INLAND MARINE INSURANCE

LESSON 1: INTRODUCTION

Introduction

Inland marine (IM) insurance protects against the financial consequences of loss

of or damage to specified types of property. The types of property covered

include property in transit, property of a movable (‘floatable’) nature and property

instrumental to transportation or communication.

Inland Marine insurance evolved in three stages:

1. Inland marine first appeared in the 1920s to describe policies developed

by marine insurers to meet new insurance needs. In the early 1900s,

states practiced a monoline approach to insurance regulation, limiting

insurers to one line of business: life, fire, marine or casualty. Marine

insurers could write policies covering property anywhere in the world

against any peril, using nonstandard forms and rates. Marine insurers

developed IM policies as a result of the increased use of the rail system

during World War I and the growth of the trucking industry after that war.

The increased use of rail and truck transportation increased the need for

insurance covering goods in transit. Marine insurers provided that

coverage.

2. IM expanded into other classes of property as a result of the general

increase in personal wealth after WWI. That increase in wealth prompted

an increased need for insurance to cover jewelry, furs and other precious

items. IM insurers developed the floater (policy that covers property that

does not always remain in a fixed location) for jewelry, fine art, cameras,

furs and other items in response to that need. IM insurers also developed

floaters for commercial loss exposures, such as bridges and tunnels,

property sold under installment plans, building materials while in transport

and mobile equipment.

3. The Inland Marine Underwriters Association (IMUA) was formed in 1931 to

stabilize the growing IM industry by controlling unfair business practices,

developing uniform forms and clauses and establishing rating methods

where possible. Today, the IMUA provides a forum for the discussion of

general IM problems, acts as an advisor regarding legislation that could

affect IM insurance and cooperates with state insurance departments.

The Purpose and Intent of the Nationwide Marine Definition

The Nationwide Marine Definition, adopted in 1933 by the National Convention of

Insurance Commissioners (NCIC, later replaced by the National Association of

Insurance Commissioners, the NAIC,) specified what could and could not be

covered by marine insurance. The drafters of the definition restricted covered

property to property in transit or property bearing some relation to transportation

or communication.

The definition’s purpose was to limit the insuring powers of marine insurers and

to prevent them from taking business from fire and casualty insurers. The

application of antitrust laws to the insurance industry in 1944 and the

development of multi-line insurance around 1950 made the Nationwide Marine

Definition obsolete.

The Nationwide Marine Definition was revised in 1953 to classify, rather than

restrict, ocean marine business. It was revised again in 1976 to include inland

marine business, including difference in conditions (DIC) policies, builders’ risk

policies and electronic data processing (EDP) equipment policies.

The effect of the current, 1976 Nationwide Marine Definition is to help insurers

properly classify IM premium and loss data and comply with rate and form filing

regulations. Simply, the definition prevents inland and ocean marine insurers

from providing unregulated coverage for items or situations that should be subject

to regulatory requirements.

The opening paragraphs of the 1976 Nationwide Marine Definition state that the

definition does not:

• List every coverage that can be classified as marine

• Guarantee that listed risks and coverages are always marine risks and

coverages

• Restrict or limit the exercise of insuring powers

The six property categories listed in the 1976 Definition include:

• Imports

• Exports

• Domestic shipments

• Bridges, tunnels and other instrumentalities of transportation and

communication

• Personal property floater risk

• Commercial property floater risk

Filed versus Non-filed Classes

Filed (controlled) classes must be written according to filed forms, rules and rates.

Some states let insurers modify their rates through consent-to-rate procedures.

The underwriter gets the insured’s written consent to a rate or form change and

files the consent with the state insurance department.

Nonfiled (noncontrolled) classes allow underwriters more flexibility to determine

policy provisions and rates, and let them respond better to customers’ needs.

Underwriters can use judgment rating on nonfiled classes to rate each risk

individually, relying on the underwriter’s experience and expertise. Nonfiled

classes often require skilled adjusters to handle losses.

Principal Classes of Commercial IM Business

Contractors’ risk coverage is the largest class of commercial IM insurance. Other

important classes include builders’ risk, transit, motor truck cargo, difference in

conditions and electronic data processing equipment coverages.

Principal Classes of Personal IM Business

Personal jewelry coverage is the largest class of personal IM insurance.

Other classes include bicycles, cameras, coin collections, farm equipment, fine

arts, furs, golf equipment, livestock, musical instruments, personal effects,

personal property and stamp collections.

The Scheduled Personal Property Endorsement

The scheduled personal property endorsement avoids three limitations found

under Coverage C (personal property) of the homeowners’ policy:

• Low monetary limits on recovery

• IM coverage for named perils only

• Application of a deductible

The Scheduled Personal Property Endorsement

The scheduled personal property endorsement is identical to the monoline IM

policy called the personal articles floater. Both the endorsement and the floater

cover specifically described jewelry, furs, cameras, musical instruments,

silverware, golf equipment, fine arts, stamp collections and coin collections for

their full value, often without a deductible, on a special-form basis.

How IM Remedies Restrictions in Commercial Property Forms

The ISO Building and Personal Property (BPP) Coverage Form excludes five

types of property that can be covered under inland marine policies:

• Bridges

• Personal property while airborne or waterborne

• Docks, piers and wharves

• Vehicles and self-propelled machines operated away from the described

premises

• Radio and television antennas

The BPP does, however, cover some IM exposures, but for low sublimits.

The Scheduled Personal Property Endorsement

Commercial property causes-of-loss forms exclude perils that can be covered

under IM. Even the special causes-of-loss form, which offers the broadest

coverage, imposes theft-related restrictions, like a $2,500 limits on furs, jewelry,

and patterns, dies, molds and forms. It also fails to cover contractors’ equipment

against theft and limits coverage for property in transit.

IM coverage may be attached to commercial package policies and

businessowners’ policies as coverage extensions. (Businessowners’ policies

combine commercial property and liability coverages with a limited number of

coverage options.) IM coverage is also included in output policies, which

combine most of the property and IM coverages organizations need.

LESSON 2: COMPONENTS OF INLAND MARINE

Components of Inland Marine Policies

Policy provisions for IM and other policies are either of the following:

• Boilerplate (standard provisions that address issues common to most IM

policies)

• Specific to the loss exposure being insured

Underwriters should know their company’s boilerplate provisions well to evaluate

individual policies more efficiently, and they should be aware that boilerplate

provisions vary from insurer to insurer.

Four Ways to Provide IM Coverage

There are four ways to provide Inland Marine coverage. They are:

• Use American Association of Insurance Services (AAIS) or Insurance

Services Office (ISO) forms without altering them. The insurer avoids

development costs at the risk of failing to meet each insured’s special

needs.

• Use an independently developed form. The insurer meets each insured’s

special needs, but incurs high development costs.

• Combine AAIS or ISO provisions with insurer-drafted provisions. The

insurer meets some of its insureds’ special needs while keeping

development costs low

• Use a form drafted by the insured’s broker. The insurer avoids

development costs, but incurs the costs of analyzing the form and

negotiating any changes.

There are four components of an AAIS or ISO IM coverage part. They are:

• Declarations page, which states the premium, limit of insurance,

deductible and other relevant information

• IM insuring agreement or coverage form, which contains the provisions

applicable to the property class covered. There may be multiple coverage

forms in one policy.

• Commercial inland marine conditions form, which contains provisions

common to all inland marine coverage forms

• Endorsements, which provide optional coverages or otherwise modify the

policy. Endorsements may benefit either the insured or the insurer (or,

usually, both.)

Named Perils versus Special Form Coverage

Named perils coverage covers only those perils specifically named in the policy.

Special form coverage covers all risks of direct physical loss except those

specifically excluded. Special form coverage is more advantageous to the

insured because:

• It is broader than named-perils coverage

• It covers unusual (and sometimes unanticipated) causes of loss

• It places the burden of proof on the insurer

Inland Marine Policy Provisions

Coverage Extensions (Additional Coverage)

Coverage extensions cover incidental loss exposures not covered by the basic

insuring agreement. There are five common IM policy extensions:

• Debris removal extension that pays to remove the debris of covered

property destroyed by a covered cause of loss. Most policies limit

coverage to 25% of the amount payable for the direct physical loss.

• Pollutant cleanup and removal extension that pays to remove pollutants

from land or water if the release of pollutants resulted from a covered

cause of loss. In most cases, the limit is low, such as $10,000.

• Newly acquired property extension that provides temporary coverage for

newly acquired property. This extension closes coverage gaps caused

when the policy covers only specifically described premises or real

property, or only scheduled items.

• Fire department service charge extension that pays the charge levied by a

fire department for saving or attempting to save covered property.

• Removal extension (preservation of property extension) that covers

property against all perils, even war, while it is being removed from the

insured’s premises and for a specified number of days after it has been

removed, if the removal was designed to prevent damage by a covered

cause of loss.

Inland Marine Policy Provisions

Exclusions

Exclusions state which perils are not covered and under what circumstances

normally covered perils will not be covered. Insurers use exclusions to remove

coverage for loss exposures that are too severe to insure, are customarily

insured under another policy, require special underwriting and/or can be treated

effectively through loss control. Exclusions exist in three tiers:

1. First tier exclusions preclude coverage for catastrophes (such as

earthquakes, floods and war) that could result in losses suffered by many

insureds at one time. These exclusions state that coverage is not provided

for losses caused either directly or indirectly by excluded perils. Most

inland marine policies exclude war and nuclear reaction. Many inland

marine policies cover earthquakes, floods and hurricanes. Five first-tier

exclusions are:

• Governmental authority exclusion, which excludes loss caused by

seizure or destruction of property by order of governmental authority.

There is partial coverage for property destruction by police and fire

services to prevent the further spread of insured destruction, which is

most commonly fire.

• Nuclear hazard exclusion, which excludes loss caused by nuclear

weapons, nuclear reaction and radiation and radioactive

contamination.

• War exclusion, which excludes loss caused by offensive or defensive

action by government forces and by military action taken against

government forces.

• Earthquake exclusion, which excludes loss caused by earthquake to

property while it is located at the insured’s premises. The insured

often may delete this exclusion for an additional premium. Fire

caused by an earthquake is covered.

• Flood exclusion, which excludes loss caused by flood, surface water,

waves, overflow of any body of water or their spray, all whether driven

by wind or not. This exclusion applies only to property while it is

located at the insured’s premises. Direct loss caused by fire, explosion

or theft caused by flood is covered. Alternative sources of flood

coverage include the National Flood Insurance Program and an IM

difference in conditions (DIC) policy.

2. Second tier exclusions vary greatly among the different coverage forms.

They target risks that do not usually involve concurrent causation. Seven

common second tier exclusions are:

• Voluntary parting exclusion, which excludes losses when the insured

(or the insured’s entrusted property holder) is tricked into voluntarily

turning over covered property, such as when a prospective car buyer

takes a car for a solo test drive and never returns with it.

• Unauthorized instructions exclusion, which excludes losses from

unauthorized instructions to transfer property to any person or any

place.

• Dishonest acts exclusion, which excludes losses from dishonest acts

by the insured or anyone entrusted with the property by the insured.

This exclusion does not apply to dishonest acts by hired carriers or to

employees’ acts of destruction.

• Unexplained disappearance exclusion, which excludes losses without

explanation (because such losses may have been caused by

dishonesty.)

• Inventory shortage exclusion, which excludes losses from shortage

discovered when taking inventory, unless it can be proven that the

shortage resulted from a covered cause of loss. This exclusion exists

because inventory shortages can result from accounting errors as well

as covered causes of loss.

• Delay, loss of use exclusion, which excludes coverage for all but direct

physical losses.

• Other exclusions include electronic disturbance, processing work, theft

from unattended or unlocked vehicles, marring and scratching,

exposure to light, breakage and other causes of loss unique to certain

types of property.

3. Third tier exclusions exclude coverage for losses directly resulting from

third-tier causes, but cover losses caused by ensuing covered causes of

loss. Five common third tier exclusions are:

• Weather conditions exclusion, which excludes losses caused by a

combination of weather conditions and a cause of loss excluded in the

first tier of exclusions.

• Acts or decisions exclusion, which excludes losses caused by “acts or

decisions, including failure to act or decide, by any person, group,

organization or governmental body.”

• Faulty planning, design, materials or maintenance exclusion, which

excludes losses caused by poor workmanship during or after

construction and installation.

• Collapse exclusion, which excludes coverage caused by collapse,

except as specified in the additional coverage collapse provision.

The additional coverage collapse provision covers building collapse

only if caused by a specified cause of loss. That provision was

designed to prevent state courts from applying the doctrine of

concurrent causation, which allows an insured to collect for a loss that

is caused jointly by an excluded peril and a peril not specifically

excluded. In an actual case, flood was the excluded peril and

government incompetence in dam design was the peril not specifically

excluded.

• Nonfortuitous losses exclusion, which excludes losses that are not

accidental, but rather are certain or expected to occur over time.

Nonfortuitous losses include wear and tear, gradual deterioration,

depreciation, mechanical breakdown and inherent vice (such as milk

souring, jewelry thinning, pipes corroding, iron rusting and people

aging.)

Inland Marine Policy Provisions

Conditions

Conditions are specific to and contained in each particular coverage form. They

are as follows:

• Coverage territory: This states the geographical boundaries within which

coverage applies.

• Valuation: Most IM policies value property at actual cash value (ACV,)

which is defined as replacement cost minus accumulated depreciation.

Insurers use valuation guidebooks, sales advertisements, local market

surveys and internet services to determine ACVs.

• Coinsurance clause: This requires insureds to insure property to its full

value or some stipulated percentage of its value (often 80%.) Under the

coinsurance clause, if the property is underinsured, the insurer will

penalize the insured at the time of loss by limiting the loss payment to (the

amount of coverage) divided by (the coinsurance percentage times the

value subject to loss), then minus the deductible, if any. Coinsurance is an

especially difficult requirement for bailees because bailees often find it

difficult to judge the value of others’ property.

• Reporting-form conditions: Some forms allow the insured to report

property values on hand to the insurer at set intervals and to have the

premium adjusted to the reported values. Insureds with widely fluctuating

inventories can pay lower premiums when inventory is low, yet still

maintain proper coverage. Coverage is provided only to the applicable

limit of insurance, even if a report lists a higher value. Most forms contain

a full value reporting clause (honesty clause,) which states that if the

reports were not made for the full value and on time, the amount of any

loss payment will be limited to (the amount declared) divided by (the

actual amount at risk when the report was made.) The separate, late

reporting clause usually limits coverage to the lowest of the amount of the

last report, ¾ of the initial amount of insurance (if the first report was late)

or the amount otherwise payable.

You can determine whether, and for how much, a loss would be covered by

an inland marine insurance policy by applying what you learned in this lesson.

LESSON 3: TRANSIT INSURANCE

Property in transit (cargo) is property being moved from one place to another.

Businesses with a financial interest in property in transit have transit loss

exposures.

The Five Components of Transit Loss Exposures

There are five components of transit loss exposures. They are:

• Property subject to loss: Some types of property are more susceptible to

loss.

• Number of parties involved: Loss exposures get more complicated if more

parties are involved. The three typical parties involved in the transit

exposure are:

o The consignor or shipper (who sells and ships the goods)

o The consignee (who buys and receives the goods)

o The carrier (who transports the goods)

• Mode of transportation: This is the shipping method. Intermodal

transportation ships cargo using two or more modes of transportation. An

intermodal cargo container is designed to fit aboard a truck trailer chassis,

railcar, barge and oceangoing cargo vessel. Intermodal cargo containers

decrease the possibility of damage by some perils (like water damage) but

increase the possibility of loss by other perils (like theft.)

• Terms of sale: This dictates when title (ownership) passes from shipper to

buyer and who pays the freight (shipping charges.) Shipper or consignee

may pay freight charges outright or charge them to the other party through

an increased or discounted sale price.

o FOB (Free On Board) Origin has the buyer assume the loss exposure

once the property is in the custody of the carrier and the bill of lading

has been issued.

o FOB Destination has the seller transport the property and assume the

loss exposure until delivery has been made to the buyer.

• Carrier liability: The circumstances of loss and the contract between the

shipper and the carrier determine if the carrier is liable for a transit loss.

The bill of lading is the carrier’s receipt for property being shipped. The bill

of lading may also contain the contract of carriage between shipper and

carrier. Many shippers and consignees buy transit insurance to cover

losses for which the carrier may not be liable or able to pay. Some

shippers and consignees retain transit losses because the values exposed

to loss are often small and the losses are predictable.

Annual Transit Insurance

Annual transit insurance covers the owner’s property while the property is being

transported by another. Coverage extends to all shipments made during the

policy period (usually one year.) Annual transit coverage is a nonfiled class.

The insured need not own the covered property. Coverage applies only to

property shipped by conveyances or carriers described in the policy. Annual

transit insurance excludes property targeted by thieves (like furs, jewelry and fine

art) or more appropriately covered under another form (like mail and securities.)

Property is only covered while it is in transit. Transit begins when the goods leave

their starting point (if the shipper is the carrier) or when the carrier takes custody

of the goods (if the shipper uses a carrier for hire.) Transit ends when the goods

have been delivered to their destination. Most policies cover property while it’s in

temporary storage, but not while it’s being temporarily processed at another

location. Some policies contain a provision that specifies when coverage begins

and ends. Property in transit is at the insured’s risk if the insured agrees to

provide insurance and/or the insured has title to the property.

Coverage Extensions

Coverage extensions are as follows:

• FOB shipments extension pays for the shipper’s interest in property

shipped FOB when the consignee refuses to pay for the loss.

• Rejected shipments extension pays for damages to rejected shipments

while the property is being returned to the shipper.

• Packing or consolidating companies extension extends coverage to

property in the custody of a packing or consolidating company being used

by named insured or consignee.

• Fraud or deceit extension pays for losses that occur when the insured or

the insured’s agent, messenger, customer or consignee gives covered

property to someone who falsely presents him/herself as the person to

receive goods for shipment or delivery.

• Other extensions include relocation to prevent loss, debris removal and

pollutant removal.

Coverage may be on an “all-risks” or on a named perils basis. Both types of

policies include all first-tier exclusions except for earth movement and flood.

Theft coverage may exclude dishonest acts, voluntary parting, unauthorized

instructions, unexplained disappearance and inventory shortages. Some policies

exclude breakdown of refrigeration equipment. Virtually every policy excludes a

list of specific perils, such as insects, vermin, inherent vice, contamination, war

and nuclear damage, rough handling, breakage, marring, scratching, chipping

and denting.

In the absence of a valuation clause, the insurer is liable for the actual amount of

loss at the time and place of occurrence. The most common valuation clause

sets the property value at its invoice price (the price of the goods shown on the

invoice,) including advanced freight and cost or charges incurred from the time of

shipment. Invoice price is advantageous to the seller because it is easily

determined and it includes the seller’s profit on the sale.

Coverage applies wherever the property is, within the policy’s stated territorial

limits. Land coverage includes imports and exports if they are not covered by

ocean marine coverage. Air and water coverage does not include imports and

exports.

The insurer preserves its right of subrogation against the property carrier or

bailee, which gives an insurer that has already paid a loss the chance to recover

some of that payment. The principal source of subrogation recovery is the

negligent carrier. Many policies include a clause that invalidates the policy if the

insured does anything to impair the insurer’s recovery rights. That clause

sometimes does not apply to ordinary bills of lading. The policy may allow the

insured to accept a released bill of lading, which limits, but does not eliminate,

the carrier’s liability for cargo loss. A released bill of lading may limit coverage to

$0.60 per pound, or some other unreasonably low amount in consideration of a

lower shipping charge.

The ISO mail coverage form insures:

• First class mail

• Certified mail

• USPS express mail

• Registered mail sent by banks, bankers, trust companies, insurers,

security brokers, investment corporations, fiduciary businesses and

corporations acting as security transfer agents or registrars for their own

security issues.

Transit Insurance Extensions in Standard Policies

There are two coverage forms. The first one is ISO Business Owners’ Special

Property Coverage Form. Special form coverage provides a $5,000 extension for

property in transit in motor vehicles owned, leased or operated by the named

insured.

The second one is ISO Building and Personal Property Coverage Form. The

personal property off-premises extension provides $5,000 coverage for personal

property in transit or temporarily at premises not owned, leased or operated by

the named insured. Property must be within the regular coverage territory, not

traveling between territories.

Underwriting Factors for Annual Transit Insurance

There are nine underwriting factors for annual transit insurance. They are:

• Type of property shipped: Many insurers assign a commodity classification

to the property that reflects the property’s damageability and

attractiveness to thieves. Target commodities (like cigarettes, jewelry, blue

jeans and over-the-counter medications) are especially attractive to

thieves. Some commodities require the removal of standard policy

exclusions. For example, museums wouldn’t want to have the fine arts

exclusion in place.

• Value of shipments: Insurers ask for the value of all shipments made at

the insured’s risk annually, categorized by mode of transportation.

Insurers charge different rates for different modes of transportation and

set limits at or near the insured’s usual maximum value per shipment.

• Use of own vehicles: Insurers want to know how many and what types of

vehicles the insured operates, details of the vehicle maintenance program,

how the insured recruits and trains its drivers, whether the insured

backhauls others’ property (or returns with an empty load) and the safety

procedures associated with shipping activities.

• Subrogation potential: Insurers want to know if the insured uses full or

released bills of lading.

• Distance and geographical scope of shipments: Long-haul shipping (trips

longer than 200 miles) is riskier than short-haul shipping. Shipping to and

from high crime areas increases the risk of theft.

• Loss history: A three-year to five-year loss history can indicate potential

loss problems. High-frequency losses indicate the need to establish and/or

improve loss control activities.

• Packing methods: Inadequate packing increases the risk of loss.

• Gross sales: Gross sales indicate the size of the insured’s business and

can be used as the rating basis when the insured would have difficulty

keeping track of shipment values.

• Terms of coverage: Policy details can eliminate coverage for high-risk

activities.

Trip Transit Policy

A trip transit policy covers a single, specified trip. The policy may cover the

owner’s interest or the carrier’s liability. Businesses that ship property

infrequently use trip transit policies.

Businesses with annual transit policies sometimes use trip transit policies to

insure high-value or one-of-a-kind shipments that exceed the limits of the annual

transit policy. Underwriting considerations are the same as for annual transit

policies.

How to Adjust Transit Insurance Claims

There are seven steps to adjust transit insurance claims. They are:

1. Check for unique coverages that may have been added to the policy.

2. For reporting-basis policies, make sure the insured’s reports were up-to-

date as of the date of loss.

3. Verify the facts of loss and ownership of lost property.

4. Get copies of key shipping documents; the bill of lading, shipping invoice,

purchase documents, shipping instructions, inspection records and master

contracts.

5. Inspect the goods to make sure damage has been minimized and

salvageability maximized.

6. Select a salvage firm.

7. Retain and use subrogation rights.

LESSON 4: MOTOR TRUCK CARGO LIABILITY

INSURANCE

Motor Carrier Cargo Liability Exposures

Motor truck cargo (MTC) liability insurance covers motor carriers against cargo

liability claims of shippers and/or consignees for property damaged or lost in

transit. A motor carrier uses automobiles to transport property or persons. A

motor carrier’s cargo liability exposure is the possibility that the carrier will be

legally obligated to pay for loss of or damage to others’ property in its care,

custody or control for purposes of transportation.

Underwriters must understand cargo liability exposures to evaluate MTC and

transit policy applicants.

The History of MTC Liability Insurance

The following is a history of MTC legislation:

• Carmack Amendment, 1906: This made common carriers strictly liable for

cargo losses. Strict liability is liability without regard to fault. Carriers could

limit their liability through released rates, reduced shipping rates in return

for limiting the carrier’s liability for cargo losses.

• Cummins Amendments, 1915 and 1916: These abolished and then

reinstated the use of released rates.

• Motor Carrier Act of 1935: This brought motor carriage and freight

forwarders under Interstate Commerce Commission (ICC) jurisdiction and

Carmack liability rules. A freight forwarder assembles and consolidates

shipments and hires carriers to do the hauling. (Consolidators and packing

houses assemble and consolidate shipments, but do not arrange for their

transport.)

• Motor Carrier Act of 1980: This partly deregulated motor carriage of cargo.

• Trucking Industry Regulatory Reform Act of 1994: This eliminated ICC

tariff-filing requirements.

• ICC Termination Act of 1995: This eliminated much of the Interstate

Commerce Act and gave the ICC’s remaining responsibilities to the US

Department of Transportation (DOT). The DOT further deregulated motor

carriage of cargo, reducing the Carmack Amendment to Section 14706 of

Title 49, which codifies common-law principles that traditionally applied

only to common carriers and applied them to both common and contract

carriers, with some exceptions (such as agricultural carriage and

emergency towing.)

Carrier Liability Defenses

Carriers are not liable for cargo losses caused by:

• Acts of God: Events that occur without human intervention or that cannot

be humanly prevented.

• Acts of the public enemy: Acts of nations or governments at war with the

nation in which the carrier is domiciled.

• Acts of a public authority: Acts taken by public officials acting with

governmental authority.

• Shipper’s fault or neglect: The shipper’s act is the sole cause of loss or

damage.

• Inherent vice: A property condition that tends to make the property slowly

self-destruct, as milk sours, iron rusts and your boss ages.

The carrier may still be held liable for a loss attributable to one of the above

causes if the carrier could have foreseen and/or avoided the loss.

When Does the Carrier’s Loss Exposure Begin?

The carrier’s loss exposure begins when the carrier receives and accepts

property for immediate delivery and the shipper has performed all necessary

actions. The carrier receives and accepts property when it picks up property at

the shipper’s address or when the shipper delivers its own property to the

carrier’s terminal.

When Ddoes the Carrier’s Loss Exposure End?

The carrier’s loss exposure ends when the carrier tenders the goods for delivery

at a reasonable time, place and manner. The consignee’s receipt is evidence of

property delivery. If the consignee does not provide delivery instructions by a

certain date, the carrier’s liability is reduced to that of a warehouse operator and

as such is only responsible for losses resulting from negligence. Negligence is

the failure to exercise the standard of care a reasonably prudent person would

have shown in a similar situation. Negligence requires a breached duty causing

damage.

The Major Types of Bills of Lading and Their Uses

A bill of lading is issued by a common carrier and serves as both a receipt for

goods placed in the custody of the carrier and as a contract between the shipper

and carrier. When the shipper seals the cargo container before delivering it to the

carrier, the carrier stamps the bill of lading with the shipper’s weight, load and

count to signify that the carrier will not be held liable for any loss resulting from

short load or count unless the shipper can prove the container was opened in

transit. The major types of bills of lading and their uses are:

• Released bill of lading: This releases the carrier from liability beyond the

value of the goods stated in the bill. That value may be stated as a

declared dollar amount for the whole load or as a dollar amount per pound

or per 100 pounds. Under such an arrangement, the carrier usually

charges a lower rate, called a released rate.

• Straight bill of lading: This does not include any limitations on value. The

straight bill states if the carrier’s services are to be paid for by the shipper

or by the consignee upon delivery.

• Order bill of lading: This is used for cash-on-delivery arrangements in

which the consignee does not receive the goods until they have been paid

for. An order bill of lading may or may not include liability limits as in a

released bill of lading. Order bills of lading are most common in ocean

commerce.

• Through bill of lading: This covers an interline shipment (a shipment

made by more than one transportation company) from its point of origin to

its destination with one charge for the entire service.

Loss Determination

The amount of loss is the market value of the lost or damaged property. The

claimant may also claim freight charges, but not expenses connected to filing the

claim.

Cargo Liabilities of Different Types of Carriers

There are five different types of carriers for cargo liabilities. They are:

• Rail carriers: These are liable for losses as stipulated in their bills of

lading.

• Domestic water carriers: These have relatively limited liability. In

addition to the usual exemptions from common carrier liability, domestic

water carriers are exempt from losses due to perils of the waters, errors in

navigation, rescue efforts and fire. Domestic water carrier liability is

governed by the Harter Act, unless the shipper and carrier agree to be

governed by the Carriage of Goods by Sea Act (COGSA).

• Domestic air carriers: These are liable for cargo in their custody unless

they can prove the loss or damage was caused by one of the five

defensible causes of loss or the domestic carrier was not negligent.

• Freight forwarders: These have the same liability as motor carriers. Their

liabilities are determined by the terms of each individual bill of lading.

• Freight consolidators: These are liable for their customers’ property as

bailees.

Motor Truck Cargo Insurance

Motor truck cargo insurance, like annual transit insurance, pays for loss or

damage to covered property resulting from a covered loss. Unlike annual transit

insurance, MTC insurance insures the carrier and only pays for losses for which

the carrier was liable. The carriers’ form covers the carrier’s legal liability for the

goods it transports. The owners’ form covers the property owner’s risk of loss to

property being transported.

Common Provisions for the Carriers Form

Here are the common provisions for the carriers’ form:

• Covered property is listed in the policy. Property is not covered unless it

has been accepted for transportation under the insured’s tariff and bill of

lading or shipping receipt. Coverage is restricted to lawful goods and

merchandise. Many insurers impose a lower limit for property at

unspecified terminal locations due to the increased risk of theft. Property

exclusions typically include accounts, bills, currency, deeds, evidences of

debt, notes, securities, jewelry, precious stones, paintings, fine arts and

property carried gratuitously or as an accommodation. Most policies

exclude coverage for loss or damage to the transporting vehicle and/or the

intermodal container. (Damage to vehicles being transported is covered.)

• Coverage extensions include debris removal and pollutant cleanup,

reloading expenses, losses at newly acquired terminals and earned freight

charges (freight that the insured has earned but is unable to collect, often

with a separate limit of coverage.)

• Covered causes of loss: The bill of lading form functions like an “all-risks”

policy, covering all causes of loss except named exclusions. The named

perils form covers all listed perils. Losses from flood, earth movement and

employee theft are usually covered. Losses from breakdown of

refrigeration equipment or violations of law are excluded from coverage.

• Coverage limits: There are separate limits for property losses per vehicle,

per listed terminal, per unlisted and/or new terminal and sometimes per

occurrence.

• Valuation is consistent with or tied to the insured’s legal obligation to pay

for losses.

• Coverage territory is limited to the US, its territories and possessions,

Puerto Rico and Canada.

• Coinsurance is rarely used.

• Gross-receipts reporting clause bases the insurance rate on the insured’s

periodic reports of gross receipts.

• BMC 32 endorsement: Motor carriers operating within federal jurisdiction

must provide evidence of adequate in-force cargo insurance. The

Interstate Commerce Commission (ICC) requires carriers to file form BMC

32 to prove they have their cargo insured. The insurer must file a

corresponding form, BMC 34. Many states require similar state filings from

intrastate and/or interstate carriers. The BMC 32 endorsement requires

the insurer to pay for all losses for which the carrier is legally liable and

which are subject to the jurisdiction of the Interstate Commerce Act,

regardless of policy exclusions. Although the endorsement contains per-

vehicle and per-occurrence limits, there is no limit to the number of claims

the insurer must pay.

Ten Underwriting Factors for MTC Liability Insurance

The ten underwriting factors for MTC liability insurance are:

• Carrier’s financial condition. A weak financial condition may indicate:

o The carrier’s inability to pay premiums and claims

o Poor overall management (which might include poor loss control

efforts)

o Moral hazard (the increased likelihood of intentional losses)

o Morale (also known as attitudinal) hazard (an indifferent attitude toward

preventing losses)

Underwriters assess carriers’ financial conditions by ordering analyses

from the Central Analysis Bureau, Inc. (CAB,) an information service that

rates motor carriers’ financial strengths, and by requesting a copy of the

carrier’s OS&D report, which lists open and unpaid claims against the

carrier for cargo losses.

• Commodities hauled: Target commodities require stringent theft control

measures. Commodities highly susceptible to damage and commodities

with low salvageability require careful handling and underwriting.

• Value of shipments: Underwriters base their coverage limits on the

average and maximum values per truckload.

• Vehicles and drivers: Assess the age and physical condition of the fleet,

vehicle maintenance program, driver hiring and training practices and

driver turnover rate.

• Gross receipts: Underwriters often base the insurance rate on the carrier’s

gross receipts.

• Bill of lading: The terms of the carrier’s bills of lading directly affect the

carrier’s liability.

• Distance and geographic scope of trips: Long-haul trucking and routes

through high-crime areas increase the risk of loss.

• Loss history: Underwriters use loss histories to avoid insuring bad risks

and to develop loss control programs for acceptable risks.

• Terminal exposures: Fire and theft are the main causes of property loss at

terminals. Evaluate the building construction and fire protection and

security features (sprinkler systems, burglar alarms.)

• Owner-operator exposures: An owner-operator owns its own trucks and

hires itself out to carriers to haul loads. Carriers that regularly hire owner-

operators are riskier to insure because the underwriter can’t evaluate

every owner-operator’s financial stability and loss history. Carriers that

regularly hire owner-operators should avoid buying MTC liability insurance

on a scheduled-vehicle basis because it then restricts itself to hiring only

listed owner-operators.

Loss Control Measures for MTC Liability Exposures

The following are control measures for MTC liability exposures:

• Management practices: Document loss control programs and

procedures. Become an active member of national motor carrier

associations. Maintain financial stability.

• Vehicle-related activities: Use equipment appropriate to the goods being

hauled. Have enough extra equipment to allow for regular maintenance.

Assign each driver permanently to a specific vehicle. Make someone

responsible for replacing worn equipment. Have drivers inspect their

vehicles before and after every trip.

• Personnel-related activities: Hire a properly trained person to handle

personnel matters. Develop driver selection standards. Keep a file on

each driver that includes the completed application and a copy of his/her

driver’s license, motor vehicle report and most recent physical exam.

Develop driver disqualification policies. Put new drivers through a driver

orientation program. Periodically put all drivers through refresher training

on the equipment they use.

• Cargo handling practices: Protect cargo from anticipated hazards. Do

not accept poorly packaged and/or damaged cargo for transport. Use

suitable equipment to load cargo onto suitable vehicles. Prevent water

condensation on the cargo. Balance cargo loads. Secure cargo on the

vehicle before beginning transport. Inspect the cargo and its securing

devices before beginning transport and at specified intervals during

transport. Inventory cargo regularly while it sits in the terminal.

• Security measures: Develop security procedures. Never leave cargo

unattended. Keep containers locked. Never drop off a load without having

someone sign for it. Ban unscheduled stops and unauthorized driver

companions.

• Reducing fire and water exposures: To reduce the fire hazard, install

sprinkler systems in terminals, store unused pallets and fuel in a safe

place, develop safe practices for cutting and welding operations in

terminals and install fire doors and firewalls. To reduce the water hazard,

protect cargo from rain before storing it outside, use pallets to keep cargo

off floors, prevent pipes from freezing, fix roof leaks quickly and inspect

sprinklers regularly to prevent malfunctions.

How to Adjust Motor Truck Cargo Liability Claims

There are four steps to adjust motor truck cargo liability claims. They are:

1. Determine coverage: Make sure the claim is actually covered.

2. Determine liability: Don’t pay for covered claims unless the insured is

legally obligated to pay.

3. Inspect damaged property: Determine the cause of loss and make sure

the property has been protected from further loss.

4. Salvage property and subrogate losses: Sell salvageable property and file

liability claims against responsible third parties.

LESSON 5: CONTRACTORS EQUIPMENT INSURANCE

Types of Contractors’ Equipment

Contractors’ equipment includes the tools and machinery used in construction,

renovation, earth moving and other activities typical of contractors.

• Earth-moving equipment: Clears job sites and moves construction

materials within the job site. Earth-moving equipment includes backhoes,

excavators, bulldozers, tractors, power shovels, loaders, scrapers,

graders, rollers, compactors and trenchers. The main hazards are upset

and overturn, fire (from broken hydraulic lines), collision, vandalism,

malicious mischief and theft.

• Site-improvement equipment: Prepares and finishes roads and parking

lots. Site-improvement equipment includes batching and mixing plants,

pavers, pavement planers and finishers. The main hazards are upset and

overturn, fire, flood damage, earthquake damage and vandalism.

• Material-handling equipment: Moves building materials and heavy

objects at the work site or into position within a structure. Material-

handling equipment includes lifts and cranes. The main hazards are

collision, fire, vandalism and theft. Cranes are prone to boom collapse,

generally caused by damage during erection, wind damage, metal fatigue,

weakened cables, lifting loads over the boom’s capacity, uncontrolled

crane movement and/or failure to use stabilizers.

• Miscellaneous contractors’ equipment: Supports or supplements other

contractors’ equipment. Miscellaneous contractors’ equipment includes air

compressors, generators and pumps. The main hazards are fire, collision,

flood damage and theft.

Twelve Types of Contractors’ Operations

The types of contractors’ operations include:

• Building contractor: Clears land and performs framing, concrete and

electrical work. Equipment includes pile drivers, tower cranes, mobile

cranes, derricks and excavators. The main hazards are theft and

vandalism. Other hazards include fire, overturn, collision and boom

collapse.

• Road building contractor: Builds new roads and repairs existing roads.

Equipment includes excavators, graders, asphalt and concrete finishers,

ditchers, loaders, rollers, scrapers, earthmovers, batching and mix plants.

The main hazards are fire, theft, vandalism, collision and upset. Work

done in mountainous terrain adds the hazards of landslide and overturn.

Work that includes blasting adds the hazards of flying debris and

accidental explosion. PML is usually low, unless equipment is

concentrated.

• Utility contractor: Installs water and sewage pipes, power lines,

telephone and cable television lines and other public service systems.

Equipment includes trenchers, digging equipment, backhoes, rough terrain

cranes and pipelaying machinery. The main hazards are fire, theft,

vandalism, collision and upset.

• Waste disposal operations: Treat and dispose of trash. Equipment

includes dozers, loaders, backhoes and specialized compaction and

incineration equipment, which is often old. The main hazards are fire and

losses caused by poor maintenance and operator errors.

• Municipal operations: These are funded and organized by state and

local governments. Operations and hazards are similar to those for

general, road building and utility contractors. The main hazards are fire,

vandalism and theft losses at the storage facility.

• Logging operations: Cut down trees for manufacturing and wood

processing operations. Equipment includes tractors, graders, chippers,

feller bunchers (which grab and cut trees and then lift and bunch the logs),

yarders (which reel logs into a consolidation point) and skidders (self-

propelled vehicles that drag logs.) The main hazards are fire, upset,

overturn, theft, vandalism and collapse of towers and spars.

• Mining operations: Gather solid natural resources underground and at

ground level. There are two main types:

o Underground mining uses shaft, slope and drift mines. Equipment

includes roof drills, roof bolters, loaders, conveyor belts, continuous

miners (which bore into the seam) and longwall miners (which move

horizontally across the seam.) The main hazards are roof collapse,

explosion, fire, blasting damage, shaft flooding and time element

losses when shafts are closed to smother fires.

o Surface mining removes natural resources from close to the surface of

the earth. There are two drilling methods:

� Auger drilling drills up to 200 feet into a seam and propels the

material backward.

� Punch-hole drilling drills up to 1,000 feet into a seam and uses a

conveyor belt to bring the material out. The main hazards are

overturn, fire, boom collapse, blasting, squeeze (pressure on the

drill bit) and highwall collapse (collapse of working face during

boring.)

• Quarry operations: Extract stone, sand, minerals and metal ores from

the earth using ground-level cutting or open-pit mining, in which a pit

slowly forms as the resource is extracted. Equipment includes crushers,

conveyors, air compressors, screens, shovels, drills, haulers, loaders and

bulk materials handling equipment. The main hazards are landslide,

flooding, falling rock, collapse of walls and explosion. Conveyor belt

systems are prone to fire. Mobile equipment is prone to upset, overturn

and collision.

• Well-servicing units: Create and maintain oil and natural gas wells.

Exploratory rigs drill wells to or through the pay zone. The servicing unit

then starts the flow of oil or gas by either of the following processes:

o Shooting the well (detonating an explosive charge in the pay zone.)

o Sand fracturing (using a high-pressure mix of oil and sand or water and

sand to access the resource.)

Servicing units also clean and replace machinery on existing wells to

increase production. The main hazards are blowout (drilling fluid, oil, gas

or water escaping uncontrollably from in the well) and cratering (the

formation of a basin-like opening around the rig caused by the erosive

action of oil, gas, air or water). Exploratory rigs tend to overturn. Sand

fracturing units catch fire.

• Shipyard operations: Build, repair and maintain ships. Equipment

includes forklifts, gantry cranes, cherry pickers, mobile cranes, burning

and welding units and locomotive cranes. The main hazards are fire,

windstorm and equipment falling overboard.

• Stevedoring operations: Load and unload goods on and off ships.

Equipment includes forklifts, cherry pickers, gantry cranes, mechanical

lifts,hydraulic lifts and materials handing equipment. The main hazards are

fire, windstorm and equipment falling overboard.

• Marine contractor: Builds structures on or over water, using mobile

equipment on large ships or waterborne structures. The main hazard is

equipment falling overboard.

Contractors’ Equipment Insurance Policy Provisions

Covered Property

A contractors equipment policy insures against loss of or damage to mobile

machinery, tools and equipment “of a mobile or floating nature” used in the

insured’s business. The property may be owned by the insured or rented or

leased equipment (equipment of others that the insured uses for a fee.)

Many policies offer both:

• Schedule coverage (for high-value items)

• Blanket coverage (for smaller items of less value)

Schedule (also known as scheduled) insurance lists the equipment to be insured.

Schedule insurance usually includes an acquisition clause that automatically

covers newly acquired property up to a specified amount if the insured reports

the acquisition within the specified time period. Schedule insurance lets the

underwriter define the exposure and satisfy insurance-to-value requirements, but

it also eliminates coverage for all undescribed equipment.

Blanket insurance covers all qualifying property with a single amount of

insurance. Blanket insurance is used to insure small tools or other low-valued

equipment. Blanket insurance usually specifies a per-item limit. Blanket

insurance for rented or leased equipment requires the insured to report the cost

of equipment hire or the values at risk at agreed-on intervals.

Excluded Property

Standard exclusions include vehicles designed and principally used for highway

transportation; aircraft; watercraft; property loaned, leased or rented to others;

property while waterborne; property while located underground; tires and tubes

(unless loss is caused by fire, windstorm or theft, or is coincident with an insured

loss); plans, blueprints, designs and specifications; property that is intended to be

or has become a part of a structure; consumable property (fuel, oil, paving

materials, building materials); and contraband. An insurer might agree to cover

property loaned, leased or rented to others if given satisfactory information about

the frequency of loan and the lessee’s location, typical work, reputation and

responsibility for loss or damage to the property.

Covered Perils

Policies are either “all-risks” or named perils. The most common named perils

are fire and lightning, windstorm and hail, explosion, flood, earthquake, collapse

of bridge or culvert, theft, collision, upset, overturn, perils of the sea and

vandalism and malicious mischief. Policies covering underground mining

equipment usually add slate fall, roof fall, cave-in, landslide, squeeze, strikes, riot

and civil commotion to the list of covered perils.

Excluded Perils

Contractors’ equipment policies usually contain all of the first-tier and some or all

of the second-tier exclusions. The insured can add coverage for some theft-

related losses by endorsement. Additional exclusions are:

• Artificially generated electric current exclusion: This excludes damage

caused by short circuits or electrical disturbances within the covered

property.

• Mechanical breakdown exclusion: This excludes coverage for mechanical

breakdown or failure, but not physical loss resulting from breakdown if

caused by a covered peril.

• Work upon the property exclusion: This excludes coverage for

adjustments, servicing or maintenance operations unless caused by an

ensuing fire or explosion.

• Pollution exclusion: This excludes loss caused by the discharge, migration

or release of contaminants or pollutants, unless caused by specified perils.

• Tire damage exclusion: This excludes tire damage and sometimes

vandalism to tires.

• Weight of load exclusion: This eliminates coverage for losses caused by

moving loads that exceed the equipment’s rated capacity.

• Tandem lift exclusion: This eliminates coverage for losses that occur when

two or more cranes are used together to perform one lift.

• Boom operation exclusion: This eliminates coverage for crane and derrick

booms unless the loss is caused by a specified peril.

• Brush or trash burning exclusion: This eliminates coverage when covered

property is used to move brush, trash and other material onto an existing

fire.

• Permafrost or muskeg exclusion: This eliminates coverage when the loss

is caused by ice subsidence or by the property breaking through ice or

sinking into permafrost or muskeg (a sphagnum bog.)

• Tsunami and wave action exclusion: This eliminates coverage for losses

caused by tsunami, tidal wave, tidal action, wave action or sea spray.

Coverage Extensions and Endorsements

Coverage extensions and endorsements include debris removal, pollutant

removal, fire department service charges, fire protection equipment and the

following:

• Rental reimbursement extension: This pays the insured for the extra

expense of renting substitute equipment to replace covered equipment

damaged by a covered peril. Most contractors prefer the rental

reimbursement extension because they can easily rent replacement

equipment and avoid business income losses.

• Business interruption and extra expense extension: This pays the insured

for lost profits and continuing expenses while business is stopped or

curtailed after a covered loss. Contractors with unusual equipment may

prefer the business interruption extension.

Limits

Scheduled policies set a limit for each item and sometimes a catastrophe limit

(the maximum amount the policy will pay for all losses associated with a single

occurrence.) Blanket policies may set a separate limit on any one item and may

include a catastrophe limit.

Valuation

Valuation is usually at actual cash value or ACV (often meaning market value) or

replacement cost. Replacement cost underwriting considerations include the age

and replaceability of the equipment and any moral hazard. A waiver of

depreciation provides replacement cost coverage for some partial losses in an

ACV policy.

Coinsurance

Scheduled policies usually have an 80% coinsurance clause applicable to each

item. Blanket policies usually have a 90% or 100% coinsurance clause.

Deductibles

Deductibles are negotiated on a per-policy basis. A split deductible is a separate

deductible that applies to specified property or perils.

Covered Locations

Covered locations are defined by the policy’s territorial limits.

Note: Eligibility for contractors’ equipment insurance is based on the Nationwide

Marine Definition, which requires such equipment to be of a “mobile and floating

nature” and principally designed for off-road use.

Underwriting Factors in Contractors Equipment Insurance

The eleven underwriting factors in contractors’ equipment insurance are:

1. The equipment’s eligibility for coverage

2. The principal loss exposures

3. The type of equipment including manufacturer, model, age and size

4. The equipment use including maintenance, type of job, type of site and

loss control measures

5. The equipment location including areas of use and storage and their

hazards

6. The management practices including loss control, personnel programs

and financial strength

7. The loss history

8. The probable maximum loss (PML)

9. The methods of maintaining insurance to value

10. The requested limits of business interruption and extra expense insurance

11. The rating method.

The Probable Maximum Loss (PML)

The probable maximum loss (PML) is the most severe loss likely to occur.

Calculation of the PML allows an underwriter to decide whether or not to accept

the risk.

PML is based on three factors:

1. The values of individual pieces of equipment

2. The concentration of equipment at one work site or storage facility

3. The exposure with the potential for the most severe loss

Maintaining Insurance to Value

Maintaining insurance to value prevents the insured from underinsuring his/her

equipment. Value equipment accurately by consulting the Green Guide for

Construction Equipment (which lists current fair market values for construction

equipment and optional attachments), trade journals or a local equipment dealer.

Book value (which is the fair market value depreciated on an accounting basis) is

inappropriate for valuing contractors’ equipment because many contractors

depreciate their values rapidly for tax purposes.

The Two Rating Method

The rate category approach assigns different rates to different types of

equipment depending on their exposures. This approach produces a premium

proportional to the risk, but it’s an awkward arrangement if the insurer buys and

sells a lot of equipment during the coverage period.

The average-rate approach uses a single weighted average rate for all insured

equipment, based on the total value of equipment at policy inception. This

approach is simpler than the rate category approach, but it produces a less

accurate premium

Loss Control for Contractors’ Operations

Crime Controls

Crime controls deter theft and vandalism. Two types of crime controls are

equipment controls and site controls. Equipment controls alter the operation or

appearance of the equipment to deter theft and to increase the likelihood of

identifying stolen equipment. Ways to alter equipment operation include separate

ignition keys, control of those keys, cut-off switches and removal of critical parts.

Ways to alter equipment appearance include repainting with distinctive colors,

attaching emblems and etching or punching serial numbers in both hidden and

obvious places, which makes it easy to identify stolen equipment by keeping a

permanent record of each piece of equipment. Site controls limit access to job

sites, use guards, fences and lighting to deter intruders.

Fire Controls

Fire controls reduce the frequency and severity of fire. Equipment maintenance

and inspection procedures reduce the incidence of damaged wiring, leaking fuel

tanks and broken hydraulic lines that can lead to fire. Don’t base maintenance

schedules on hours of use because hour meters are easily adjusted. Locate the

fuel source away from other equipment, fuel equipment carefully and develop

procedures for fuel spills. Place extinguishers on every piece of equipment and at

every fuelling station. Train personnel in their use.

Overturn Controls

Overturn controls prevent equipment from tipping over during operation. Ways to

implement overturn controls are:

• Driver/operator selection: Hire experienced drivers with good safety

records. Train new drivers by offering incentives for the safe operation of

equipment.

• Transit procedures: Transport equipment on flatbed trailers. Secure the

equipment and load and unload it correctly. When driving equipment on

roads, include an escort vehicle to detect problems ahead and to alert

other motorists.

• Operating procedures: Review soil conditions on the job site. Avoid

operating the equipment at full capacity or with a full load. Keep loads

low. Stay safely away from uneven ground and obstacles, avoid sharp

turns and use stabilizers.

To Adjust Contractors’ Equipment Insurance Claims

There are four steps to adjust contractors’ equipment claims. They are:

1. Verify coverage: Make sure the equipment and the cause of loss are

covered. Pay close attention to whether property is scheduled or

unscheduled, the scope of unique coverages and exclusions and the

policy’s valuation, coinsurance and loss payable provisions.

2. Investigate the claim: Get statements from the owner and the equipment

operator that include:

a. General information about the business

b. General details of the loss

c. A description of the damaged equipment

d. Prior losses to the equipment

e. Purchase and service history of the equipment

f. A description of the particular job being performed at the time of

loss

g. Financing details

h. Contracts involving the damaged equipment

i. Additional relevant facts

i. Investigate questionable losses

ii. Call in experts if needed

iii. Confirm official reports and contracts

3. Determine damages: A constructive total loss has the insurer pay the total

value of the equipment and sell the damaged property for salvage, even if

the equipment can be repaired. Insurers declare a constructive total loss

when the repair cost is higher than the amount needed to scrap the

equipment, minus its salvage value. If the loss is not a total or constructive

total loss, the insurer should call in experts as needed to determine the

amount of loss.

4. Recover: Subrogate against negligent third parties. Sell the damaged

equipment for salvage.

LESSON 6: BUILDERS’ RISK POLICIES AND

INSTALLATION FLOATERS

Builders’ Risk Policies and Installation Floaters

A builders’ risk policy covers a building or structure while under construction, plus

building materials and supplies while at the site, in storage or in transport to the

site. The property owner usually buys the policy. An installation floater covers

property to be installed in a building or structure while at the site, in storage or in

transport to the site. The contractor usually buys the policy.

Installation floaters may cover:

• The contractor’s interest in others’ property it will install

• The supplier’s interest in property it has sold but not yet installed

• The property owner’s interest in its own property

The construction contract between a project owner and a contactor specifies:

• What will be built

• When it will be built

• Where it will be built

• The cost of the project

• The details regarding insurance

The Provisions of Builders’ Risk Policies

Covered Property

Covered property is property undergoing construction, reconstruction, repair or

alteration, and for which the insured is liable. Types of insured property include

machinery, equipment, materials, supplies and fixtures that will become a

permanent part of the structure and materials and supplies owned by others for

which the insured is responsible. Coverage may also include forms (which hold

concrete in place until it hardens), scaffolding (support systems on which workers

stand while performing their work), falsework (temporary structures that support

the building until it’s strong enough to support itself), temporary structures and

the cost of debris removal.

Excluded Property

Excluded property may include land, water, automobiles, contractors’ mobile

equipment and tools, watercraft, aircraft, existing property to which alterations or

additions are being made and property in storage not specifically assigned to the

job site.

Covered Perils

Coverage is for “all-risks,” with special attention to the key loss exposures such

as:

• Flood and earthquake: Coverage may be added for additional premium,

and each peril is usually subject to special deductibles and limits

• Collapse: Some policies cover collapse by specified perils; others cover

collapse unless the cause of loss is specifically excluded

• Weather conditions: Some policies exclude coverage if weather conditions

contribute concurrently or in sequence with specified excluded perils

• Faulty design, materials or work: Most policies exclude the cost of redoing

part of the project caused by faulty design, materials or work, but include

physical loss caused by faulty design, materials or work

• Theft: Exclusions limit the scope of theft coverage

Time Period Covered

Coverage may begin when transit commences or when the insured acquires an

insurable interest. Coverage ends at the earliest of the following times:

• When the insured’s financial interest ceases

• When the buyer accepts the property as complete

• When the policy expires or is cancelled

• When the property is put to its intended use

• A specified number of days after construction has ceased

• When the insured abandons construction

Builders’ risk insurers do not like to insure structures being built on speculation

that are nearing completion but have not been sold because the builder is likely

to prolong construction to avoid buying a more expensive policy to protect the

finished—and unoccupied—property.

Limits

There are separate limits for property in transit, at the job site and at locations

other than the job site. There may be separate earthquake and flood limits.

Extensions

BI and EE exclude coverage for delay caused by labor strikes, inefficient

management, heavy rain and excluded perils.

Coverage may be extended to include:

1. Valuable papers and records (blueprints, plans, drawings and data-

processing media)

2. Trees, shrubs and plants (up to a stated limit per item and per occurrence)

3. Ordinance or law (to cover the increased cost of reconstructing a

damaged or destroyed building because ordinance or law requires new

features or demolition and rebuilding)

4. Testing (to cover losses caused by cold testing (testing of less hazardous

equipment, such as electrical or hydrostatic building components) and/or

hot testing (testing of hazardous equipment, such as boilers and

processing equipment)

5. Soft costs (expenses incurred as a result of completion delay, including

additional bank interest to extend the loan, advertising expenses,

additional taxes and commission expense for real estate brokers related to

re-renting or re-leasing the property)

6. Business income and extra expense insurance covers business income

losses (loss of rent or earnings caused by a covered completion delay)

and extra expenses (costs incurred to continue operations despite a

covered completion delay)

Valuation

The settlement basis is the cost of materials and labor to repair or replace

damaged property. Insurers encourage their insureds to maintain insurance to

value by including the equivalent to a 100% coinsurance clause that requires the

insured to insure the project at its full completed value or incur a penalty on all

loss adjustments.

Premiums

Policies may be written on a reporting or non-reporting basis. The completed

value non-reporting form charges a fixed premium for the expected completed

value of the property under construction. The value reporting form charges a

monthly premium based on monthly reported values, has the equivalent of 100%

coinsurance in its honesty clause and charges either a monthly premium or a

fixed, one-time premium based on monthly reports of the expected completed

values of all structures started during the preceding month. The completed value

rate under the completed value reporting form is expressed as a fraction of the

completed value per month (e.g., $0.10 per $100 per month) and may be used to

compute a monthly or a fixed premium.

Rating

Each insurer has its own rating formula. The rate usually equals a percentage of

the rate that would be charged for the completed building (often 55%), which

overcharges the insured during the early stages of construction and under-

charges him/her during the later stages. Rating also reflects the type of building

being constructed and its fire resistance.

The Provisions of Installation Floaters

Covered Property

Covered property may include any property being installed for which the insured

is liable. Installation floaters usually cover plumbing, heating, cooling and

electrical systems. There is no coverage for money, securities, plans, blueprints,

tools or equipment that will not be installed.

Covered Perils

Coverage is “all-risks,” excluding wear and tear, gradual deterioration and

inherent vice. Coverage may also exclude mechanical breakdown, artificially

generated electricity, design errors, faulty workmanship and materials and

explosion or rupture of steam boilers.

Time Period Covered

Time period covered is the same as with builders’ risk coverage.

Limits

There are separate limits for property in transit and at the job site.

Valuation

The usual method is actual cash value for the insured’s own property and the

amount of liability for property of others.

Premiums

Policies may be written on a reporting basis.

Ratings

Each insurer has its own rating formula. A common formula determines the

average fire contents rate of the building in which the property is to be installed

and loads the rate for theft, vandalism, transportation and all other covered perils.

Suggest coverage and recommend loss control measures for a case study by

applying what you have learned.

The Underwriting Of Builders’ Risk Policies

Fire

Underwriters evaluate the type of construction, the size of the project and the

contractor’s ability to handle a project of that size, work force, financial stability

and loss history.

Underwriters also evaluate specific underwriting factors such as fire, windstorm,

collapse, theft, earthquake and flood, breakage of structural components,

renovation, testing, storage and transit exposures and probable maximum loss.

The four main factors under fire are Construction, Occupancy, Protection and

External exposure (mnemonic: COPE).

Construction describes how a building is being or has been built. There are six

common types of construction, here arranged from least to most fire resistive:

• Frame has combustible exterior walls

• Joisted masonry has masonry exterior walls and combustible interior

walls, floors and roof

• Non-combustible has non-combustible exterior walls, floors and roof, often

of metal, supported by non-combustible material

• Masonry non-combustible has masonry exterior walls and non-

combustible floors and roof

• Modified fire resistive has masonry or fire resistive exterior walls, floors

and roof and can resist fire (1,700 degrees Fahrenheit) for at least one but

not more than two hours

• Fire resistive has masonry or fire resistive exterior walls, floors and roof

and can resist fire for at least two hours

Occupancy describes a building’s purpose and use. Some occupancies are very

hazardous (cooking and welding). Other occupancies are not very hazardous

(clothing stores and pet stores).

Protection includes both public and private fire protection. Fire protection consists

of fire prevention activities and equipment that reduce the frequency of fire,

detect fire and alert fire fighting personnel, and fire suppression activities and

equipment that reduce the severity of fire by containing and extinguishing fire.

Underwriters use public protection classifications (PPCs) to evaluate public

protection. The Insurance Services Office (ISO) assigns a PPC to each

municipality to indicate the quality of its fire protection (from 1—the best—to 10—

no protection). Buildings under construction sometimes have no nearby hydrants

and poor access for fire trucks, reducing the municipality’s ability to provide

adequate protection. When volunteers provide the local fire protection, the

underwriter should make sure there are a source of sufficient water close to the

job site and roads to the site and the water source.

External exposure is the possibility of fire spreading to the insured building from

nearby structures or through nearby media such as brush (a.k.a., exposing

properties).

Windstorm

High winds can damage and collapse buildings under construction. Underwriters

should consider the geographical location and building schedule for each

structure. It’s best to insure projects that will be built between hurricane seasons.

Collapse

Buildings under construction are weak until completed, increasing their likelihood

of collapse. The main causes of collapse are faulty design, faulty welds or

improper bolting in steel superstructures, improper bracing and inadequate

curing of poured concrete. In large projects, a clerk of the works—often a

professional engineer—provides day-to-day building supervision. The clerk of the

works can stop all work and require unacceptable work to be redone.

Theft

Builders’ risk theft losses are low severity but high frequency. Many underwriters

demand 24-hour guard service, nighttime lighting and perimeter fencing.

Earthquake and Flood

Use earthquake and flood maps to identify danger zones.

Breakage of Structural Components

Evaluate the exposure carefully; projects involving delicate and expensive

machinery can generate large losses.

Renovation

Renovations can be more hazardous than new construction because they involve

partial demolitions, structural alterations, cutting through firewalls, disabled

sprinklers and hot work near old, dry timbers. Underwriters may require a

separate insurance limit for the existing structure, separate valuation provisions

for old and new construction and separate coinsurance provisions tied to the

ACV of the existing property at the time of loss.

Testing

The testing exposure depends on the equipment being tested and on the testing

methods.

Storage and Transit Exposures

Determine if these exposures are unusually high.

Probable Maximum Loss (PML)

PML is usually based on potential fire loss, often ignoring the assumptions that

underlie the PML for a completed building (operational sprinkler system, timely

response by the local fire department and functional fire controls).

Note: The underwriting of installation floaters is the same as with builders’ risk

coverage.

Fire

There are four ways to reduce fire loss:

1. Control ignition sources: Hot work exposures stem from cutting, welding,

soldering, brazing, grinding, thermal spraying and similar operations that

produce heat and sparks. Control hot work exposures by developing a

hot-work permit program to minimize hot-work fire hazards, keeping

combustible materials away from hot-work areas, keeping fire

extinguishers close to hot-work areas, and monitoring the area for fires.

Control electrical exposures by using a properly fused temporary power

system and disconnecting it at the end of each day. Control temporary

heating exposures by allowing only approved heaters into the building,

keeping combustible material away from heaters, providing adequate

support for each heater and periodically inspecting heaters.

2. Store and handle flammable and combustible liquids carefully: Keep only

a one-day supply of hazardous material in the building, use approved or

UL-listed containers and keep fuel tanks at least 50 feet from the building,

properly diked and grounded.

3. Practice good housekeeping: Keep the site clear of combustible material.

Put dumpsters away from the building and its storage areas.

4. Provide adequate fire protection equipment: Keep the right kinds of fire

extinguishers in the building, inspect them regularly and make sure

employees know how to use them.

Water

Ways to control water risks are to inspect piping, valves and drains regularly.

Don’t store building material in basements. Protect susceptible materials from

rain.

Wind

Attach roofing and siding securely at the end of each workday and before severe

weather. Remove snow from roofs, brace walls and anchor mobile offices and

lightweight building materials.

Theft and Vandalism

Physical controls include limited vehicle access, fencing, guard services, local

police patrols, locking up all building materials and using roving patrols in

unfenced areas. Procedural controls include scheduling deliveries to avoid

stockpiling building materials and increasing security as on-site values increase.

How to Handle Builders’ Risk Claims

There are three steps to handle builders’ risk claims. They are:

1. Verify coverage: Make sure the policy covers the loss.

2. Investigate the claim: Inspect the construction site and gather all relevant

contracts.

3. Determine the amount of loss: Call in experts as needed.

LESSON 7: DEALERS’ POLICIES AND RELATED

COVERAGES

Dealers’ Policies and Related Coverages

A dealers’ policy is the inland marine policy designed to meet the specific needs

of merchants, including retailers, wholesalers and distributors. Dealers’ policies

are often called block policies (from the French en bloc, meaning ”all together”)

because they were among the first policies to offer “all-risks” coverage.

Dealers Eligible for the Inland Marine Dealers’ Policy

Dealers eligible for the inland marine dealers’ policy include jewelers, furriers and

dealers of cameras, coins, fine arts, mobile equipment, musical instruments,

stamps and other property that the ultimate buyer could cover under an IM policy

(such as bicycles and computers).

Dealers’ Policy Provisions

Covered Property

The policy covers the insured’s “stock in trade” (inventory) and similar property of

others in the insured’s care, custody or control. Coverage therefore extends to

property on consignment (property of others that the dealer holds and pays for

when it is sold to a third party). Coverage of others’ property allows the insured to

preserve customer goodwill by paying for those property losses even though the

insured isn’t liable for them. Some dealers’ policies exclude property of others

stored by the insured. Dealers’ policies can be extended, for an additional

premium, to cover furniture, fixtures, office supplies, machinery, tools, fittings,

patterns, dies, molds, models, tenants’ improvements and betterments and

money in locked safes or vaults on the insured’s premises. All eligible property is

covered while on the premises, in transit or in the custody of the insured’s

employees, or located elsewhere. Separate limits and exclusions apply to each

category.

Property not covered varies with each contract.

Covered Perils

Coverage is usually “all risks” with the usual IM and commercial property

exclusions. Many policies cover earthquake and flood. When the policy covers

property susceptible to theft, the policy typically excludes mysterious

disappearance, inventory shortage, dishonest acts, voluntary parting and

unauthorized instructions plus these additional exclusions:

• Unattended vehicle exclusion excludes theft coverage from any vehicle

unless someone is in or with the vehicle at the time of theft

• Unlocked vehicle exclusion excludes theft coverage from any vehicle

unless the vehicle is locked at the time of theft and there are visible signs

of forced entry

• Show windows exclusion excludes jewelers’ block coverage for smash-

and-grab thefts from show windows unless the policy lists a limit for show

window coverage

• Shortage losses to property in transit exclusion excludes jeweler’s block

coverage for missing property unaccompanied by evidence of theft

• Processing or work exclusion excludes coverage for losses caused by

processing or work on the property, except for resulting fire and explosion

losses

• Breakage exclusion excludes breakage of fragile items, except by

specified perils

• The named-perils approach limits theft coverage by naming and defining

the covered perils

Coinsurance

Some policies use a coinsurance provision; others do not.

Reporting Form

The reporting form is appropriate if the insured’s inventory values tend to

fluctuate and if the insured will actually report accurate values.

Peak Season Limit

Peak season limit is an alternative to the reporting form that applies a higher

insurance limit during the insured’s peak season, as described in the policy.

Valuation

Valuation varies among policies. Some policies value unsold inventory at ACV—

sold but undelivered property at its selling price—and others’ property at ACV, or

the amount for which the insured is liable. Dealers must maintain accurate and

current inventory values because some dealers’ raw materials fluctuate in value.

Most dealers’ policies contain a provision requiring insureds to keep accurate

inventory records.

Protective Safeguards Provision

Protective safeguards provision suspends coverage if the insured fails to

maintain and use protective safeguards (e.g., burglar alarms, sprinklers, guard

services), until those safeguards are back in place. Although some courts don’t

enforce some safeguard provisions, insurers still use them to remind insureds of

the importance of protective safeguards.

Proposal

Proposal is a special application form that becomes part of the policy. If the

insured provides false information on the application, the insurer may void the

policy for misrepresentation. With an attached proposal, the insurer needn’t

prove fraud.

How to Underwrite Dealers’ Policies

Analyze the proposal: The typical dealers’ policy asks the applicant to provide a

five-year loss history, information about showcases, show windows, alarms,

inventory values for the past year and descriptions of safes and vaults on the

premises. The applicant must also describe its inventory records, state the

percentages of property kept in locked enclosures outside of business hours and

request specific insurance limits.

Evaluate the theft exposure: Evaluate the type of merchandise sold, its

likelihood of theft and any loss control measures already in place. Underwriters

are more concerned with outside theft since most dealers’ policies exclude theft

committed by employees, the insured or others entrusted with covered property.

There are four categories of loss control for theft:

1. Physical protection includes passive restraints, safes and vaults:

• Passive restraints: Include door locks, bars, gates, grills and

breakage-resistant glass or plastic in show windows

• Safes include:

o Fire-resistive safes (protect their contents from fire and have

square or rectangular doors).

o Burglar-resistant safes (use thick walls and sophisticated

locks to protect their contents against theft and have round

doors). Most underwriters accept only Underwriters

Laboratories (UL)-labeled safes as burglar resistant. To

maximize the effectiveness of a burglar-resistant safe, the

insured should use the safe, secure it to the floor, make it

visible from outside the building, equip it with an alarm and

limit both the number keys in circulation and the number of

employees with the safe’s combination.

• Vaults: A vault is a room, built into the building, designed to protect

its contents from theft, fire and other causes of loss

2. Alarm systems indicate the presence of intruders. There are three levels

of protection:

• Perimeter protection signals unauthorized building entry

• Area protection protects specific areas within a building

• Object protection protects specific objects from theft. A local alarm

sounds an alarm only at the insured’s premises. A central station

alarm sounds an alarm usually at a central monitoring company but

sometimes at a local police station, ensuring a quick and

appropriate response. A holdup alarm is a central station alarm

triggered by an employee during a robber. Underwriters prefer UL-

certified alarm systems that are technologically current, appropriate

to the occupancy, continuously monitored and tested regularly.

Underwriters prefer alarm systems to protect all building openings

and to detect motion. Alarm systems don’t protect fully because

they don’t prevent robberies and many false alarms reduce police

response times.

3. Guards patrol the premises after (and sometimes during) business hours

4. Surveillance cameras and close-circuit television: Allows those monitoring

the cameras to detect intruders

Protect property: Protect property in the open by installing fences and bright

lighting, employing guards, using alarm systems designed to protect outdoor

property, installing surveillance cameras, storing the property in open spaces

where thieves can’t hide and physically securing the property.

Evaluate the fire exposure: Review the building’s construction, occupancy,

protection and exposures (COPE). Also review its special hazards.

Evaluate the flood and earthquake exposures: Evaluate the flood exposure

for the building and all yard locations, and evaluate the insured’s emergency

flood and earthquake plans

How to Handle Dealers’ Policy Claims

There are three steps to handle dealers’ policy claims. They are:

1. Make sure coverage applies: Be especially careful that all protective

safeguards were in good working order and in operation at the time of

loss.

2. Investigate the loss: Interview the insured, collect all needed documents

(inventories, receipts) and consider the possibility of subrogation against

the landlord (if the insured was a tenant).

3. Value the property: Use experts to value property.

4. Reduce further damage: Repair the property or maximize the salvage.

Floor Plan Policy

A floor plan is an agreement under which a dealer borrows money to buy

merchandise and pays off the loan as the merchandise is sold. The merchandise

is the loan’s collateral. The lender’s right to the property is the encumbrance. A

floor plan policy covers floor plan merchandise other than autos. Covered

merchandise must be encumbered to the lender. The dealer must not be able to

sell it unless the lender releases its encumbrance.

The single-interest floor plan policy covers either the dealer’s or the lender’s

interest in the property. The dual-interest floor plan policy covers both the

dealer’s and the lender’s interests. The ISO’s filed forms are on a reporting basis

and provide coverage similar to that of dealers’ policies. There is no earthquake

exclusion. Covered property not yet sold is valued at the least of restoration cost,

replacement cost or the price the dealer paid. The ISO single-interest form limits

loss payments to the insured’s proportional interest in the property at the time of

loss. The ISO’s dual-interest forms state that the lender’s coverage is not

affected by the dealer’s failure to meet policy conditions.

Underwriting: Evaluate theft, fire, other perils at the dealer’s premises, the transit

exposure, the earthquake exposure and the merchandise’s attractiveness to

thieves.

Installment Sales Policy

Installment sales policy covers the retailer’s, manufacturer’s or bank’s interest in

property other than autos while in transit to, or in the custody of, a buyer. The loss

exposure arises out of dealers’ conditional sales contracts, which let buyers take

possession of property after making down payments and agreeing to make periodic

payments. The buyer receives title to the property when he has finished paying for

it. The single interest policy covers the only seller’s interest in the property. The

dual interest policy covers the seller’s and the buyer’s interests in the property.

Coverage is on a reporting basis.

Underwriting: Evaluate the risks of the particular merchandise and the dealer’s

desire and ability to attract responsible customers.

Leased Property Policy

Leased property policy covers the lessor’s interest in property while in transit to,

or in the custody of, any lessee. It is only issued as a single-interest policy

because the lessor retains complete ownership of the property. Coverage is on a

reporting basis.

Underwriting: Evaluate the risks of the particular merchandise, the storage

facility’s exposures to fire, theft, and other perils and the dealer’s desire and

ability to attract responsible customers.

LESSON 8: BAILEE AND BAILOR COVERAGES

Bailee Liabilities

Bailment delivers the property of one person (the bailor) to another person (the

bailee) to be held for some special purpose. Three criteria prove the existence of

a bailment. They are:

• The bailor owns or has the right to possess the property

• The bailor delivers exclusive possession of and control over the property

to the bailee

• The bailee knowingly accepts the property and agrees to return it as

directed by the bailee

There are two types of bailee loss exposures: the first one is that there is a legal

liability for losses for which the bailee is legally liable. Bailees are liable for losses

if they do not take reasonable and necessary steps to safeguard property; the

second one is loss of customer goodwill, which is the loss of customers due to

their uncompensated property losses. Bailees not legally at fault often replace

damaged property to maintain good customer relations.

The bailee owes the bailor ordinary care for the safety of the property and is

liable for ordinary negligence. The care required of a bailee is less than that of a

common carrier. The bailee must demonstrate the exercise of due care to avoid

charges of negligence for property damage. The bailee’s liability may be

extended by oral or written contract with the bailor, advertisement or performing

actions beyond the bailment contract. The bailee may limit its liability by limiting

the property value(s) stated in the bailment contract.

There are three types of bailment:

1. Gratuitous bailment for the bailor’s benefit benefits only the bailor and

does not compensate the bailee. Example: “Patrick, will you take care of

our cat Tyke while we’re away?”

2. Gratuitous bailment for the bailee’s benefit benefits only the bailee and

does not compensate the bailor. Example: “Uncle Ray, may I use your

560SL for the prom?”

3. Bailment for hire (commercial bailment) benefits both parties, as the bailee

receives or pays a fee for holding the property. Example: “Mr. Taylor, may

I rent 12 chairs and a table for this weekend?”

Bailees’ Customers’ Policy

Bailees’ customers’ policy covers property loss irrespective of the bailee’s

liability. The policy is issued in the bailee’s name. Bailees choose this coverage

when their failure to pay for losses (for which they are not legally liable) would

result in a poor public image and loss of goodwill.

Note: Bailees’ customers’ insurance is dual interest insurance because it covers

both the bailee’s interest in property due to potential legal liability and loss of

goodwill, and the bailors’ interests in their own property.

Provisions

Covered property includes any property accepted for the type of service or

processing described in the policy. Some policies explicitly describe covered

property to narrow the scope of coverage. Some policies cover property held in

storage; others do not.

Excluded property includes common IM property exclusions (contraband,

property sold and delivered) plus valuable papers and records, jewelry and

precious metals, autos, watercraft, animals, delicate or highly valuable property

that may be serviced in the bailee’s operations, property services for no charge

and property in the custody of other bailees.

Excluded perils: Both the named-perils and “all risks” forms typically exclude:

• Mysterious disappearance

• Inventory shortage

• Employee dishonesty

• Theft of goods left overnight in an unsecured vehicle

• Misdelivery or careless destruction of goods

• Loss caused by processing or work on the property unless by ensuing fire

or explosion

• Changes or extremes in atmosphere, temperature or humidity

• Express or implied extension of bailee liability to guarantee processing

results

• Express or implied extension of bailee liability to guarantee insurance

coverage for the customers’ benefit

Covered locations: Property is covered at the insured’s premises, as described in

the declarations, at others’ premises, as described in the declarations, and while

being transported between locations in the coverage territory.

Coverage extensions are often subject to sublimits. They are:

• Confusion of property extension covers the insured’s inability to identify

the property’s owners after covered loss by a covered peril

• Processing damage extension cover loss caused by work on the property

• Property in storage extension covers stored property of others. Some

policies limit coverage to property accepted for processing work. Some

policies limit coverage to property accepted for processing work. Some

policies require the insured to issue storage receipts

• Earned charges extension: Covers uncollectible storage charges (and

sometimes processing charges) on lost property

• Defense of suits extension: Covers the insured’s cost of defending itself

against claims alleging covered losses

Limits vary by policy. Some policies list many per-occurrence limits. Others list no

limits other than the ACV of the damage property.

Valuation: Most policies value property at its ACV at the time of loss.

Underwriting and Loss Control

Evaluate the applicant’s general transit, fire and theft exposures, unique

exposures and existing loss control measures. For example, dry cleaning plants

are prone to fire, boiler explosions, mechanical failures and theft.

An underwriter should assess the average and maximum property values in the

dry cleaner’s custody at any one time, its use of flammable solvents, the amount

of flammable solvents stored on the premises, its storage and disposal practices

for those solvents, its housekeeping practices, its fire detection and suppression

systems and its theft security measures for property in transit.

Insurance to Value

Customer property values on an insured’s premises fluctuate due to:

• Large volumes of diverse property

• Rapid turnover of property

• Changing property values

• Seasonal changes

Different types of property require different valuation methods. The value of

covered property on a bailee’s premises depends on the types of properties on

its premises, the size of its storage facilities and its annual gross receipts (which

indicate turnover).

The formula for estimating the value of customers’ property:

(Gross Receipts) (Value of Each Order in Proportion to Service Charge)

Number of Days Open per Year / Average Turnover Time per Order

or

Total Value of Goods for Twelve Months / Number of Complete Turnovers

Reporting form policies base their premiums on the insured’s gross receipts for

each reporting period.

Claims adjustment

The four-step claims adjustment procedure:

Verify coverage: Make sure the policy covers the loss location. Determine which

coverage extensions apply to the loss and whether the policy covers defense

costs.

Investigate the claim: Get a statement from the insured to confirm the facts of

the loss. Get and review all relevant records, contracts and receipts. Get a

cause-and-origin expert to verify the cause of loss.

Determine damages: Value the property accurately. Protect it from further loss.

Subrogate and salvage: Subrogate against third parties if possible. Hire a

salvor to repair and sell the damaged property.

Furriers’ customers’ insurance is bailees’ customers’ insurance for furriers. It

differs from bailees’ customers’ insurance in six ways: Furriers’ customers’

insurance:

1. Offers broader coverage

2. Requires the insured to issue a receipt to each customer, stating each

article’s value

3. Limits recovery to the least of the receipt amount, ACV or

repair/replacement cost

4. Covers the insured’s legal liability beyond the receipt amount (excess

legal liability coverage)

5. Requires the insured to use protective safeguards

6. Lets the insured issue certificates of insurance to its customers

The Uniform Commercial Code (UCC) governs commercial transactions within

the US and includes provisions that relate directly to warehousing and

warehouse operator liabilities.

The UCC defines a warehouse operator as one engaged in the business of

storing goods for hire. The UCC states that a warehouse receipt should include

nine items of information:

• The warehouse location

• The date of issue

• The receipt number (receipts should be numbered consecutively)

• The individual or business to whom the goods will be delivered at the end

of storage

• The rate of storage and handling charges

• A description of the goods of their packages

• The warehouse operator’s signature

• A statement of ownership if the warehouse operator owns or partially

owns the goods

• The amount of advances made or liabilities incurred for which the

warehouse operator owns or partially owns the goods or claims a security

interest

Warehouse operators can limit their legal liability through storage receipts, but

such limitations are not always held up in court.

A dry-storage warehouse stores goods that do not require refrigeration. A cold-

storage warehouse stores perishable or temperature-sensitive property.

Warehouse operators that provide logistics services produce and/or distribute

customers’ goods as well as store them. Such warehousers may need additional

coverage for goods accepted for processing and motor truck cargo liability.

There are three types of warehouses:

1. Private warehouse: Stores a retailer’s or manufacturer’s own goods

2. Public warehouse: Stores the property of anyone willing to pay the

warehouser’s charges and accept its terms

3. Bonded warehouse: Stores imports, pending the owner’s payment of US

customs duties

Warehouse Operators’ Legal Liability (WHLL) Insurance

Warehouse operators’ legal liability (WHLL) insurance covers the warehouse

operator’s legal liability as a bailee for negligence and defense costs. There is no

coverage for loss of goodwill.

Provisions

WHLL policies are unfiled. The insuring clause contains the insurer’s agreement

to pay all sums owed by the insured due to legal liability and defense.

Excluded Property

An excluded property is a property for which the insured has assumed excess

liability or been released from liability, is not listed in a warehouse receipt, is in

transit, is of high value or susceptible to theft, has live plants and animals, is

requiring refrigeration and is held in a leased storage space (because the insured

will have little access to the storage unit or knowledge of its contents).

Excluded Perils

The policy excludes common first-, second- and third-tier exclusions plus:

• Contamination, deterioration and latent defect

• Processing or work on the property

• Inventory shortage

• Changes or extremes in temperature or humidity

• Breakdown of refrigeration equipment

Additional coverages include defense costs, preservation of property, debris

removal, pollutant cleanup and removal and earned warehouse charges.

Refrigerated warehouses may add an endorsement to cover damage due to

temperature changes. There is usually a separate limit per location, a limit for

unnamed locations and a catastrophe limit. There is no coinsurance clause.

Premiums may be flat annual or on a gross-receipts reporting basis. Rating is

based on the average amount at risk, usually estimated after an inspection of the

premises.

Underwriting is based on the:

• Applicant’s physical survey report, financial statements and claims history

• Terms of the warehouse receipt

• Types of goods stored

• Fire and crime protection

• Fluctuation in the amounts and values of goods stored

• Average and probable maximum losses

• Storage configurations

• Housekeeping and safety standards

• Accuracy of inventory records

• Deductible

Warehouse operators can demonstrate an adequate degree of care for others’

property through suitable fire and theft protection, good housekeeping practices,

properly trained personnel and accurate records. Warehouse operators need

accurate records of goods to track fluctuating property values and changing loss

exposures, reduce inventory shortages and defend against negligence charges.

Loss Control

Loss control reduces high-rack storage. High-rack storage lifts and stacks goods

onto shelving, which increases the fire exposure by reducing sprinklers’

effectiveness, keeps aisles between storage areas debris-free, installs sprinkler

heads within storage racks, protect against burglary with guard services, locks,

fences and alarm systems, installs extra protection for items more susceptible to

theft, does not store goods outside the warehouse, screens and trains

employees and maintains and properly operates machinery.

Claims Adjustment

The same four step procedure is used for claim adjustments in Warehouse

Operators’ Legal Liability Insurance as in Bailees’ Customers’ Claims.

Bailees can also cover some or all of their loss exposures through commercial

property policies, including business owners’ policies and commercial crime

policies, commercial auto policies and other marine policies, such as motor truck

cargo policies, builders’ risk policies, dealers’ policies, museum collection policies

and marina operators’ legal liability policies.

Garment Contractors’ Floater

Garment contractors’ floater is the bailor policy that covers a garment

manufacturer’s interest in its own property while in the custody of, or en route to,

a garment contractor’s premises.

Covered Property

Covered property includes:

• Types of property owned by the insured and described in the declarations

• Raw materials, finished and unfinished garments and their containers

• Similar property of others for which the insured is liable

• Property consigned to the insured

• Property for which the insured has made an advance payment

Excluded Property

Excluded property includes any types of garments specifically excluded in the

policy and any property more properly covered under another IM policy.

Covered Locations

Property is covered while on the insured’s premises, on the insured’s contractors’

premises and in transit between the insured, its contractors and its suppliers.

Covered Perils

Coverage is either on a named-perils or “all-risks” basis. Exclusions are either

general IM exclusions or specific to the garment manufacturing industry. The

consequential damage exclusion excludes coverage for the decreased value of

an undamaged garment (suit coat if the trousers are lost). Such coverage is

available by endorsement.

Limits

Many policies list separate limits for different forms of transit.

Valuation

Unfinished garments are valued at the costs of labor and materials. Finished

garments and all other property are valued at ACV.

Coinsurance

There is usually a coinsurance clause.

Underwriting

Underwriting factors include the contractors used by the insured, the forms of

transit and protection from fire, theft and water-damage losses. The transit

exposure is significant because the exposure is often great (because the covered

property is often in transit) and property in transit is especially susceptible to

theft.

Loss Control

In the event of a fire, prevent and/or reduce smoke and water damage to

garments by ventilating all areas of the building, storing goods in plastic

containers raised off the floor and separating storage and work areas.

Pattern and Die Floater

Pattern and Die Floater is the bailor policy that covers loss to patterns and dies

while in the premises of or in transit to or from a contracted foundry. Coverage is

on a scheduled or blanket basis. Coverage is “all-risks” or named perils. There is

no coverage for wear and tear, depreciation, obsolescence, soiling, inherent vice,

fading, rusting, poor workmanship, faulty manufacture, inventory shortage,

warping, cracking or splitting. Policies not written on a reporting form basis

include a coinsurance clause. Valuation includes value reductions due to

obsolescence. Underwriting factors include a review of the descriptions and

values of scheduled items, the covered locations and the methods of

transportation. Assess fire and theft protection at each covered location.

LESSON 9: COVERAGE FOR COMPUTERS AND

COMMUNICATIONS EQUIPMENT

Electronic data processing equipment (computer systems) became part of the

Nationwide Marine Definition in 1976. The five general types of computers are:

• Supercomputers, which million dollar computers used for research

• Mainframe computers, which are large-scale computers located in data

centers

• Minicomputers, which are scaled-down mainframes

• Microcomputers, which are scaled-down minicomputers that can fit on a

desktop

• Microcontrollers, which are computer ships embedded in cars, appliances

and other devices

Property and Time Element Exposures of Computers

Hardware

Hardware equipment includes consoles, computers, core storage units, magnetic

tape units, card readers, printers and their related equipment. Hardware is prone

to damage by fire, smoke, flood, earthquake and other perils. Hardware is

especially prone to vandalism from employees’ computer rage. Because

computers contain sensitive and complex components, they can sustain serious

damage from power outages, power surges, lightning, mechanical breakdown,

wear and tear and changes in atmospheric conditions.

Software

Software includes computer programs. Software is subject to the same perils as

hardware plus programmer errors, user errors, computer viruses, programs that

disrupt or destroy electronic data and/or data processing activities and hacker

activities such as computer fraud (the unlawful taking of property by using a

computer to cause the property owner to transfer the property to the criminal).

Time Element Exposures

Business income losses and extra expenses: Data losses can lead to

uncollectible debts, manufacturing delays, inability to provide contracted services

and costly data restoration. Mitigate data losses by duplicating records and

storing duplicates in safe locations.

Property and Time Element Exposures of Radio and TV

Broadcast Towers and Equipment

Property Exposures

Transmission equipment includes broadcast towers and their attached

equipment, ground-mounted satellite dishes, equipment in transmitter and studio

buildings and mobile production and transmission equipment. A guyed tower has

stabilizing cables called guy lines. A self-supporting tower uses a wide (and

sometimes pivoting) base to support itself. A monopole tower is a self-supporting

tower that supports cellular telecommunications equipment. Radio and TV towers

are prone to damage or collapse from windstorm, corrosion, lightning, ice,

aircraft, flood, earthquake, vandalism and structural failure. Four factors affect

the design of towers:

1. The required height

2. The weight of attached equipment

3. The forces to which the tower will be subjected

4. The amount of open land surrounding the tower

Engineers design towers to withstand the estimated wind load (the maximum

force of wind expected in the area) and ice load (the potential ice accumulation).

Time Element Exposures

Property losses can cause business income losses and extra expenses through

lost advertising time, lost rental income and the costs of renting backup

equipment and pre-taped programming.

The electronic data processing (EDP) equipment policy covers the insured’s risk

of direct loss to equipment, data and media it owns or rents, and the insured’s

risk of indirect loss due to resulting extra expenses and business interruption. It is

one of the largest classes of IM insurance.

Policy Provisions

Property covered includes the hardware, software and storage media owned by

the insured or in the insured’s care, custody or control. Some policies also cover

the insured’s air conditioning, fire protection and surge protection equipment.

Property not covered includes valuable papers and records not converted to

software form, stock in trade, property leased or rented to others and portable

personal computers.

Covered Locations

Coverage applies at the insured’s premises, in transit and on premises not

owned or operated by the insured.

Covered Perils

Coverage is “all-risks,” typically excluding acts of civil authority, war, nuclear

hazard, dishonest acts, voluntary parting, pollutants, wear and tear,

obsolescence and loss of use.

Perils Not Covered

There is no coverage for:

• Programming errors and omission (this applies only to extra expenses)

• Inherent vice

• Electrical and power supply disturbances

• Temperature and humidity changes

• Lease terms

• Computer viruses and hackers

Endorsements

The insured can add coverage for:

• Newly acquired locations

• Emergency removal and preservation of property

• Debris removal

• Pollutant cleanup

• Newly bought or leased equipment

• Software backup storage

• Extra expenses

• Business income

Coinsurance

Coinsurance is normally 80, 90 or 100% for equipment.

Valuation

Hardware is valued at actual cash value (ACV) or replacement cost (RC).

Software is typically valued at the cost to reproduce or replace lost information.

The upgraded value endorsement values hardware at the amount needed to

upgrade outdated equipment with the newest comparable equipment.

Limits

There are limits per location and separate limits for hardware, software and extra

expenses. Loss of business income coverage usually has per-day and per-

occurrence limits.

Deductibles

There are two deductibles: one for mechanical breakdown, power and electrical

disturbance losses and another for all other losses. Business interruption

coverage may have a waiting period that serves as a time element deductible.

The Electronic Data Processing (EDP) Equipment Policy

Underwriting

Assess the computer equipment and the way it’s used. Consider:

• How long the equipment is left running and unattended

• Personnel training

• Data security measures

• Protection against fire, smoke damage and electrical disturbance

Computer service agreements protect against some physical damage losses, but

do not cover mechanical breakdown and electrical disturbance losses. A

computer room houses computer equipment. Computer rooms increase the

building’s fire exposure by concentrating heat-generating equipment. A shell site

is an empty computer room that houses temporary or replacement computers in

the event of damage to the main room. A hot site is an alternate computer room

fully stocked with ready-to-use EDP equipment.

Loss Control

Protect the computer room: The room should be a cut-off, windowless,

noncombustible enclosure, should be fire resistive for at least one hour and

should have self-closing access doors. The room should incorporate protection

against electrical fires, electrical surges, power losses, temperature and humidity

extremes, smoke damage and water damage. To protect against water damage,

build the room on a raised floor with noncombustible decking material and

scuppers, above grade level, with a waterproof ceiling.

Control electrical disturbances: An uninterrupted power supply (UPS) prevents

EDP crashes from electricity spikes and power loss.

Control data security: Restrict access to both equipment and data. Access codes

prevent unauthorized persons from accessing sensitive equipment and data. A

firewall monitors and prevents data access between two networks. Encryption

encodes data so that only someone with the proper code can decipher the data.

Develop a contingency plan to handle catastrophic losses: Two arrangements an

insured can make in a contingency plan (in case EDP equipment becomes

damaged) are to arrange for replacement equipment and alternative computer

sites, and to maintain duplicate records and system

Claim

The seven-step claims adjustment procedure:

• Verify coverage: Make sure the property, location and type of loss are

covered

• Gather the relevant contracts, including software licensing agreements

• Plan the reconstruction of lost data

• Mitigate business income losses

• Hire a computer consultant to investigate unusual or complex losses

• Subrogate against landlords and/or vendors, if appropriate

• Salvage damaged equipment\

Radio and Television (RTV) Policy

Radio and television (RTV) policy covers direct physical loss or damage to

broadcasting structures and equipment. It is a small class of IM insurance.

Policy Provisions

Property covered includes:

• Towers and antennas, including dishes and other permanent equipment,

guy wires, masts, de-icing equipment, reflectors, transmission lines and

tuning equipment

• Transmitting, receiving and recording equipment, including storage media,

component parts, power-feed wiring and similar equipment;

• Mobile equipment, including both handheld equipment and equipment

attached to a vehicle (but excluding the vehicle itself)

• Studio equipment and contents, including:

o Audio and video apparatus

o Transmitting, receiving, recording, monitoring, switching and editing

equipment

o Cameras and projectors

o Software and storage media

o Film and tape libraries

o Sets, scenery, costumes and props

• Property not covered includes:

o Money and securities

o Accounts receivable

o Valuable papers and records

o Precious metals

o Jewelry

o Furs

o Works of art

Many policies also exclude motor vehicles, watercraft, aircraft and property while

waterborne or airborne. Some IM policies cover tenants’ improvements and

betterments, such as building additions that change the buildings and enhance

their values, such as partitions, soundstages and acoustic ceilings.

Covered Perils

Coverage is “all risks” with the usual IM exclusions.

Perils Not Covered

Perils not covered include:

• Electrical disturbances and mechanical breakdown

• Marring, scratching, exposure to light and glass breakage

• Tuning and retuning

• Failure to maintain towers and antennas

Endorsements

Insureds can add coverage for:

• Equipment at newly acquired locations

• Newly bought or leased equipment

• Emergency removal and preservation of property

• Debris removal

• Pollutant cleanup and removal

• Damage to buildings and personal property due to tower or antenna

collapse

• Tower retuning expense

• Business income and extra expense

The IM policy covers building and property damage due to tower or antenna

collapse as a holdover from when commercial property insurance excluded

coverage for falling objects.

Tower modification provision voids coverage if the character, design or

construction of a tower, or its attached equipment, is materially altered during the

policy period. Insureds who want to alter a covered tower must first get the

insurer’s approval.

Coinsurance

Coinsurance is 80, 90 or 100% for equipment.

Valuation

Valuation may be actual cash value or replacement cost.

Limits

There are limits per location and separate limits for hardware, software and extra

expenses. Loss of business income coverage usually has per-day and per-

occurrence limits.

Deductibles

There are two deductibles: one for mechanical breakdown, power and electrical

disturbance losses, and another for all other losses. Business interruption

coverage may have a waiting period that serves as a time element deductible.

Underwriting

The main underwriting factors are:

• The type of broadcasting the applicant conducts

• COPE factors for each location (Construction, Occupancy, Protection and

Exposure [or environment])

• Total values of the covered property

• Loss control systems and disaster recovery plans already in place

• Design and condition of the tower(s)

The PML of one tower is 100% of the tower’s value. The PML of two towers

within falling range of each other is the sum of both towers’ values. The PML for

business income and extra expense is based on the time needed to replace a

tower.

Loss Control

Design towers to withstand expected wind pressure and speed for the area,

expected ice accumulation, uneven melting of ice and the effects of lightning.

Fence towers to reduce damage from vandalism and auto collision. Keep the

area surrounding the tower free of grass, brush, building materials and other

combustible materials. Lock transmitter buildings. Inspect towers periodically for

signs of wear, loose guy wires, anchor-shaft corrosion and settling of surrounding

soil. Add and remove equipment to and from towers with great caution. Protect

studio equipment from fire and theft.

Claim

The seven-step claims adjustment procedure:

• Make sure the property, location and type of loss are covered

• Review the coverage details with the insured

• Review tower construction, design, maintenance, lease and purchase

documents

• Hire experts to determine the cause of loss and the value of damaged

property

• If there’s a business income or extra expense loss, review the insured’s

financial records

• Subrogate against landlords, manufacturers or repairers if appropriate

• Salvage damaged equipment

Other Sources of EDP Equipment Coverage

BPP Coverage Form

The BPP coverage form covers hardware and software owned or leased by the

insured. The BPP:

• Does not cover mechanical breakdown or electrical disturbance

• Does not pay for restoration of data

• Covers software-related business income losses for only 60 days

Output Policy

Output policy combines property, IM, auto physical damage and equipment

breakdown coverages. An output policy offers coverage similar to the EDP

equipment policy.

Commercial Crime Policy

Commercial crime policy covers computer fraud losses not covered by the EDP

equipment policy.

Medical Diagnostic Equipment

Medical diagnostic equipment includes x-ray machines, computer-assisted

tomography (CAT) scanners and magnetic resonance imaging (MRI) equipment.

Loss Exposures

Fixed-location equipment: The main causes of loss are fire, smoke, lightning,

water, flood, earthquake, windstorm, breakage, mechanical breakdown and

electrical injury.

Mobile equipment: The main causes of loss are collision, upset, overturn and fire.

Mobile units have higher exposures to fire than fixed units because mobile units

have less sophisticated fire detection and suppression systems.

Coverage

IM coverage is “all risks,” subject to policy exclusions. Coverages for mechanical

breakdown and electrical injury are available by endorsement and are subject to

separate deductibles. Many owners of medical diagnostic equipment forego the

service contract and instead buy “maintenance insurance” under an IM form,

property form or equipment breakdown form.

Medical Diagnostic Equipment

Underwriting

For mechanical breakdown and electrical injury coverage:

• Assess the service provider’s staying power and knowledge of the

equipment

• Assess the usefulness of the service hours

• Make sure the service provider will install manufacturer-approved parts

• Require the insured to maintain the service agreement during the policy

period

• Exclude losses covered by the equipment’s warranty.

If the insured requests coverage for the chassis on which mobile equipment is

installed, do not cover the vehicle power unit as well; insure loss of income and

extra expense with caution.

Cable Television Systems

A cable television system distributes television signals through cables running

from a master control center to the system’s individual subscribers. ”Head-end”

equipment translates signals received by an antenna at the master control center

into the signals sent via cable.

Property Exposures

Towers are subject to collapse and ice and windstorm damage. ”Head-end”

equipment is subject to fire, theft and vandalism. Outdoor cables and drop lines

are subject to windstorm, ice, snow and sleet damage. Underground cables

present little exposure. Utility poles are subject to fire, collision and lightning

damage.

Policy Provisions

Most cable television equipment can be insured under an RTV policy endorsed to

cover cable lines. There may be separate limits for underground lines, above-

ground lines and separate geographical areas. Cable television providers may

opt for large deductibles, thus retaining localized losses and buying coverage

only for severe losses.

LESSON 10: FINE ARTS INSURANCE

Fine Arts Loss Exposures

For Non-Museum Collectors

It includes fire, water damage, theft and breakage. Fire and water damage cause

low-frequency, high-severity losses. Theft and breakage cause high-frequency,

low-severity losses.

For Museum

It includes non-museum loss exposures plus transit losses and employee

dishonesty losses.

The Fine Arts Floater

The fine arts floater covers the art collections of businesses, institutions and

other organizations, and personal art collections that exceed the homeowners’

fine arts limits. (The HO policy covers art as it covers any other personal

property, usually for named perils up to the Coverage C limit.)

Policy Provisions

Property covered: Coverage is normally scheduled, although some insurers

provide blanket coverage for large collections.

Perils covered: Coverage is “all risks,” excluding:

• Breakage of fragile articles from non-specified perils

• Earthquake and flood excerpt for property in transit

• Processing and work

• Employee dishonesty

• Mysterious disappearance

• Inventory shortage

• Voluntary parting

• Theft from unattended and/or unlocked vehicles

The insured may add coverage for breakage, earthquake and flood for an

additional premium. Underwriters should consider the percentage of covered

property subject to breakage before eliminating the breakage exclusion.

Locations covered: Scheduled items are covered while at the described

premises, in transit or temporarily at other locations for exhibition, framing,

renovation, packing or appraising.

Endorsement: The policy may be endorsed to cover newly acquired fine arts for

the shorter of 60 days or the number of days until policy expiration.

Valuation: Fine arts floaters are valued policies. They value each item at its

agreed value (the value the insurer and the insured agree on at policy inception).

In the event of total loss, the insurer will pay the agreed value minus any

deductible. In the event of partial loss, the insurer will pay either:

• The restoration cost—up to the agreed value, if the item can be restored

to its full value

• The restoration cost plus the item’s loss in value—up to the agreed value,

if the item can not be restored to its full value

Museum Collection Policy

A museum collection policy covers art collections of museums plus museums’

bailee loss exposures.

Policy Provisions

Property covered:

Permanent collection: Art objects owned by the museum. Coverage is blanket.

Property is covered while at the insured’s premises, in transit or temporarily at

other locations for repair, restoration or storage.

Loan collection: Art objects the museum has loaned from, or to, others. Coverage

is either on a standing blanket basis or arranged at each borrowing. Most

coverage is on a wall-to-wall basis, covering the property from the time it is

removed from the owner’s walls until it is returned there. The museum’s loan

agreements describe the museum’s coverage responsibilities for items it borrows

or loans to others.

Liability covered: The policy covers the museum’s conservation department’s

bailee exposure for property of others in its care, custody or control. A conservation

department restores, protects and maintains its museum’s permanent collection

and may perform such services for private clients.

Perils covered: Coverage is “all risks,” excluding common IM exclusions plus:

• Processing and work

• Employee dishonesty

• Specified transit exposures

Locations covered: Territorial limits depend on the scope of the museum’s

operations.

Valuation: Owned objects are valued at their ACVs, fair market values or

amounts shown on the insured’s records. Borrowed objects are valued at their

agreed values. The buy-back option lets the insured buy recovered stolen

property back from its insurer if the insured has already been compensated for its

loss.

Deductible: Some museums set large deductibles on their permanent

collections but no deductibles on their loan collections because they want to

retain as many losses as possible and want to borrow items from owners who

require certificates of insurance to full value.

Limits: There are separate limits for:

• The permanent collection

• The loan collection

• Property at all other locations

• Property in transit

Reporting: If the value of covered property is likely to fluctuate, the insurer may

arrange coverage on a reporting basis.

How to Underwrite a Fine Arts Floater

There are 10 elements that need to be evaluated regarding the applicant. They

are:

1. COPE factors (Construction, Occupancy, Protection and Exposure

factors)

2. Loss control measures already in place

3. Likelihood of flood, water damage and earthquake losses

4. Percentage of fragile items in its collection

5. Value of property shipped annually

6. Modes of transportation used to ship objects

7. Loan agreements with collection borrowers

8. Frequency of loans

9. Typical destinations of loaned objects

10. Schedule of objects to be insured. Underwriters are most concerned with

losses from fire, water damage, theft and breakage. The schedule of

objects to be insured should list each object’s artist, title, medium or type

(oil painting, marble sculpture, etc.), year of creation and requested

insured value.

How to Underwrite a Fine Arts Floater

Apply the same underwriting factors would be applied to the fine arts floater plus

these additional considerations:

• Museum collections are likely to need reinsurance and are highly

susceptible to employee dishonesty losses

• Museums have greater exposures for borrowed objects, have greater

transit exposures, use professional conservators, curators and security

personnel to prevent losses and can’t afford to appraise every object in

their collections

• Museums accredited by the American Association of Museums (AAM)

have formal mission statements detailing how they manage their

collections, financial stability personnel skilled in collection management

and the capacity to document, care for and handle objects

Loss Control for Fine Arts

Transit Losses

Pack items properly, bearing in mind the method of transportation. Use special

transportation equipment when necessary (air-ride vans, vermin-controlled vans,

etc.). Get each carrier to agree to the values for which it is responsible in the

event of loss. Use qualified and experienced packers and shippers. Unpack

delivered containers immediately and inspect items for damage. Store items in

secure locations. Complete a condition report for each item before and after each

shipment, detailing its current condition. Request a facility report from each

borrower before loaning an item. A facility report details the borrower’s building

construction, security, fire protection and environmental controls.

Fire and Smoke Damage

Museum fire hazards increase when museums also contain restaurants,

workshops, storerooms and other fire-hazardous facilities. Most museum fires

are caused by:

• Faulty electrical heating equipment

• Inadequately controlled hot work

• Mishandled flammable materials

Control losses by installing firewalls and fire divisions, protecting building

services from fire, installing dampers to prevent the spread of smoke, protecting

storage areas from fire and smoke and installing fire detection and suppression

systems.

Water Damage

Store and display items in above-grade spaces and at least four inches off the

floor. Consider the use of scuppers. Install shields below overhead pipes. Cover

stored items in plastic. Use adequate ventilation and dehumidification to prevent

mold and mildew damage.

Theft

Use ropes and stanchions to prevent viewers from touching items on display.

Investigate all potential employees. Supervise staff after hours. Control access to

storage areas. Install solid, high-security locks on all building openings. Install

alarms on exterior doors. Hire guards to patrol the museum during and after hours.

Install and monitor surveillance cameras. Design exhibitions so guards can see all

the objects on display. Install an electronic intrusion detection system.

Environmental Hazards

Protect items from light, heat, cold, humidity and pests.

How to Handle a Fine Arts Claim

1. Make sure the policy covers the item

2. Make sure the insured has met all policy conditions

3. Collect and analyze all relevant records and documents (bills of lading,

loan agreements, etc.)

4. Inform the police of any stolen item

5. Record any stolen item with the Arts Loss Register (ALR) to increase the

likelihood of recovery

6. Hire a special investigator to assist in any theft loss

7. Hire a restoration specialist to advise on restoration of any damaged item

8. Hire an appraiser to verify the lost or damaged item’s value

LESSON 11: OTHER COMMERCIAL INLAND MARINE

COVERAGES

Accounts Receivable Insurance

Accounts receivable insurance covers the insured’s risk of uncollectible amounts

caused by damage to its accounts receivable records. The policy also pays for

interest on loans taken to offset uncollectibles, collection expenses in excess of

normal collection expenses and reasonable expenses incurred to reconstruct

damaged records. (Commercial property, EDP and businessowners’ policies

sometimes provide a limited amount of accounts receivable coverage, but many

insureds want the higher limits and broader coverage of accounts receivable

insurance.) There is no coverage for the usual IM exclusions plus no coverage

for bookkeeping, accounting or billing errors or omissions or electrical or

magnetic injury, disturbance or erasure of records other than direct loss caused

by lightning.

There are premium discounts for storing records in fire-resistant receptacles,

maintaining duplicate records stored in another fire zone and excluding coverage

for specified insureds whose records are more easily reconstructed.

Claims handling considerations:

1. Make sure the policy information is accurate

2. Make sure the insured has met all policy requirements

3. Base the loss valuation on the average account receivable adjusted for:

a. Seasonal variations

b. Uncollectible accounts

c. Bad debts, accrued interest and service charges

4. Monitor the insured’s recoveries of lost accounts and claim reimbursement

when entitled

Valuable Papers and Records Insurance

Valuable papers and records insurance covers the insured’s risk of direct

physical loss to valuable papers and records owned by the insured or in the

insured’s care, custody or control. The form covers property away from the

premises up to $5,000. Irreplaceable items are covered up to their agreed values

on a scheduled basis. Reconstructible items are covered at ACV on a blanket

basis. Coverage exclusions are the same as for accounts receivable insurance.

Control losses by storing records in fire-resistant receptacles and maintaining

duplicate records stored in another fire zone.

When handling claims make sure irreplaceable damaged items appear on the

schedule and hire a document restoration expert to reconstruct other damaged

items.

Signs Insurance

Signs insurance covers the insured’s risk of direct physical loss to signs owned

by the insured or in the insured’s care, custody or control. Signs in the filed class

include neon, fluorescent and automatic or mechanical electric signs and lamps.

(Commercial property coverage forms cover outdoor signs, but with low limits

and fewer covered perils.) Coverage is ACV up to the applicable limit. Coverage

applies anywhere in the US, Puerto Rico and Canada.

Coverage excludes:

1. Breakage during transportation, installation, repair or dismantling—except

for loss by fire, lightning or accident to conveyance

2. Electrical injury or disturbance within a covered sign caused by an artificial

current—except for direct loss by resulting fire or loss to any other covered

article

3. Property in transit to or from Alaska, Hawaii or Puerto Rico. The schedule

of insured signs describes each sign’s type, lettering, location and

coverage limit.

Commercial Articles Coverage Form

Commercial articles coverage form covers cameras, projection machines and

photographic equipment used commercially, and musical instruments and

equipment used for remuneration or public performance. Coverage includes

property owned by the insured or others’ property in the insured’s care, custody

or control.

Coverage excludes:

• Television cameras

• Coin-operated or token-operated devices

• Cameras insured in their dealers’ or manufacturers’ names

• Aerial cameras

• Radar cameras

Coverage is scheduled, blanket or both. (A professional musician or

photographer might schedule his own property and arrange blanket coverage for

property he borrows.) Blanket coverage is subject to 100% coinsurance. The

coverage territory is worldwide.

Underwriting considerations:

1. Camera equipment used in a studio suffers fewer losses than equipment

used outside

2. Loss exposures of motion picture equipment vary with each film

3. Dance bands and orchestras suffer more losses than all other groups that

insure musical instruments

4. Musical instruments often in transit have high probabilities of loss

Physicians’ and Surgeons’ Equipment Coverage Form

Physicians’ and surgeons’ equipment coverage form covers the insured’s risk of

direct physical loss to the insured’s medical and dental equipment (coverage may

be extended to equipment of others in the insured’s care), office equipment and

interest in non-removable improvements and betterments made at the insured’s

expense. The policy may be endorsed to cover only medical and dental

equipment, which might be used when the insured has covered the other two

property categories under a commercial property form. There are blanket limits

per location, but the insurer may schedule some items for separate limits.

There is no coverage for the usual IM exclusions plus processing or work on the

property except for direct loss by fire or explosion and marring, scratching,

exposure to light or breakage of glass articles other than lenses unless caused

by specified perils.

Claims handling considerations:

• Hire an expert to assess losses to high-value, state-of-the-art equipment

• Base replacement cost coverage for used equipment on the cost to

replace new, not the cost to buy more used equipment

Theatrical Property Coverage Form

The theatrical property coverage form covers the insured’s risk of direct physical

loss to scenery, costumes and other theatrical property owned by the insured or

in the insured’s care, custody or control, and used or intended for use in a

production described in the policy declarations. Carnivals, circuses, rodeos,

costume-rental firms and theatrical supply houses are not eligible for coverage.

Property is covered anywhere in the US, Puerto Rico and Canada, or while in

transit within that territory.

Coverage exclusions are the same as for physicians’ and surgeons’ equipment

coverage plus theft from unattended vehicle unless the vehicle was locked at the

time of loss and there were signs of forced entry.

Claims handling considerations:

• Confirm the name of the production and the specific property covered

• Hire an expert to estimate loss amounts

Negative Film Coverage Form

The negative film coverage form is the AAIS form that covers the insured’s risk of

direct physical loss to exposed motion picture film (negatives only), “properly

recorded” magnetic or video tape and sound-tracks. Coverage only applies to

productions included in the declarations. The ISO’s film coverage form covers the

same risk. Both forms cover educational, training and promotional films and

videos. (Major motion picture productions buy non-filed policies that also insure

cast members, props, sets and wardrobes.) Property is covered in the US,

Puerto Rico and Canada and within 50 miles of those places.

There is no coverage for the usual IM exclusions plus exposure to light, use of

developing chemicals and laboratory work on film. Loss valuation is the sum of

the property’s reproduction cost and the reduction in value to undamaged parts

of a production. There is no coverage for story, scenario, music rights, continuity,

permanent sets, owned wardrobes or props. Premiums are calculated on a

reporting basis.

Mobile Agriculture Equipment Coverage Form

The mobile agricultural equipment coverage form is a filed form that covers the

insured’s risk of direct loss to mobile agricultural equipment, including

accessories, tools and spare parts used to maintain the equipment.

Coverage is “all risks” and may be blanket or scheduled. Property not covered

includes self-propelled harvester-thresher combines used for hire, self-propelled

mechanical cotton pickers used for hire, machinery and equipment used in

logging or forestry operations, portable sawmills, irrigation equipment and lug

boxes.

Livestock Coverage Form

The livestock coverage form is a filed form that covers loss due to death or

necessary destruction of cattle, sheep, swine, horses, mules, goats and donkeys.

Coverage is for named perils, including:

• Fire and lightning

• Windstorm

• Hail

• Explosion

• Riot attending strike, civil commotion, aircraft or smoke

• Earthquake or flood

• Collision

• Sinkhole collapse

• Volcanic action

• Vandalism

• Theft

Coverage may be extended by endorsement to cover death by accidental

shooting, drowning, electrocution, attack by dogs or wild animals, loading or

unloading accidents and building collapse. Coverage may be blanket or

scheduled. Recovery under blanket coverage is limited to $2,000 per animal.

Coverage excludes:

• Livestock insured under a mortality policy

• Range animals (beef animals at any time; sheep while on the range)

• Horses, mules or donkeys used for racing, show or delivery

• Livestock at or being transported to or from stockyards or commercial feed

lots

• Livestock of others held by the insured for public sale

• Circus, carnival and theatrical livestock

• Livestock on winter ranges

• Livestock of others held by veterinarians or humane societies

(Insureds use mobile agricultural equipment coverage and livestock coverage

when they want to insure one or both of those classes of property and no other

class. Otherwise, a farmowner-type package policy provides ample coverage.)

(Insureds use nonfiled IM livestock coverages when the limits on filed coverages

are too low, their livestock aren’t eligible for filed coverage and/or they want to

insure livestock against disease.)

Animal Mortality Insurance

Animal mortality insurance is term life insurance on animals. Animal mortality

insurance covers the loss of the insured animal from death by accident, injury,

disease and theft. Endorsements add coverage for veterinary treatment, surgical

costs and loss of value from infertility.

Coverage is usually on an agreed-value basis. Coverage excludes neglect,

elective surgery unless the insurer gives prior approval, unauthorized instructions

to transfer the animal, seizure or destruction by governmental authority, war and

nuclear risks and intentional destruction of the animal unless the animal has an

irreversible or incurable condition, resulting from a covered cause of loss, the

destruction is for humane reasons and the insurer gives prior approval (unless

the animal must be destroyed immediately).

Claims handling considerations:

• Confirm coverage for both the animal and the loss

• Check the reliability of the animal’s medical history

• Make sure the insured received prior approval for destruction of the animal

• Hire a veterinarian to verify the cause of death

• Hire a market valuation expert to assess the animal’s fair market value

unless the policy is on an agree value basis

Feedlot Insurance

Feedlot insurance covers a feedlot operator’s bailee liability for animals in its

custody and for liabilities assumed by contract. A feedlot is a commercial facility

that fattens animals and markets them for slaughter. Coverage is named perils

often with no coverage for smothering or exposure to the elements.

Sales Persons’ Samples Floater

The salespersons’ samples floater covers risk of loss to merchandise samples

and their containers in the custody of the insured business’s sales

representatives, or while being shipped to or from sales reps. There is no

coverage for jewelry, furs or property held for sale. Coverage is “all risks”

excluding theft from an unattended vehicle (excluding common carriers).

Insurers sometimes delete or modify that exclusion.

The Nationwide Marine Definition lists (as instrumentalities of transportation,

which includes bridges and tunnels, piers, wharves and docks) pipelines—

including on-line equipment, power transmission lines and outdoor cranes—

loading bridges and similar loading, unloading and transport equipment.

IM policies may cover the above instrumentalities of transportation plus any kind

of property instrumental to transportation (e.g., rolling stock, traffic signaling

equipment and automated toll-collection systems).

LESSON 12: DIFFERENCE IN CONDITIONS (DIC) AND

OUTPUT POLICIES

Difference in Conditions (DIC) Policies

A difference in conditions policy supplements a named perils or special form

commercial property policy by providing “all risks” coverage over the underlying

policy. Insureds buy DIC policies to cover flood and earthquake exposures,

provide excess flood and earthquake coverage, provide excess flood coverage

over National Flood Insurance Program (NFIP) policies and/or cover loss

exposures not covered by underlying coverage.

Advantages of the DIC

The DIC offers:

• “All risks” coverage

• Cost-effective flood and earthquake coverage

• No coinsurance clause

• Replacement of several policies with one DIC policy

• Coverage modification to meet the insured’s individual coverage needs

Disadvantages of the DIC

• Since the market is small, coverage may be hard to find

• Court interpretations of non-standard provisions are difficult to predict

• Policy language is unapproved by insurance regulators

• Minimum premium requirements make coverage expensive for small

insureds

DIC Policy Provisions

DIC-type endorsements are named-perils endorsements to commercial property

policies that otherwise function like DIC policies. They typically cover flood and

earthquake losses. DIC-type endorsements:

• Are subject to separate, lower, limits

• Are subject to separate, higher, deductibles

• Do not contain coinsurance provisions

Covered property includes buildings and business personal property. Seven

common DIC exclusions:

• Currency, money, deeds, evidence of debt, notes and securities

• Jewelry, precious stones, precious metals, furs and fine arts

• Plants and animals

• Data processing equipment

• Property in the course of construction

• Property in transit

• Watercraft, aircraft, motor vehicles, rolling stock and pipelines

Covered perils: Coverage is “all-risks” excluding:

• Perils insured against under the underlying policy

• Steam boiler explosion

• Equipment breakdown

• Theft (if the insurer thinks the theft exposure is too large)

• Water damage with flood coverage available by endorsement.

Some of those perils can be added by extension. To be eligible as inland marine

insurance, DIC policies must exclude coverage for fire and extended coverage

(windstorm, hail, aircraft, riot, vehicles, explosion and smoke wharves). Flood

and earthquake coverages are often subject to separate limits and deductibles.

The flood deductible often equals the coverage limit of the underlying NFIP

policy, but because NFIP coverage is often narrower than DIC coverage, the

insured may end up retaining a substantial part of its flood deductible.

Coverage territory usually includes the US and Canada. Worldwide coverage is

available.

Valuation: The DIC policy should use the same valuation clause as the

underlying policy. There may be separate valuation provisions for different types

of property.

Other insurance: The DIC policy applies as excess over other policies covering

the same property and perils. If the underlying policy uses the same other-

insurance clause as the DIC policy, each policy becomes excess to the other,

and insurers must negotiate their shares of each covered loss.

Insurance to value: There is no coinsurance clause, because DIC coverage is

usually less than the full value of the property.

Underwriting DIC Policies

Compare the DIC and underlying policies to determine which exposures are

excluded by the underlying policy but covered by the DIC policy. Then, focus on

those exposures. The exposures most often focused on are:

• Flood

• Earthquake

• Theft

• Property in transit

• Collapse

Underwriting Factors for Earthquake Coverage

The factors include:

• The type of construction

• The location of the risk

• The susceptibility of the contents to earthquake damage

Use the ISO Commercial Lines Manual to identify properties in earthquake zones

and evaluate those properties according to ISO building classifications. The main

underwriting factor for flood coverage is the location of the risk. Use Flood

Insurance Rate Maps (FIRMs) to identify areas subject to flooding, both when

underwriting and when adjusting claims. The National Flood Insurance Program,

which provides federal flood insurance for flood-prone communities, can provide

insurers with flood maps and information on areas subject to flooding. The

National Flood Insurance Program offers non-residential limits of $100,000 on

buildings and $100,000 on contents under its emergency program, and $500,000

on buildings and $500,000 on contents under its regular program. The NFIP

policy’s other insurance provision reduces the insured’s recovery if the insured

had other flood insurance and did not buy the full amount of NFIP coverage.

Output Policies

Output policies (previously called manufacturers’ output policies or MOPs)

replace commercial property policies, covering the insured’s personal property

loss exposures under a single policy. Output policies were originally developed

for manufacturers, but today they are sold to wholesalers, distributors, real estate

owners and rental chains. Most policies combine commercial property, business

income/extra expense, inland marine, crime, auto physical damage and

equipment breakdown coverage.

Advantages of Output Policies

• One policy provides several coverages

• Rating is flexible

Disadvantages of Output Policies

• There is no liability coverage

• The insurer must file its forms and rates

Output policies are not IM policies, but they have traditionally been sold by IM

insurers because they involve transit and other IM exposures and they use

flexible rating plans.

Output Policy Provisions

The stock throughput policy, like the output policy, combines fixed location and

transit coverages. It covers ocean shipments in transit and in warehouses,

domestic personal property and domestic transit. Some insurers even add liability

and buildings and structures coverages.

Covered property:

• Buildings and other structures including equipment and materials within

1,000 feed (not 100 feet) of the premises

• Personal property stock, furniture and fixtures

• Equipment and machinery

• The insured’s interest in labor, materials or services arranged by the

insured on personal property of others

• The insured’s interest as a tenant in improvements and betterments.

• The insured’s personal property used in the business. Personal property

not owned by the insured is typically covered under an MOP when:

o The insured is liable for the property

o The insured sells the property and agrees to insure it until delivered

to the buyer

o Property has been sold under an installation contract. The output

policy excludes coverage for many of the same types of property

excluded by standard commercial property forms but the output

policy tends to cover foundations, underground pipes and retaining

walls. Personal property is covered anywhere in the coverage

territory.

Covered perils: Coverage is usually “all-risks” subject to that policy’s exclusions.

Flood and earthquake coverages are optional.

Valuation varies by policy.

Insurance to value: There is usually no coinsurance clause.

Rating: Rates are based on the insured’s industry classification and are adjusted

according to a deficiency point schedule, which charges deficiency points based

on the underwriter’s knowledge of the risk. Loss experience may also affect the

rate.

Auto physical damage coverage is an optional output policy coverage.

Insureds use high deductibles to retain small losses while protecting against

catastrophic losses to large fleets.

Equipment breakdown coverage is an optional output policy coverage. The

insurer generally reinsures this coverage with a specialist insurer. Some insurers

”add” this coverage not by attaching a separate coverage form but by eliminating

policy exclusions.

Underwriting Output Policies

The main underwriting factors are:

• Fire protection

• Protection from windstorm, burglary, explosion, collapse, water damage,

flood and earthquake, both at fixed and temporary locations