Summary: The Association of Insurance Services (AAIS) has developed a home-based business coverage endorsement (ML-450) that may be attached to an AAIS homeowners, mobile homeowners, or farm owners policy. It extends the homeowners coverage limits so that other structures and property used in the business are covered. Liability coverage is extended to provide for bodily injury or property damage arising out of the designated business. The endorsement is not intended to cover liability arising out of professional services; however, many businesses commonly engaged in by a home-based entrepreneur are covered. Classifications include office, retail, crafts, office, food, service, and bed and breakfast. (For a discussion of the AAIS homeowners forms, see Property Coverages—AAIS Homeowners.)
The property coverages are the subject of the following discussion. For a discussion of the liability coverages, see The AAIS Home-Based Business—Liability.
Topics covered: Introduction and eligibility Insuring agreement Definitions Policy conditions Principal property coverages Incidental property coverages Perils insured against Exclusions that apply to property coverages Loss or claim settlement Mortgage provisions Loss payable options Optional property coverages
Home-based businesses have become increasingly popular. To address the need for coverage, the Association of Insurance Services (AAIS) endorsement ML-450 may be attached to an AAIS homeowners, mobile homeowners, or farm owners policy. This endorsement deletes or amends the coverage restrictions, particularly those applying to business use, so that coverage applies to other structures used in the insured business and to business personal property. For example, under coverage C, the limitation for personal property used in business is deleted so that the entire coverage C amount applies to both personal property and personal property used in the business.
The home-based business endorsement is designed for six classifications. The first is office, which includes word processing, counseling, tutoring, and the like.
The professional liability exposure of these activities, however, is not included. The second classification is service, which includes furniture upholstering and photography. A contracting business that offers installation services is ineligible. The third classification is retail, which includes sales of collectibles, art work, cosmetics, and the like. A business that manufactures its own products, or sells items under its own label, is not eligible. The fourth classification is crafts, which includes making and selling crafts such as ceramics and wood products. The fifth classification is food, which includes baked goods and canning. A fruit and vegetable stand is eligible, so long as there is no “pick your own” operation. Finally, bed and breakfasts may be written; however, the proprietor insured needs to be aware that there is no coverage for liquor liability. The coverage is designed for a small operation having no more than six rooms for overnight guests. The bed and breakfast must be owned and operated by one or more of the persons insured on the underlying homeowners policy.
Certain types of businesses are not eligible. Contracting businesses that offer installation services are ineligible. Child and adult care services are ineligible; however, coverage for providing such service for no more than three people can be endorsed onto the homeowners; see Common Endorsements—AAIS Program). Also ineligible are home health care services and lawn care services.
Finally, there cannot be more than a single business conducted on the premises; however, the rules allow an exception to be made if the other business is a permitted incidental occupancy such as an office or studio.
The endorsement contains many optional property and liability coverages. These are activated by showing the premium charge on the supplemental declarations. The property coverages are included within this discussion; for the liability coverages see The AAIS Home-Based Business—Liability.
This coverage part covers the “business” described on the Home-Based Business Supplemental Declarations Page and conducted by an “insured” on the “insured premises”. “We” provide the Principal and Incidental Property and Liability Coverages described in this coverage part. “We” also provide those Optional Coverages for which coverage is shown on the Home-Based Business Supplemental Declarations Page. Coverage is subject to the
“terms” of this coverage part and to the “terms” of the policy, except as amended by this coverage part. The “terms” of this coverage part apply only to coverage for the “business” described on the Home-Based Business Supplemental Declarations Page.
Analysis
It is important to note that the terms of the homeowners form to which the home-based business coverage part is attached apply. The ML-450 may amend certain of the homeowners terms and provisions but only in regards to the business being insured.
1.The definitions of “you” and “your” are deleted and replaced by the following with respect to the “business” covered by this coverage part:
The words “you” and “your” mean the person, persons, or organization named as the insured on the Home-Based Business Supplemental Declarations Page.
2.If the policy does not define the “term” “limit,” the following definition is added:
“Limit” means the amount of coverage that applies.
3.”Perishable stock” means property of the “business” covered by this coverage part which is preserved and maintained under controlled conditions and is susceptible to loss if the controlled conditions change.
4.If the policy does not define the “term” “pollutant,” the following definition is added:
“Pollutant” means:
a.any solid, liquid, gaseous, thermal, or radioactive irritant or contaminant, including acids, alkalis, chemicals, fumes, smoke, soot, vapor, and waste. Waste includes materials to be disposed of as well as recycled, reclaimed, or reconditioned; and
b.electrical or magnetic emissions, whether visible or invisible, and sound emissions.
Analysis
Very few words need to be defined because most applicable definitions are already in the underlying homeowners form. Since the endorsement broadens or extends the coverage already found in the AAIS homeowners, the definitions in the homeowners forms apply to the home-based business coverage endorsement. Only a few terms need further explanation in the Definitions section. Other terms are defined throughout the policy and will be discussed at that time.
The definitions of “you” and “your” are amended so that these words apply throughout the home-based business coverage part (not, however, throughout the homeowners form itself) to the business named in the supplemental declarations page. The supplemental declarations page is important since if it is not listed there, there coverage is not provided for the business. “Limit” is defined in both the AAIS homeowners form and the home-based business form as “the amount of coverage that applies.” “Term” is defined in the homeowners form and means “all provisions, limitations, exclusions, conditions, 'declarations,' and definitions used in this policy.” The definition for a “pollutant” is identical to that in the homeowners form.
In keeping with the use of the ML-450 to cover a food business, the definition for “perishable stock” is added to the form. This is stock kept under controlled conditions (such as a refrigerated unit) that will be damaged if the controlled conditions change. Presumably, therefore, if the business was making jams or preserves that can be stored on a pantry shelf—an uncontrolled condition—the jam would not be considered perishable stock. But if the business included fresh vegetables or baked products that would require refrigeration, the definition would apply.
1.The following apply to both the Property and Liability Coverages provided by this coverage part:
a.Examination of Books and Records—”We” [the insurer] may examine and audit “your” books and records that relate to the “business” covered by this coverage part during the policy period and within three years after this coverage part has expired.
b.Premium—If the premium is shown on the Home-Based Business Supplemental Declarations Page as a deposit premium, “we” will compute the final earned premium at the end of each audit period shown on the Home-Based Business Supplemental Declarations Page. If the final earned premium is more than the deposit premium paid by “you,” “we” will bill “you” for the difference. If it is less than the deposit premium paid by “you,” “we” will return the difference to “you.” “You” must maintain records of the information that is necessary for computing the premium. Copies of the records must be sent to “us” at the end of the audit period or when requested by “us.”
2.The following applies to the Property Coverages provided by this coverage part:
No Benefit to Bailee—coverage under this policy will not directly or indirectly benefit any person or organization, other than “you,” paid to assume custody of the covered property.
Analysis
The insurer has the right, but not the obligation, to examine the business's books. The insured keep records for at least three years after the policy is no longer in force. Many home businesses do not survive; insureds must be cautioned that ending the business does not necessarily mean the records can immediately be destroyed.
The conditions allow for the insured to pay a deposit premium, although the insurer may not permit this. If a deposit premium is paid, an audit will be conducted by the insurer to determine the final premium. This is more like a commercial policy arrangement, where a deposit premium can be made and premium is based in part on revenue.
Finally, there is no benefit for a bailee under this form. For example, if the business involves making jam and paying a shop to display and sell the product, the shop owner cannot receive payment under this form if there is a loss to the jam.
1.Under Coverage A—Residence, Coverage B—Related Private Structures, and Coverage C—Personal Property, the following is added:
“We” do not cover signs used to identify “your” “business”, except as provided under the Incidental Property Coverages.
2.Under Coverage B—Related Private Structures, the exclusion that applies to structures used for “business” does not apply to structures used for storing the property of the “business” covered by this coverage part. However, this exception does not apply to structures that are used to store the property of the “business” covered by this coverage part and used for any other “business” purpose not permitted by the policy.
Analysis
There is limited coverage for signs, as will be noted later. There is no distinguishing between signs that are attached to the building and those that are freestanding. All that is necessary to tie the coverage to the provisions is that they “identify” the business.
Although the coverage provision removes the exclusion of coverage for a “related private structure” as long as it is used to store property used in the business, it is important to note that the structure cannot be used for any other business purpose except for those allowed under the unendorsed homeowners form. For example, a garage may be used to store business personal property and rented for use as a private garage. However, if the insured decides to use the garage both for business property storage and for a small store, there is no coverage. If the insured decides to conduct the home-based business from the garage, he must purchase the optional coverage for related private structures.
3.Under Coverage C—Personal Property, the following is added:
“We” cover “business” personal property leased to “you” which the “business” covered by this coverage part has a contractual responsibility to insure.
4.Except as stated below, all special “limits” in the policy under Coverage C—Personal Property apply to the property of the “business” covered by this coverage part.
a.The special “limit” that applies to securities, stamps, letters of credit, notes other than bank notes, personal records, tickets, accounts, deeds, evidence of debt, passports, and manuscripts does not apply to valuable papers and records that pertain to the “business” covered by this coverage part.
Valuable papers and records means written, printed, or otherwise inscribed documents and records. This includes books, maps, films, drawings, abstracts, deeds, mortgages, and manuscripts.
It also means programs or instructions used in “your” data processing operations, including the media on which the data is recorded.
b.The special “limits” that apply to “business” property do not apply to the property of the “business” covered by this coverage part. Property of the “business” covered by this coverage part is covered up to:
1)any other special “limit” that applies under Limitations on Certain Property, while either on or away from the “insured premises”;
2)if no other special “limit” applies under Limitations on Certain Property, the coverage C “limit” while on the “insured premises”; or
3)if no other special “limit” applies under Limitations on Certain Property, $5,000 while away from the “insured premises”, unless otherwise shown on the Home-Based Business Supplemental Declarations Page.
This does not increase the Coverage C “limit.”
Analysis
The special limits in the underlying homeowners form that apply to certain classes of property apply to the property of the business with some exceptions. The limit that applies to securities. stamps, and the like is changed so that it does not apply to valuable papers and records, including software programs used in the business.
The homeowners limits for business property are amended so that the entire coverage C amount applies to both personal and business property on the insured premises. Care must be taken, therefore, to make sure the coverage C limit is adequate in event of a total loss. The business property is still subject to the other underlying special limits. For example, the homeowners policy limits for money and bank notes are $250. This limit still applies even though the insured may have $500 in cash on hand for the business.
Business property away from the insured premises is limited to $5,000, although this amount may be increased. The form also specifies that business personal property leased to the insured is covered if the insured has a contractual responsibility to insure it. If an insured has leased equipment on the insured premises, it is considered business property and falls under the coverage C limits. It could be, though, that an expensive piece of equipment—a photo copier, perhaps—is leased by the insured and is placed in a subcontractor's home. This provision makes it clear that coverage applies as long as there is a contractual arrangement that the insured insure the property. But remember that there is a $5,000 away from the insured premises limitation for business property; with an expensive piece of equipment this amount may need to be increased.
5Under Personal Property Not Covered, the following is added:
“We” also do not cover:
a.contraband or property in the course of illegal transportation or trade; or
b.personal property of customers of the “business,” if the Home-Based Business Supplemental Declarations Page indicates that the “business” covered by this coverage part is a Bed and Breakfast. [Coverage for guests' personal property may be purchased; see below.]
6.If the policy includes replacement cost loss settlement “terms” for Coverage C—Personal Property, those “terms” are subject to the following additional exclusion with respect to the coverage provided by this coverage part:
Additional Exclusion—The replacement cost loss settlement “terms” for coverage C do not apply to:
a.”business” property leased to “you”, or
b.property of others in “your” care for “business” purposes.
Any other exclusion that applies to “business” property under the replacement cost loss settlement “terms” for Coverage C is deleted and replaced by this additional exclusion with respect to the coverage provided by this coverage part.
7.If the policy includes coverage for Refrigerated Food Spoilage, such coverage does not apply to the property of the “business” covered by this coverage part. Coverage for loss to “perishable stock” caused by spoilage is provided by this coverage part only if shown on the Home-Based Business Supplemental Declarations Page.
8.Coverage D does not apply to any costs that “you” incur to resume or continue “your” “business” when interrupted by loss to the “insured premises.”
Analysis
The homeowners form lists personal property that is not covered, such as property covered by scheduled insurance. (See Property Coverages—AAIS Homeowners.) Additional property is added to this list when the ML-450 is attached. Illegal or contraband property, and property of guests if the business insured is a bed and breakfast, are not covered.
If replacement cost loss settlement provisions for coverage C apply, either by attaching endorsement ML-55 or if the underlying homeowners is a form 5 (this form includes replacement cost for personal property), the replacement cost provision does not apply to business property leased to the insured. To apply replacement cost would be to give the lessor a unique advantage. Depreciation is considered part of the cost of doing business, yet, in event of a loss the lessor would depreciate equipment (a tax advantage) and have it replaced with new equipment at no cost. For this reason, losses to leased equipment are settled on an actual cash value basis. Similarly, property of others in the insured's care for business purposes is limited to actual cash value loss settlement.
There is no coverage under the homeowners incidental coverage for refrigerated food spoilage for business perishable stock. If the insured wishes this coverage for business perishable stock, the coverage must be purchased and indicated on the supplemental declarations.
Finally, coverage D, additional living costs and loss of rent, does not apply to any costs the business incurs in event of a loss to the insured premises. Coverage for loss of income resulting from business interruption may be purchased.
1.The Incidental Property Coverages in the policy are extended to the “business” covered by this coverage part. However, if the Incidental Property Coverages include Refrigerated Food Spoilage, that coverage does not apply to the property of the “business” covered by this coverage part.
2.Under Incidental Property Coverages, the following are added:
a.Valuable Papers and Records—Research Cost—”We” pay for the cost of research or other expenses necessary to reproduce, replace, or restore lost information on lost or damaged valuable papers and records of the “business” covered by this coverage part, including all forms of converted data and computer programs which exist on electronic or magnetic media, for which duplicates do not exist.
The most “we” pay is $2,500 per “occurrence”, unless otherwise shown on the Home-Based Business Supplemental Declarations Page. This coverage is subject to the deductible shown on the declarations of the policy.
b.Signs—”We” pay for direct physical loss to signs used to identify “your” “business” caused by a peril insured against described under Coverage C. No deductible applies.
The most “we” pay is $500 per “occurrence”, unless otherwise shown on the Home-Based Business Supplemental Declarations Page.
3.Under the Incidental Property Coverage for Credit Card, Forgery, and Counterfeit Money, the exclusion that applies to loss resulting from the “business” of an “insured” does not apply to loss resulting from activities of the “business” covered by this coverage part.
However, the Incidental Coverage for Credit Card, Forgery, and Counterfeit Money is subject to the following additional exclusion with respect to the coverage provided by this coverage part: Additional Exclusion—”We” do not pay for loss resulting from the acceptance of
a.counterfeit money; or
b.checks or promissory notes that are not paid upon presentation,
in exchange for “your” merchandise or services.
4.Under the Incidental Property Coverage for Trees, Plants, Shrubs, or Lawns, the exclusion that applies to trees, plants, shrubs, or lawns grown for “business” does not apply to trees, plants, shrubs, or lawns grown for the “business” covered by this coverage part.
Analysis
The incidental coverages in the underlying homeowners policy (for a discussion of these, see Property Coverages—AAIS Homeowners) are extended to apply to the home business shown in the declarations. There are modifications, however, to three of these.
The first is for refrigerated food spoilage. Endorsement ML-450 modifies this coverage so that it does not apply to property of the business. (Spoilage coverage is optional and may be purchased to apply to business property.) Secondly, the incidental coverage for credit card, forgery, and counterfeit money is modified.
The exclusion for “loss [that] results from the 'business' of an 'insured'” is deleted in respect to the business insured. An additional exclusion is added to this incidental coverage for loss resulting from the acceptance of counterfeit money or checks or promissory notes that are returned for nonpayment when these are accepted in exchange for the insured's goods or services. The third of the modified incidental coverages is for trees, plants, lawns, and shrubs. This incidental coverage contains an exclusion for “trees, plants, shrubs, or lawns grown for 'business'.” This exclusion is deleted with respect to any of these grown for the insured business.
Endorsement ML-450 adds two incidental coverages. The first of these is $2,500 for the cost to research, reproduce, replace, or restore lost information on lost or damaged valuable papers and records. This includes converted data and computer programs for which duplicates do not exist. If duplicate records exist, then coverage is based on the cost to copy records. The policy deductible applies to this coverage. The limit applying to this coverage may be increased.
The second additional incidental coverage is $500 for signs. No deductible applies. As with the cost to research valuable papers and records, this coverage may be increased. The sole criterion for a “sign” is that it is used to identify the business. So, for example, if an insured painted a large sign covering one wall of his dwelling, and it was damaged by hail, the only coverage for replacing the “artwork” would be the $500 (or whatever amount selected).
1.If the Home-Based Business Supplemental Declarations Page indicates that the “business” covered by this coverage part is a Bed and Breakfast and the policy includes coverage for loss caused by theft, the following additional exclusion is added under the Perils Insured Against that apply to Coverage C with respect to the coverage provided by this coverage part:
Additional Exclusion—”We” do not pay for theft of:
a.money, bank notes, bullion, gold, goldware, gold-plated ware, silver, silverware, silver-plated ware, pewterware, platinum, platinumware, or numismatic property;
b.securities, stamps, letters of credit, notes other than bank notes, personal records, tickets, accounts, deeds, evidence of debt, passports, or manuscripts, regardless of the medium on which these items exist; or
c.jewelry, watches, precious or semiprecious stones, gems, or furs,
from a part of the “insured premises” usually occupied solely by an “insured” while it is rented to others.
Any other exclusion that applies to theft from a part of the “insured premises” usually occupied solely by an “insured” while it is rented to others is deleted and replaced by this additional exclusion with respect to the coverage provided by this coverage part.
2.If the policy includes coverage for sudden and accidental damage from artificially generated electrical currents, the following additional exclusion is added:
Additional Exclusion—”We” do not pay for loss to “perishable stock” caused by or resulting from artificially generated electrical currents.
Analysis
The perils insured against are those of the underlying homeowners form—the form 2, 3, or 5, for example. However, if the insured business is a bed and breakfast, an additional exclusion is added to the “theft” cause of loss. The bed and breakfast owner should be sure to remove any such valuable property as that listed into a part of the premises not rented to others in order to have theft coverage for these items to apply. The exclusion applies to theft from the part of the residence usually occupied by an insured but only while that part is rented—a bedroom, bath, or family room, for example.
The coverage for sudden and accidental damage caused by artificially generated current does not apply to any “perishable stock.” Coverage for spoilage of stock may be purchased.
Exclusions That Apply to Property Coverages
The exclusions of the underlying homeowners form apply to the insured business, as well. There are, however, some additional exclusions.
The following exclusions are added with respect to the coverages provided by this coverage part. The following exclusions also apply to any optional coverages that may be elected under this coverage part, unless otherwise stated in the optional coverages.
1.Criminal, Fraudulent, or Dishonest Acts—”We” do not pay for loss caused by or resulting from criminal, fraudulent, dishonest, or illegal acts committed alone or in collusion with another by:
a.”you”;
b.others who have an interest in the property;
c.others to whom “you” entrust the property;
d.”your” partners, officers, directors, trustees, or joint venturers, or “your” members or managers if “you” are a limited liability company; or
e.the employees or agents of 1.a., 1.b., 1.c., or 1.d. above, whether or not they are at work. This exclusion does not apply to acts of destruction by such employees or agents of 1.a., 1.b., 1.c., or 1.d. above, but “we” do not pay for theft by such employees or agents.
“We” do not pay for loss caused by dishonest acts by carriers or other bailees for hire.
2.Voluntary Parting—”We” do not pay for loss due to “your” voluntary parting with possession of covered property if “you” are induced to do so by a trick, scheme, or device or through fraud or false pretense. This includes the acceptance of:
a.counterfeit money or fraudulent post office or express money orders;
b.checks or promissory notes that are not paid upon presentation; or
c.credit cards that are illegally obtained and or used.
3.Calendar Date or Time Failure—”We” do not pay for loss or damage resulting from the failure of any electronic data processing equipment, computer program, software, media, or data to correctly recognize, interpret, or process any encoded, abbreviated, or encrypted date or time.
Analysis
As noted previously, the exclusions that apply to the homeowners form selected also apply to the insured business, such as those for war, earth movement, wear and tear, and water damage. (See Property Coverages—AAIS Homeowners.) But in keeping with the nature of the ML-450—to provide coverage for a business—there are additional exclusions that are commonly found in commercial business coverage forms.
The first of these is for any criminal, fraudulent, or dishonest act if committed by the named insured, others with an interest in the property such as a lender, or partners, officers, or directors, or the employees of the business. But, vandalism by employees is covered. There is no coverage for dishonest acts of bailees or other carriers for hire.
The second is the exclusion for “trick or device”; that is, for any voluntary relinquishing of the insured business's property through any fraudulent act, trick, or scheme. So, for example, if a customer asks to take a piece of merchandise home to see if the piece will fit her decor, and does not pay for the goods or return them, there is no coverage.
As was already indicated in the incidental coverage for credit card, forgery, and counterfeit money, the form repeats that there is no coverage for counterfeit money or for checks from a customer that do not clear the bank. There is no crime coverage available under the home-based business coverage form.
1.The following provisions are added with respect to the property of the “business” covered by this coverage part:
a.Finished Merchandise—The value of finished merchandise “you” make is based on the market price as of the time and place of the loss, less all discounts and unincurred expenses.
b.Merchandise Sold—The value of merchandise “you” have sold but not delivered is based on the selling price, less all discounts and unincurred expenses.
c.Valuable Papers and Records—The value of valuable papers and records, including those which exist on electronic or magnetic media (other than prepackaged software programs), is based on the cost of blank materials and the labor to transcribe or copy the records when there is a duplicate.
2.The following is added to the loss settlement “terms” under How Much We Pay for Loss or Claim with respect to the coverage provided by this coverage part:
For personal property of others in “your” care for “business” purposes or “business” personal property leased to “you” which the “business” covered by this coverage part has a contractual responsibility to insure, the most “we” pay is the greater of:
a.the actual cash value of the property at the time of the loss, plus labor, materials, and supplies; or
b.the amount “you” are contractually obligated to pay for the property.
Personal property of others in the care of the “business” covered by this coverage part is not covered under replacement cost “terms.”
3.The following is added under Insurance Under More Than One Policy with respect to the property of the “business” covered by this coverage part: When covered property is the subject of a contract of sale, any insurance on the covered property held by the loss payee will also be considered other insurance for purposes of determining “our” share of the loss.
Analysis
The ML-450 adds loss settlement provisions in keeping with the coverage intent. These are similar to those found in commercial property loss settlement provisions: the value of finished merchandise is based on the market price at the time of the loss, and the value of merchandise that has been sold but not delivered is based on the selling price. Discounts and unincurred expenses—such as the cost of transportation that will not take place because of the loss—are taken into account. Two different prices—market and selling—are indicated. To see how these apply, think of jars of jam with a shelf price of $9.95 per jar (market price). However, a good customer places an order for two hundred jars, and because of the size of the order, gets a discount so that the price is $7.95 per jar. If a loss occurs after payment but before delivery, the selling price of $7.95 rather than $9.95 governs the amount that the insurer will pay. But if there are fifty jars of jam on hand that are not part of that order, reimbursement in event of their loss will be based on the $9.95 price.
The loss settlement for valuable papers and records is the cost of blank materials plus the labor cost to copy them (see the Incidental Coverages section).
Prepackaged software is valued at actual cash value unless the insured has replacement cost for personal property on the underlying homeowners policy.
There is a loss settlement condition for personal property of others in the insured's care for business purposes or property leased to the insured for which there is a contractual responsibility to insure. If a covered loss occurs, the insurer will pay the greater of the actual cash value at the time of the loss plus labor, material, and supplies, or the amount the insured is contractually obligated to pay for the property.
Finally, if the insured has business personal property being purchased under a sales contract, and the seller has insurance on the property, that insurance is considered to be “other insurance” for loss settlement purposes. In this instance, the home-based business insurer pays that part of the loss that the limit of insurance as shown on the declarations bears to the total insurance applying to the loss.
If a mortgagee (mortgagee includes trustee) is shown on the Home-Based Business Supplemental Declarations Page, loss to building property will be paid to the mortgagee and “you” as interests appear. If more than one mortgagee is shown, they will be paid in order of precedence.
The insurance for the mortgagee continues in effect even when “your” insurance may be void because of “your” acts, neglect, or failure to comply with the coverage “terms.” The insurance for the mortgagee does not continue in effect if the mortgagee is aware of changes in ownership or substantial increase in risk and does not notify “us.”
If “we” cancel this coverage, “we” will notify the mortgagee at least ten days before the effective date of cancellation.
“We” may request payment of the premium from the mortgagee, if “you” fail to pay the premium.
If “we” pay the mortgagee for a loss where “your” insurance may be void, the mortgagee's right to collect that portion of the mortgagee debt from “you” then belongs to “us.” This does not affect the mortgagee's right to collect the remainder of the mortgage debt from “you.” As an alternative, “we” may pay the mortgagee the remaining principal and accrued interest in return for a full assignment of the mortgagee's interest and any instruments given as security for the mortgage debt.
If “we” choose not to renew this coverage, “we” will give written notice to the mortgagee at least ten days before the expirations date of this coverage.
Analysis
Although an insured may have a mortgage on the dwelling, there may be instances where a different mortgagee might loan money for an insured to build a separate structure—perhaps one used for a bed and breakfast—or modify an existing one, for business purposes. These provisions address such a situation. The insurer has the right not to renew the home-based business coverage part but may still continue on the underlying homeowners policy. These provisions address that possibility with regard to any mortgagee for the business.
With respect to the property of the “business” covered by this coverage part, a Loss Payable Option described below applies when shown on the Home-Based Business Supplemental Declarations Page.
Loss Payable—Option 1
Any loss will be adjusted with “you” and will be payable to “you” and the loss payee shown on the Home-Based Business Supplemental Declarations Page as interests appear.
Lender's Loss Payable—Option 2
Subject to the conditions specified below, any loss will be payable to “you” and the loss payee shown on the Home-Based Business Supplemental Declarations Page as interests appear. If more than one loss payee is named, they will be paid in order of precedence.
“You” must confirm that the loss payee is a creditor with whom “you” have entered into a contract for the purchase of “business” property covered by this coverage part. The loss payee's interest in the covered property must be evidenced by a written contract.
The insurance for the loss payee continues in effect even when “your” insurance may be void because of “your” acts, neglect, or failure to comply with the coverage “terms.” If “we” deny “your” claim because “your” insurance is void, the loss payee is still entitled to receive payment provided the loss payee:
1.pays the premium if requested by “us” because “you” fail to do so;
2.submits a signed, sworn proof of loss within sixty days after “we” notify the loss payee that “you” have not done so; and
3.notifies “us” of any changes in ownership or substantial increase in the risk known to the loss payee.
All “terms” of this coverage part applicable to property coverages also apply to the loss payee.
If “we” pay the loss payee for a loss when “your” insurance may be void, the loss payee's right to collect that portion of the debt from “you” then belongs to “us.” This does not affect the loss payee's right to collect the remainder of the debt from “you.” As an alternative, “we” may pay the loss payee the remaining principal and accrued interest in return for a full assignment of the loss payee's interest and any instruments given as security for the debt.
The loss payee is entitled to receive loss payment despite the fact that the loss payee may have instituted foreclosure proceedings on the covered property.
If “we” cancel this coverage for nonpayment of premium, “we” will notify the loss payee at least ten days before the effective date of cancellation. If “we” cancel for any other reason, “we” will notify the loss payee at least thirty days before the effective date of cancellation.
If “we” choose not to renew this coverage, “we” will give written notice to the loss payee at least ten days before the expiration date of this coverage.
Contract of Sale—Option 3
Any loss will be adjusted with “you” and will be payable to “you” and the loss payee shown on the Home-Based Business Supplemental Declarations Page must be a person or organization “you” have entered into a contract with for the sale of covered property.
Analysis
When the insured is purchasing business property, and there is a loss payee on the property, the insured may select the loss provision that will apply in event of a covered loss. For example, if property is being purchased under a sales contract, the insured may select option 3. In that case, there must be a valid contract between the insured and a person or organization. In other instances, there need not be a contract, but there may be a financial arrangement in which the insured has borrowed money for the business. As is the case with a mortgagee, insurance continues for the benefit of a loss payee even if the policy is voided through an action of the insured's.
It is important to remember that an insurance payment to a loss payee does not relieve the insured of an obligation to the loss payee for property. If a portion of a debt for property remains unpaid, the insured must settle the debt with the loss payee.
The AAIS Home-Based Business form is similar to a businessowners policy in that optional coverages are included within the form itself; however, these coverages are activated only when a limit is shown on the supplemental declarations page. These coverages are: related private structures; guests' personal property coverage; accounts receivable coverage; loss of income; and spoilage.
Each of the following Optional Property Coverages applies only if coverage is shown on the Home-Based Business Supplemental Declarations Page. The Optional Property Coverages are subject to the “terms” of the policy and this coverage part, except as provided in the following paragraphs.
Related Private Structures
If the “business” covered by this coverage part is conducted in a related private structure on the “insured premises,” “we” cover that structure for direct physical loss caused by a peril insured against described under Coverage B. Coverage includes additions and built-in components and fixtures and building materials and supplies located on the “insured premises” for use in construction of or to the structure.
All of the “terms” that apply to Coverage B in the policy apply to this structure. However, with respect to the coverage provided by this coverage part, the exclusion applicable to structures used for “business” does not apply.
The “limit” shown for Coverage B on the declarations of the policy does not apply to the related private structures listed on the Home-Based Business Supplemental Declarations Page. The most “we” pay for a loss to a related private structure covered by this coverage part is the “limit” for that structure shown on the Home-Based Business Supplemental Declarations Page.
Analysis
The home-based business endorsement amends the exclusion on the underlying homeowners policy so that if a related private structure—a shed or garage, perhaps—is used for storing property related to the insured business, the structure is covered. However, any other business activity conducted in the related private structure will preclude coverage for the structure unless the optional coverage is purchased. So, for example, an insured may store ceramics supplies in a detached garage. But if the insured holds ceramics classes there, coverage for the structure is excluded unless this optional coverage is purchased.
When the optional coverage is purchased, the limit applying to the structure as shown on the homeowners declarations page is superseded by that shown on the Home-Based Business Supplemental Declarations Page. That limit then becomes the most that will be paid in event of a covered loss.
Also, when the optional coverage is purchased, coverage extends to built-in components and fixtures and to building materials and supplies for use in construction of or to the structure.
Guests' Personal Property Coverage
If the Home-Based Business Supplemental Declarations Page indicates that the “business” covered by this coverage part is a Bed and Breakfast, “we” cover personal property owned by guests of the covered Bed and Breakfast for loss caused by a peril insured against described under Coverage C. Coverage is provided while the guests' personal property is on the “insured premises,” whether or not the personal property is in the care of an “insured.” However, this coverage does not apply to any article of property or type of loss that is described under Coverage C, Personal Property Not Covered, in the policy.
Subject to the special “limit” for guests' money, the most “we” pay per “occurrence” under this coverage is the “limit” shown for Guests' Personal Property on the Home-Based Business Supplemental Declarations Page.
The special “limit” for guests' money is 10 percent of the “limit” for guests' personal property. The special “limit” for guests' money does not increase the overall “limit” for guests' personal property. These “limits” are the most “we” pay for any one “occurrence,” regardless of the number of guests.
Coverage is subject to the deductible that applies to Coverage C in the policy. The loss settlement “terms” that apply to Coverage C also apply to this option.
No exclusion for theft from that part of the “insured premises” usually occupied solely by the “insured” while it is rented to others applies to this optional coverage.
Analysis
An insured whose insured business is that of a bed and breakfast may elect to cover the personal property of guests while it is on the insured premises. Since one of the primary concerns in running this sort of operation is theft, whether caused by an outsider or by another guest, in the interest of good will the host will often wish to replace any guest's property that is lost or damaged by a covered peril. There is no need to establish legal liability for the guest's loss, nor must the lost or damaged property be in the care of the insured. Also, by purchasing this optional coverage, the insured removes the exclusion for theft from that part of the “insured premises” normally occupied by the insured while it is rented to others.
The coverage C perils of the underlying homeowners apply. If the insured home business owner has a form 3, the named perils of that form apply. If the insured has a form 5, coverage is on an open perils basis. Equally important is the fact that the coverage does not apply to that personal property not covered as described in the underlying homeowners form; for example, motorized vehicles, aircraft and their parts, or animals.
Although a special sublimit applies to guests' money (10 percent of the limit selected for guests' personal property), there is no mention that the other limitations on certain classes apply to guests' personal property. Presumably, therefore, if a guest's $5,000 diamond ring is destroyed in a fire, and the limits are adequate, the ring will be covered subject to the underlying homeowners deductible. The insured should remember that a guest might well expect the owner host to cover the deductible.
Accounts Receivable Coverage
1.Property Covered
“We pay for loss to “your” accounts receivable records caused by a peril specified in this Accounts Receivable Coverage while at the “insured premises.” This includes:
a.the sums that are due and that “you” cannot collect from “your” customers because of the loss;
b.the interest charge on a loan if that loan is used to offset those sums that cannot be collected pending “our” payment of those sums;
c.collection costs that result from the loss which are above “your” normal collection costs; and
d.the reasonable cost to reconstruct “your” accounts receivable records.
2.Property Not covered
“We” do not cover contraband or property in the course of illegal transportation or trade.
3.Additional Coverages
These coverages do not increase the “limit” for the covered property.
a.Property Away from Premises—”We” cover direct physical loss to “your” accounts receivable records caused by a peril specified in this optional coverage while away from the “insured premises.” This additional coverage applies while the accounts receivable records are at a temporary location or in transit, but not while in storage at another location.
The most “we” pay under this coverage is 10 percent of the Accounts Receivable Coverage “limit.”
b.With respect to the Accounts Receivable Coverage provided by this coverage part, Emergency Removal in the policy is deleted and replaced by:
Removal—”We” pay for loss to “your” accounts receivable records while moved or being moved from the “insured premises” to prevent a loss from a peril specified in this optional coverage . “We” pay for any direct physical loss to that property. This coverage applies for up to ten days after the property is first moved.
4.Perils Covered
“We” cover external risks of direct physical loss unless the loss is limited or caused by a peril that is excluded below.
5.Perils Excluded
a.In addition to the exclusions in this coverage part for Criminal, Fraudulent, or Dishonest Acts; Voluntary Parting; and Calendar Date or Time Failure, only the following exclusions in the policy apply to the Accounts Receivable Coverage provided by this coverage part:
1)Civil Authority;
2)Nuclear Hazard; and
3)War.
b.The following exclusions are added with respect to the Accounts Receivable coverage provided by this coverage part.
“We” do not pay for loss or damage if one or more of the following exclusions apply to the loss.
1)concealment—”We” do not pay for loss caused by the destruction, alteration, falsification, or concealment of “your” accounts receivable records that is done to conceal the criminal, fraudulent, dishonest, or illegal giving, taking, or withholding of money, securities, or other property.
2)Damage, Disturbance, or Erasure of Electronic Data—”We” do not pay for loss that results from electrical or magnetic damage, disturbance, or erasure of electronic data or records that is caused by:
a)erroneous programming or faulty equipment instructions;
b)faulty or inadequate installation or maintenance of data processing equipment; or
c)electrical power supply disturbances including surges, blackouts, or brownouts if the cause of the disturbance took place more than 100 feet from the “insured premises.”
3)Discrepancy—”We” do not pay for loss that results from a discrepancy that is discovered in “your” books or records if this is the only means to prove that a loss has occurred. If there is other evidence to prove that a loss has occurred, “you” may use the discrepancy to support “your” claim.
4)Errors and Omissions—”We” do not pay for loss caused by bookkeeping, accounting, or billing errors or omissions.
5)Loss of Use—”We” do not pay for loss caused by or resulting from loss of use, business interruption, delay, or loss of market.
6.How Much We Pay
The loss settlement “terms” are deleted and replaced by the following with respect to the Accounts Receivable Coverage provided by this coverage part:
Loss Settlement Terms—”We” pay the least of:
a.the total sum of accounts receivable due. From this total “we” will deduct:
1)all amounts due from the accounts receivable records that are not lost;
2)all amounts due that can be established by other means;
3)all amounts due that “you” have collected from the records that are lost;
4)all unearned interest and service charges; and
5)an amount to allow for bad debts;
b.the reasonable cost to reconstruct “your” accounts receivable records; or
c.the Accounts Receivable “limit” shown on the Home-Based Business Supplemental Declarations Page.
If a loss occurs and “you” cannot establish the actual accounts receivable amount due, it will be determined as follows:
“We” will determine the average monthly accounts receivable amount(s) for the past 12 month period that directly proceeds the month in which the loss occurred. “We” will adjust this average amount for any verifiable variance in the accounts receivable amount for the month in which the loss occurred.
No deductible applies.
7.Conditions
The Recoveries condition is deleted and replaced by the following with respect to the Accounts Receivable Coverage provided by this coverage part:
Recoveries—All amounts that “you” receive on accounts receivable which “we” have paid for belong to “us.” Amounts that “you” receive that are above the amount that “we” have paid will belong to “you.”
Analysis
This optional coverage is intended to reimburse the insured for accounts receivable that cannot be collected because a covered loss has destroyed the records. For example, if a fire occurs on the insured premises, destroying the office where the insured business owner keeps all his records, he may be unable to reconstruct the amounts due the business. This coverage will pay the amounts due subject to the coverage limit selected. No deductible applies to this coverage.
Loss caused by acts that an insured could reasonably control—erroneous programming or inadequate maintenance of electronic data processing equipment—is excluded. Further, a loss that is only brought to light through a discrepancy in the books is not covered. However, if there is other evidence to prove the loss, then the discrepancy may be used as additional evidence to support the claim.
The importance of good record keeping is obvious. If an insured has no idea as to the amounts due the business, the insurer will determine the average amounts received by the business in the twelve months preceding the loss and settle accordingly. The underlying condition in the homeowners policy governing “recoveries” is deleted in regards this coverage. In the event that the insured receives payment on accounts receivable that the insurer has already paid, the payment belongs to the insurer. Any amount the insured receives above reimbursement made by the insurer belongs to the insured.
There are two additional coverages contained within the accounts receivable coverage part. The first of these is for 10 percent of the accounts receivable limit for property away from the insured premises at a temporary location—say at an accountant's office. The second is for removal, as when the accounts receivable records are being moved. In both cases, loss or impending loss must be from a cause of loss specified in this coverage part.
Loss of Income Coverage
“We” provide the coverages described below during the “restoration period” [see below] when the “business” covered by this coverage part is necessarily interrupted by direct physical loss to a building or structure on the “insured premises” or personal property in the open (or in vehicles) within 100 feet of the “insured premises.”
If direct physical loss to a building or structure necessitates the interruption of the “business,” the loss must be caused by a peril insured against described under Coverage A.
If the policy does not include Coverage A or if direct physical loss to personal property necessitates the interruption of the “business,” the loss must be caused by a peril insured against described under Coverage C.
The most “we” pay is the “limit” for Loss of Income Coverage shown on the Home-Based Business Supplemental Declarations Page. No deductible applies.
1.Definition
The following definition is added with respect to the Loss of Income coverage provided by this coverage part:
“Restoration period” means the time period that:
a.starts on the date of loss to real or personal property caused by a peril insured against at the “insured premises”; and
b.ends on the earliest of the following dates:
1)the date property should be rebuilt, repaired, or replaced with reasonable speed and similar quality;
2)the date the “business” is resumed at the “insured premises”; or
3)12 consecutive months from the date of direct physical loss or damage to the property.
This does not include any increase in time due to the enforcement of any ordinance, law, or decree that regulates or requires:
a.the construction, use, repair, or demolition of any property, or the removal of its debris;
b.the testing, evaluating, observing, or recording of the existence, level, or effects of “pollutants; or
c.the clean up, removal, containment, treatment, detoxification, or neutralization of “pollutants.”
The expiration date of the policy will not limit the “restoration period.”
2.Earnings
“We” pay for “your” actual loss of net income (net profit or loss before income taxes), payroll expense, interest, and other continuing operating expenses normally incurred and earned by “your” “business.”
“We” pay for only the expenses that are necessary during the “restoration period.” Consideration is given to continuation of payroll and other expenses to the extent necessary to resume “your” normal “business” activities with the same quality of service that existed before the loss.
“We” do not pay for any increase in loss due to “your” failure to use reasonable efforts to resume all or part of “your” normal “business” activities by using other property at the “insured premises.”
If “your” normal “business” activities are not resumed as soon as possible, or if they are not resumed at all, the value of loss payment is based on the period of time it would have otherwise taken to resume “your” normal “business” activities as soon as possible.
In determining a loss, “we” consider the experience of “your” “business” before the loss and the probable experience had no loss occurred.
3.Extra Expenses
“We” pay for the necessary extra expenses that “you” incur to resume or continue “your” normal “business” activities as nearly as practicable.
“We” cover only the extra expenses that are necessary during the “restoration period.”
“We” pay for extra expenses to repair, replace, or restore any property, but only to the extent that they reduce the loss otherwise payable under this optional coverage.
“We” pay for extra expenses to research, replace, or restore information on damaged valuable papers and records, but only to the extent that they reduce the loss otherwise payable under this coverage.
“We” do not pay for any increase in loss due to “your” failure to use reasonable efforts to resume all or part of “your” normal “business” activities at the “insured premises.” This includes making use of other property at the “insured premises” to reduce the loss.
If “your” normal “business” activities are not resumed as soon as possible, or if they are not resumed at all, the value of loss payment is based on the period of time it would have otherwise taken to resume “your” normal “business” activities as soon as possible.
The salvage value of any property bought for temporary use will be deducted from the amount of loss determined for extra expense.
4.Exclusions and Limitations
The following exclusions and limitations are applicable to Loss of Income coverage.
a.Electronic Information—”We” do not pay for loss of earnings caused by damage to or loss of electronic information beyond:
1)sixty consecutive days from the date of loss; or
2)the time from the date of loss until the date “you” could reasonably rebuild, repair, or replace other damaged property at the “insured premises” caused by the same “occurrence,” whichever is greater.
Electronic information is media, programs, or records for electronic data processing or electronically controlled equipment including films, tapes, discs, drums, or cells.
b.Fire Extinguishment—”We” do not pay for expenses to put out a fire.
c.Leases, Licenses, Contracts, or Orders—”We” do not pay for any increase in loss due to the suspension, lapse, or cancellation of leases, licenses, contracts, or orders.
However, “we” do pay for loss during the “restoration period” if the suspension, lapse, or cancellation results directly from the interruption of “your” normal “business” activities.
“We” do not pay for any extra expense caused by the suspension, lapse, or cancellation of leases, licenses, contracts, or orders beyond the “restoration period.”
d.Strikes, Protests, and Other Interference—”We” do not pay for any increase in loss due to interference by strikers or other persons at the “insured premises.” This applies to interference with rebuilding, repairing, or replacing the property, or with resuming “your” normal “business” activities.
5.Supplemental Loss of Income Coverages
“We” provide the following extensions of Loss of Income Coverage.
a.Interruption by Civil Authority—”We” extend “your” coverage to include loss while access to the “insured premises” is specifically denied by an order of civil authority. This order must be a result of damage to property other than at the “insured premises” and caused by a peril insured against under the policy. This extension is limited to two consecutive weeks from the date of the order.
This does not increase the “limit” for Loss of Income Coverage.
The Civil Authority exclusion contained in the policy does not apply to this supplemental coverage.
b.Period of Loss Extension—”We” extend “your” coverage to pay for loss from the date the property that incurred the loss is rebuilt, repaired, or replaced until:
1)the end of thirty consecutive days; or
2)the date “you” could reasonably resume “your” normal “business” to the conditions that would have existed had no loss occurred, whichever is earlier.
This does not increase the “limit” for Loss of Income Coverage.
The following extension applies only if indicated on the Home-Based Business Supplemental Declarations Page:
c.Utility Interruption—”We” extend “your” coverage to include “your” loss of earnings and the necessary extra expenses “you” incur caused by the interruption of a utility service to the “insured premises.” The interruption must result from direct physical loss or damage caused by a covered peril under the policy to the water, electricity, steam, or gas utility services which are not on the described premises. “We” only cover loss “you” sustain after the first twelve continuous hours following loss or damage to these utility services.
This does not increase the “limit” for Loss of Income Coverage.
The Power Disruption exclusion contained in the policy does not apply to this extension of coverage.
Analysis
This optional coverage provides loss of earnings coverage and reimburses extra expenses necessary to continue the business as nearly as practicable. These time element coverages are triggered by direct physical loss to (a) a building or structure on the insured premises when caused by a cause of loss insured against under coverage A of the underlying homeowners policy; or (b) to personal property in the open (or in vehicles) within 100 feet of the insured premises. This latter provision is troublesome. For other commercial forms providing similar coverage, the trigger is direct physical damage from a covered cause of loss to property at the insured premises. But, under the AAIS form, it is conceivable that coverage could be denied because business property within a building is either burned up (with no damage to the structure) or stolen, and coverage would be denied because the property was not in the open or in a vehicle. AAIS intends to revise and clarify coverage intent at the next revision; however, the present form is as given.
The period of restoration begins on the date of loss to real or personal property, and does not, as do many of the commercial counterparts, include a time deductible. Nor does a monetary deductible apply to this coverage. Coverage ends on the earliest of the date the property should be rebuilt, replaced, or restored with reasonable speed; the date business actually resumes at the insured premises; or twelve consecutive months from the date of loss.
Expenses incurred during the period of restoration that are necessary to enable the insured to resume or continue the insured business are covered. There is coverage for expenses to repair, replace, or restore property but only to the extent they reduce the loss otherwise payable. The insured is encouraged to use reasonable efforts to resume business, even if this means making use of other property at the insured premises to reduce loss. For example, if the dwelling addition in which the insured maintains the business office is damaged, the insured is expected to move into a nondamaged portion of the dwelling to continue the business.
Certain exclusions and limitations of coverage apply. The cost of putting out a fire is excluded. Any increase in a loss resulting from a suspension, lapse, or cancellation of a lease, license, or order is excluded unless the suspension, lapse, or cancellation results directly from the interruption of the insured business. For example, say that an insured is unable to deliver a promised product within the agreed-upon time because of over-committing, and the buyer cancels the order. There is no coverage for this. However, if the insured is unable to deliver the promised product because of a covered fire loss, and the order is cancelled, the business interruption coverage will respond.
An increase in loss because of strikers or other interference at the insured premises is not covered if the strikers or interference is occasioned by the rebuilding, repair, or replacement of the damaged property or resumption of the insured business. Loss of earnings caused by loss or damage to electronic information is limited to the greater of sixty days from the date of loss or from the date of loss to the time the insured could reasonable rebuild, repair, or replace other damaged property at the insured premises caused by the same occurrence.
There are two supplemental business income coverages. The first is for interruption caused by action of civil authority in denying access to the insured premises. The action must be a result of damage to property other than at the insured premises, and the damage must be caused by a covered cause of loss. This coverage is limited to two consecutive weeks from the date of the order. For example, a fire loss at neighboring premises may mean access to the insured premises is prohibited by civil authority. But if a flood, an excluded cause of loss, means access is prohibited by civil authority, there is no coverage.
Secondly, there is an extension of coverage limited to the earlier of the end of thirty consecutive days or the date the insured could reasonably expect to have the business restored to preloss condition. This supplemental coverage—period of loss extension—gives the insured a chance to recover preloss customers, for example.
If indicated in the supplemental declarations, there is coverage for business interruption resulting from loss of utility service to the insured premises. This supplemental coverage contains a twelve-hour time deductible.
Spoilage Coverage
1.Property Covered
“We” pay for loss caused by a peril described below to “your” “perishable stock” while on the “insured premises.” This includes “your” interest in similar property that belongs to others.
If the Home-Based Business Supplemental Declarations Page indicates that the “business” covered by this coverage part is a Bed and Breakfast, “we” also pay for loss to similar property of “your” guests caused by a peril specified below while it is in “your” care at the “insured premises.”
2.Perils Covered
“We” pay for loss to covered “perishable stock” caused by the following events.
a.Breakdown—This means a change in temperature or humidity resulting from:
1)mechanical breakdown;
2)malfunction; or
3)failure,
of the refrigeration system or the equipment or apparatus controlling the refrigeration system while at the “insured premises.”
b.Contamination—This means contamination by the refrigerant of the refrigeration system.
c.Power Disruption—This means a change in temperature or humidity resulting from:
1)complete or partial lack of electrical power; or
2)fluctuation of electrical current,
due to conditions beyond “your” control.
3.Perils Excluded
a.In addition to the exclusion in this coverage part for Calendar Date or Time Failure, only the following exclusions in the policy apply to the Spoilage Coverage provided by this coverage part:
1)Civil Authority;
2)Earth Movement;
3)Nuclear Hazard;
4)War; and
5)Water Damage.
b.The following exclusions are added with respect to the Spoilage coverage provided by this coverage part:
“We” do not pay for loss if one or more of the following exclusions apply to the loss.
1)Disconnection—”We” do not pay for loss caused by the disconnection of any refrigeration, cooling, or humidity control system from the source of power.
2)Deactivation—”We” do not pay for loss caused by any action taken to deactivate any switch or device, including any safety or protective device, used to regulate or control the electrical current or power.
3)Glass Breakage—”We” do not pay for loss caused by the breakage of any glass that is a permanent part of the refrigeration, cooling, or humidity control system.
4)Inability to Provide Sufficient Power—”We” do not pay for loss caused by:
a)the inability of an electrical utility company or other power source to provide sufficient power due to governmental order or lack of fuel; or
b)the inability of the power source and associated equipment, at the “insured premises” to provide sufficient power to meet the demand of the refrigeration, cooling, or humidity control system.
5)Loss of Use—”We” do not pay for loss caused by or resulting from loss of use, business interruption, delay, or loss of market.
4.How Much We Pay
The loss settlement “terms” are deleted and replaced by the following with respect to the Spoilage coverage on the Home-Based Business Supplemental Declarations Page.
This coverage is subject to a $250 deductible unless otherwise shown on the Home-Based Business Supplemental Declarations Page.
Analysis
The final optional property coverage available under the home-based business coverage form is spoilage coverage for perishable stock. “Perishable stock” means “property of the 'business' covered by this coverage part which is preserved and maintained under controlled conditions and is susceptible to loss if the controlled conditions change.” Since the home-based business may include a bed and breakfast, with food on hand to feed guests, or a fruit and vegetable stand, with necessary refrigerated storage, the coverage is a necessary one for many business owner insureds.
Coverage applies not only to stock spoiled by temperature change, but also to loss by contamination by the refrigerant in the refrigeration system. Similar property of a guest, if the business is a bed and breakfast, is covered as well. A $250 deductible applies unless otherwise indicated on the supplemental declarations.
Certain exclusions apply. The exclusion for loss caused by calendar or time failure (Y2K or similar failure) applies, as do the exclusions for civil authority, earth movement, nuclear hazard, war, and water damage. If the system is disconnected—whether from failure to pay the utility bill or from an insured's inadvertently unplugging the refrigerator—there is no coverage for resulting loss. Any attempt to deactivate any switch or device that regulates or controls current or power that results in loss is excluded. Glass breakage that results in loss is excluded. An interesting exclusion is for loss caused by the inability of the utility company to provide sufficient power, or by equipment, such as a generator, at the insured's premises, that provides insufficient power. Loss resulting from or caused by loss of use, business interruption, delay, or loss of market is excluded. For example, if an insured runs a fruit stand, and the entire crop of refrigerated cherries is spoiled because of a covered peril, there will be coverage only for loss to the cherries themselves. Loss of market or business interruption is not covered under this optional coverage. Of course, the insured may purchase business interruption coverage to cover this exposure.