The Insurance Services Office (ISO) boiler and machinery coverage form (BM 00 25 06 95) is designed to dovetail with ISO's building and personal property coverage form (CP 00 10) and its causes of loss forms (CP 10 10 06 95 basic causes of loss form; CP 10 20 06 95, broad causes of loss form; and CP 10 30 06 95, special causes of loss form). The property causes of loss forms exclude coverage provided by the boiler and machinery form and they cover perils excluded by the boiler and machinery form. For example, the property forms exclude explosion of steam boilers, which are covered by the boiler and machinery form. On the other hand, the property forms cover the explosion of gasses in the furnace of a boiler, an excluded peril on the boiler and machinery form.

The description of the named peril explosion in the basic and broad property causes of loss forms and the exclusion of steam boiler explosion in the same forms set forth a distinction that can be drawn between the commercial property and boiler and machinery forms.

The named peril property forms define the insured explosion peril as, “Explosion, including the explosion of gasses or fuel within the furnace of any fired vessel or within the flues or passages through which the gasses of combustion pass. . . .” So far, any explosion, and specifically gas combustion explosions, are covered perils in the commercial property forms.

The property causes of loss forms then exclude the “explosion of steam boilers, steam pipes, steam engines or steam turbines . . . . But if loss or damage by fire or combustion explosion results we will pay for that resulting loss or damage.” To bring it in line with the named peril forms, the special causes of loss form adds, “We will also pay for loss or damage caused by or resulting from the explosion of gasses or fuel within the furnace of any fired vessel or within the flues or passages through which the gasses of combustion pass.”

The distinction is that the property form covers explosion due to combustion of gasses (among other types of explosion) while the boiler and machinery policy is designed to cover only explosion resulting from excessive pressure in steam boilers and other vessels.

This distinction between combustion explosion and excessive pressure explosion is further supported in the boiler and machinery policy, which excludes all types of explosion except the “explosion of any steam boiler, electric steam generator, steam piping, steam turbine, steam engine, gas turbine, or moving or rotating machinery caused by centrifugal force or mechanical breakdown.” The boiler and machinery form reinforces the distinction also by excluding loss from “Explosion of gas or unconsumed fuel within the furnace of any boiler or fired vessel or within the passages from that furnace to the atmosphere.” The boiler and machinery and commercial property forms make it clear that boiler and machinery forms cover only excessive pressure explosions, while commercial property forms cover all explosions except excessive pressure explosions.

Despite this careful coordination of the boiler and machinery and the property forms, cases will arise where it is unclear which policy provides coverage. If boiler and machinery coverage and commercial property coverage are written by different insurance companies, a dispute between them could arise over which carrier should cover how much of a given loss.

Suppose a hostile fire in the furnace of a steam boiler causes the pressure in the boiler to build until it explodes, damaging not only the boiler but much of the machinery and equipment around it. Damage caused by the fire in the gas combustion chamber is covered by the property carrier. Loss due to the explosion of the steam boiler is covered by the boiler and machinery carrier. Which peril caused the damage to the surrounding equipment: the fire in the boiler's furnace or the resulting explosion of the steam boiler?

Such questions are not unusual. In 1963 a fertilizer manufacturer, Nitrin, Inc., was insured by American Motorists Insurance Company for boiler and machinery coverage and by Protection Mutual for property coverage. An explosion caused damage to their production equipment, causing output to cease for ten days. Protection Mutual denied coverage for the ensuing business interruption loss, asserting that the damage to insured property was caused by an explosion of an unfired pressure vessel, which was excluded in their property policy. The boiler and machinery insurer, American Motorists, denied coverage claiming that the explosion was caused directly or indirectly by a fire in part of the piping of the equipment. The case went to trial and was appealed to a higher court, where it was decided that American Motorists should pay the loss. American Motorists reimbursed Nitrin, Inc. for its business interruption loss—five and one half years after the explosion. This case is Nitrin, Inc. v. American Motorists Insurance Company, 236 N.E.2d 737 (1968).

Upon occasion the boiler and machinery insurer and the property carrier will agree on the total amount of the loss, and even that each is responsible for a percentage of the loss, but they will disagree on how the loss should be divided between them. St. Joseph Light & Power Company had placed its boiler and machinery coverage with the Zurich Insurance Company and had split its property insurance among 16 insurance companies. In 1975 a ten-story boiler caught fire and suffered over $4 million in damage.

The Zurich boiler and machinery policy covered only damages resulting from low water conditions in the boilers. At first Zurich denied the loss saying that it resulted solely from fire. The fire carriers paid a sum to be applied against the portion of the loss, if any, attributable to fire. They contended, however, that a low water overheating condition, not fire, caused the damage.

A jury found that the damage was caused both by low water in the boiler and by fire, and that Zurich owed about 46 percent of the direct loss and the fire carriers owed about 54 percent. An appeal to higher courts over prejudgment interest, coinsurance, and other issues delayed the payment of the loss until 1983, seven and one half years after the occurrence of the loss. This case is St. Joseph Light & Power Company v. Zurich Insurance Company, 698 F.2d 1351 (1983).

In order to avoid lengthy and costly disputes, an attempt should be made to have the same insurer cover boiler and machinery and commercial property. If separate carriers must be used, each policy should be endorsed with what is commonly known as a joint or disputed loss agreement. BM 99 43 09 96 is an endorsement that modifies the boiler and machinery policy, and CP 12 70 09 96 is the endorsement for the commercial property coverage form. The boiler and machinery endorsement and the property endorsement are mirror images of each other. Where the property endorsement talks about boiler and machinery insurance, the boiler and machinery endorsement talks about the property coverage form.

These endorsements are intended to facilitate payment of the insurance proceeds to the insured when an insured loss damages property covered both by the commercial property coverage form and the boiler and machinery policy and when the insurers disagree as to whether there is coverage or as to the amount of loss to be paid by each company. The endorsements allow the insured to be paid before the two insurers settle their dispute by stipulating that each insurer will pay, at the insured's request, one half of the disputed amount and all of its respective undisputed portion of the loss.

In order for the endorsements to work, three requirements must be met.

First, each policy must be endorsed with substantially the same loss adjustment endorsement, each bearing similar requirements, procedures, and conditions.

Second, the damage to the covered property must have been caused by a loss for which both insurers accept some responsibility for payment under their respective policies; or, either insurer does not admit to any liability for payment while contending the other insurer does owe for the loss.

Third, both insurers and the insured must agree on the total amount of the loss. The only question should be the percentage of the agreed-upon loss each insurer should pay. The dispute must be over the amount of loss each insurer should pay that is attributable to an “accident” under the boiler and machinery policy and a cause of loss covered under the commercial property policy. The disputed amount should arise from a covered loss under each policy.

Note that the St. Joseph Light and Power case does not quite fit these requirements because each insurer initially denied responsibility for coverage of the loss, although the 16 property insurers did allow for the possibility that they might be responsible. The endorsement would have come into play had the boiler and machinery and the commercial property insurers agreed that the total loss was $4 million and that they each covered some portion of it, but the property group and the boiler and machinery carrier disputed the basis for dividing the loss between them.

Both loss adjustment endorsements require that after each insurer pays its half of the disputed amount (and its full portion of the undisputed amount), the two insurance companies must submit their disagreement to arbitration within 90 days of payment. The insured must cooperate with the arbitration procedures.

In summary, ISO's boiler and machinery forms and its commercial property forms are designed to complement each other. Yet the coordination of coverage does not always work, especially when different insurance companies provide the coverages. The solution is to endorse both the boiler and machinery policy and the commercial property form with ISO's loss adjustment endorsements (BM 99 43 09 96 for the boiler and machinery policy and CP 12 70 09 96 for the commercial property coverage form), also known as joint or disputed loss agreements.