This chapter’s objectives are to: Explain how the simplified commercial lines portfolio policy meets property loss exposures, identify property and perils covered by boiler and machinery insurance, describe how insurance contracts can be designed to insure property that fluctuates in value, list the different types of consequential loss exposures and types of insurance coverage available for such loss exposures.
Lecture No 18 Fundamental Legal Principles Copyright © 2011 Copyright Pearson © 2011Prentice Pearson Prentice Hall AllHall rights All rights reserved reserved 91 Chapter Objectives • • • • Explain how the Simplified Commercial Lines Portfolio policy meets property loss exposures Identify property and perils covered by boiler and machinery insurance Describe how insurance contracts can be designed to insure property that fluctuates in value List the different types of consequential loss exposures and types of insurance coverage available for such loss exposures Copyright © 2011 Pearson Prentice Hall All rights reserved 92 Insuring Agreements • Loss to property – Perhaps the chief reason for the purchase of boiler and machinery insurance is either to • • • Replace damaged property belonging to the insured in the event of sudden or accidental loss Or to prevent the occurrence of such a loss Expediting expenses Thereasonableextracostofexpeditingrepairofthe machinery ã Includingovertimecostsandtheextracostofexpressor otherrapidmeansoftransportation Copyright â 2011 Pearson Prentice Hall All rights reserved 93 Optional Endorsements • Business income insurance – One of the important types of loss stemming from the failure of the steam boiler or other vital machinery • – • Use and occupancy insurance is commonly added by endorsement to the boiler and machinery contract Extra expense – Could arise from the failure of a heating plant boiler • • Is the shutdown of an entire plant Forcing a business to install temporary alternative methods of heating at considerable expense Consequential damage – Provides protection when an interruption of power is due to failure of an insured object on the insured’s own premises Copyright © 2011 Pearson Prentice Hall All rights reserved 94 Business Owners Policy • Designed for certain small to mediumsized businesses – Small to mediumsized is defined to mean • • Apartments and office buildings of less than six stories and with a total area of less than 100,000 square feet A standalone policy and cannot be added to the CPP Copyright © 2011 Pearson Prentice Hall All rights reserved 95 Business Owners Policy • Property forms used – – – • Standard and special Mandatory coverage exists for both direct and indirect loss to property, liability, and medical payments Options include outdoor signs, money and securities, employee dishonesty, and mechanical breakdown Recovery basis – – Prior to 1996, the business owners program assumed the insured would insure 100 percent to value However practical experience has shown the need for an insurancetovalue requirement • – Because many insureds underreport their property values For full replacement cost coverage to apply • The amount of Insurance at the time of the loss must be at least 80 percent of the full replacement cost Copyright © 2011 Pearson Prentice Hall All rights reserved 96 Other Commercial Property Forms • Difference in conditions insurance (DIC) – – • Written with the insureds basic contract because DIC excludes the basic cause of loss perils Generally only large firms purchase this coverage but it is becoming more popular Builders’ risk – – – – Used to insure buildings under construction Usual approach requires the insured to purchase an amount of insurance equal to the finished value of the building However the rate charge is usually 55% of the standard rate The insured has full coverage during the construction period Copyright © 2011 Pearson Prentice Hall All rights reserved 97 Reporting Forms • • Designed to adjust insurable coverage on contents to changing property values at one location or in different locations Have several advantages – – – The amount of insurance protection is automatically adjusted to changes in values of property at different locations New locations are automatically covered The insured does not have to pay premiums on limits of liability in the policy • – – Rather pays premiums according to the actual values at risk The possibility of having gaps in coverage or duplication of insurance is virtually eliminated Insured avoids being shortrated when coverage is reduced Copyright © 2011 Pearson Prentice Hall All rights reserved 98 Reporting Forms • Important purpose of reporting forms – – • To adjust insurance protection for business firms that have many plants located in different geographical areas Or wish protection to be adjusted automatically to constantly changing values at these plants The insured purchases an insurance policy with a stated maximum as its limit – – This figure is the most the insurer will ever pay Howevertheinsuredisonlychargedfortheexposurethatexists ã Mayreceivearefundattheendofthepolicyperiod Eachperiodtheinsuredisrequiredtoreporttothecompany whattheactualvalueswereateachlocationonaspecificdate Copyright â 2011 Pearson Prentice Hall All rights reserved 99 Consequential Loss Coverage • • Suppose a small manufacturer suffers a serious fire that shuts down its plants for two months while repairs are being made The manufacturer is fully insured against direct loss by fire – • The fire policy pays for the cost of lost raw materials, goodsinprocess, and finished goods – • But carries no consequential loss coverage As well as repairs to machinery and buildings However, the manufacturer finds it is necessary to keep certain key employees on the payroll to help with the reorganization and to render service to customers Copyright © 2011 Pearson Prentice Hall All rights reserved 910 10 Coinsurance • • Most business income forms contain a coinsurance clause Requirements vary from 50% upward – • Depending on the amount of coverage desired If the business concern elects to take the 50% form – – It is required to carry at least 50% of its profits plus operating expenses Failing to carry this amount, it becomes a coinsurer Copyright © 2011 Pearson Prentice Hall All rights reserved 916 16 How Much Insurance to Carry? • • • The answer depends on what the firm believes the maximum loss might be Coinsuranceformsareavailablethatallowtheinsuredto carryaslittleasẵofitsannualinsurablevalue However,ifthefirmhasreasontobelieveitmighttakeas muchasayeartorestorethebusinesstoregular operations ã Itshouldcarryinsuranceequaltoitsfullinsurablevalue Somefirmsoperateonaseasonalbasis A few months operations might account for an entire year’s profits Copyright © 2011 Pearson Prentice Hall All rights reserved 917 17 How Much Insurance to Carry? • The loss may be only partial – If the business is only partially shut down • • Indemnity can be collected for the partial loss Extendedperiodofindemnity endorsement – Under the terms of this endorsement that period of loss is defined to mean that period necessary to return to normal business operations • Not just that period necessary to reopen the business physically – A firm make need several months to obtain new customers and to achieve the same level of operation it enjoyed prior to closure Copyright © 2011 Pearson Prentice Hall All rights reserved 918 18 InsurancetoValue Requirements • By endorsement an insured can choose one of three alternatives to coinsurance – – – • Including a maximum of indemnity A monthly amount of indemnity An agreed amount Under the standard approach, the insurancetovalue requirement is based on the estimated business income that is expected during the twelve months following the date of purchase of the insurance policy – This approach reduces some of the uncertainty associated with estimating the required amount of insurance • • As the insured knows exactly which twelve months will be used in making the calculation Usually a 50 percent minimum coinsurance clause is present in the business income form – However this implicitly assumes a sixmonth restoration period Copyright © 2011 Pearson Prentice Hall All rights reserved 919 19 InsurancetoValue Requirements • • Those firms with a maximum restoration period of less than six months may have to purchase more insurance than they can collect The BPP has two optional coverages from which to choose – Maximum period of indemnity • – Monthly limit of indemnity • • Replaces the insurancetovalue requirement with the maximum restoration period of 120 days Designed for small businesses and does not have a coinsurance clause To assure full recovery for any loss – The insured must carry sufficient limits so that the selected limit will cover the total earnings for any one month Copyright © 2011 Pearson Prentice Hall All rights reserved 920 20 InsurancetoValue Requirements • Agreed amount clause – – – Substitutes an agreed amount of coverage for the coinsurance clause The insured must complete and sign a business income worksheet when the endorsement is purchased If that statement underestimates income • • A penalty will be applied if a loss occurs Contingent business income – – – Sometimes a firm is forced to shut down because an insured peril forced the shutdown of a plant belonging to a supplier or to an important customer on whom the firm depends Contingent business income insurance has been devised to deal with these situations The regular business income policy will not cover such losses • – Because the insured peril did not cause any damage at the firm’s own property The coverage form is called the business income from dependent properties Copyright © 2011 Pearson Prentice Hall All rights reserved 921 21 Extra Expense Income • Certain types of business firms do not find it possible or expedient to close down following the destruction of their physical plants – Firms such as laundries, newspapers, dairies, public utilities,banks,andoildealerswilloftencontinuetheir businessesusingalternativefacilities ã Closingofthesefirmswoulddeprivethepublicofavital serviceorwouldinvolveacompletelossofgoodwillorof businesstocompetitors Copyright â 2011 Pearson Prentice Hall All rights reserved 922 22 Extra Expense Income • Because these firms will continue to operate if loss occurs – • Business income insurance is not attractive These firms need extra expense insurance that covers expenses beyond the normal cost of conducting business – Examples of extra expenses • Rental of quarters, purchase of extra transportation facilities, leasing of substitute equipment, overtime payments to employees, the cost of moving to temporary facilities, and the cost of additional advertising to inform the public the firm is still operational Copyright © 2011 Pearson Prentice Hall All rights reserved 923 23 Leasehold Interest Insurance • Leasehold – – An interest in real property that is created by an agreement (a lease) that gives the lessee (the tenant) the right of enjoyment and use of the property for a period of time May become very valuable to the lessee because changing business conditions, improvements in the property, and good management may increase the rental value of real estate considerably above the rental under the lease • This increase in value creates what is known as leasehold interest, or leasehold value Copyright © 2011 Pearson Prentice Hall All rights reserved 924 24 Contracts Without a Time Element • Use to insure losses that result from fire – But where the loss cannot be measured either by direct damage by fire or in terms of elapsed time Copyright © 2011 Pearson Prentice Hall All rights reserved 925 25 Manufacturers Selling Price • • • BPP covers goods and finished stock that are sold but not delivered at selling price This endorsement applies this approach to finished stock regardless of whether it has been delivered It differs from business income insurance – • The latter covers profits that would have been earned in the future had the fire or other insured peril not damaged the firm’s plant Endorsement covers the loss of the profit element in goods already manufactured but destroyed before they could be sold Copyright © 2011 Pearson Prentice Hall All rights reserved 926 26 Accounts Receivable Insurance • • Attempts to indemnify an insured for the loss brought about because of the inability to collect from open account debtors after a fire destroys accounts receivable records If a catastrophe makes it impossible to prove the existence of a debt because there are no records of the transaction – • Written on a specialform basis – • With various exclusions including bookkeeping, accounting, or billing errors and admissions The coverage applies only while the accounts receivable records are on the premises – • Some debtors may refuse to honor their obligations For an additional premium the records may be covered while at another temporary location It may be required that the records be stored in a vault or a safe when the business is closed Copyright © 2011 Pearson Prentice Hall All rights reserved 927 27 Rain or Event Insurance • • Rain, as such, seldom causes any direct damage to property The accumulation of water due to extended rainfall does cause much loss to property – In the form of flood or rising water • • However, rain itself may result in indirect loss – • • Such coverage is generally not available from private insurers Its occurrence may greatly reduce the expected profits of promoters of an outdoor or public event Rain insurance covers the loss of profits and fixed expenses or extra expenses due to rain, hail, snow or sleet The advisability of purchasing rain insurance depends on the promoter’s estimate of the actual effect of rainfall on anticipated attendance and the resulting profit – In some areas rain is so common that it does not discourage attendance substantially • Whereas in other locations even a light rainfall will ruin attendance Copyright © 2011 Pearson Prentice Hall All rights reserved 928 28 Hospital Disaster Risk Management • • Many business such as utilities and hospitals may have liability suits arise from their alleged negligence in preparing for a major storm For instance, if a storm knocks out power to a hospital and the hospital’s secondary power source fails to work – The hospital may suffer lawsuits from patients who were harmed or died during the interval • For instance, those in ICU and on life support – It does not take much of a power interruption to cause serious injury or death Copyright © 2011 Pearson Prentice Hall All rights reserved 929 29 End of Lecture 18 Copyright © 2011 Copyright Pearson © 2011Prentice Pearson Prentice Hall AllHall rights All rights reserved reserved 930 ... Property forms used – – – • Standard? ?and? ?special Mandatory coverage exists for both direct? ?and? ?indirect loss to property, liability,? ?and? ?medical payments Options include outdoor signs, money? ?and? ?securities, employee ... Small to mediumsized is defined to mean • • Apartments? ?and? ?office buildings of less than six stories? ?and? ? with a total area of less than 100,000 square feet A standalone policy? ?and? ?cannot be added to the CPP Copyright... Portfolio policy meets property loss exposures Identify property? ?and? ?perils covered by boiler? ?and? ? machinery? ?insurance? ? Describe how? ?insurance? ?contracts can be designed to insure property that fluctuates in