Summary: There are two basic methods of insuring property. One is specific insurance (sometimes referred to as “scheduled” insurance), in which a definite amount of coverage applies to any one item of property. For example, a policy may have a total amount of insurance of $140,000, with $100,000 applying to a building, and $40,000 to its contents. If a loss occurs to the building and contents, the limits shown on the policy are applied separately, plus an additional 25 percent (of the amount paid) for debris removal.
The other method is blanket coverage, in which different items are insured under one total amount. It may be “vertical” coverage, which applies to two or more items of property, such as a building and personal property, in a single fire division. It may be “horizontal,” which applies to a single kind of property in two or more buildings in one or more locations. An example is merchandise in three separate warehouses. On the other hand, blanket insurance may be a combination of the two, covering two or more buildings and their contents. A blanket limit of $140,000 for building and contents has the entire amount of insurance available to apply to building, contents, or both in event of a covered loss. For claims adjustment purposes there is no distinction between contents and building.
Topics Covered:
Advantage of blanket coverage
Multiple locations
Fluctuating values
Some disadvantages of blanket coverage
Advantage of Blanket Coverage
The advantage of blanket insurance is loss settlement. Suppose, in the example of specific insurance given above, contents totaling $50,000 are destroyed. A disappointed insured might wonder why coverage remained on the policy for the building, when a total loss to contents was not fully covered. Often, questions arise as to the difference between building and contents. Is a hydraulic lift installed by the insured covered under part A, building, or part B, your business personal property? If a loss occurs to building and contents, which debris removal expenses are attributable to the building, and which to contents? Uncertainty is eliminated through the use of vertical blanket insurance.
Multiple Locations
If an insured has stock stored at different locations and the values at each location vary, while the total value is relatively constant, horizontal blanket coverage is appropriate. For example: a furniture store has three locations in a city. One of the locations is a warehouse where furniture is received and held until delivered to one of the stores. Though the inventory at any one location may vary, the annual stock value remains constant. The anticipated average may then be used as the basis for the blanket rate. Providing policy conditions are met, the full blanket amount can be applied to a loss at any location. One policy can provide coverage for the insured's buildings and personal property at all locations, with a minimum of paperwork on the part of the insured.
Consider, for example, an insured with contents at two locations, #1 and #2, valued respectively at $100,000 and $50,000. The contents are insured on specific policies for $80,000 and $40,000, with an 80 percent coinsurance clause. Imagine a total fire loss to the contents at location #1. The amount of the uninsured loss is therefore $20,000. Now consider the same two locations insured under one blanket policy, with a limit of insurance of $120,000 and an 80 percent coinsurance clause. Contents at location #1 are destroyed. Under the blanket policy, the entire loss would be payable, because the amount of insurance is adequate to satisfy the coinsurance requirement, and the loss is less than the amount of insurance.
Fluctuating Values
The insured with fluctuating total values or locations can still obtain the benefits of blanket insurance through use of the value reporting form. Periodic reports of values must be made, and the provisional premium charged at the beginning of the year is subject to adjustment at the end of the year based on the values submitted.
Some Disadvantages of Blanket Coverage
Blanket insurance has disadvantages as well as benefits. Establishing a rate is cumbersome. The building must be written with a minimum of 90 percent coinsurance, with no premium credit. In specific insurance 90 percent coinsurance earns a 5 percent, and 100 percent coinsurance a 10 percent credit. With blanket coverage, only a 5 percent credit for 100 percent coinsurance is possible.
There are two methods of rating. First, the insured can apply the highest 80 percent coinsurance rate applicable to any single item to the entire limit of insurance. This can result in a premium greater than for specific insurance. For example, if a $1.50 rate applies to one item, and a $.50 rate to another, the $1.50 rate must be used on both. If the item with the lower rate is a substantial portion of the total property, the insured will pay significantly more to obtain blanket coverage. If the “highest rate” method is not chosen, the insured is required to file a statement of values for each item with the rating authority. A blanket average rate is achieved by taking the average of individual 80 percent coinsurance rates times the value for each item.
The blanket rate is good for a year from its effective date, or until there is a general revision in rates, whichever occurs first. Additional insurance or renewals during that year use the same rate, even though the distribution may have changed. This is often a simpler transaction than a specific insurance adjustment. If there is a significant change in values, the insured can apply for a new blanket rate to reflect this change.
Besides the cumbersome rating procedures, another disadvantage of blanket insurance is the amount of coinsurance required. Eighty percent coinsurance can only be used when personal property of others in the care, custody, or control of the named insured is covered. And then, 80 percent can only be used if the property of others is:
1. the same type of personal property as the insured;
2. located in the same building, and;
3. subject to the same rate as personal property of the insured.
Tenants improvements and betterments located in the same building as personal property of the insured may also be written at 80 percent coinsurance. A building must be insured for a minimum of 90 percent of its value. An insured faced with this choice may decide that any possible loss will not exceed 80 percent of the insurable property value, and opt for the (perceived) less expensive specific insurance.
Elimination of uncertainty at the time of a loss was noted earlier as the advantages of blanket coverage. Unfortunately, in event of a loss, the insurance company may require the insured to provide “a complete inventory of damaged and undamaged property,” including “quantities, costs, values, and amount of the loss claimed.” This is necessary to determine whether the coinsurance requirement has been met. It can be a laborious process, since, under the blanket, all covered property at all locations must be inventoried. (Blanket insurance requires that coinsurance apply to all the property under the blanket, not just the property at the loss location.) This problem can be solved by writing more than one blanket policy on the property, taking care to cover enough locations on each policy to get the spread needed for full coverage at any one location. The drawback to this solution is that values at a location may fluctuate without the insurance being adjusted accordingly.
The optimal approach is to eliminate the task of inventorying the property at the time of the loss through use of the agreed value clause. Under this optional coverage, the insured agrees to carry insurance equal to at least 90 percent of the value of the property. The insured must complete the statement of values endorsement, indicating the full actual cash values (or replacement cost values, if the replacement cost coverage option is requested). The agreed value provisions are effective for up to one year. When the agreed value clause is used, however, the insurance company, the insured, and the insurance agent must be alert. Because the statement of values endorsement can indicate separate items and values, it must be clear that blanket, not specific, insurance is requested. Any question as to what coverage is being provided should immediately be answered. In the absence of the agreed value clause, coinsurance applies, so care must be taken to make sure it appears on the policy at each renewal.
Finally, valued policy laws must be considered when writing blanket coverage. Three states—Florida, Georgia, and New Hampshire specifically exempt blanket insurance from application of the law. In the other eighteen states with valued policy laws, it would appear that all buildings insured under the blanket must be destroyed in order for the law to be invoked. The matter has not, however, been resolved by the courts. See Valued Policy Laws.
Blanket coverage may also be used for business income. For further information, see Business Income Information.