Analysis

The CP 00 10 covers furniture and fixtures, machinery and equipment, stock, and any other personal property owned by and used in the insured's business as business personal property. Coverage applies when the property is located in or on the insured building or in the open (and in vehicles) within 100 feet of the premises.

“Stock” is defined in the form as merchandise held in storage or for sale, raw materials, and in-process or finished goods, including supplies used in packing or shipping them. The form clarifies (under “property not covered”) that stock of outdoor trees, shrubs, and plants is treated as any other stock and is not subject to coverage limitations imposed by the outdoor property coverage extension.

The form does not specify whether goods sold but not yet delivered are always treated as the insured's business personal property rather than property of others. If treated as the insured's business personal property, the valuation provision states that stock sold but not delivered is valued at the selling price less discounts and expenses that the insured otherwise would have had. Whether goods sold but not delivered should be treated as belonging to the

insured or the customer may depend on several factors. The provisions of the bill of sale between the commercial entities may state how such property is to be treated, or state variations on the Uniform Commercial Code (UCC) may also clarify the issue. For example, Article 2, section 2-401 of the UCC concerns how title passes to the buyer under a variety of circumstances, including when delivery by the seller is to be made without moving the goods and there is no explicit agreement concerning the transfer of title. If the property is considered to be property of others and the insured has not bought this coverage, only $2,500 additional insurance is available under an extension of the insured's business personal property coverage—and then only if a coinsurance percentage of 80 percent or more or a value reporting symbol is shown on the declarations page. If ownership is held by the insured, the property is covered for the limit that applies to business personal property.

An insured's typical sales transactions should be analyzed and coverage and limits should be purchased according to when—in the course of typical transactions—title passes. Most sales will be governed by the explicit agreement of the parties, but the UCC provides guidance where such an agreement does not exist. According to the UCC, delivery to the buyer can be

made (under some circumstances) by the act of contracting. In such a case, if title has passed but the buyer leaves the property in the insured's care until it is convenient to pick it up, only the limited $2,500 coverage for the buyer's property is available unless the insured has coverage for personal property of others.

Business personal property also contemplates coverage of the “labor, materials, or services furnished or arranged” by the insured on personal property of others. If, for example, an insured repairs a television set at a cost of $50 in labor, $75 in materials, and $10 for a special trip to acquire a necessary part, $135 is recoverable under this coverage, less any deductible, if the television set is damaged by an insured peril before it can be returned to the customer.

The form also covers, as personal property, a tenant's use interest in improvements and betterments. Improvements and betterments consist of fixtures, alterations, installations or additions of a permanent type that have been acquired at some expense by the tenant. They are items of real property such as store fronts, decorations, partitions, or elevators and are

not legally removable by a tenant.

Coverage for improvements and betterments does not extend to an insured's loss of use if a lease is canceled after a covered loss. This type of exposure may be covered by adding leasehold interest coverage form CP 00 60 06 95. Leasehold interest coverage is a subject of another treatment in this section.

The same as any other item or class of covered property, the values of improvements must be taken into account when considering the amount of insurance necessary for compliance with the coinsurance clause. Actual valuation procedures pertaining to improvements and betterments are treated later in this discussion. (See Improvements and Betterments Coverage in this volume for other matters regarding improvements and betterments coverage.)

The form provides that the insured's business personal property includes “leased personal property for which [the insured has] a contractual responsibility to insure, unless otherwise provided for under Personal Property of Others.” This provision allows flexibility by permitting coverage for unplanned, short-term equipment leasing under business personal property, while also giving the insured the option to buy coverage under personal property of others or endorsement CP 14 60 07 88 (leased property). If the insured selects coverage for planned leased property exposures under his business personal property coverage, the limits should take the leased property into account.

One important item to note about leased equipment coverage is that the form contemplates coverage for leased equipment for which the insured has an obligation to insure. One incident occurring under this phrasing had the insurance company denying coverage for a piece of damaged leased equipment where the lease only called on the lessee to be “legally liable” for damage. There was no express requirement in the lease that the lessee provide

insurance. This points out the need to carefully review lease terms and agreements.

The various categories of business personal property (stock, contents except stock, machinery and equipment, furniture, fixtures, tenant's improvements and betterments) may be assigned individual limits of insurance by using endorsement CP 19 10 06 95, business personal property—separation of coverage. This endorsement also functions as a way to exclude certain of these types of personal property, since any categories not listed with an individual limit of insurance are not covered at the specified locations. Care must be taken that in specifying a limit on one class of property at a scheduled location (e.g., stock), coverage is not inadvertently voided at that location on another category (e.g., all business personal property except stock).

Very few items of business personal property are excluded from the building and personal property coverage form (see the Property Not Covered section that follows). However, it may be desirable either from the insured's or an underwriter's viewpoint to exclude some particular items. Endorsement CP 14 20 11 91—additional property not covered is used for this purpose.

Covered Property—Personal Property of Others

Analysis

The final type of property that can be covered under the building and personal property coverage form is property of others in the insured's care, custody, or control. The same conditions as to the location of such property apply here as they do to any business personal property of the insured (that is, on, in, or within 100 feet of the premises).

Up to $2,500 additional insurance is automatically provided by a coverage extension of the insured's business personal property coverage (discussed later) to apply to personal property of others in the care, custody, or control of the insured. The purchase of additional and specific personal property of others coverage is appropriate when the insured needs coverage of values in excess of the $2,500 amount provided by the extension. Suppose an

insured has charge of personal property of others on the premises and the value of that property is $10,000. The insured has coverage for the first $2,500 as an extension of business personal property (assuming 80 percent coinsurance is listed on the declarations). The additional $7,500 should be scheduled under personal property of others. Note carefully that there is no coverage on property of others—except for the extension—unless coverage is activated by the appropriate entry on the declarations page.

Any loss to property of others is adjusted “for the account of the owner of the property.” The loss conditions section details adjustment of such losses.

For a related discussion of legal liability coverage on property of others coverage, see Legal Liability Coverage Form.

Property Not Covered

Analysis

A few notes on some of the items are excluded, or specifically considered property not covered, on form CP 00 10.

Accounts, bills, currency, evidences of debt, money, notes or securities. A revision effective October 1, 1991 clarified that lottery tickets held for sale are not “securities” (i.e., they are covered property), but food stamps are not covered (since they are evidences of debt).

Animals. The building and personal property coverage form clarifies that animals that are “stock” located inside of buildings, and those animals that are boarded by the insured, are not excluded.

Contraband, or property in the course of illegal transportation or trade. In earlier property forms, this exclusion was located within the war and governmental activity general exclusion.

Land, growing crops, and lawns. In conjunction with revisions to the debris removal clause in 1986—described below—an exclusion for water was added to this list.

Property more specifically covered elsewhere—except for excess coverage. There is no coverage on a primary basis for any item that might qualify for coverage under the form if that same item is also the subject of other, more specific, insurance. For example, an expensive piece of specialized machinery is insured with the building if permanently installed. If the insured has purchased other insurance identifying the machine and insuring it separately, then the machine is “more specifically covered” by the other contract.

The protection of the building and personal property coverage form applies only as excess insurance to pick up the difference, if any, between the insured's loss and the recovery under the other contract. Note that other insurance that is not more specific than this insurance is not considered in this provision. A policy covering “contents,” for example, is not more specific than the promise in this form to cover “personal property owned by the insured that is used to maintain or service the building or structure or its premises.” The other insurance clause (see Commercial Property Conditions) controls in that situation. (It is possible to exclude specific items of business personal property by using endorsement CF 14 20, additional property not covered.)

Electronic data. This provision replaces the one that removed coverage for the cost to research, replace, or restore information. The new provision removes coverage for all such data regardless of where it is stored. However, it only applies to situations other than as described in the new additional coverage of electronic data. This provision does not apply to the insured's stock of computer software.

Cost to replace data. The cost to replace records as data is not covered, but some valuable papers coverage is given later in the form.

Vehicles or self-propelled machines, including watercraft and aircraft. The exclusion states that these items are not covered if they are licensed for use on public roads or are usually operated away from the insured premises. (While this language supports coverage for equipment such as forklifts, it also opens the door to coverage for an unlicensed auto if its operation is restricted to the insureds' premises, and for a boat principally operated on a lake that is located on the insured's premises.)

Certain types of property are listed as exempt from this exclusion: 1) vehicles (including autos) or self-propelled machines manufactured, processed or warehoused by the insured; 2) vehicles or self-propelled machines (other than autos) held for sale by the insured; 3) rowboats or canoes out of the water and kept at the insured premises; and 4) trailers.

The following property is excluded while it is located outside insured buildings.

Grain, hay, straw, or other crops. At one time, only damage to these items from windstorm, hail, ice, snow, or sleet was excluded.

Outdoor fences, radio and television antennas (including lead-in wiring, masts or towers and satellite dishes), detached signs, trees, shrubs, plants. There is limited coverage for these items under the coverage extensions described later. The 1991 form did not specifically mention satellite dishes, as does the current form. However, it should be noted that satellite dishes come within the meaning of “television antennas,” since the definition of “dish” in Webster's Ninth New Collegiate Dictionary includes “a directional microwave antenna having a concave usu. parabolic reflector.” Revisions effective October 1, 1991, clarify that “stock” of outdoor trees, shrubs, and plants is treated as covered property and is not subject to limitations under the coverage extensions.

Coverage for the following property is excluded on form CP 00 10, but it is possible to buy coverage at the building rate by using endorsement CP 14 10 06 95, additional covered property. Use of this endorsement clarifies not only that coverage is intended on the items, but that they are to be included in coinsurance considerations.

Bridges, roadways, walks, patios or other paved surfaces.

Cost of excavations, grading, backfilling, or filling.

Foundations of buildings, structures, machinery or boilers if their foundations are below: 1) the lowest basement floor; or 2) the surface of the ground, if there is no basement.

Bulkheads, pilings, piers, wharves or docks, underground pipes, flues or drains, and retaining walls not part of the building. (Bulkheads were added to the list with the 1995 revision.)

Covered Causes of Loss

Analysis

Three versions of the causes of loss form are available for use with the building and personal property coverage form: basic, broad and special. These forms are discussed elsewhere in this section.

Additional Coverages

The additional coverages under the building and personal property form are: debris removal; preservation of property; fire department service charge; pollutant clean up and removal; increased cost of construction; and electronic data. A discussion of each follows.

Debris Removal

Analysis

This coverage provides restitution for expenses incurred in cleaning up covered property after a covered cause of loss. The formula used for paying debris removal expenses is specific but the examples in the policy should help the insured understand how much he can expect to receive from the insurer for debris removal.

To emphasize that coverage does not extend to losses occurring after the end of the policy period, changes made in the 1991 edition (effective October 1, 1991) provide that loss reporting must occur within 180 days of the physical loss, rather than “within 180 days of the earlier of: (a) The date of direct physical loss or damage; or (b) The end of the policy period.” And, the point is made that the debris removal coverage does not apply to pollution clean up costs.

Preservation of Property

Analysis

The policy covers property moved from the insured location for protection from loss or damage by a covered peril. This coverage is for damage from any physical loss for 30 days while it is being moved or stored. The 1991 version had a time limit of 10 days for property being moved or stored.

Fire Department Service Charge

Analysis

The insured's liability for service charges assessed by a fire department (assumed by a contract before a loss or required by the provisions of a local ordinance) are paid up to $1,000. No deductible applies.

Pollutant Clean Up and Removal

Analysis

An additional coverage—with a separate annual aggregate limit of $10,000—was introduced in 1986 for the clean up and removal of pollutants from land or water if the “release, discharge or dispersal” of pollutants resulted from a covered cause of loss. Paralleling the language of the commercial general liability policy, the current edition provides that coverage applies if the “discharge, dispersal, seepage, migration, release or escape” of pollutants is caused by a covered cause of loss.

Changes made in the 1991 edition of CP 00 10 clarify that there is no coverage for costs to test for, monitor or assess the existence, concentration, or effects of pollution except when such testing is performed in the course of extracting “pollutants.” The 1991 edition also clarified that a loss must be reported within 180 days of the date on which the covered cause of loss occurs.

Increased Cost of Construction

Analysis

This additional coverage applies only to buildings that are covered on a replacement cost basis, and applies when an ordinance or law regulating the construction or repair of buildings results in increased costs in order for the insured to comply with such ordinance or law. This coverage clause limits the amount that the insurer will pay, and this amount is considered additional insurance, that is, not included in the limit of insurance set on the declarations page for covered buildings. There are also restrictions described in this clause as to when the insurer will not pay for the increased cost of construction: the property has to actually be repaired or replaced at the same or another premises; and, the repairs have to be made within two years of the loss date (unless the insurer agrees in writing to extend this period).

Electronic Data

Analysis

Previous editions of the CP 00 10 attempted to cover electronic data as valuable papers and records. As electronic data became more and more important, it became clear that it needed to be treated separately. The CP 00 10 now provides coverage for such data contained on CD's, floppy disks, hard drives, etc. The policy promises to replace or restore data that has been damaged or corrupted by a covered cause of loss applicable to business personal property. However, even if the insured has purchased open perils coverage for his business personal property, the policy limits coverage for data to the specified causes of loss. Also, if the insured has purchased an extra covered cause of loss (like flood), that peril does not apply to data. Damage done to data by a virus is covered, as long as the virus was not introduced to the system by an employee or leased employee. Viruses are also excluded if introduced by any entity hired by the insured to work on the computer system.

The limit of liability for this coverage is an annual aggregate of $2,500. If a loss begins in one policy period and extends into another, only the first policy period's limit applies.

Coverage Extensions

Analysis

The building and personal property coverage form includes six extensions of coverage, each providing additional limits of insurance. For these extensions to apply, either a coinsurance percentage of 80 percent or more or a value reporting period symbol must show on the declarations. (The coinsurance condition does not apply to the coverage within the extensions themselves.) Note that as the basic coverages are excess as to other insurance that is more specific, so, too, are the extensions.

Buildings are covered for a maximum of 30 days for $250,000 at each building. (Note that the 1991 version's limit for this extension was 10 percent of the building limit, not to exceed $250,000). It is possible to increase this limit by endorsement. Protection applies to new buildings under construction on the insured's premises and to any buildings the insured acquires. As to the latter, the new acquisition must be for usage similar to insured buildings or for use as a warehouse.

Any business personal property at acquired locations is insured for a maximum of 30 days for $100,000 at each building (this was a 10 percent of contents coverage limit, not to exceed $100,000 in the 1991 form). This extension does not encompass personal property at fairs or exhibitions, and does not include personal property of others that is in the temporary possession of the named insured. There is no restriction that the newly acquired business personal property be “intended for similar occupancies or purposes.” Additional premium is charged for values reported from the date construction begins or

the property is acquired.

Personal Effects and Property of Others

Analysis

An additional $2,500 per occurrence is available at each described premises for loss or damage to personal effects (i.e., items usually worn or carried on the person) owned by the insured, the insured's officers, partners, or employees and to any property of others in the insured's care, custody, or control. Property of others is a much broader category than personal effects. It need not be similar to the business personal property of the insured. The

perils applying to business personal property extend to these items, except that personal effects are not covered for theft. Adjusting and paying for losses to personal property of others are discussed below under Conditions.

Valuable Papers and Records (Other than Electronic Data)

Analysis

When valuable papers and records (other than electronic data) are destroyed at a described location, there are separate items to be considered in restoring such property. First, there is the cost of blank paper, film, discs, etc. Second, there is the cost of actually transcribing or copying such papers and records from available duplicates. If there are no duplicates, the cost of research and other expenses in reconstructing the records will be a third item. This item, the expense of research involved in recompiling data, is the subject of the valuable papers and records extension. The insured may apply up to $2,500 per location ($1000 in the 1991) to such costs following destruction of valuable papers and records by an insured peril. Again, if open perils apply, valuable papers and records are covered for the specified causes of loss only. This is an additional amount of insurance.

Property Off Premises

Analysis

Covered property temporarily at a location not owned, leased, or operated by the insured is insured up to $10,000 ($5000 in the 1991 form). This extension specifically excludes: 1) property in or on a vehicle; and, 2) property in the care, custody or control of salespersons, except under certain circumstances. The previous version of CP 00 10 excluded the named insured's stock from this coverage extension, but the current version has removed this limitation.

Outdoor Property

Analysis

If any of the named perils of fire, lightning, explosion, riot, civil commotion, or aircraft cause damage to outdoor fences, radio antennas, television antennas, satellite dishes, detached signs, or trees, shrubs, and plants, up to $1,000 applies to the loss, including debris removal expense (no other debris removal coverage is available for these items). As regards trees, shrubs, and plants, payment is restricted to $250 per item up to $1,000. These limitations do not apply to “stock” of outdoor trees and such stock is treated as “covered property.” Indoor trees, shrubs, and plants used for decoration are eligible for the full coverage of the forms both as to covered perils and as to insured values. These limits may be increased by endorsement.

Nonowned Detached Trailers

Analysis

Coverage under CP 00 10 is extended to nonowned detached trailers under certain circumstances. For example, if an insured rents a U-Haul trailer and uses it in his business, he has coverage for damage to that trailer as long as the trailer is in the named insured's care, custody, or control at the premises described on CP 00 10's declaration page; and, as long as the named insured has signed a contract whereby he is legally responsible for damage done to the trailer. However, if the trailer is attached to a truck or van, the coverage ends.

This is limited coverage, but it is of benefit to an insured, for example, who rents a trailer to be used as a temporary office at a work site, as long as the trailer is not hitched up to any vehicle that could move it. And, note that the insurance provided by this clause is excess coverage.

Exclusions and Limitations

Analysis

Just as the covered causes of loss are based on which form the insured chooses—basic, broad, or special—so also are the exclusions and limitations on the coverage based on those forms.

Limits of Insurance

Analysis

The maximum amounts the insurer will pay for loss or damage in any one occurrence are those shown in the declarations. Payment for loss to outdoor signs attached to buildings is limited to $1,000 per sign. This provision makes it clear that payments made under the additional coverage of preservation of property are not additional amounts of insurance, but are included in the applicable limit of insurance.

Deductible

Analysis

The standard deductible applying to all perils except earthquake is $250 and is employed only once per occurrence. The rules permit the purchase of insurance with higher deductible amounts. The rules allow for application of the optional deductibles on a per location basis, with different deductibles permitted for different locations. All property at one location is subject to the same deductible, even if divided between blanket coverage and specific limits, except that different deductible amounts may be provided at each location for windstorm-hail or theft through endorsement CP 03 20 10 92. Formerly, deductibles—even at one location—could vary by cause of loss. For purposes of instituting the higher deductible amount, the 80 percent coinsurance requirement was eliminated by the 1990 changes on CP 00 10; minimum coinsurance requirements are determined by rules for the causes of loss forms and other individual rules that may apply. Where one occurrence causes loss at different insured locations, only the largest applicable deductible is used to reduce the insured's recovery. Changes made in the 1991 edition of CP 00 10 clarify that loss payment calculations must first take into account any coinsurance penalty or deductions for the agreed value option.

New to the 1995 form are two examples illustrating application of the deductible when there is more than one limit of insurance. The deductible is added to the limit of insurance. If the amount of loss is less than this sum, then the deductible is subtracted from the amount of loss to obtain loss settlement. If the amount of loss is greater than the sum, the amount paid is the limit of insurance.

Loss Conditions

Analysis

The loss conditions of the building and personal property coverage form are in addition to those common policy conditions and commercial property conditions. The first of these is abandonment. The insured may not simply abandon damaged property to the insurance company.

The condition regarding appraisal in the building and personal property coverage form provides that if either the insurance company or the insured submits a written demand for an appraisal after a property loss, each will choose and pay for an appraiser. No time constraints are set. In the event the appraisers fail to agree on both the value of the property and the amount of loss, the issue is given to an umpire (previously selected by the two appraisers or appointed by a judge from any court having jurisdiction). When an agreement is reached by any two of these parties (among the appraisers and umpire), the decision stands. Any expenses beyond the cost of each party's appraiser are divided equally between the insurance company and the insured. It is stated within the appraisal provision that the insurance company may still deny a claim despite the fact an appraisal has been done. The purpose of the statement is to avoid a legal argument that the insurer's participation in the appraisal process carries an implied agreement to pay that prevents subsequent denial.

Analysis

After a loss, an insured must supply information to the insurance company in the form of a notice of loss that includes a description of the property. (This is not required to be in writing, but it must be given promptly.) “As soon as possible” that information is to be followed by a description of how, when, and where the damage took place. Subsequently, if the insurance company requests it, an inventory of damaged and undamaged property must be compiled. Finally, a signed, sworn proof of loss containing the information requested by

the insurer must be sent within 60 days of the request on forms supplied by the insurance company. The wording proof of loss conveys the fact that the insured must provide proof to substantiate the loss.

In addition, an insured is expected to: 1) notify police if a law may have been broken in the course of the loss; 2) protect the covered property from any further damage and keep track of costs for emergency and temporary repairs to do so; 3) separate damaged from undamaged property, if feasible; and 4) generally cooperate with the insurance company. Cooperation includes submitting to questions under oath, including questions about books and records. Any insured answering such questions must sign his or her answers.

The current edition of the form states that the insurer may “examine” the insured under oath (a term that courts have held encompasses both oral and written examination). The insurer may make copies from the insured's books and records (based on similar language in the Standard Fire Policy) and examine insureds separately and out of the presence of other insureds. Following USF&G v. Hill, 722 S.W.2d 609 (Mo. App. Ct. 1986) in which a Missouri appellate court found the insurer's right to examine insureds separately had to be made explicit in the policy else the insurer had no such right, this language was added to the form.

The insurer may also take samples of damaged and undamaged property. Explanatory information submitted from ISO with the 1991 form stated that comparisons of the two types of property is desirable in the investigation of fire loss claims.

The insured's expenses in preserving the property from further loss are to be suitably documented by records “for consideration in the settlement of the claim.” These expenses, if paid, are subject to the limit of insurance. A change in the 1995 edition is that the insured must take “all reasonable steps to protect the covered property from further damage.” The 1991 form states the insured must take reasonable steps to protect the covered property from further damage “by a covered cause of loss.” The change in wording indicates that the insured must protect the property from any ensuing loss, whether covered or not. For example, an insured could not move property from a burning building to a flooded area, since this would cause greater damage to the property.

Analysis

Following a covered loss, the insurance company has four options. First, it may pay “the value of” the property that was lost or damaged. The valuation clause discussed later pegs “value” in most instances as actual cash value at time of loss or damage.

Second, the company may pay the cost of replacing the property or the cost of repairing it. A change in the 1995 edition states this provision will not encompass any increased cost because of enforcement of any ordinance or law regulating construction, use, or repair of any property. Third, the company may take the property at an agreed or appraised price.

Finally, the company may repair, rebuild, or replace with property of like kind and quality. Here again, this provision does not allow for any increased costs because or enforcement of any ordinance or law governing rebuilding or repair.

The insurer promises to put the insured on notice as to which of the four options it chooses—that one most favorable to the insurer's interest—within 30 days of receipt of the sworn statement of loss. And, whatever the option, the insurer will not pay more than the financial interest of the insured in the covered property.

As regards damaged property of others in the insured's custody, payment will be made to the property owner directly and such payment satisfies any claims of the insured under either the coverage extension to property of others or the direct coverage, if that has been purchased. The adjustment of such losses may be with the owners or through the insured as intermediary, at the discretion of the insurance company. In any case, payment is based upon the property owner's financial interest in the items. The insurance company may choose to provide defense for the insured against any lawsuits resulting from claims regarding property of others.

If the insured has complied with the terms of the contract and the amount of loss is determined and agreed upon (or appraisal award is made), the insurer promises payment within 30 days after receipt of the sworn statement of loss.

Analysis

This section provides a method for loss readjustment in case stolen property is recovered where the insured has the option to return the amount of any claim payment in return for the original item. Recovery expenses and any necessary repairs to the property are borne by the insurance company up to the applicable limit of liability.

Analysis

The 1995 form was revised in that the vacancy condition was divided into two parts. The first of these is a description of terms. “Building” for a tenant insured will therefore mean the portion of the building rented or leased to that insured. The portion will be considered vacant if there is not enough business personal property within to conduct customary business.

“Building” for the owner insured means the entire building, which is considered vacant unless at least 31 percent of its total square footage either is rented, or is used by the owner to conduct customary operations. The 1991 edition stated that a building would be considered vacant when it did not contain enough business personal property to conduct customary operations. Accordingly, a building containing the furniture and fixtures of a business, but from which the stock had been removed, would be considered vacant since without the presence of the stock, “customary operations” could not be conducted. It would appear that, in the 1995 edition, a building could contain fixtures, fittings, and business personal property would still be considered vacant if it were not being put to its intended use of performing customary operations.

It should be noted that, under the 1995 form and the current form, buildings under construction or renovation are not considered vacant. Prior to the inclusion of renovation in the clause, there was much controversy as to whether the exemption in the vacancy clause applied to such buildings. Although courts had held both ways, adjusters were inclined to apply the exemption to new buildings only, as the word “construction” implies. (Webster's Third New International Dictionary: “the act of putting parts together to form a complete integrated object: Fabrication.”) Insureds argued that the exposure was the same, and oftentimes that was probably true. However, the times when the building and personal property coverage form applies—by coverage extension—to a building under construction are rare and are limited by the provisions of the form (30 days). An existing structure, on the other hand, can now be subjected to renovation at any time with no requirement of notice to the insurance company, since it will not be considered vacant.

The second part of the vacancy condition details specific provisions. After a building is vacant for more than 60 consecutive days (or more if increased by endorsement), it is ineligible for any of the following coverages: vandalism; building glass breakage; water damage; theft or attempted theft; or sprinkler leakage (unless steps have been taken to protect the system against freezing). Payment for damage caused by any other covered peril after 60 consecutive days of vacancy is reduced by 15%.

Analysis

Generally, the building and personal property coverage form provides actual cash value coverage in case of loss to covered property. There are, however, five specific exceptions to this. First, valuation for buildings sustaining loss less than $2,500. If the coinsurance requirement is met (the insured adheres to an amount of insurance equaling the prescribed percentage of the actual cash value of the property), and the loss involves costs of $2,500 or

less, replacement cost is applied (i.e., the insurer pays either the cost of repair or replacement). Damage to some items that are eligible for consideration as part of a building (awnings, floor coverings, appliances, outdoor equipment and furniture) are not reached by this replacement cost provision.

An addition in the 1995 form is the provision that the cost of building repairs or replacement does not include any increased cost because of enforcement of any ordinance or law governing repair or construction of any property.

The second exception to actual cash valuation is that for stock. If covered as the insured's business personal property, loss to stock that is sold but not delivered is settled based on its selling price less any discounts and expenses that are normally incurred. Otherwise, such goods that are treated as property of others are valued at actual cash value.

The third exception is that for glass. Replacement with safety glazing material is provided if required by law.

The fourth exception is for tenant's improvements and betterments. The type of settlement for this coverage is determined by how soon damages are repaired by the insured. If repairs are promptly made, settlement is calculated on an actual cash value basis. “Promptly” is not defined in terms of actual length of time, but is presumed to mean “immediately” or “quickly.” According to explanatory material from ISO, there was no change in intent from the language of previous forms, “within a reasonable time.”

If repairs are not made promptly, a proportional settlement is made. The original cost of the improvement is multiplied by the number of days from the loss to the lease's expiration or the expiration of the renewal option period, if applicable. The amount computed is then divided by the number of days from the installation of the improvement to the expiration of the lease or the renewal option period. The inclusion of renewal option periods addresses the long standing question of whether such periods should be considered during loss settlement calculations to provide a better restitution for an insured's use interest in a damaged improvement.

To illustrate, suppose a tenant holds a one year lease for a commercial building that expires on July 31. The lease contains a one year renewal option. On March 3, the tenant installs an improvement in the form of paneling costing $1,500. A fire occurs on June 2 that causes damage so extensive that the insured closes the business permanently. Had no loss occurred, the tenant would have stayed in business and exercised the renewal option.

Without taking the renewal option period into consideration, the insured stands to receive a $600 payment for the improvement ($1,500 x 60/150 = $600—where 60 equals the days from loss to lease expiration and 150 equals the days from improvement installation to lease expiration). When the renewal option period (365 days) is included in the calculation, the result of the proportional loss settlement is $1,238 ($1,500 x 60 + 365/150 + 365 = $1,238),

a significant difference.

These formulas are used only if the insured is disqualified from actual cash value recovery by failure to undertake repairs promptly. No settlement is made if someone other than the tenant (the landlord, for instance) repairs damaged improvements.

The final exception to actual cash valuation for valuable papers and records has been removed from the 2002 form, because that issue is now addressed in the above extension of coverage.

Additional Conditions

Analysis

The principle of coinsurance—whereby a reduced rate is exchanged for the insured's agreeing to maintain a specified relationship between values and amount of insurance—has long been a source of confusion for insureds. The building and personal property coverage form attempts an explanation that may reduce the confusion. Within this provision, the mechanics of coinsurance are explained with a step-by-step description and the ramifications of a penalty are explored. Examples show the effects of coinsurance computations in three

different situations: where limits are inadequate; where limits are adequate; and where a blanket limit exists.

In composing the examples the drafters illustrate the clause's provision that deductible amounts are subtracted after the coinsurance calculations are done. This approach results in a less advantageous settlement for the insured, especially in the case of sizeable deductibles (see subsequent discussion). The coinsurance clause and its explanation applies the deductible not to the loss, but to the adjusted loss.

In the form's first example, an insured becomes a 50 percent coinsurer of a $40,000 loss. The example shows the insured recovering $19,750, which is the adjusted loss minus a $250 deductible. At one time, property forms provided for the deductible to be applied to the loss and the insured would have recovered 50 percent of $39,750, or $19,875.

(1)10 days before the effective date of cancellation if we cancel for your non-payment of premium; or

(2)30 days before the effective date of cancellation if we cancel for any other reason.

Analysis

This condition spells out the rights and duties of any mortgagees or trustees (here referred to as mortgage holders) that are named on the declarations. If an insured is in compliance with all coverage terms and submits a claim, any mortgage holder listed receives payment for losses as interests may appear. Even if foreclosure proceedings or “similar action(s)” have begun on a building that suffers a loss, a mortgage holder may collect a loss payment. Further, if payment for a claim is denied to an insured (due to the insured's actions or lack of compliance with the terms for coverage) a mortgage holder is still entitled to loss payment as long as any obligations concerning premium or proof of loss due to the company are taken care of by the mortgage holder.

Additionally, a mortgage holder is required to notify the insurance company of any known change in ownership, occupancy, or increase of hazard. When these conditions are satisfied, all terms of the building and personal property coverage form become applicable to the mortgage holder.

If partial claim payment is made to a mortgage holder (and not to an insured), two results occur: the insurance company inherits a proportion of the mortgage holder's rights under the mortgage based on the extent of claim payment; and the mortgage holder still retains subrogation rights and may attempt to recover the full amount of the claim.

At the insurance company's option, the mortgage holder may be paid the full payment of the principal and interest on the mortgage in exchange for transfer of the mortgage to the insurance company. The insured continues mortgage payments, but to the insurance company instead of the original mortgage holder.

In the event the policy is canceled by the insurance company, written notice is sent to the mortgage holder 30 days before the effective date of cancellation. If the cancellation is due to nonpayment of premium by the insured, then notice to the mortgage holder is only 10 days, the same as for company nonrenewal. (Note that if the policy is not renewed by the company due to nonpayment of premium or some other action by the insured, the mortgage

holder is not entitled to any advance notice.)

Optional Coverages

Analysis

The insuring agreements of three popular coverages (agreed value, inflation guard and replacement cost) are built into the building and personal property coverage form. When purchased, coverage is activated by placing appropriate entries on the declarations. This format removes the need for additional endorsements for those commonly requested coverages.

When the agreed value provision is purchased, it removes the coinsurance requirement from the covered property for which it is designated and substitutes an agreement to cover any loss in the same proportion as the limit bears to stated agreed value. If the agreed value on an item is stated to be $100,000 and the limit is $100,000, then any loss is covered at 100 percent. Coverage extends until the agreed value expiration date marked on the declarations or the actual expiration date of the policy, whichever occurs first. After expiration, if the provision is not renewed by the company, the coinsurance condition is reinstated.

Analysis

This is a protective device to help offset the effects of inflation. It automatically increases an insured's stated limits of liability based on a predetermined percentage rate. In the building and personal property coverage form, this is an annual rate that is applied on a pro rata basis and can be purchased for building and personal property coverages. In the event of a midterm loss, the most current limits of insurance will be increased by the pro rata percentage applying to the property before any loss settlement amounts are computed. The current edition of the form contains an example of the operation of the inflation guard provision.

Analysis

Replacement cost coverage may be purchased for building property, personal property, stock, or the personal property of others (under certain circumstances). Replacement cost does not apply to stock unless the replacement cost designation on the declarations page specifically shows the “Including `Stock”' option. The actual cash value settlement provision is replaced by the provisions of this optional coverage. An insured may still request an actual cash value settlement (with coinsurance computed on an actual cash value basis) and then give notice within 180 days of the loss of intent to make a replacement cost claim for the additional amount.

The insured must make repairs or replacement “as soon as reasonably possible” and no replacement cost settlements will be made by the insurance company until the repairs or replacements are completed.

Under activation of replacement cost coverage, the least of the following amounts will be paid: (1) the limit of insurance applicable to the property; (2) what it costs to replace the damaged property with comparable material and quality at the same location for the same purpose (though actual rebuilding need not occur at the same premises); or (3) what the insured actually spends “that is necessary” to repair or replace the damaged property (leaving the insurer some discretion over the amount of payment for costs actually incurred).

Replacement cost coverage does not apply to personal property of others, unless extended to such property in accordance with the provisions of CP 00 10; contents of a residence; works of art, antiques, or rare articles. Note that tenants' improvements and betterments are not included in this category, although the policy does have certain limitations to the amount that the insurer will pay for improvements and betterments.

Definitions

Analysis

The 2002 adds the definition of fungus, including mold. The use of the word “fungus” to define “fungus” is called a circular definition and is a practice frowned upon by grammarians. The editors believe a better definition could be written without use of the word fungus in it.

These definitions apply to the building and personal property coverage form and to any of the causes of loss forms that may be combined with it. For example, the causes of loss—special form exclusion B.2.j. precludes coverage for loss or damage resulting from discharge of “pollutants,” which is defined in the building and personal property coverage form.