Summary: Accounts receivable insurance, provided under inland marine forms and rules of the commercial lines program of Insurance Services Office (ISO), is actually a kind of consequential coverage. The risk insured by this coverage is loss resulting from the insured's inability to collect amounts due from customers because of loss or damage to the insured's records. Also covered are interest charges on loans required to offset amounts that the insured is unable to collect pending the insurer's payment of a loss; collection expenses in excess of the insured's normal collection expenses that are made necessary by the loss; and other reasonable expenses incurred by the insured to reestablish lost records of accounts receivable. Following is a discussion of the most recent coverage form from ISO.
Introduction
The ISO forms for insuring unscheduled business property—whether the building and personal property form or the condominium commercial unit owner form—include coverage for damage to accounts receivable, but recovery is limited to the cost of blanks and, if the insured has duplicate records intact after the loss, the cost of transcribing the duplicates to the blanks. Accounts receivable coverage form CM 00 66 09 00 is required if the insured wishes to obtain broader, consequential coverage. Coverage may be written on either a nonreporting or reporting basis, in which case endorsement CM 66 06 must be attached.
The accounts receivable coverage form is issued in conjunction with the commercial inland marine conditions form (CM 00 01 09 00) and the common policy conditions form (IL 00 17 11 98). An accounts receivable declarations page, based on an ISO advisory form for that purpose, is also needed. The ISO advisory form, CM DS 03 09 00, lists limits of insurance for different coverage offered by the accounts receivable form: coverage applicable at the named insured's premises, coverage away from those premises, and coverage applicable at all locations. CM DS 03 also has a space for information on coinsurance, rates and premium, description of receptacles for the accounts receivable, and duplicate records.
It should be noted that the accounts receivable exposure is highly responsive to loss control measures, the principal one being daily duplication of records and safekeeping of the records at another location. Safekeeping of records in vaults or safes is another method of loss control. ISO rules for the coverage form allow substantial rating credits for such measures. Consult the commercial lines manual (CLM).
Insuring Agreement
A. Coverage
1. We will pay:
a. All amounts due from your customers that you are unable to collect;
b. Interest charges on any loan required to offset amounts you are unable to collect pending our payment of these amounts;
c. Collection expenses in excess of your normal collection expenses that are made necessary by the loss or damage; and
d. Other reasonable expenses that you incur to re-establish your records of accounts receivable;
that result from Covered Causes of Loss to your records of accounts receivable.
Analysis
As noted above, the accounts receivable form provides coverage for the cost of reestablishing records of accounts receivable as well as actual loss sustained because of the inability to collect sums due resulting from an insured loss or damage to the records. Included is coverage for collection expenses in excess of normal collection expenses necessitated by the loss, reasonable expenses incurred to reestablish records of accounts receivable, and interest charges on any loan the insured must obtain, pending the insurer's payment, to offset amounts unable to be collected.
2. Property Not Covered
Coverage does not apply to:
a. Records of accounts receivable in storage away from the “premises” shown in the Declarations; or
b. Contraband, or property in the course of illegal transportation or trade.
Analysis
As is common with the other inland marine forms, there is no coverage for contraband or other illegal property. There is no coverage for records of accounts receivable in storage away from the “premises.” In what appears to be a contradiction, however, the advisory accounts receivable declarations from ISO shows three classes of property: coverage applicable at the insured's premises; coverage applicable away from the insured's premises; and coverage applicable at all locations. The contradiction is resolved, however, through the meaning of the word “storage,” which is “the safekeeping of goods in a depository, such as a warehouse,” according to Webster's New Collegiate Dictionary (Tenth Edition). The wording “in storage” implies that the records are no longer actively in use, and are stored in a warehouse rather than in a vault or safe. Records that are of immediate value—such as those given to an accountant or an outside bookkeeper for current use—are covered.
3. Covered Causes of Loss
Covered Causes of Loss means RISKS OF DIRECT PHYSICAL LOSS OR DAMAGE to your records of accounts receivable except those causes of loss listed in the Exclusions.
Analysis
The accounts receivable form is open perils in that all direct physical loss to the accounts receivable records is covered unless specifically excluded. It is important to remember that it is the cost of reestablishing the accounts receivable records, and the loss of income resulting from the inability to collect the sums due, that are covered.
4. Additional Coverage—Collapse
We will pay for direct loss or damage caused by or resulting from risks of direct physical loss or damage involving collapse of all or part of a building or structure caused by one or more of the following:
a. Fire; lightning; windstorm; hail; explosion; smoke; aircraft; vehicles; riot; civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; breakage of building glass; falling objects; weight of snow, ice or sleet; water damage; earthquake; all only as insured against in this Coverage Form;
b. Hidden decay;
c. Hidden insect or vermin damage;
d. Weight of people or personal property;
e. Weight of rain that collects on a roof;
f. Use of defective materials or methods in construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation.
This Additional Coverage does not increase the Limits of Insurance provided in this Coverage Form.
Analysis
Additional coverage provided by the form is for direct loss or damage involving collapse of all or part of a building or structure caused by certain enumerated perils. The building or structure need not be on the insured's premises, so that property located elsewhere—as indicated on the declarations—is covered.
5. Coverage Extension
Removal
If you give us written notice within 10 days of removal of your records of accounts receivable because of imminent danger of loss or damage, we will pay for loss or damage while they are:
a. At a safe place away from your “premises”; or
b. Being taken to and returned from that place.
This Coverage Extension is included within the Limit of Insurance applicable to the “premises” from which the records of accounts receivable are removed.
Analysis
The coverage form contains an extension providing coverage for loss occurring while records of accounts receivable have been removed from the insured's premises because of imminent danger of loss. The property is covered while at “a safe place” away from the described premises or while in transit to or from such place. The extension is included within the limit of insurance applicable to the premises from which the records have been removed; it does not represent a separate amount of insurance. The insured is required to give the insurance company written notice within ten days after the records are removed. The form is silent as to length of time the records of accounts may be removed from the “premises.”
Exclusions
B. Exclusions
1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
a. Governmental Action
Seizure or destruction of property by order of governmental authority.
But we will pay for loss or damage caused by or resulting from acts of destruction ordered by governmental authority and taken at the time of a fire to prevent its spread if the fire would be covered under this Coverage Form.
b. Nuclear Hazard
(1) Any weapon employing atomic fission or fusion; or
(2) Nuclear reaction or radiation, or radioactive contamination from any other cause. But if nuclear reaction or radiation, or radioactive contamination results in fire, we will pay for the direct loss or damage caused by that fire if the fire would be covered under this Coverage Form.
c. War and Military Action
(1) War, including undeclared or civil war;
(2) Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign or other authority using military personnel or other agents; or
(3) Insurrection, rebellion, revolution, usurped power or action taken by governmental authority in hindering or defending against any of these.
Exclusions B.1.a. through B.1.c. apply whether or not the loss event results in widespread damage or affects a substantial area.
2. We will not pay for loss or damage caused by or resulting from any of the following:
a. Delay, loss of use, loss of market or any other consequential loss.
b. Dishonest or criminal act committed by:
(1) You, any of your partners, employees, directors, trustees, or authorized representatives;
(2) A manager or a member if you are a limited liability company;
(3) Anyone else with an interest in the property, or their employees or authorized representatives; or
(4) Anyone else to whom the property is entrusted for any purpose.
This exclusion applies whether or not such persons are acting alone or in collusion with other persons or such acts occur during the hours of employment.
This exclusion does not apply to Covered Property that is entrusted to others who are carriers for hire or to acts of destruction by your employees. But theft by employees is not covered.
c. Alteration, falsification, concealment or destruction of records of accounts receivable done to conceal the wrongful giving, taking or withholding of money, securities or other property.
This exclusion applies only to the extent of the wrongful giving, taking or withholding.
d. Bookkeeping, accounting or billing errors or omissions.
e. Electrical or magnetic injury, disturbance or erasure of electronic recordings that is caused by or results from:
(1) Programming errors or faulty machine instructions;
(2) Faulty installation or maintenance of data processing equipment or component parts;
(3) An occurrence that took place more than 100 feet from your “premises”; or
(4) Interruption of electrical power supply, power surge, blackout or brownout if the cause of such occurrence took place more than 100 feet from your “premises”.
But we will pay for direct loss or damage caused by lightning.
f. Voluntary parting with any property by you or anyone entrusted with the property if induced to do so by any fraudulent scheme, trick, device or false pretense.
g. Unauthorized instructions to transfer property to any person or to any place.
h. Neglect of an insured to use all reasonable means to save and preserve property from further damage at and after the time of loss.
3. We will not pay for loss or damage that requires any audit of records or any inventory computation to prove its factual existence.
4. We will not pay for loss or damage caused by or resulting from any of the following. But if loss or damage by a Covered Cause of Loss results, we will pay for the loss or damage caused by that Covered Cause of Loss.
a. Weather conditions. But this exclusion only applies if weather conditions contribute in any way with a cause or event excluded in paragraph 1. above to produce the loss or damage.
b. Acts or decisions, including the failure to act or decide, of any person, group, organization or governmental body.
c. Faulty, inadequate or defective:
(1) Planning, zoning, development, surveying, siting;
(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
(3) Materials used in repair, construction, renovation or remodeling; or
(4) Maintenance;
of part or all of any property wherever located.
d. Collapse except as provided in the Additional Coverage – Collapse section of this Coverage Form.
Analysis
In addition to the exclusions of loss standard to most coverage forms—governmental action (but loss caused by government action to halt the spread of a fire is covered), nuclear hazard, and war and military action—there are several additional exclusions found in the accounts receivable coverage form. Any loss caused by or resulting from loss of use or loss of market, or any other consequential loss, is excluded. Also excluded are dishonest acts by the named insured, anyone else with an interest in the covered property, or the employees or authorized representatives of either, or anyone entrusted with the property. The exclusion applies whether such persons act alone or in collusion with others, and whether the acts occur during or after the hour of employment. However, the exclusion is stated not to apply to a carrier for hire, whose dishonest acts might otherwise be considered to be excluded because they were committed by a person entrusted with covered property.
Exclusion 2.c. eliminates coverage for alteration, falsification, concealment, or destruction of records in order to conceal the wrongful giving, taking, or withholding of money, securities, or other property. However, the exclusion is stated to apply only to the extent of the wrongful giving, taking, or withholding. To illustrate how the exception to the exclusion might operate, say that an employee of the insured sets fire to all of the insured's records of accounts receivable in an attempt to conceal the employee's one act of embezzlement. The exclusion would apply only to the destruction of records relating to the embezzlement; the insured would not be prevented from collecting losses resulting from destruction of other records of accounts receivable.
Exclusion 2.d. concerns bookkeeping, accounting, or billing errors or omissions that cause or result in a loss. Exclusion 2.e. applies to electrical or magnetic injury, disturbance, or erasure of electronic recordings that is caused by or results from programming errors, faulty installation or maintenance of data processing equipment, an occurrence that took place more than 100 feet from the premises (the interior portion of the building in which the insured's business is located) of the named insured, or an interruption of electrical power supply, power surge, blackout, or brownout if the cause of such an occurrence took place more than 100 feet from the named insured's premises. However, the exclusion does not apply to direct loss caused by lightning.
Exclusion 2.f. eliminates coverage for voluntary parting with property by the insured or anyone entrusted with the property if induced to do so by any fraudulent scheme, trick, device, or false pretense. Exclusion 2.g. deals with loss resulting from unauthorized instructions to transfer property to any person or to any place.
The insured has a duty in the event of a loss to take all reasonable steps to protect covered property from further damage. If the insured neglects that task, not only does he violate a condition of the policy, but his claim can also become subject to an exclusion. Exclusion 2.h. applies if the insured neglects to use all reasonable means to save and preserve damaged property from further damage. For example, if the insured suffers a fire loss and then negligently leaves his remaining accounts receivable out in the open to be stolen, his subsequent claim is subject to the exclusion.
Another exclusion found in the coverage form, exclusion 3., applies to loss that can be proven only by audit or inventory. This exclusion is virtually identical to an exclusion found in various crime insurance forms. It should be noted that the accounts receivable form does not contain the wear and tear exclusion found in most other inland marine coverage forms.
Limits of Insurance
C. Limits of Insurance
The most we will pay for loss or damage in any one occurrence is the applicable Limit of Insurance shown in the Declarations.
Analysis
The advisory declarations page contains blanks for indicating three different limits of insurance: for property at the named insured's premises; for property away from the premises of the insured; and for coverage applicable at all locations. These limits represent the most that the insurer will pay for loss in any one occurrence. Note that if one occurrence—such as a tornado or hurricane—damages records at more than one location, the insured can recover no more than the overall limit applying to property at all locations, even if the sum of the limits for each location exceeds the overall limit.
Any limit for property at the insured's premises applies only to property inside the premises whose address is shown in the declarations. This is because the policy territory includes property within the insured's “premises” only, and “premises” is defined as the interior portion of the building at the address shown in the declarations that the named insured occupies for its business. The need to specifically declare each location of the insured's where accounts receivable records are kept is clear.
Additional Conditions
D. Additional Conditions
1. Determination of Receivables
General Condition F. Valuation in the Commercial Inland Marine Conditions is replaced by the following:
a. If you cannot accurately establish the amount of accounts receivable outstanding as of the time of loss or damage, the following method will be used:
(1) Determine the total of the average monthly amounts of accounts receivable for the 12 months immediately preceding the month in which the loss or damage occurs; and
(2) Adjust that total for any normal fluctuations in the amount of accounts receivable for the month in which the loss or damage occurred or for any demonstrated variance from the average for that month.
b. The following will be deducted from the total amount of accounts receivable, however that amount is established:
(1) The amount of the accounts for which there is no loss or damage;
(2) The amount of the accounts that you are able to re-establish or collect;
(3) An amount to allow for probable bad debts that you are normally unable to collect; and
(4) All unearned interest and service charges.
2. Recoveries
The following is added to Loss Condition H. Recovered Property in the Commercial Inland Marine Conditions:
You will pay us the amount of all recoveries you receive for loss or damage paid by us. But any recoveries in excess of the amount we have paid belong to you.
3. The following conditions apply in addition to the Commercial Inland Marine Conditions and the Common Policy Conditions:
a. Coverage Territory
We cover records of accounts receivable:
(1) Within your “premises”; and
(2) Away from your “premises” while in transit or within premises of others if those premises are located or the transit is within:
(a) The United States of America (including its territories and possessions);
(b) Puerto Rico; and
(c) Canada .
b. Coinsurance
If a Coinsurance percentage is shown in the Declarations, the following condition applies. We will not pay the full amount of any loss if the value of all accounts receivable, except those in transit, at the time of loss times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of Insurance for Coverage Applicable at All Locations.
Instead, we will determine the most we will pay using the following steps:
(1) Multiply the value of all accounts receivable, except those in transit, at the time of loss by the Coinsurance percentage;
(2) Divide the Limit of Insurance for Coverage Applicable at All Locations by the figure determined in Step (1); and
(3) Multiply the total amount of loss by the figure determined in Step (2).
We will pay the amount determined in Step (3) or the Limit of Insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself.
This condition will not apply to records of accounts receivable in transit, interest charges, excess collection expenses or expenses to re-establish your records of accounts receivable.
c. Protection of Records
Whenever you are not open for business, and except while you are actually using the records, you must keep all records of accounts receivable in receptacles that are described in the Declarations.
Analysis
The accounts receivable form contains conditions in addition to those found in the inland marine conditions (CM 00 01) and common policy conditions (IL 00 17). The determination of receivables condition describes the valuation method to be used in adjusting losses if the insured cannot accurately establish the amount of accounts receivable outstanding at the time of a loss. First, the average monthly amount of accounts receivable, based on the twelve months immediately preceding the month in which the loss occurs, is determined. That coverage is then adjusted for any normal fluctuations in the amount of accounts receivable for the month in which the loss occurred or for any demonstrated variance from the average for that month. From the resulting amount the following are deducted: (1) the amount of the accounts for which there is no loss; (2) the amount of the accounts that the insured is able to reestablish or collect; (3) an allowance for probable bad debts that the insured is normally unable to collect; and (4) all unearned interest and service charges. The same items are deducted from the total amount of receivables, even if that amount can be determined accurately after loss, i.e., from actual records.
A recoveries condition, which supplements the recoveries condition found in the inland marine conditions form (CM 00 01), states that the insured must pay the insurer the amount of all recoveries the insured receives for a loss the insurer has paid. However, the insured may keep any recoveries in excess of the amount the insurer has paid.
As noted above, the coverage territory is within the premises whose address is shown in the declarations. The coverage territory also applies to property away from the premises of the insured while in transit or within premises of others. However, the premises of others and the transit must be within the United States, Puerto Rico, or Canada .
The coverage form also contains a coinsurance clause. The advisory accounts receivable declarations form states that the coinsurance percentage is 80 percent, unless otherwise indicated on the advisory form; as a helpful suggestion, the insured should purchase a high enough limit to equal at least 80 percent of the highest possible amount of receivables that the insured can anticipate having in the policy period. Of course, significant fluctuations in the amount of accounts receivable may make the reporting endorsement more desirable than the nonreporting arrangement.
The coinsurance clause describes the procedures by which the insurer will determine the most it will pay if the insured has a coinsurance defect. The clause clearly states that the insured will either have to rely on other insurance or absorb the loss if a coinsurance penalty applies. Note that the coinsurance clause does not apply to records of accounts receivable in transit.
A protection of records condition states that whenever not open for business, and except while actually using the records, the insured must keep all records of accounts receivable in the receptacles described in the declarations. Failure to do so can result in loss of coverage for records left out of the receptacle. Commercial lines manual rules for the accounts receivable form provide rate discounts ranging from 10 to 40 percent, depending on the physical characteristics of the container in use. The rate is doubled , however, if no receptacle is shown in the declarations. Avoiding the protection of records condition by forgoing any rate discount that would result from describing an available receptacle in the declarations is therefore costly. The significance of the protection of records condition should be carefully explained to any insured qualifying for the rate discount.
Definitions
“Premises” means that interior portion of the building at the address shown in the Declarations that you occupy for your business.
Analysis
“Premises” in the accounts receivable form means the interior portion of the insured's building indicated on the declarations. Coverage does not, therefore, except where stated in the form, extend to, say, the insured's parking lot.
Endorsements
Three endorsements are available for use only with the accounts receivable coverage form. Endorsement CM 66 01 09 00 provides the means for excluding loss to records of accounts receivable of specified customers, an underwriting measure permitted by commercial lines rules. Endorsement CM 66 04 07 90 provides that the insured will duplicate a stipulated percentage of its records of accounts receivable and keep those duplicates for at least six months at specified premises. The percentage and the premises are both to be specified in the declarations. The endorsement is used in conjunction with certain listed rating credits in return for a promise by the insured to duplicate the records and keep those records within a separate fire division.
As noted above, the accounts receivable form may be written on either a reporting or nonreporting basis. The basic form itself (CM 00 66 09 00) provides for coverage on a nonreporting basis. If the reporting basis is desired—as it may be for insureds whose receivables are subject to fluctuation—then endorsement CM 66 06 09 00 is added. Provided values are reported correctly and promptly, and a sufficient limit of insurance is maintained to cover the highest value at any time, then the fluctuations are covered. In contrast, insuring fluctuating receivables with nonreporting coverage necessitates the payment of premium on the same maximum limit for the entire policy period, even if receivables are much lower for much of the year.
The reporting endorsement deletes the coinsurance clause that otherwise applies to the accounts receivable coverage form, and contains a determination of receivables condition which replaces that of the basic coverage form. If the amount of accounts receivable as of the time of a loss cannot be accurately established, this method is used: (1) the amount of all outstanding accounts receivable at the end of the same month in the preceding year is determined; (2) the percentage increase or decrease in total outstanding receivables between the two preceding twelve month periods is determined; and (3) the amount determined in step 1 is adjusted by the percentage determined in step 2. The result is considered to be the total amount of accounts receivable.
From the total amount of accounts receivable, whether arrived at through the steps outlined above or established from actual records, the following are deducted: the amount of the accounts for which there is no loss; the amount of the accounts that the insured is able to reestablish or collect; an allowance for probable bad debts that the insured is normally unable to collect; and all unearned interest and service charges.
The reporting endorsement requires the insured to report the amount of its accounts receivable at each insured location within thirty days after the end of each reporting period shown in the declarations. Manual rules do not specify what the duration of reporting periods may be, but accounts receivable insurance has traditionally been subject to monthly reports.
Premium is computed as of each reporting period, using the rates shown in the declarations and the reported amount of receivables. If the “premium adjustment period” (not to be confused with the reporting period discussed above) is annual, the insurer will, at the end of the policy year, reconcile the computed premium with the “deposit premium” charged at the beginning of the policy period. Any excess deposit premium is then refunded to the insured; or, if the computed premium exceeds the deposit, the insured pays the difference.
If other than an annual premium adjustment period is shown in the declarations, the insurer applies the computed premium to the deposit premium until deposit premium is extinguished. The insured is then required to pay all premiums that exceed the deposit premium.
In the event of cancellation, the insured is to report the amount of receivables as of the date of cancellation. Premium for less than a full adjustment period is computed on a pro rata basis.
The only “penalty” for late reports is that if a loss occurs after the insured has failed to submit a required report, the insurer will pay no more than the amount last reported.
Extreme care should be taken to obtain a limit of insurance for each location that is no less than the greatest anticipated amount of receivables at that location during the year. Although the computed premium is based on reported receivables, the insurer is not required to pay more than the applicable limit. This is true even if the insured has reported—and ultimately must pay premium for—an amount higher than the limit.