Conditions Applicable to Property and Liability Coverages
Summary: The loss settlement provisions, and conditions applying to the property and liability coverages, of the American Association of Insurance Services (AAIS) homeowners forms are similar in many respects to those of the Insurance Services Office (ISO). There are, however, differences. Following is a discussion of the provisions and conditions.
Introduction
Although many of the AAIS policy provisions and conditions are similar to those found in the ISO homeowners forms, there are differences. For example, the ISO form states that the insured must, in case of loss to covered property, “protect the property from further damage.” Contrast this with the AAIS wording “take all reasonable steps to protect covered property at and after an insured [italics added] loss…” The following discussion centers on the AAIS language; differences from the ISO form are noted.
For defined terms used in the following discussion, seeProperty Coverages—AAIS Homeowners; and seeLiability Coverages—AAIS Homeowners.
The following discussion focuses on Form 3, the Special Form (similar to the ISO HO 00 03 04 91; the differences in loss settlement provisions of Form 8, the Limited Form (similar to the ISO HO 00 08 04 91) and Form 5, the Special Building and Contents Form (ISO has no similar form) are indicated.
Duties in Event of a Loss or Claim
The following are duties the insured must carry out in event of a loss or claim.
1. Notice—
a. In case of a loss, the “insured” must:
1) Give “us” or ”our” agent prompt notice (“We” may request written notice.);
2) Give notice to the police when the act that causes the loss is a crime; and
3) Give notice to the credit or debit card company if the loss involves a credit or debit card.
b. The notice to “us” must state:
1) the name of the “insured”, the policy number, and the time, place, and the details of the loss; and
2) the names and addresses of all known potential claimants and witnesses.
2. Cooperation—The “insured” must cooperate with “us” in performing all acts required by this policy.
3. Volunteer Payments—An “insured” must not make payments, pay or offer rewards, or assume obligations or other costs, except at the “insured's” own cost. This does not apply to costs that are allowed by this policy.
4. Repairs—The “insured” must take all reasonable steps to protect covered property at and after an insured loss to avoid further loss. “We” will pay the reasonable costs incurred by “you” for necessary repairs or emergency measures performed solely to protect covered property from further damage by a peril insured against if a peril insured against has already caused a loss to covered property. The “insured” must keep an accurate record of such costs. However, “we” will not pay for such repairs or emergency measures performed on property which has not been damaged by a peril insured against. This does not increase “our” “limit”.
5. Other Duties—Property Coverages—At “our” request the “insured” must:
a. give “us” a signed, sworn proof of loss, within 60 days after “our” request, that shows:
1) the time, place, and the details of the loss;
2) the interest of the “insured” and the interest of all others in the property. This includes all mortgages and liens;
3) other policies that may cover the loss;
4) changes in title or use;
5) available plans and specifications of buildings;
6) detailed estimates for repair; and
7) in detail, the quantity, description, cost, amount of loss, and actual cash value of the personal property involved in the loss. The “insured” must give “us” copies of all bills, receipts, and related documents to confirm these;
b. submit to examination under oath in matters that relate to the loss or claim as often as “we” reasonably request. If more than one person is examined, “we” have the right to examine and receive statements separately from each person and not in the presence of the others;
c. Show the damaged property and allow “us” to take samples of damaged property for inspection, testing, and analysis as often as “we” reasonably request;
d. show records, including tax returns and bank records of all canceled checks that relate to the value, loss, and costs, and permit copies to be made of them as often as “we” reasonably request;
e. assist “us” to enforce any right of recovery which the “insured” may have against a party causing the loss;
f. show records that prove loss of rents and show receipts for additional living costs, and permit copies to be made of them as often as “we” reasonably request; and
g. submit evidence or affidavit supporting a claim under Credit Card, Forgery, and Counterfeit Money Coverage stating the amount and cause of loss.
Analysis
There are some interesting differences between the AAIS and the ISO forms. As noted earlier, the AAIS form requires the insured to “take all reasonable steps to protect covered property at and after an insured loss to avoid further loss.” The insurer promises to pay reasonable costs for necessary repairs or emergency measures to protect the covered property from further damage “from a peril insured against.” The language would appear to force the insured to make a determination at the time of the loss as to whether or not the loss is covered. Since losses are not always clear-cut, this could present a problem when the insured expects to collect for the cost of repairs if a loss turns out not to be covered. Conversely, if an insured thinks a loss is not covered and fails to make emergency repairs, could the claim be denied because of failure to fulfill the conditions?
The ISO language simply states that “in case of a loss to covered property…you must …make reasonable and necessary repairs to protect the property…” Here the insured need not make a pre-determination as to whether or not the loss is covered; however, a similar problem could arise if the insured assumes coverage for a loss for which no coverage actually exists, and expects reimbursement for repair costs.
The insured is cautioned not to make any payments, offer or pay any rewards, or assume any obligations. This applies to both property and liability losses; similar ISO language appears in the section II liability conditions, but without mention of offering or paying a reward.
Note that the insured must produce records, including tax and bank records relating to the “value, loss, and costs” and permit the insurer to make copies of such records. This could impose an unfair and unrealistic burden on an insured both before and at the time of a loss. How many records, and kept for how long? The U.S government allows tax records to be destroyed after three years; is the insurer more restrictive? An insured might argue that tax records are a matter between him and the Internal Revenue Service.
Further, what would happen if, say, an insured purchased expensive furniture, and threw away the receipts after two years? If the furniture were destroyed in a fire, could the insurer penalize the insured for failing to maintain such records indefinitely?
Other Duties—Personal Liability Coverage—In case of an “occurrence which might result in a claim, the “insured” must promptly give “us” copies of all notices, demands, and legal papers that relate to the “occurrence” or the claim.
At “our” request, the “insured” must help “us”:
a. to settle a claim;
b. to conduct suits. This includes being at trials and hearings;
c. to enforce the right of recovery or indemnification against all parties who may be liable to an “insured” for the injury or damage;
d. in the securing of and giving of evidence; and
e. in obtaining the attendance of all witnesses.
Analysis
These duties are similar to those found in the ISO section II—Conditions. The insured is under obligation to cooperate with the insurer in event of a claim or “occurrence.”
Other Duties—Medical Payments to Others Coverage—In case of a loss, the injured person or someone acting on behalf of that person must:
a. give “us” written proof of claim (under oath if “we” request) as soon as practical; and
b. authorize “us” to get copies of medical records.
The injured person must submit to medical exams by doctors chosen by “us” when and as often as “we” may reasonably require.
8. Other Duties—Damage to Property of Others—In case of a loss, “you” must give “us” a signed, sworn statement of loss within 60 days after the loss and “you” must exhibit the damaged property if it is within “your” control.
Analysis
These provisions are common to both the AAIS and the ISO forms. In the case of a loss under medical payments coverage, written proof of the claim and authorization to obtain medical records must be sent to the insurer by either the injured person, or someone acting on that person's behalf.
In event a loss involves damage to property of others as set forth in the incidental liability coverages (see Liability Coverages—AAIS Homeowners), the insured must forward a signed, sworn statement of loss to the insurer within sixty days. If possible, the damaged property must be shown to the insurer.
Loss Settlement Provisions
The following provisions detail how a covered loss is settled under Form 3, the Special Form.
1. Property Coverages
a. Our Limit—Subject to the deductible or other limitation that applies, “we” pay the lesser of:
1) the “limit” that applies;
2) ”your” interest in the property; or
3) the amount determined under the applicable Loss Settlement Terms.
b. Deductible—This applies to all Principal Property Coverages and all Incidental Property Coverages except Emergency Removal; Fire Department Service Charge; Credit Card, Forgery, and Counterfeit Money; Grave Markers; Refrigerated Food Spoilage; and Loss Assessment. [Form 5 adds Lock and Garage Door Transmitter Replacement, an incidental property coverage in this form.] It applies to all perils insured against unless otherwise shown.
”We” pay that part of the loss over the deductible. The deductible applies per occurrence, and separately at each covered location. Only one deductible applies at each location.
c. Loss to a Pair or Set—If there is a loss to an item that is part of a pair or set, “we” pay only to replace or repair the item, or “we” pay the difference in the actual cash value of the pair or set just before the loss and the actual cash value just after the loss.
d. Loss to Parts—If there is a loss to a part of an item that consists of several parts when it is complete, “we” pay only for the value of the lost or damaged part or the cost to repair or replace it.
Analysis
The provisions clearly set out how the deductible is to be applied to a loss. In the ISO form, reference to the deductible is found in both the additional coverages and in the loss settlement provisions. Both forms describe loss settlement if there is loss or damage to a pair or set; however, the AAIS form describes how a loss will be settled if there is loss to a part of an item. Although it may appear that this provision may be applied to partial losses, as when, for example, part of a roof is destroyed, it will be seen (see following discussion) that this is not the intent. The provision may be applied, for example, if lightning damages an amplifier contained in a stereo system that consists of speakers, CD player, tape deck, and turntable. The insured cannot claim that the entire system must be replaced.
e. Loss Settlement Terms—Subject to the “terms” shown above, “we” settle losses according to the Replacement Cost Terms. If the Replacement Cost Terms do not apply, “we” settle losses according to the Actual Cash Value Terms.
1) Replacement Cost Terms
a) The Replacement Cost Terms apply only to buildings covered under Coverages A and B that have a permanent foundation and roof. They do not apply to:
(1) mobile homes whether or not on a permanent foundation;
(2) window air-conditioners;
(3) awnings and canopies;
(4) appliances;
(5) carpets;
(6) window coverings; and
(7) antennas.
b) In determining the replacement cost, do not include the cost of:
(1) excavations; brick, stone, or concrete foundations; piers; and other supports which are:
(a) below the undersurface of the lowest basement floor; or
(b) below the surface of the ground inside the foundation walls, if there is no basement; and
(2) underground flues, pipes, wiring, and drains.
Analysis
Note that replacement cost applies only to buildings, under coverages A and B, that have a permanent foundation and roof. Losses to mobile homes, as well as carpeting, appliances, window coverings, and antennas are settled on an actual cash value basis. The ISO form settles losses to personal property on an actual cash value basis; however, since it can be argued that custom made window treatments are actually part of the dwelling, the ISO form could conceivably provide loss settlement to window treatments on a replacement cost basis. The AAIS form avoids the argument by settling all losses to “window coverings” at actual cash value. The ISO form refers to “outdoor equipment, whether or not attached to buildings,” which could include a window air-conditioner or an attached grill.
Excavations, foundations, supports below the undersurface of the lowest basement floor or below the surface of the ground if there is no basement are not taken into account when determining replacement cost. Underground pipes, wiring, and drains should not be included in the replacement cost calculations. (Whether or not this is prudent is another issue. Earthquakes or even an extremely intense fire can damage a foundation.)
c) When the cost to repair or replace exceeds the lesser of $2,500 or 5% of the “limit” on the damaged building, “we” do not pay for more than the actual cash value of the loss until repair or replacement is completed.
”You” may make a claim for the actual cash value of the loss before repairs are made. A claim for an additional amount payable under these “terms” must be made within six months after the loss.
d) If the “limit” on the damaged building is less than 80% of its replacement cost at the time of loss, the larger of the following amounts is used in applying the “terms” under Our Limit:
(1) the actual cash value at the time of the loss; or
(2) that part of the replacement cost of the damaged part which “our” “limit” on the building bears to 80% of the full current replacement cost of the building.
e) If the “limit” on the damaged building is at least 80% of its replacement cost at the time of loss, the smaller of the following amounts is used in applying the “terms” under Our Limit:
(1) the cost to repair or replace the damage on the same premises using materials of like kind and quality, to the extent practical; or
(2) the amount spent to repair or replace the damage.
Analysis
When at least 80% insurance to value is carried, then replacement cost provisions apply. Note that materials of “like kind and quality, to the extent practical” may be used. ISO refers to “like construction and use on the same premises”—a subtle difference, but nonetheless a difference.
Although it appears that the only provisions used in settling a replacement cost loss are found in e) (1) and (2), reference is made to the “`terms' under Our Limit.” These are the terms referenced earlier in the form, which state that the lesser of the “limit that applies” (which can be the property limit of liability) or “the amount determined under the applicable Loss Settlement Terms” will be the amount paid. So, in effect, there are three loss settlement provisions when the insured carries at least 80% insurance to value.
2) Actual Cash Value Terms—Actual cash value includes a deduction for depreciation, however, caused.
a) The Actual Cash Value Terms apply to all property not subject to the Replacement Cost Terms.
b) The smallest of the following amounts is used in applying the “terms” under Our Limit:
(1) the cost to repair or replace the property with materials of like kind and quality to the extent practical;
(2) the actual cash value of the property at the time of loss; or
(3) (applies only to mobile homes) the difference in the actual cash value just before the loss and the actual cash value just after the loss.
Analysis
Personal property is adjusted on an actual cash value basis, as are “other structures” that are not buildings. In the case of loss to a mobile home (remember that the form may be used for a mobile homeowner) loss may be adjusted as the difference between actual cash value immediately before the loss and actual cash value just after the loss.
2. Coverage L—Personal Liability—The “limit” shown on the “declarations” for Coverage L is the most “we” pay for loss for each “occurrence”. This applies regardless of the number of:
a. persons insured under this policy;
b. parties who sustain injury or damage; or
c. claims made or suits brought.
3. Coverage M—Medical Payments To Others—The “limit” shown on the “declarations” per person for Coverage M is the most “we” pay for all medical expenses payable for “bodily injury” to one person as the result of one accident.
When a “limit” is shown on the “declarations” per accident for Coverage M, that “limit” is the most “we” pay for any one accident.
The payment of a claim under Coverage M does not mean “we” admit “we” are liable under Coverage L.
4. Insurance Under More Than One Coverage—If more than one coverage of this policy applies to a loss, “we” pay no more than the actual loss.
Analysis
Liability coverage is on a “per occurrence” basis. No matter how many claimants injured in one loss, or how many “insureds” are covered by the policy, the limit of liability shown on the declarations is the most that will be paid for any one loss. Similarly, if a per-person limit is shown on the declarations for medical payments coverage, that is the most that will be paid for medical expenses for any one person.
Note that in no case will the form respond with duplicate payments for a loss if there is duplicate coverage. Say, for example, a guest is injured on the insured premises, and receives payment for medical expenses. If the guest then sues for damages, alleging negligence on the part of the insured, in no event will the medical expenses be paid twice.
5. Insurance Under More Than One Policy—
a. Property Coverage—If there is other insurance that applies to the loss, “we” pay “our” share of the loss. “Our” share is that part of the loss that the “limit” of this policy bears to the total amount of insurance that applies to the loss. When a loss is also covered by the master policy of an association or corporation of property owners, this insurance is excess.
b. Coverage L—Personal Liability
This insurance is excess over other valid and collectible insurance that applies to the loss or claim. However, this does not apply to insurance written specifically to provide coverage in excess of the “limits” that apply in this policy.
If the other insurance is also excess, “we” pay only “our” share of the loss. “We” pay only that part of the loss that the applicable “limit” under this policy bears to the total amount of insurance covering the loss.
6. Restoration of Limits—Each loss “we” pay under this policy does not reduce the “limits” available over the policy period.
Analysis
If a property loss is covered by more than one policy, the form responds to loss on a proportional basis, unless the other insurance is a condominium master policy. If this is the case, then that is the primary form; this policy then responds on an excess basis.
If a liability loss is covered by more than one policy (for example, loss assessment for a liability claim under a condominium master policy), then the AAIS policy is excess, unless the other policy is also excess. If that is the case, then both policies share proportionately in the loss. But if the other policy is an excess or umbrella policy, the AAIS form is primary; the excess or umbrella is excess.
The limits of liability are not aggregate but are restored following a loss.
The following provisions describe the insurer's obligations and options in claims settlement.
1. Your Property—”We” adjust each loss with “you”. “We” pay an insured loss within 30 days after an acceptable proof of loss is received and the amount of the loss is agreed to in writing. If “you” and “we” do not agree, “we” pay within 30 days after the filing of an appraisal award with “us”. Payment is made to “you” unless a loss payee is named.
2. Additional Living Costs—If the “insured premises” is made unfit for use for more than one month, covered costs are paid on a monthly basis. “you” must give “us” proof of such costs.
3. Damage to Personal Property of Others—At “our” option, an insured loss may be adjusted with and paid:
a. to “you” on behalf of the owner; or
b. to the owner. If “we” pay the owner, “we” do not have to pay an “insured”.
4. Our Options—”We” may:
a. pay the loss in money; or
b. rebuild, repair, or replace the property. “We” must give “you” notice of “our” intent to do so within 30 days after “we” receive an acceptable proof of loss.
”We” may take all or part of the damaged property at the agreed or appraised value. Property paid for or replaced by “us” becomes “ours”.
5. Liability Coverages—A person who has secured a judgment against an “insured” for an insured loss or has liability established by a written agreement between the claimant, an “insured”, and “us” is entitled to recover under this policy to the extent of coverage provided.
Analysis
The provisions in this section of the policy explain who will receive payment in event of a covered loss. If an insured liability loss is settled, or liability for a loss is established by a written agreement between the claimant, insured, and insurer, then the claimant is entitled to receive payment (up to the amount of loss or the policy limits).
If there is a loss of more than a month's duration involving additional living expense, reimbursement is on a monthly basis. In other words, the insured cannot request, for example, a five month's advance. The insured must be able to document the additional expense.
If personal property of others is damaged, then payment may be made either to the insured on behalf of the claimant, or directly to the claimant. Finally, the insurer has the option to rebuild, replace, or repair damaged property, and to take all or part of the damaged property. If the insurer pays for or replaces damaged property, then that property becomes the property of the insurer.
Loss Settlement Provisions—Forms 5 and 8
Since Form 8, the Limited Form, may be used for dwellings that do not qualify for the Special Form coverage, perhaps because of value or unique construction, there is no replacement cost provision. Loss settlement is on an actual cash value basis for real and personal property. Following are the Form 8 loss settlement terms.
e. Loss Settlement Terms—Subject to the “terms” shown above, “we” settle losses on an actual cash value basis. Actual cash value includes a deduction for depreciation, however caused.
Analysis
Note that the form makes it clear that there will be a deduction for depreciation. Depreciation may occur because of “wear and tear,” or decline in market value because of a deteriorating neighborhood—for whatever reason, a deduction for depreciation will still be made.
Form 5, the Special Building and Contents Form, includes within the form coverage for contents on a replacement cost basis (this coverage is available in the ISO program only by endorsement). The terms for replacement of buildings covered under coverage A and B are identical to those of Form 3, so only the terms for replacement of personal property are given below.
2) Replacement Cost Terms That Apply to Personal Property Only
a) These “terms” apply to:
(1) property covered under Coverage C; and
(2) the following scheduled classes of personal property if covered under this policy:
(a) jewelry;
(b) furs and garments trimmed with fur or consisting principally of fur;
(c) cameras, projection machines, films, and related articles of equipment;
(d) musical instruments and related articles of equipment;
(e) silverware, goldware, items plated with gold or silver, and pewterware;
(f) golfer's equipment; and
(g) bicycles.
b) These “terms” do not apply to:
(1) articles of art or rarity that cannot be duplicated;
(2) memorabilia, souvenirs, collector's items, and similar items whose age or history contribute to its value;
(3) items not maintained in good or workable condition; or
(4) items that are outdated or obsolete and are stored or not being used.
c) The smallest of the following amounts is used in applying the “terms” under Our Limit:
(1) the cost to repair or replace the property with new property of equivalent kind and quality, to the extent practical, without deduction for depreciation;
(2) the amount computed after any special limitation in this policy has been applied to the loss;
(3) for loss to property covered under Coverage C, the Coverage C “limit”; or
(4) for loss to scheduled personal property, the “limit” that applies to the item.
d) When the cost to repair or replace for each occurrence is more than $500, “we” do not pay for more than the actual cash value of the loss until actual repair or replacement is completed. “You” may make a claim for the actual cash value amount of the loss before repairs are made or replacement is completed. A claim for any additional amount payable under this provision must be made within six months after the loss.
Analysis
Replacement cost for personal property extends to certain classes of scheduled property, such as jewelry, musical instruments, and silverware. Fine arts or antiques, obsolete, or poorly maintained items are not subject to the replacement cost terms. There are limitations to the amount that will be paid in event of a loss: the coverage C limit; the scheduled limit; the cost to repair or replace; or any special limits in the policy (guns, for example).
Replacement cost is only paid when actual repair or replacement is complete if a loss exceeds $500. The insured may claim actual cash value and submit a claim for any additional amount within six months after the loss.
Conditions Applicable to all Coverages
There are some seventeen policy conditions in all. The following eleven apply to all coverages.
1. Assignment—This policy may not be assigned without “our” written consent.
2. Bankruptcy of an Insured—Bankruptcy or insolvency of an “insured” does not relieve “us” of “our” obligations under this policy.
3. Cancellation and Nonrenewal—”You” may cancel this policy by returning the policy to “us” or by giving “us” written notice and stating at what future date coverage is to stop.
”We” may cancel or not renew this policy by written notice to “you” at the address shown on the “declarations”. Proof of delivery or mailing is sufficient proof of notice.
During the first 60 days this policy is in effect, “we” may cancel for any reason. “We” will give “you” notice at least ten days before cancellation is effective.
After this policy has been in effect 60 days or more, or if it is a renewal of a policy issued by “us”, “we” may cancel or not renew only at the anniversary date unless:
a. the premium has not been paid when due;
b. the policy was obtained through fraud, material misrepresentation, or omission of fact, which, if known by “us”, would have caused “us” not to issue the policy; or
c. there has been a material change or increase in hazard of the risk.
If “we” cancel this policy for nonpayment of premium, “we” will give “you” notice at least ten days before cancellation is effective. If “we” cancel this policy for any other reason after it has been in effect for 60 days or more, “we” will give “you” notice at least 30 days before cancellation is effective.
If “we” do not renew this policy, “we” will give “you” notice at least 30 days before nonrenewal is effective.
”Your” return premium, if any, will be refunded at the time of cancellation or as soon as practical. Payment or render or the unearned premium is not a condition of cancellation.
Analysis
The cancellation provisions are similar to those found in the ISO form; however, the differences are noteworthy. Whereas in the ISO form “proof of mailing” is sufficient proof of notice, the AAIS form states that proof of delivery or mailing is sufficient proof of notice. When the policy has been in force at least sixty days, the ISO form allows cancellation at any time for material misrepresentation, nonpayment of premium, or substantial change in risk. Similarly, the AAIS form allows cancellation at any time for nonpayment of premium, but adds that, in addition to material misrepresentation, fraud may be a condition for cancellation. Rather than “substantial change in risk,” which can encompass anything from new ownership to vacancy, the AAIS form states that “material change or increase in hazard” of the risk may constitute grounds for cancellation. Since a “hazard” is usually defined as something that increases the possibility of loss, this wording allows for slightly more leeway in cancellation.
Both forms provide for the insured to cancel the policy by written notice to the insurer; however, the AAIS form specifies that the cancellation date must be in the future.
4. Change, Modification, or Waiver of Policy Terms—A waiver or change of the “terms” of this policy must be issued by “us” in writing to be valid.
If “we” adopt a revision which broadens coverage under this edition of “our” policy without an additional premium, the broadened coverage will apply to “your” policy as of the date “we” adopt the revision in the state in which the premises shown on the “declarations” as the described location is located. This applies only to revisions adopted 60 days prior to or during the policy period shown on the “declarations”. This does not apply to changes adopted as a result of the introduction of a subsequent edition of “our” policy.
”Our” request for an appraisal or examination under oath does not waive policy “terms”.
If this policy has no expiration date, “we” may substitute or “we” may add, at each anniversary date, forms that are then authorized for use.
5. Conformity With Statute—”Terms” in conflict with the laws of the state in which the premises shown on the “declarations” as the described location is located are changed to conform to such laws.
6. Inspections—”We” have the right, but are not obligated, to inspect “your” property and operations. This inspection may be made by “us” or may be made on “our” behalf. An inspection or its resulting advice or report does not warrant that “your” property or operations are safe, healthful, or in compliance with laws, rules, or regulations. Inspections or reports are for “our” benefit only.
Analysis
Note that the liberalization clause refers to the state in which the premises indicated on the declarations are located. This differs from the similar ISO wording in that ISO refers to “your state,” leaving open the possibility that the insured may assume the change applies to what he considers to be his state, which may not be the one indicated on the policy declarations.
An interesting provision is the one permitting the insurer to inspect the premises. There is no similar provision in the ISO form. Customarily, the application for insurance contains a statement to the effect that the insurer may inspect the premises. The form makes clear, however, that such an inspection is not tantamount to providing a warranty that the dwelling or any operations meet any standards or is in compliance with any laws or regulations. The insured could not therefore argue, in event of a loss involving, say, ordinance and law, that the insurer knew of the condition and did not advise the insured to correct the condition.
7. Misrepresentation, Concealment, or Fraud—This policy is void as to “you” and any other “insured” if before or after a loss:
a. ”you” or any “insured” has willfully concealed or misrepresented:
1) a material fact or circumstance that relates to this insurance or the subject thereof; or
2) an “insured's” interest herein; or
b. there has been fraud or false swearing by “you” or any other “insured” with regard to a matter that relates to this insurance or the subject thereof.
Analysis
ISO has removed the provision voiding the entire policy in event of concealment or fraud whether before or after a loss; AAIS retains it. This effects an ambiguity in that this provision states the policy will be voided if any insured misrepresents a material fact before or after a loss, while condition 3. cancellation and nonrenewal states that in event of fraud or material misrepresentation in obtaining the policy, the policy will be cancelled. Obviously, in canceling a policy notice must be given and coverage is extended; when a policy is voided it is as if the policy never existed.
8. Policy Period—This policy only covers losses, “bodily injury”, and “property damage” that occur during the policy period.
9. Recoveries—This applies if “we” pay for a loss and lost or damaged property is recovered, or payment is made by those responsible for the loss.
”You” must inform “us” or “we” must inform “you” if either recovers property or receives payment. Property costs incurred by either party are paid first.
”You” may keep the property. The amount of the claim paid, or a lesser amount to which “we” agree, must be returned to “us”.
If the claim paid is less than the agreed loss due to a deductible, or other limiting “terms”, the recovery is prorated between “you” and “us” based on the interest of each in the loss.
10. Subrogation—If “we” pay for a loss, “we” may require that “you” assign to “us” the right of recovery up to the amount “we” pay. “We” are not liable for a loss if, after the loss, “you” impair “our” right to recover against others. “You” may waive “your” right to recover, in writing before a loss occurs, without affecting coverage. If “we” pay a loss to or for “you” and “you” recover from another party for the same loss, “you” must pay “us” as stated in Recoveries.
Subrogation does not apply to Coverage M—Medical Payments to Others or to Damage to Property of Others under the Incidental Liability Coverages.
11. Suit Against Us—No suit may be brought against “us” unless all the “terms” of this policy have been complied with and:
a. Property Coverages—The suit is brought within two years after the loss.
If a law of the state where the premises is located makes this time period invalid, the suit must be brought within the time period allowed by the law.
b. Liability Coverages—The amount of the “insured's” liability has been fixed by:
1) a final judgment against the “insured” as a result of a trial; or
2) a written agreement of the “insured”, the claimant, and “us”.
No person has a right under this policy to join “us” or implead “us” in actions that are brought to fix the liability of an “insured”.
Analysis
These provisions make it clear that only losses—to covered property or those involving bodily injury or property damage—occurring during the policy period are covered. If a claim for covered property has been paid, and the property is recovered by either party, that party must notify the other. If the insured elects to keep the property, the claim settlement is adjusted accordingly. However, if the amount of loss is greater than the amount paid, either because of a deductible or other limit, then the amount of the recovery may be prorated between the insurer and the insured.
All terms and conditions of the policy must be complied with before a suit can be brought against the insurer. A suit claiming damages because of property coverages may only be brought within two years after the loss, although this time frame is subject to state law.
Conditions Applicable to Property Coverages Only
The following six policy conditions apply only to property coverages.
12. Abandonment of Property—”You” may not abandon the property to “us” unless “we” agree.
13. Appraisal—If “you” and “we” do not agree as to the value of the property or the amount of the loss, “you” and “we” will each select a competent appraiser within 20 days after receiving a written request from the other. The two appraisers will select an umpire. If they do not agree on an umpire, the two appraisers will ask a judge of a court of record of the state in which the appraisal is pending to make the selection. The written agreement of any two of these three will be binding and set the amount of the loss. “You” will pay the expense of “your” appraiser and “we” will pay “ours”. “You” and “we” will share equally the expense of the umpire and the other expenses of the appraisal.
14. Death—On “your” death, protection on “your” covered property passes to:
a. ”your” legal representative; or
b. any other person having proper, temporary custody of covered property.
15. Mortgage, Secured Party, and Lender's Loss Payable Clause—If a mortgagee if named on the “declarations”, a loss payable under Coverage A or B will be paid to the mortgagee and “you”, as interests appear. If more than one mortgagee is named, the order of payment will be the same as the order of precedence of the mortgagees. The word mortgagee includes trustee.
If a secured party is named on the “declarations”, a loss payable on property subject to the security interest will be paid to the secured party and “you”, as interests appear. If there is more than one security interest in the same property, the order of payment will be the same as their order of priority.
However, the secured party's interest is not covered for “your” conversion, embezzlement, or secretion of encumbered property in “your” possession, unless specifically insured against and premium paid for such.
If a lender if named on the “declarations”, a loss payable on property on which the lender has an insurable interest will be paid to the lender and “you”, as interests appear.
If “we” deny “your” claim, that denial does not apply to a valid claim of the mortgagee, secured party, or lender if the mortgagee, secured party, or lender has:
a. notified “us” of change in ownership, occupancy, or substantial change in risk of which the mortgagee, secured party, or lender became aware;
b. paid the premium due under this policy on demand if “you” neglected to pay the premium; and
c. submitted a signed, sworn proof of loss within 60 days after receiving notice from “us” if “you” failed to do so
All “terms” of this policy apply to the mortgagee, secured party, or lender unless changed by this clause.
If “we” cancel or do not renew this policy, “we” will notify the mortgagee, secured party, or lender at least ten days before the date cancellation or nonrenewal takes effect.
Payment to Mortgagee—If “we” pay the mortgagee for a loss and deny payment to “you”, “we” are subrogated, up to the amount “we” paid for the loss, to all the rights of the mortgagee granted under the mortgage on the property. Subrogation will not impair the right of the mortgagee to recover the full amount of the mortgagee's claim.
At “our” option, “we” may pay to the mortgagee the whole principal on the mortgage plus the accrued interest. In this event, “we” shall receive a full assignment and transfer of the mortgage and all securities held as collateral to the mortgage debt.
Payment to a Secured Party—If “we” pay the secured party for a loss and deny payment to “you”, “we” are subrogated, up to the amount “we” paid for the loss, to all the rights of the secured party granted under the security agreement. Subrogation will not impair the right of the secured party to recover the full amount of the security agreement.
At “our” option, “we” may pay the secured party the remaining amount due on the security agreement, plus the accrued interest. In this event, “we” shall receive full assignment of the security agreement and securities held as collateral for the agreement.
Payment to Lender—If “we” pay the lender for a loss and deny payment to “you”, “we” are subrogated, up to the amount “we” paid for the loss, to the rights of the lender to collect on the debt from “you”. Subrogation will not impair the right of the lender to collect the rest of the debt from “you”.
At “our” option, “we” may pay the lender the remaining amount due plus the accrued interest. In this event, “we” shall receive a full assignment of the lender's interest and any instruments given as security for the debt.
16. No Benefit to Bailee—Coverage under this policy will not directly or indirectly benefit those who are paid to assume custody of the covered property.
17. Volcanic Action—All volcanic action that occurs within a 168-hour period constitutes a single occurrence.
Analysis
Whereas the ISO form only addresses loss settlement with regard to a mortgagee, the AAIS expands this provision to address loss settlement when a mortgagee, secured party, or lender is indicated on the declarations. Note that any or all of these parties must be indicated on the declarations for the provisions to apply. For example, it is not uncommon for a mechanic's lien to be placed on a dwelling when a contractor takes on a remodeling project for a homeowner. (In many instances, the homeowner is not even aware this has been done until the home is in process of being sold.) However, if the lien is indicated on the declarations, the provisions apply. So, for example, if a dwelling is being remodeled and a new addition (not yet fully paid for) is destroyed by a covered peril, the loss is settled as the interests of the contractor and the insured appear. However, if the insured misappropriates building materials supplied by the contractor and sells them for his or her own profit, the policy will not respond unless this act has been specifically insured against.
Likewise, if an insured has a chattel mortgage indicated on the declarations, then any loss involving the encumbered property is settled as the interests of the insured and the loss payee appear.
Note that in event of payment to a mortgagee, secured party, or lender, the insurer has the option of paying the balance due plus accrued interest, thus receiving full assignment and transfer of the mortgage, security agreement, or loan agreement.
Finally, the form states that any volcanic action within a 168-hour period constitutes one occurrence.