1. Insurance Community University 33333 1 Difference in Conditions  The webinar will begin shortly.  There is no audio at this time.  This presentation is being recorded for your viewing pleasure at a future date.  The attendance and proctor forms are available under ‘Materials’ in the Webinar’s Console to the right.  The PowerPoint presentation is also available under ‘Materials’.  You will receive the course number for your state near the end of class.  Use the ‘chat’ window for questions on the content.  100% Participation in Polling Questions is required to receive credit for this class. Even if you do not intend to receive credit, please participate in the polls.

2. Insurance Community University Welcome to your Insurance Community University All of you are currently on mute – Un-mute your own system – Telephone Option Select Telephone on your screen Dial in the PIN number so that your number becomes active – Microphone and/or Speaker Option You can use this option if you have a headset that you use with your computer Audio 2

3. Insurance Community University Participation & Chat Window You will receive information from the monitor via the ‘Chat’ window. –Please locate window in the control panel Q & A is welcomed during the presentation and at the end of the presentation You will find the question box on your control panel –Write your question in that box and send it to the presenter/organizer The presenter will take those questions in the order submitted 3

4. Insurance Community University DOI Requirements When you see a slide with the hand up symbol, touch the “hand” icon on your control panel – Click ONCE only If you do not raise your hand, the monitor will be in contact with you in the chat box If you are in a group, the designated proctor is responsible to make certain you are all in attendance at all times 4 = Hand is down

5. Insurance Community University Polling Throughout the class we will be conducting periodic polls We need 100% participation on the polls The polls are intended to check participation but also to create discussion topics throughout the presentation 5

6. Insurance Community University Forms To Complete for CE After class ends – Return attendance form – Proctors – return your form to email address Email address is in chat window or in email sent to you today 6

7. Insurance Community University DOI Requirements We will file your hours with the DOI after the completion of this webinar and we have received the attendance form. You have 48 hours to return the form You will be sent a Certificate of Attendance/Completion by email. Please retain this for your records for five years. 7

8. Insurance Community University Internet Disruption If the presenter looses internet connection STAY ON THE LINE The administrators will communicate with you

9. Insurance Community University Internet Failure If the internet fails and all participants are kicked off line by Go To Training or other source then the seminar will be terminated You will receive instructions by email as to how we will proceed This is a precautionary notice, only 9

10. Insurance Community University This class is being recorded Available in the University This course is approved for CE in CA Only

11. Insurance Community University Disclaimer Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by the instructor or the creator(s) of this material do not modify or revise insurance policy language. In providing these materials, the authors assume neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Copyright 2010 – 2013 All Rights Reserved www.insurancecommunitycenter.com 11

12. Insurance Community University Your Instructor Today Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR Insurance Community Center, LLC Director of Education President: Segale Consulting marjorie@insurancecommunitycenter.com 714.206.9583 12

13. Insurance Community University What This Course Will Cover Property policy exclusions Earthquake, Flood, Named Storms – Definitions – Coverage considerations – Deductibles PML development and concerns Structuring coverage Coverage review 13

14. Insurance Community University Polling Question #1 14

15. Insurance Community University Purpose of a Difference in Conditions Policy Designed to provide “all risk” coverage subject to exclusions broader than CP Special Form Designed to tailor coverage for an insured’s specific needs May be used for international risks 15

16. Insurance Community University Purpose of Difference in Conditions Coverage No standard form – Limited market provided by carriers Used for perils not covered elsewhere Flood / Water Damage Earthquake EQ / Flood – 80% of the losses covered by DIC insurance 16

17. Insurance Community University DIC Development Ocean Marine – DIC purchased by a merchant to fill perils gap between the open cargo policy and any insurance required by the merchant’s sale contract Inland Marine – DIC purchased to provide “All Risk” as a supplement to the Fire and “Named Perils” coverage provided. 17

18. Insurance Community University DIC Development Insurance Forms Today – Generally the admitted / standard property form already provides “All Risk” coverage – The DIC is purchased to provide coverage for perils excluded in the “All Risk” policy often for the catastrophe perils 18

19. Insurance Community University Supply And Demand In The DIC Marketplace Limited capacity with a limited number of markets Little or no new capacity entering the market Emphasis of underlying acceptability has moved to the BETTER risk – Better meaning better construction and generally newer 19

20. Insurance Community University DIC Coverage Trends Coverage options are being narrowed Policy wording is being clarified, improved and often times more restrictive Deductibles are larger and more specific Not all carriers are willing to follow other carrier’s DIC forms (no following form) 20

21. Insurance Community University DIC The DIC will exclude any loss covered by the original property policy (referred to as an “underlying policy”) If coverage for the same peril exists in both policies - the other insurance clause will be invoked in both policies 21

22. Insurance Community University Methods To Exclude Perils On a DIC Exclude the perils covered by the underlying policy by including a list of traditional named perils as excluded perils in the DIC Exclude the perils on the underlying policy by specifically identifying the specific policy by policy number and insurer name. 22

23. Insurance Community University Methods To Exclude Perils On a DIC Make a statement that all perils covered by ISO Cause Of Loss Forms are excluded on the DIC Require that the insurance carry an “all risk” parallel policy whereby DIC applies only to the differences in coverage on the DIC and All Risk Policy unless otherwise excluded 23

24. Insurance Community University The Excluded Perils Under a DIC Policy May Include Fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism and sprinkler leakage Explosion of hot water boilers or hot water heaters, mechanical breakdown and arcing – Creates a gap between DIC and Equipment Breakdown coverages 24

25. Insurance Community University DIC Exclusion – Fire and ECE

26. Insurance Community University Polling Question #2 26

27. Insurance Community University Flood Exposure and Coverage Options

28. Insurance Community University National Flood Insurance Program Why offer NFIP – Can’t purchase coverage in standard market – Forced Placed - Lending Documents – Capacity reasons – Carrier requirements (Excess Clause) 28

29. Insurance Community University National Flood Insurance Program 100 Year Flood Zones (A and V elevation/wave wash) Limited coverage available on amount Limited coverage available based on area Limited coverage based on comprehensiveness of “buy back” – No Business Income – No Building Ordinance Must purchase as first layer in order to qualify for FEMA 29

30. Insurance Community University National Flood Insurance Program Provides limited coverage – Real / Personal only – $500k - Real / $250k - Personal – Some extensions – Low Deductibles – Cheap 30

31. Insurance Community University Flood Endorsements Endorsements are available with different insurance companies modifying the property forms. – Caution: the endorsements vary as to the comprehensiveness of coverage and deductibles applicable. – Caution: Company endorsements do not substitute for NFIP to qualify for FEMA 31

32. Insurance Community University Combination NFIP and DIC Often the most cost effective means of securing adequate limits Flood coverage calls for the purchase of a maximum available limit under the NFIP and excess under a DIC – Caution: the Federal Program’s coverage may be more restrictive then the DIC or vice versa 32

33. Insurance Community University Difference in Conditions Standard / Surplus Line Market (DIC) – May exclude Flood Hazard Zones – Large Deductibles ($ or %) w/ Minimums – Larger limits available – Can provide coverage for Business Income and Extra Expense 33

34. Insurance Community University Earth Movement, Flood and Wind The typical DIC policy first excludes the perils The form will specifically add back the named perils of Earth movement, Flood and wind 34

35. Insurance Community University Earth Movement, Flood and Wind Caution: – It is essential to compare the language of the Property AND DIC exclusions with the named peril description providing the coverage – The exclusions may be much more comprehensive then the buy backs 35

36. Insurance Community University Property Policy Exclusions Compared to DIC Coverage

37. Insurance Community University Water Damage Exclusion g. Water (1) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not; (2) Mudslide or mudflow; (3) Water that backs up or overflows from a sewer, drain or sump; or (4) Water under the ground surface pressing on, or flowing or seeping through: (a)Foundations, walls, floors or paved surfaces; (b)Basements, whether paved or not; or (c) Doors, windows or other openings. But if Water, as described in g.(1) through g.(4) above, results in fire, explosion or sprinkler leakage, we will pay for the loss or damage caused by that fire, explosion or sprinkler leakage.

38. Insurance Community University DIC Flood Definition Flood means, whether natural or manmade, Flood waters, surface water, waves, tide or tidal water, overflow or rupture of a dam, levy, dike, or other surface containment structure, storm surge, the rising, overflowing or breaking of boundaries of natural or manmade bodies of water, or the spray from any of the foregoing, all whether driven by wind or not. A tsunami shall not be considered a Flood.

39. Insurance Community University Earth Movement Exclusion b. Earth Movement (1) Earthquake, including any earth sinking, rising or shifting related to such event; (2) Landslide, including any earth sinking, rising or shifting related to such event; (3) Mine subsidence, meaning subsidence of a man-made mine, whether or not mining activity has ceased; (4) Earth sinking (other than sinkhole collapse), rising or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water under the ground surface. But if Earth Movement, as described in b.(1) through (4) above, results in fire or explosion, we will pay for the loss or damage caused by that fire or explosion. (5) Volcanic eruption, explosion or effusion…

40. Insurance Community University DIC Earthquake Definition D. Earth Movement means any natural or manmade: 1. Earthquake, including any earth sinking, rising or shifting related to such event; 2. Landslide, including any earth sinking, rising or shifting related to such event; 3. Mine subsidence, meaning subsidence of a man-made mine, whether or not mining activity has ceased; 4. Earth sinking rising or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water under the ground surface; 5. Shocks, tremors, mudslide, mud flow, rock falls, volcanic eruption, sinkhole collapse, subsidence; and includes tsunami.

41. Insurance Community University Wind / Hail / Named Storms When property is located in a mapped area that has significant exposure to wind, storm surge, etc. the property insurer will often excluded wind/hail losses. The DIC carrier will provide the coverage, but subject to specific underwriting, additional premium and deductibles

42. Insurance Community University Wind / Hail Exclusions – CP 10 54 A. The following is added to the Exclusions section and is therefore not a Covered Cause of Loss: WINDSTORM OR HAIL We will not pay for loss or damage: 1. Caused directly or indirectly by Windstorm or Hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage; or 2 Caused by rain, snow, sand or dust, whether driven by wind or not, if that loss or damage would not have occurred but for the Windstorm or Hail. But if Windstorm or Hail results in a cause of loss other than rain, snow, sand or dust, and that resulting cause of loss is a Covered Cause of Loss, we will pay for the loss or damage caused by such Covered Cause of Loss. For example, if the Windstorm or Hail damages a heating system and fire results, the loss or damage attributable to the fire is covered subject to any other applicable policy provisions.

43. Insurance Community University Named Storm Coverage Wording Named Storm: for Locations wholly or partially within Special Flood Hazard Areas (SFHA), areas of 100-year flooding as defined by the Federal Emergency Management Agency (FEMA). Limit: $ 10,000,000 Regardless of the number of Coverages, Locations or Perils involved including, but not limited to, all Flood, (however caused) wind, wind gusts, storm surges, tornados, cyclones, hail, or rain, the maximum amount the Company will pay per Occurrence as respects all covered Loss or Damage arising out of a Named Storm (a storm that has been declared by the National Weather Service to be a Hurricane, Typhoon, Tropical Cyclone, Tropical Storm, or Tropical Depression). In the event covered Loss or Damage by Flood arises out of a Named Storm, the maximum amount the Company will pay per Occurrence for all such Loss or Damage by Flood shall be the Sublimits of Liability for Flood as shown in Subparagraphs E.2.a. and E.2.b. above. However, if Flood is not covered, the maximum amount the Company will pay per Occurrence for all such Loss or Damage by Named Storm shall exclude Loss or Damage by Flood.

44. Insurance Community University Polling Question #2 44

45. Insurance Community University Probable Maximum Loss Insurance should be placed at limits not less than the PML – Concentration of risk – Geographic impact on loss amount – Type of loss EQ Flood Wind

46. Insurance Community University Coinsurance There should be no coinsurance on the policy Often the insured is buying coverage only at the PML level and NOT at the entire value of the property Cross reference this to the deductible portion of the policy

47. Insurance Community University Covered Property Description Definition should be close to the same as the Commercial Property coverage – Buildings – BPP – PPO Caution: For certain catastrophic perils the property definition must be broader.

48. Insurance Community University Covered Property Description Watch for excluded or limited property such as Foundations, retaining walls, Roofs over 20 years of age (often limited or with a higher deductible)

49. Insurance Community University Examples of Excluded Property Land, including land on which the covered property is located, water, trees, shrubs, plants, growing crops, and animals Property while underground, underwater or waterborne Buildings or structures in the course of construction 49

50. Insurance Community University Excluded Property Dams, bridges, tunnels and pipelines Foundations below the surface of the ground Property in transit 50

51. Insurance Community University Structuring the Coverage Specific Limits Blanket Limits – Reference to SOV on file removes the blanket advantage

52. Insurance Community University Structuring the Coverage Single policy – Purchase insurance equal to total loss exposure – Small catastrophic exposure – No concentration of risk

53. Insurance Community University Structuring the Coverage Single policy – Purchase insurance equal to total loss exposure – Small catastrophic exposure – No concentration of risk

54. Insurance Community University Structuring the Coverage Loss Limit – Limit that is less than total exposure Occurrence loss limit – This is where an insured buys a limit that is less than their total exposure to loss. – Purchase made on Probable Maximum Loss (PML) – No coinsurance clause should be applied

55. Insurance Community University Occurrence Of Liability Endorsement (OLL) The premium for this policy is based upon the Statement of Values on file with the Company or attached to this policy. In the event of loss hereunder, liability of the Company shall be limited to the least of the following: The actual adjusted amount of loss, less applicable deductible(s); The total stated value for the property involved, as shown on the latest statement of values on file with the company, less applicable deductibles; The limit of liability or amount of insurance shown on the face of this policy or endorsed onto this policy. 55

56. Insurance Community University More Than One Company Providing Coverage Participation, Quota share – All insurers participating take a proportionate share of the limits provided. – Each participant accepts a certain percentage of the risk in return for the same share of the premium. Excess of Loss (Layering) – This option is where one or more participants accept the “first dollar” of loss, and one or more participants accept losses only after the lower participants’ participation is fully exhausted.

57. Insurance Community University Polling Question #3 57

58. Insurance Community University Structuring the Coverage Two or more policies – Layer Limits exceed one carrier’s capacity Property presents frequency and/or severity loss exposures – Participation policies One carrier does not have capacity to provide the excess limits Premium will vary depending on the limits being provided in each layer by carrier

59. Insurance Community University Structuring the Coverage Layering – First layer Most expensive – Second layer and subsequent layers Placed when first layer underwriter has reached capacity Participation – More than one insurer on a layer

60. Insurance Community University Layering Coverage Example: – $15,000,000 coverage requirement 3 carriers each share at $5,000,000 each Each carrier shares all loss within the layer and pays 1/3 of the loss – $15,000,000 coverage requirement 1 carrier has $10,000,000 and pays 2/3 of the loss 2 nd carrier has $5,000,000 and pays 1/3 of the loss

61. Insurance Community University Sample Participating Language

62. Insurance Community University Critical Considerations in Layering Coverage must match – exactly Each carrier provides their own form and there will be differences – Follow lead language endorsement – Not always available

63. Insurance Community University Sample Followed Policy Language

64. Insurance Community University Limits Of Insurance Defined as the MOST the insurance company will pay in any one occurrence Flood and Earthquake typically have annual aggregates. – Annual aggregates apply separately to each peril, specifically Earthquake and Flood – Annual aggregate is the most the company will pay in any annual period – No reinstatement of aggregate 64

65. Insurance Community University Example Of Excess Limit Of Liability “Drop Down” Clause It is understood and agreed that in the event of reduction or exhaustion of the underlying aggregate limits, this policy shall apply in excess of the reduced underlying limit, or if such limit is exhausted, shall apply as underlying insurance, notwithstanding anything to the contrary in the terms and conditions of this policy. In no event, however, shall this Company be liable for more than the limits of liability specified by this endorsement. 65

66. Insurance Community University Occurrence Language Key component Earthquake, Flood and Named Storms typically use a time reference – all loss within that time frame is deemed to be one loss Earthquake – 72 hours – 168 hours

67. Insurance Community University Occurrence Language Flood / Wind – 72 hours For EQ, Flood, Wind – Loss or damage must be covered either before inception (“nose” coverage) or after expiration (“tail coverage) within the occurrence definition

68. Insurance Community University Polling Question #4 68

69. Insurance Community University “Nose” Coverage Language Exclusion D.6. is replaced by the following: 6.We will not pay for loss or damage caused by or resulting from any Earthquake or Volcanic Eruption that begins before the inception of this insurance. But we will pay for loss or damage by Earthquake or Volcanic Eruption that occurs on or after the inception of this insurance, if the series of Earthquake shocks or Volcanic Eruptions began within 72 hours prior to the inception of this insurance.

70. Insurance Community University “Tail” Coverage Language All Earthquake shocks or Volcanic Eruptions that occur within any 168-hour period will constitute a single Earthquake or Volcanic Eruption. The expiration of this policy will not reduce the 168-hour period.

71. Insurance Community University Deductibles Earthquake Deductible: 10% total INSURED value at the time of the loss / per unit basis: building, BPP, BI/EE Note that MANY DIC policies have the deductible taken against INSURABLE value Minimum earthquake deductible: $25,000 Flood Deductible: $50,000 per loss

72. Insurance Community University Deductible Buy Down Policies Depending on the limits and exposure for CAT loss, i.e., EQ, Flood, wind, the deductibles on the DIC policy can be significant Limited number of insurance companies offer a deductible buy down

73. Insurance Community University Buy Down Examples LIMIT: The Difference between the original deductibles being USD 250,000 per Occurrence or USD 500,000 per Occurrence in respect of locations with roofs 10 years or older and the Insured’s Retention. Maximum recoverable under this policy USD 450,000 per Occurrence but USD 1,800,000 in the annual aggregate INSURED’S RETENTION: USD 50,000 per Occurrence locations or coverages involved.

74. Insurance Community University Valuation Replacement cost subject to SOV / OLL / Scheduled limits Selling price should be requested on mfg stock / inventory A carrier may only allow ACV on old, unreinforced property – Must put this in writing to the client

75. Insurance Community University Coverage Enhancements/Endorsements Must mimic the Commercial Property Policy Examples: – Additional Debris removal Debris removal should include covered / uncovered property – Pollutant clean up and removal from land or water – ask for increased limit – Spoilage

76. Insurance Community University Coverage Enhancements/Endorsements – Ordinance or Law Coverage A included within Limit B and C - blanket specified limit – Increased Period of Restoration – Extended Period of Indemnity 360 days – Dependent Business Income / Extra Expense – Civil Authority – Ingress / Egress (critical coverage point)

77. Insurance Community University Coverage Enhancements/Endorsements – Utility Services – Direct and Time Element Water, Power, Communication Include overhead transmission lines – Followed policy language over primary or lead insurer May be included but must compare policy language

78. Insurance Community University Coverage Enhancements/Endorsements – Followed claim language This coverage is often not granted – Notice / Knowledge of loss limited to Executive Officer of First Named Insured – Unintentional failure to disclose included

79. Insurance Community University Drop Down Provision / Priority of Payment Joint Loss Clause Background – Drop Downs Only necessary under Primary/Excess placements, use of inconsistent perils, sublimits or aggregates (EQ and Flood) – Priority of Payments Similar to a Drop Down - More widely accepted – Joint Loss Used to bridge a Fire, DIC or Boiler policy when loss is a result of a combined perils 79

80. Insurance Community University DIC Coverage Territory At the locations shown in the declarations – “Per schedule on file with the company” Possible expansions – “All other locations” AOL – Property in due course of transit 80

81. Insurance Community University DIC Coverage Territory Sample Language #1 We cover property wherever located within the United States, Canada, Puerto Rico, Territories, Possessions. 81

82. Insurance Community University DIC Coverage Territory Sample Language #2 This policy insures against all risks of direct physical loss or damage from any external cause except as hereafter excluded while anywhere within the 50 states of the United States of America and the District of Columbia.

83. Insurance Community University DIC Coverage Territory My be written for specified coverage by state. – Many DIC’s are written for California ONLY to add earthquake coverage 83

84. Insurance Community University Underwriting Information Required

85. Insurance Community University Underwriting Information Required COPE – Construction, Occupancy, Protection (private and public), Exposure AGES – If the buildings are older than 30 years, provide any structural updates, including roof replacement – Many buildings may be updated to new seismic codes for occupant safety, but have little impact on constructive total loss probability to the structure. Therefore, will not assist in reducing EQ pricing or acceptability. 85

86. Insurance Community University Underwriting Information Required Statement Of Values – Provide both the values contained in each layer and the 100% ground up values of each item exposing the layer – Any summary information regarding split of values by age, construction, and occupancy can help place excess layers 86

87. Insurance Community University Underwriting CAT Loss - Information Required Loss history, summarized by loss to each layer under the proposed terms Include ground up loss information as well as losses to each proposed layer using the proposed deductibles, terms and conditions Catastrophe exposures by statistical or geographic zone 87

88. Insurance Community University Underwriting CAT Loss Considerations Construction considerations, such as type, age, retrofits to bring to current code, number of stories, damageability of contents Probable maximum loss 88

89. Insurance Community University Underwriting Earthquake Considerations Location considerations such as soils, liquefaction and landslide potential, proximity to other risks Coverage considerations, such as building, contents, business interruption, sprinkler leakage, coverage for building code upgrades and fire following the earthquake 89

90. Insurance Community University Underwriting Earthquake Considerations Newer construction which meets current seismic building codes Risks of superior construction Risks not located on or near major faults Risks located on firm natural ground Risks with lower liquefaction potential Risks which accept reasonable underlying deductibles 90

91. Insurance Community University Polling Question #5 91

92. Insurance Community University Proposal from Wholesalers Review sub-limits Review coverage endorsements, limitations and enhancements Verify that all forms on each layer are REALLY consistent – Coverage is often placed based upon capacity but there has been no conscious attempt to coordinate coverage terms or conditions 92

93. Insurance Community University Terminology

94. Insurance Community University Excess of Loss Terminology Primary – The layer that pays the first dollar of loss after deductible (if any) First Excess – In a layered structure, the first excess layer is the first layer above the primary Second Excess, etc. – In a layered structure, this is the next excess of loss layer above the first excess layer, or the second layer above the primary; 94

95. Insurance Community University Excess of Loss Terminology Point of Attachment – The amount of loss that first penetrates a layer Point of Release – The amount of loss that completely exhausts a layer Mixed Participating and Excess Structure – A layer structure where a prorata portion of the structure is shared on a proportional basis, and a portion of the structure is “internally layered” or quota shared into two or more layers. 95

96. Insurance Community University Excess of Loss Terminology Working Layer – A layer that is expected to have exposure to frequency losses, or losses considered within the PML Buffer Layer – A layer that is expected to have lower frequency than a working layer. – This layer is expected to only pay loss if some low probability event occurs. – This layer would be involved in a Maximum Foreseeable Loss 96

97. Insurance Community University Excess of Loss Terminology Capacity Layer – A layer that has a very low probability of paying loss – This layer is often excess of the amount MFL, or at least only partially exposed to an MFL event 97

98. Insurance Community University Summary DIC policy placement is challenging Critical components – KNOWLEDGEABLE wholesaler – Review of policy language when placing layers and/or participating insurers – Disclosure of coverage limitations to client in writing

99. Insurance Community University Upcoming Classes Upcoming University/Paid CE ClassesCyber Liability and the Personal Lines Account FREE to University Members $50.00/charge for non university members 11/07Farm Auto 11/12Livestock & Dairy 11/14Trucking 99 Join the University TODAY. www.insurancecommunitycenter.comwww.insurancecommunitycenter.com Click Join University at the top of the bar Upcoming Community ClassesFREE to University Members $25.00/charge for non university members 11/05Bullying Prevention and Intervention Program