1. Chapter 25, Rejda (13th ed.) Commercial Property Insurance
ISO Commercial Property Program
Building and Personal Property Coverage Form
Causes-of-Loss Form
Value Reporting Forms
Business Income Insurance
Equipment Breakdown Insurance
Transportation Insurance
Businessowners Policy
Italy cruise ship Costa Concordia accident
January 13, 2012
2012 Lamma Island ferry collision

2. Exhibit 25.1 Components of the ISO Commercial Package Policy
Insurance Service Office (ISO)
ISO provides statistical information, actuarial analysis, policy language, and technical information to participants in property and liability insurance markets. ISO has drafted a considerable number of commercial policy forms.

3. ISO Commercial Property Program
Business firms can purchase a commercial package policy
The package policy is tailored to meet the specific needs of the business
The policy combines two or more coverages into a single policy
Advantages include: fewer gaps in coverage, lower premiums, and convenience
The policy contains:
Common policy declarations
Common policy conditions, e.g., cancellation terms
Coverage parts, e.g., commercial property, crime

4. Building and Personal Property (BPP) Coverage Form
The building and personal property (BPP) coverage form is a commercial property coverage part that is widely used to cover a direct physical damage loss to commercial buildings and personal property
The form covers the buildings described in the declarations, including fixtures and permanently installed machinery and equipment
Business personal property, such as furniture and computers, is covered
Includes the insured’s interest in improvements and betterments as a tenant
Personal property of others in the care, custody, or control of the named insured is also covered
Can select 1 or all 3 coverages.

5. Building and Personal Property (BPP) Coverage Form
Additional coverages include debris removal, the cost of preserving property, fire department charges, and the cost to replace data destroyed by a covered loss
Under certain conditions, the insurance can be extended to cover other property, such as the personal effects of employees, newly acquired property, and property off the premises
The declarations page must show a coinsurance requirement of 80% or greater or a value-reporting period symbol
A standard deductible of $250 applies to each occurrence
If applicable, the coinsurance requirement must be met to avoid a penalty
The policy can be endorsed to cover losses on an agreed value or replacement cost basis, or to add an inflation guard

6. BPP: Examples
Most business firms do not require coverage in all three categories. For example,
Worldwide Realty (WR) Inc., is the owner of a building rented to others. It purchases coverage for the building only.
A law firm operates in WR’s building, purchases coverage only for its own business personal property because it does not have an insurable interest in the building and does not have any personal property of others in its possession.
Sue’s Jewelry Shop operates in WR’s building. As a tenant, it has no need for building coverage. The shop purchases coverage for its own business personal property and for the personal property of others in her care, custody, or control.
City Laundry, Inc., a commercial laundry, owns and occupies the building adjacent to WR’s building. It purchases coverage for the building, its business personal property, and the personal property of others in its care, custody, or control.

7. Valuation of Property

8. Application Question: Wilson’s BPP
Wilson Manufacturing Company insures its factory and business personal property under a BPP with the following limits, which satisfy the policy’s 80% coinsurance provision:
Building $500,000
Business Personal Property $800,000
Wilson’s property was badly damaged by a covered peril. Indicate how much, if anything, Wilson’s BPP should pay for each of the following aspects of the loss. Ignore any deductible.

9. Application Question: Wilson’s BPP
Several underground pipes, valued at $5,000, were destroyed.
$1,300 cash was destroyed.
Wilson was required by local ordinance to pay a $500 service charge to the local fire department.
Plans and blueprints owned by Wilson were destroyed. The cost of research to replace these valuable papers was $6,000.
Patterns owned by a customer of Wilson’s were destroyed. Their actual cash value was $5,000.
The damaged property included a quantity of finished goods that had been sold but not delivered at the time of loss. The cost for Wilson to manufacture the goods was $5,000, and their selling price was $10,000.

10. Application Question: Coinsurance and Deductible
Yeah Café owns a building with an actual cash value of $100,000. The building is covered under a BPP with a coinsurance clause and a $1,000 deductible. How much will Yeah Café recover under its BPP in each of the following situations?
Insurance carried Coinsurance rate required ACV of loss
A) $80, % $10,000
B) $60, % $10,000
C) $80, % $10,000
D) $100, % $50,000
E) $80, % $90,000

11. Application Question: Improvements and Betterments
A tenant in IFC insures its personal property and its use interest in improvements and betterments (i&b) under a BPP. A fire in the tenant’s premises destroyed the tenant’s business personal property as well as the i&b that had been installed by the tenant when it first occupied the building. Because the tenant’s 5-year lease had only one year remaining at the time of the loss, the tenant decided not to replace the i&b. If the original cost of the i&b was $100,000, how much, if anything, would the tenant be able to recover for the i&b under its BPP?

12. Application Question: Agreed Value Option
A building and its contents are insured under a BPP with the agreed value option in effect. The limit of insurance carried is $100,000 with a $500 deductible. If the agreed value shown in the policy is $150,000, how much will the insurer pay if the insured sustains $30,000 loss by an insured peril?

13. CAUSES-OF-LOSS Forms
A cause-of-loss form must be added to the policy to have a complete contract.
Four forms:
Cause-of-loss basic form
Cause-of-loss broad form
Cause-of-loss special form
Cause-of-loss earthquake form
Deduction is usually 2~5 % of the value of the insured property.
Aftershocks within 168-hour period are considered to be a single event.

14. Causes-of-Loss basic Form
A causes-of-loss form must be added to the policy to have a complete contract
The form specifies the covered perils for the business and personal property coverage
The causes-of-loss basic form provides coverage for 11 basic causes of loss:
Fire
Lightning
Explosion
Windstorm or hail
Smoke
Aircraft or vehicles
Riot or civil commotion
Vandalism
Sprinkler leakage
Sinkhole collapse
Volcanic action

15. Fire Peril
Friendly Fire: a fire that stays in its intended place. E.g., a fire in a fireplace is a friendly fire as long as it remains contained in the fireplace.
Hostile fire: a fire that leaves its intended place. E.g., if a sparkle escapes the fireplace and sets the carpet on fire, the fire becomes hostile fire.

16. Causes-of-Loss broad Form
The causes-of-loss broad form includes all causes of loss covered by the basic form plus:
Falling objects
Weight of snow, ice, or sleet
Water damage
Also, collapse is covered for certain causes, such as hidden decay

17. Crime Perils
Note that crime perils are not always included in the policy.
Burglary is the taking of property from inside a building by someone who unlawfully enters the building.
Robbery is the taking of property from a person by someone who has caused or threatened to cause the person harm.
Theft is a broad term that means any act of stealing.
A break-in is a burglary; a purse snatching or a holdup is a robbery; and both are thefts.

18. Example: Insured Perils
Suppose you have purchased a property insurance policy that covers ONLY the following perils: fire, lightning, vandalism, aircraft & vehicle damages, falling objects, and windstorm.
For each of the following loss scenarios given below, indicate whether you would be reimbursed by the insurance company underwriting your policy.

19. Example: Insured Perils
a) While having a fire in your fireplace one evening, your girlfriend (boyfriend) throws your expensive FIN3240 textbook into the fireplace. When the book catches on fire, a spark jumps out of the fireplace and burns your sofa. Is the damage to your FIN3240 textbook covered? Is the damage to your sofa covered?
Damage to the textbook Circle one: Yes No Damage to the sofa Circle one: Yes No
b) Your neighbor's teenage daughter intentionally spray-paints offensive words on the side of your house. It costs you $200 to have the siding of the house cleaned. Is this cost to restore the siding of your house covered? Circle one: Yes No
c) A tornado destroys your neighbor's car, which was parked in front of your house at the time it was destroyed. Is this auto physical damage covered? Circle one: Yes No

20. Example: Insured Perils
d) A light fixture falls from your ceiling because of several loose screws. The light fixture itself breaks and also damages the glass table upon which it lands. Is the damage to light fixture covered? Is the damage to glass table covered?
Damage to the light fixture Circle one: Yes No Damage to the glass table Circle one: Yes No
e) While on vacation, your home is burglarized. In the process of breaking into your home, the burglar damages your back door. The burglar also escaped with some of your valuable personal property. Is the damage done to your back door covered? Are the items stolen during the burglary covered?
Damage to the back door Circle one: Yes No Items stolen Circle one: Yes No

21. Causes-of-Loss special Form
The causes-of-loss special form insures against “risks of direct physical loss” unless specifically excluded
That is a “all-risks” policy.
Also, personal property in transit is covered for certain causes of loss
Coverage also includes glass damage
Advantages:
The burden of proof falls on the insurer.
Some common perils that are not in Basic and Broad Form coverage:
Theft; Friendly Fire; Vehicle damage; …
Relatively small additional premium charged.

22. Examples: Cause of Loss Forms
Assuming each of the following losses involved covered property, indicate whether each loss would be covered by the Cause of Loss-Basic Form, Broad Form, and Special Form. (Treat each question separately.)
a) An expensive hand tool was accidentally dropped into a BBQ oven.
Basic Form Circle one: Covered Not covered
Broad Form Circle one: Covered Not covered
Special Form Circle one: Covered Not covered
b) Vandals spray-painted graffiti on the exterior walls of the insured building.

23. Examples: Cause of Loss Forms
c) A vehicle owned by the insured and driven by one of the insured’s employees knocked down a garage wall.
Basic Form Circle one: Covered Not covered
Broad Form Circle one: Covered Not covered
Special Form Circle one: Covered Not covered
d) An air conditioning unit (valued at $600) belonging to the insured was destroyed by collision while being transported to a repair shop on the insured’s truck.
e) A shipment of merchandise (value at $5,000) from the insured manufacturer to a customer was destroyed by a fire that occurred while the merchandise was being transported in a truck operated by a common carrier.

24. Reporting Forms
The reporting form is used to insure fluctuations in business personal property
Premiums are based on the actual value of the covered property
The insured can report inventory on a daily, weekly, monthly, quarterly or annual basis
If the insured underreports the property values at a location, and a loss occurs at that location, recovery is limited to the proportion that the last value reported bears to the correct value that should have been reported
E.g., if the actual inventory on hand is $500,000, and the insured reports only $400,000, only 4/5 of any loss will be paid (less the deductible).

25. Application Question: Value Reporting Form
Camera Shop occupies a leased building. On December 10 a fire totally destroyed the building and its contents. The ACV of the contents was $105,000. Camera Shop’s personal property was insured under a BPP with the Value Reporting Form with a $90,000 limit and a monthly reporting requirement. The policy had been in force since August 1. At the time of the loss, Camera Shop had made the following monthly reports of values:
August 31 $91,000;
September 30 $79,000;
October 31 $110,000
Because these reports were accurate and made on time, Camera Shop believed that it was entitled to receive payment of $105,000, which was less than the amount last reported.
How much will Camera Shop be able to recover under its value reporting coverage, assuming no deductible?

26. Business Income Insurance
Property losses can lead to any or all of the following financial consequences:
Direct Loss: Reduction in the value of the property
Time Element (Indirect) Loss
Lost income
Extra expenses
Two basic forms:
Business income and extra expense coverage form
Extra expense coverage form

27. Application Question: Business Income Loss Exposure
Mail Order, Inc., suffered a fire loss at its single warehouse. During the six-month restoration period that followed, Mail Order’s sales decreased from an expected $2 million to an actual $1 million, and (mainly because of extra expenses for temporary relocation and rental expenses) expenses increased from an expected $1 million to an actual $1.5 million.

28. Application Question: Business Income Loss Exposure
(A) What was Mail Order’s net income for the six-month period of restoration?
(B) What would Mail Order’s net income have been for the same six month period if no loss had occurred?
(C) What was the amount of Mail Order’s business income and extra expense loss for the six month period?
(D) Could Mail Order’s business income loss have continued after it resumed operations in its rebuilt warehouse? Why or why not?

29. Business Income Insurance
Business income insurance is designed to cover the loss of business income, expenses that continue during the shutdown period, and extra expenses because of loss from a covered peril
One form is the business income (and extra expense) coverage form
This form covers the loss of business income due to suspension of operations during a period of restoration
Suspension must result from a covered direct physical loss
Extra expenses, such as relocation costs, are also covered
An extended business income provision covers the reduction in earnings for a limited period after the business reopens
Business income is defined as the net profit or loss before income taxes that would have been earned, and continuing normal operating expenses, including payroll

30. Business Income Insurance
The business income coverage form can be purchased with coinsurance of 50, 60, 70, 80, 90, 100, or 125%
The coinsurance percentage selected depends on the length of time it takes to complete repairs and resume operations
A higher percentage should be selected if the business expects to be shut down for a longer period of time
Some optional coverages include:
A maximum period of indemnity of 120 days
Also eliminates the coinsurance requirement
A monthly limit of indemnity
Eliminates the coinsurance requirement and limits the maximum monthly amount that will be paid for each consecutive 30-day period
Business income agreed value
This option suspends the coinsurance clause and places no limit on the monthly amount paid, provided that the agreed amount of insurance is carried

31. BIC Coinsurance Example
When: The Net Income and operating expenses for the 12 months following the inception, or last previous anniversary date, of the policy would have been $400,000.
The Coinsurance percentage is 50%
The Limit of Insurance purchased is $150,000.
Assume the amount of loss is $80,000
Step l: $400,000 × 50% = $200,000 (the min. amount of insurance to meet the coinsurance requirements)
Step 2: $150,000 ÷ $200,000 = .75
Step 3: $80,000 × .75 = $60,000
The insurer will pay no more than $60,000. The remaining $20,000 is not covered. (Underinsurance Example)

32. Business Income Insurance
The extra expense coverage form is a separate form that can be used to cover the extra expenses incurred by the firm in continuing operations during a period of restoration
Can be used by firms that must continue to operate after a loss occurs, such as a newspaper
The form does not cover loss of business income
Expenses to continue operations are covered, subject to certain limits
An endorsement can be added to a business income policy to cover the loss of business income from dependent properties (contingent business income loss)
Used when a business depends on a single supplier for raw materials, or relies on a single customer to purchase its products
The loss of income must result from direct damage to property of the dependent property
Types of dependent properties include:
Contributing location (sole supplier’s business is interrupted)
Recipient location (sole customer’s business is interrupted)
Manufacturing location
Leader location

33. Local Cases – Business Income Insurance Claims
The Peninsula:
HK$95m recovered from BIC
Mandarin Oriental:
HK$120m recovered from BIC
BIC due to SARS no longer available when policy renewed
Should SARS be excluded?

34. The Peninsula Hotel and Mandarin Oriental Hotel

35. Other Commercial Property Coverages
Some firms have certain needs that require more specialized property coverage
A builders risk coverage form can be used to insure buildings under construction
A condominium association coverage form is used to cover a condominium building
Businesses that own units in a condominium building can purchase a condominium commercial unit-owners coverage form
The equipment breakdown coverage form can be used to cover losses due to the accidental breakdown of covered equipment, such as steam boilers, refrigeration equipment, and computer equipment
Difference in Conditions (DIC) insurance is an “all-risks” policy that covers other perils not insured by basic property insurance contracts

36. Equipment Breakdown Insurance
Covers losses due to the accidental breakdown of covered equipment (formerly known as boiler and machinery insurance), such as steam boiler, air conditioning and refrigeration equipment; electrical generating equipment; pumps, etc…
The cause-of-loss forms discussed earlier exclude steam boiler explosion, electrical breakdown and mechanical breakdown.
Coverages Provided: property damage; expediting expenses; business income and extra expenses; spoilage damage; utility interruption; newly acquired premises, etc…

37. Examples of Equipment Breakdown Losses

38. Application Question
The insured’s boiler exploded, causing the losses listed below. If the insured had a typical equipment breakdown policy, which of the following losses would the policy cover?
Destruction of the boiler: Covered Not covered
Damage to the insured’s building: Covered Not covered
Damage to a neighboring building owned by another business: Covered Not covered
Damage to the insured’s business personal property:
Covered Not covered
Damage to customers’ property in the insured’s control:
Bodily injury to a member of the public who was walking by the building when the explosion occurred: Covered Not covered

39. Transportation Insurance
Ocean marine insurance provides protection for goods transported over water
It is one of the oldest forms of transportation insurance
Ocean marine insurance comes in several different forms:
Hull insurance covers physical damage to the ship or vessel
A collision liability clause (running down clause) covers the owner’s legal liability if the ship collides with another vessel or damages its cargo
Cargo insurance covers the shipper of the goods if the goods are damaged or lost
Regular shipments can be covered with an open-cargo policy
This coverage requires the shipper to report periodically the shipments that are made

40. Transportation Insurance
Protection and indemnity (P&I) insurance is usually written as a separate contract that provides comprehensive liability insurance for property damage or bodily injury to third parties
Coverage includes liability for damages caused by the ship to piers and docks, and for illness or injury to passengers and crew
Freight insurance indemnifies the ship owner for the loss of earnings if the goods are damaged or lost and are not delivered

41. Transportation Insurance
Ocean marine insurance is based on certain fundamental concepts, or implied warranties:
The owner implicitly warrants that the vessel is seaworthy
The ship cannot deviate from its original course
The ship can only deviate to avoid an accident, or to save the life of an individual on board, or rescue persons from another vessel
The purpose of the voyage is legal
The ocean marine policy provides broad coverage for perils of the sea, such as bad weather, high waves, collision, sinking, and stranding
Includes losses from fire, pirates, and jettison (to save the ship)
The policy can be written on an “all-risks” basis
Common exclusions are losses due to delay and war

42. Transportation Insurance
A particular average is a loss that falls entirely on a particular interest
Under the free-of-particular average (FPA) clause, partial losses are not covered unless the loss is caused by certain perils, such as stranding or sinking
The insurer pays the full amount of a loss only if it exceeds a certain percentage specified in the FPA
A general average is a loss that falls on all parties to the voyage, incurred for the common good
Each party must pay its share of the loss based on the proportion that its interest bears to the total value in the venture
Conditions for a general average loss include imminent peril, voluntary sacrifice, preservation of at least part of the value
All parties claiming contributions must be free of fault

43. Transportation Insurance
Inland marine insurance provides protection for goods shipped on land
The coverage grew out of ocean marine insurance
Conflicts between fire and marine insurers were resolved with a nationwide marine definition in 1933, to define the types of property that marine insurers could write
The current definition includes imports, exports, domestic shipments, means of transportation and communication, personal property floater risks, and commercial property floater risks
Some examples of property that can be insured include:
Losses to domestic goods in transit
Property held by a bailee, such as dry cleaner
Mobile equipments, such as a tractor
Property of certain dealers, such as jewelry and fine art
Means of transportation and communication, which is property at a fixed location that is used in transportation or communications, such as a bridge or television tower

44. Transportation Insurance
Inland marine contracts are classified as either filed or nonfiled forms
Filed forms are filed with the state insurance department, and are typically used in situations where there are a large number of potential insureds
Forms under the ISO simplified commercial inland marine program include, for example:
Accounts receivable coverage
Camera and musical instrument dealers coverage
Film coverage form
Mail coverage form
Signs coverage form
Theatrical property coverage form

45. Transportation Insurance
Nonfiled inland marine forms are used to meet specialized needs
An annual transit policy can be used to cover the shipment of goods on public trucks, railroads, and coastal vessels
Both incoming and outgoing shipments can be insured on a named perils or “all-risks” basis
A trip transit policy is used by firms to cover a single shipment
A business floater covers property that frequently moves from one location to another, such as contractors equipment and garments in the process of manufacturing

46. Businessowners Policy (p.589-91, Rejda 2014)
A businessowners policy (BOP) is a package policy specifically designed for small- to medium-sized retail stores, office buildings, apartment buildings, and similar firms
The ISO BOP provides both property and liability coverage in one policy
Businesses are ineligible if their loss exposures are outside those contemplated for the average small- to medium-sized firm
e.g., auto repair shops and bowling alleys
Property losses are covered on an “all-risks” basis
Coverage includes buildings described in the declarations, fixtures, permanently installed machinery and equipment
Business personal property, including property in the insured’s care, is also covered
A peak season provision provides for a temporary increase of 25% of the amount of insurance when inventory values are at their peak
Some addition coverages include debris removal, collapse, and interruption of computer operations

47. Businessowners Policy
For an additional cost, businessowners can also cover:
Outdoor signs
Money and securities
Employee dishonesty
Mechanical breakdown
A standard deductible of $500 per occurrence applies to all property coverages
The BOP also includes business liability coverage similar to the commercial general liability policy (CGL)
The businessowner is insured for bodily injury and property damage liability, and advertising and personal injury liability
Medical expense insurance is also provided

48. Application Question: BOP
Sam’s Shoe Store is located in a building owned by the store’s proprietor. The building and its contents are insured under a BOP including the special property coverage form for $160,000 on the building and $100,000 on the contents, including merchandise. The policy does not include any optional coverages or endorsements. What amount, if any, will the insurer pay for each of the following losses? Ignoring deductibles.

49. Application Question: BOP
(A) A robbery occurred at Sam’s Store. The robber took $400 in cash.
(B) Sam suffered a reduction in net income because of his inability to obtain merchandise from his main supplier following a fire at the supplier’s warehouse.
(C) Vandals smashed the plate glass window in the front of Sam’s Show Store. The cost to replace the window was $300.
(D) Sam rented space in a nearby mall to open a second store. After Sam had moved $20,000 worth of merchandise to the new location, a fire in the mall destroyed the merchandise.
(E) Sam’s part-time sales clerk stole $2,000 worth of merchandise over a two-month period.

50. Application Question: BOP
Julia’s Bridal Shop is insured under a BOP policy with a limit of $200,000 on the building and $120,000 for personal property, both on an replacement cost basis. The policy includes the businessowners special property coverage form with all optional property coverages except mechanical breakdown. For each of the losses described below, indicate how much should be paid under Julia’s BOP. And why? Ignoring deductibles.

51. Application Question: BOP
A typhoon damaged Julia’s shop and its contents.
(1) Business income and extra expense loss was $100,000 during the period of restoration, which lasted seven months. The calculation of business income loss included $5,000 per month for ordinary payroll.
(2) Julia’s business did not return to the normal level for 3 weeks after reopening. The reduction in net income during those 3 weeks was $1,000.
(3) The replacement cost of personal property lost in the fire was $130,000. Average value of covered personal property for the 12 preceding months were $115,000.
(4) The cost to repair the damage to the building was $150,000. The ACV of the damaged property was $100,000. The replacement cost of the whole building immediately before the loss occurred was $300,000.

52. Property All Risks, Business Interruption and Money Insurance @ CUHK (old)
Section I: Sum Insured: HK$5,347,613,550
Building: HK$4,044,461,800
Business Property of Others: HK$748,467,750
Library Books: HK$270,900,000
Others ……..
Sub Limit:
Burglary: HK$15,000,000 per location
Landslip: HK$50,000,000 in aggregate per policy year
Full Theft: HK$5,000,000
Premium: HK$1,577,546
Section II: Sum Insured: HK$17,970,000
Staff Quarters: 257 flats in 11 HK$25,000 each (2 months)  HK$12,850,000
Bank of America Tower (2 months)  HK$1,000,000
Jockey Club for Positive Aging (3 months)  HK$300,000
Premium: HK$5,301.15