before the inception of the policy
• willfully violates the law
• assumes liability in a contract or agreement

Not covered if the injuries results from;

• a breach of contract
• the failure of goods to conform to advertised quality

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 Protecting Your Business

• the wrong description of the price of goods, products or ser-

vices
• an offense committed by an insured whose business is ad-
vertising, broadcasting, publishing or telecasting

Coverage C

The coverage agrees to pay medical expenses which are incurred

within one year of an accident during a policy period when bodily in-
jury occurs on the premises owned or rented by the insured, or for
bodily injury which results from the insured’s operations.

Negligence does not have to be established in order to make a pol-

icy pay a claim. It is no fault coverage with no reimbursement for
medical payments for necessary hospital, ambulance, funeral ex-
penses, professional nursing care, first aid which is given when an
accident occurs, any necessary medical, surgical, prosthetic de-
vices, x-ray and dental services.

Exclusions

Medical payments will not cover expenses for bodily injury to;
• insureds
• persons hired to work for the insured or a tenant of an in-
sured
• tenants of the insured
• persons entitled to workers compensation
• persons involved in an athletic event
• persons injured resulting from the products-completed op-
erations hazard
• persons excluded under Coverage A
• persons due to war

Supplementary Payments

Under Coverage A and B the insurance company will also pay the
following;
• all reasonable expenses and up to $100 per day of lost
wages when the insured is incurring expenses at the in-
surer’s request to help in an investigation or defense of a
claim or lawsuit.
• up to $250 for cost of bail bonds required because of acci-
dents or traffic law violations arising out of the use of any
vehicle to which the bodily injury liability coverage applies.
The insurer does not have to furnish these bonds.
• any expenses incurred by the insurance company

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 Protecting Your Business

• all costs levied against an insured in a lawsuit

• reasonable expenses insured in defense of a claim
• interest payments, both pre-judgement and post judgement

Insureds include individuals, partnerships and other organizations

which may be insured under the CGL. Employees of these insur-
eds acting within the scope of their employment are also covered.
The insured’s legal representative is considered an insured if the
insured dies, but only with respect to duties as the legal representa-
tive.

Limits of Insurance are shown in the Declarations with the limits

defined below;

Aggregate Limits of liability are established for all coverages

to include two sets: The first set is for products-completed op-
erations claims and the second for all other coverages.

General Aggregate Limit is the most the insurance company

will pay during the policy period for BI and PD except those
provided for under Products-Completed Operations coverage.

Personal and Advertising Injury Limit is a per person or or-

ganization limit. The amount shown is the most the company
will pay for the sum of all personal and advertising injuries to
one person or organization.

Each Occurrence Limit is the most the insurance company

will pay for any one occurrence, subject to the General Aggre-
gate.

Fire Damage Limit is a per fire limit.

Medical Payments Limit is a per person limit.

Conditions found in both the occurrence and claims made

forms

Bankruptcy condition states that if the insured becomes bank-

rupt or insolvent the insurer cannot refuse to pay claims that
may be covered under this policy.

Duties in the event of occurrence, claim or suit requires that

the insured promptly notify the insurance company of an occur-
rence that may result in a claim or suit and give written notice to

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 Protecting Your Business

the insurer of any claim that has been made or suit that has
been brought against the insured.

Legal action against us states that no person or organization

has the right to join the insurance company as a party or bring
the insurance company into a suit.

Other Insurance condition states that if the insured carries

more than one CGL policy, coverage A and B will be effected
as follows;
• primary insurance: if the policy were written with the
intent that it respond to a claim first, it will do so, until
its limits of insurance are exhausted. Another primary
policy will pay its share in accordance to the method of
sharing provision described in the policy.

• excess insurance: this policy will respond after other

policies have responded and exhausted their limits of
insurance.

• method of sharing insurance: this policy will pay its

portion of the loss.

Premium Audit is computed by the insurer. Premium shown

as advance premium is a deposit premium only. At the close of
each audit period the insurer will compute the earned premium
for that period. Audit premiums are due and payable on notice
to the first named insured. Excess premium will be returned by
the insurer if the sum of the advance and audit premiums is
greater than the earned premium.

Defense Costs incurred by the insurer in defending a suit is a

very important benefit. Settlement of a case prior to suit is
seen as a preferable course of action to all concerned for the
following reasons;
• the illogical basis for many court settlements
• the costly and lengthy nature of litigation for both sides
• the changing strength of a case based on tie
• legal fees mount up quickly

6.6 Other Liability Coverages

These specialized coverage forms may be added to the Com-

mercial General Liability Forms.

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 Protecting Your Business

Owners and Contractors Protective (O&CP)

This policy has been designed to cover an insured’s independ-

ent contractor exposure. It provides liability protection in those
situations where the law holds the owner or principal contractor
liable for the negligence of an independent contractor, espe-
cially when the work is unlawful, very dangerous and such that
the liability for it cannot be transferred or delegated. Bottom
line, the O&CP is designed to cover one liability exposure and
one liability exposure only: the independent contractor or con-
tingent liability exposure. All other liability exposures are ex-
cluded from coverage.

Claims will be paid according to the insuring agreement under

O&CP insurance for bodily injury or property damage due to
operations which are performed for an insured who is named
by a contractor (as designated in the declarations agreement
and only at the designated location). This policy will also help
pay for defending a lawsuit.

Professional Liability

Professional liability arises from a failure to use due care and

the degree of skill required and expected in a particular profes-
sion. A profession is a vocation, calling or occupation involving
labor, skill, education and special knowledge of an intellectual
nature. As an example, hospitals can be sued for unauthorized
release of information; doctors can be sued by injured patients;
attorneys can be sued for giving bad advice, etc.

Typical professionals include physicians, attorneys, account-

ants, engineers, architects, securities and insurance profes-
sionals.

The two broad types of professional liability insurance is

malpractice and errors and omissions.

Malpractice insurance addresses the professional liability

needs of the medical and allied professions. There are specific
malpractice policies for physicians, surgeons, dentist, hospitals,
druggists, nurses, opticians etc.

Errors and Omissions insurance addresses the professional

liability needs of lawyers, engineers, architects, insurance
agents, real estate agents, registered representatives etc.

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 Protecting Your Business

Both of these are limited policies. In order to have a full range

of liability protection it would be necessary to purchase some
other general liability policy.

Examples of specific professional liability policies;

• Physicians, Surgeons and Dentists
• Partnership
• Hospital
• Lawyers
• Insurance agents and brokers
• Directors and Officers - Although generally excluded
from other types of liability coverage, this coverage will
cover their decisions, action and/or inaction.

Umbrella Liability Coverage

These policies are designed to protect an insured individual or

business agent against catastrophic or disastrous claims. This
type of policy provides coverage over and above or an excess
of primary coverage. The umbrella usually provides coverage
in some dollar amount, normally at least a million dollars over
and above the primary amount carried. The purpose of an um-
brella liability policy is to provide low cost coverage due to ex-
posure of businesses because of a greater variety of liability
hazards.

In recent years, umbrella liability policies have become quite

popular with professionals and members of middle and upper
management for their business and personal liability expo-
sures.

Remember, primary insurance pays first, up to the policy limits,

regardless of other insurance in effect. Excess insurance, like
an umbrella policy, begins to pay after primary insurance has
been exhausted.

Personal Umbrella Coverage

This type of insurance policy provides individuals and families

with high limit/excess protection over basic Comprehensive
Personal Liability (Section II of the Homeowners Policy), auto-
mobile liability and other liability insurance carried with respect
to property of a personal/family nature, as distinguished from
business and professional activities and property. Personal
Umbrella Liability insurance is written with a minimum limit of li-
ability of $1 million with higher limits available.

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 Protecting Your Business

Commercial Umbrella Coverage

This policy provides excess general liability, automobile liability,

employers liability limits and also protects the insured firm from
exclusions and gaps in the primary liability policies which serve
as underlying insurance.

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 Protecting Your Business

7. Crime & Employee Dishonesty

7.1 Overview

Crime insurance provides a vital form of protection for busi-

nesses as well as individuals. Depending on who you listen to
or what statistics you choose to believe, modern society suffers
from a serious crime rate involving a high degree of the theft of
money, securities or other property.

Insurance cannot by itself prevent these crimes from taking

place. However, insurance coverage can protect policyholders
against financial losses resulting from the dishonest acts of
others.

With todays high tech world and smarter criminals getting more
sophisticated business owners must develop some form of risk
management programs.

Keep in mind that not all theft losses involve breaking and en-
tering or even robberies. Some losses are more difficult to con-
trol and more difficult to detect.

Many different types of dishonest acts may be the subject of

crime insurance. Some policies even provide coverage for loss
by “mysterious disappearance”.

Losses generally fall into one of the following categories;

♦ Employee dishonesty
♦ Forgery
♦ Theft
♦ Robbery
♦ Burglary

Commercial crime coverages may be written as a separate pol-

icy or as part of a commercial package policy.

Crime forms were included by the Insurance Services Office

(ISO), and the coverages may now be written on the new
commercial forms. Some of the coverages are written on
Surety Association of America (SAA) forms. However, both

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 Protecting Your Business

SAA and ISO forms may be attached to the same commercial

policy.

7.2 Coverage Forms

Currently there are 17 coverage forms which are designated by

letter. The forms are as follows;

♦ Form A – Employee dishonesty

♦ Form B – Forgery
♦ Form C – Theft, disappearance and destruction
♦ Form D – Robbery and safe burglary
♦ Form E – Premises burglary
♦ Form F – Computer fraud
♦ Form G – Extortion
♦ Form H – Premises theft and robbery outside premises
♦ Form I – Lessees of safe deposit boxes
♦ Form J – Securities deposited with others
♦ Form K – Liability for guest’s property – safe deposit box
♦ Form L – Liability for guest’s property – premises
♦ Form M – Safe depository liability
♦ Form N – Safe depository direct loss
♦ Form O – Public employees dishonesty – per loss
♦ Form P – Public employees dishonesty – per employee,
♦ Form Q – Robbery and safe burglary – money and se-
curities

Any combination of the available crime forms included in the

same policy completes what is known as a Commercial Crime
Coverage part.

Whether crime coverages are issued as a monoline policy or as

part of a package, a crime coverage part must be attached to
the common conditions of the commercial lines program.

The crime coverage part will consist of;

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♦ Crime declarations page (Form A or B)

♦ Crime general provisions form and/or safe de-
pository provisions form

♦ One or more crime coverage forms

♦ Any applicable endorsements

7.3 Declarations Page

The crime declarations show the policy number, applicable

coverage forms, limits of insurance, deductible amounts and
endorsements which are attached to the coverage part.

Declarations Form A is to be used when crime coverages are

being issued as a monoline policy. The Form has a place for
the named insured’s name and address, the policy period, and
the identity of the insurance company and the producer.

Declarations Form B is to be used when crime coverages are

being issued as part of a package policy. It does not identify
the named insured, insurance company or producer, cut that in-
formation will be found on the Common Policy Declarations.

7.4 Crime Insurance Policies

Crime insurance policies cover specific types of property

against loss by specific perils. For example, burglary and rob-
bery are specific perils. Whether or not a loss is covered may
depend upon whether a burglary or robbery, as defined in the
policy, ahs been committed.

This insurance is designed to cover losses which are not ex-

pected and cannot be fully eliminated, such as theft by employ-
ees, burglars or robbers. Intentional criminal acts by a named
insured or partner are not covered.

Losses resulting from the execution of an order by any gov-

ernment body is not covered such as the police seizing illegal
drugs or stolen property which the business owner was holding
for sale.

Additional employees or premises acquired by purchase or

merger will be automatically covered for 30 days. Written no-
tice must be given and additional premium paid within that time
period.

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 Protecting Your Business

Crime coverages are subject to a discovery period because

losses are not always immediately apparent. However, certain
limitations will apply. In order for a loss to be covered it must
be discovered not later than one year after the end of the policy
period.

7.5 Once a Crime is Discovered

The insured has the obligation and duty to notify the insurance
company as soon as possible, submitting to an examination
under oath and signing a statement of the answers given, pro-
viding a sworn proof of loss within 120 days, and cooperating
with the investigation and settlement of claims.

Most forms also require the insured to notify the police.

With multiple insureds, knowledge of any insured person is

treated as knowledge by all insured parties and an employee of
any insured is treated as an employee of every insured person.

Suing the insurance company to recover for a loss is not al-

lowed unless all policy provisions have been satisfied and proof
of loss has been filed for at least 90 days. No suit may be
brought more than two years after a loss is discovered.

7.6 Multiple Coverage

If more than one coverage apply to the same loss, the insur-
ance company will pay the actual amount of loss or the total of
the applicable limits of coverages, whichever is less.

Under certain conditions, the insurance company will pay under

the current policy for a loss that occurred under prior insurance
when the loss could have been recovered except for expiration
of the discovery period under the prior insurance. This applies
only when the current policy took effect on the date the prior
policy terminated and provides seamless coverage across time,
as long as a crime policy is renewed immediately upon expira-
tion.

If a loss is covered partly by the current policy and partly by a

prior policy issued by the same insurance company, the most
that will be paid is the amount of recovery under the current
policy or the prior policy, whichever is greater.

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 Protecting Your Business

Generally, coverage will not apply to any loss that is also cov-
ered by another policy. However, if the amount of the other in-
surance is insufficient, this coverage will apply as excess over
the other insurance. It will not pay any deductible amounts of
the amount of loss that exceeds the limit of insurance shown in
the declarations.

7.7 Recovery of Stolen Property

After an insurance company pays for a loss, if property is re-

covered it will be distributed first to the insured for amounts
above the limit of insurance, then to the insurance company up
to the amount of any settlement, and then to the insured to re-
imburse any deductible assumed.

Example:

An insured has a $40,000 loss of money and coverage of

$20,000 above a $1,000 deductible. After the insurance
company pays its $20,000 limit, the full $40,000 is recov-
ered. The first $19,000 goes to the insured to compensate
for the uninsured loss. The next $20,000 goes to the in-
surance company to reimburse it for its settlement. The fi-
nal $1,000 goes to the insured to reimburse the deductible.

7.8 Right To Recovery

Any rights the insured has to recover damages from another

party are transferred to the insurance company and is known
as the subrogation right.

Example:

After settlement of a theft loss, the thief is found. The sto-

len funds have been squandered, but the thief has other
assets. The insurance company has the right to take legal
action to recover its payment.

7.9 Valuation of Money

Loss of money will be paid at face value while foreign currency

may be paid at its face value in that other currency or in the
American dollar equivalent determined by the exchange rate on
the day the loss was discovered.

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 Protecting Your Business

A loss of stock will be paid at their value at the close of busi-

ness on the day the loss was discovered. However, the insur-
ance company has the option of replacing them in kind or pur-
chasing a lost securities bond in connection with issuing dupli-
cate securities.

If property other than money and securities is lost or damaged

in another country, the insurance company has the option of
paying for the loss in the currency of that other country or in the
U.S. dollar equivalent as determined by the exchange rate on
the date the loss was discovered.

7.10 Disagreement in Value

If the insured and the insurance company cannot agree as to the

value of the stolen property, the value or cost will be determined by
arbitration.

7.11 Theft and Disappearance Insurance

This Form provides a common type of commercial crime insurance.

It protects the insured against a broad range of exposures to the loss
of money and securities which arise from external threats of loss,
such as burglary and robbery. However, coverage applies both in-
side and outside of the premises. This form is frequently issued in
conjunction with employee dishonesty coverage, which protects
against internal threats of loss.

It should be noted that loss resulting from accounting errors or omis-

sions is excluded because this is not a crime. While losses resulting
from criminal acts of employees, directors or trustees are excluded
under this form, coverage is available under the Employee Dishon-
esty Coverage Form.

7.12 Employee Dishonesty

Employee dishonesty coverage is one of the most common types of

commercial crime insurance. It protects the insured against the in-
ternal exposure to loss when employees have access to money, se-
curities and other covered property.

The extent of an employer’s exposure to employee dishonesty losses

depends upon the type of business. The risk appears greater when
employees handle large volumes of money or merchandise having
high values.

7.13 Crime General Provisions

This form outlines the exclusions, conditions and definitions common

to most crime coverages. These are additional exclusions, condi-

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 Protecting Your Business

tions, and definitions specific to the Employee Dishonesty Coverage

Form.

There will be no coverage for the following;

♦ Loss caused by any employee for whom prior similar insur-

ance has been cancelled.

♦ Loss which is revealed or shown only by an inventory or

profit and loss calculation.

7.14 Fidelity Bonds

Occasionally an employee may attempt to steal a large sum of

money or merchandise. These are the types of losses covered by a
fidelity bond. Since an employee is personally liable for his/her own
dishonest acts, an insurance company that makes payment under a
fidelity bond always has the right to seek recovery from the employee
responsible for loss.

While there are both fidelity and surety bonds, only the surety bonds
actually fit the technical definition of bonds.

Every bond involves the following persons;

♦ Principal – the party who has agreed to fulfill an obligation

♦ Obligee – the party for whose benefit the bond is written, and
to whom payment is made if the principal defaults

♦ Guarantor – the surety or insurance company providing the

bond and agreeing to pay damages if the principal defaults.

In the surety field, it is the principal who applies for and pays for a
bond, and three parties are clearly involved in forming the contract.
These bonds guarantee that specific obligations will be fulfilled. The
obligation may involve meeting a contractual commitment, paying a
debt or performing certain duties. This is not always true of fidelity
bonds. Many fidelity bonds are issued to cover losses resulting from
employee dishonesty.

A fidelity bond will pay the employer if a bonded employee steals

company funds, but it is the employer (obligee) who arranges for the
bond and pays the premium. The employees are not part of the con-
tract.

A typical fidelity bond agrees to indemnify the insured (employer) for

losses resulting from employee dishonesty. It covers direct loss of
money or other personal property belonging to the insured or for
which the insured is legally liable.

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 Protecting Your Business

STUDENT NOTES

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