Part 2 - Section I Property Coverages & Additional Coverages

Part 3 - Section I Exclusions & Conditions

Part 4 - Section II Liability Coverages & Exclusions

Part 5 - Section II Additional Coverages, Conditions & Endorsements

Topics covered:

Section I - Exclusions

Section I - Conditions

Section I Exclusions

Since the ISO home business insurance coverage form is designed to be attached to an underlying homeowners form, the exclusions of the underlying form still apply. The exclusions discussed below are additional exclusions and do not replace the Homeowners Section I Exclusions.

10. The following exclusions are added. This is Exclusion A.10. in Forms HO 00 03 and HO 00 05:

a. Dishonesty

We will not pay for loss caused by or resulting from dishonest or criminal acts by you, anyone else with an interest in the property, or any of your or their partners, "employees", directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose:

(1) Acting alone or in collusion with others; and

(2) Whether or not occurring during the hours of employment.

This exclusion does not apply to acts of destruction by your "employees"; but theft by "employees" is not covered.

With respect to accounts receivable and "valuable papers and records", this exclusion does not apply to carriers for hire.

Analysis

The HO 07 01 will not pay for loss caused by or resulting from employee dishonesty. Dishonest or criminal acts of the insured, anyone with an interest in the property, or any partners, employees, directors, trustees, or authorized representations that result in loss are not covered. This exclusion applies whether the party is acting alone or in collusion with others and whether or not the loss occurred during the hours of employment.

There are two exceptions to the exclusion. The first is that acts of destruction by employees are covered, but not acts of theft by employees. For example, if a disgruntled employee breaks into the insured business at night, steals some business property, and vandalizes walls and furniture, the vandalism (an act of destruction) is covered but not the theft. The second exception is that there is coverage if accounts receivable or valuable papers and records are the subject of criminal or dishonest acts by a carrier for hire.

b. False Pretense

We will not pay for loss caused by or resulting from voluntary parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false pretense.

Analysis

There is no coverage for loss resulting from voluntarily parting with property if the insured is a victim of any fraudulent scheme, trick, device, or false pretense. For example, if an employee gives a reupholstered sofa to someone pretending to be its owner, there is no coverage for the loss. Insureds should take precautions to not be victimized by any such scheme.

c. "Business Income" And "Extra Expense"

We will not pay for:

(1) Any "extra expense", or increase of "business income" loss, caused by or resulting from:

(a) Delay in rebuilding, repairing or replacing the property or resuming "operations", due to interference at the location of the rebuilding, repair or replacement by strikers or other persons; or

(b) Suspension, lapse or cancellation of any license, lease or contract. But if the suspension, lapse or cancellation is directly caused by the suspension of "operations", we will cover such loss that affects your "business income" during the "period of restoration"; or

(2) Any other consequential loss.

Analysis

This exclusion applies specifically to the coverages for business income and extra expense. Coverage is precluded for any extra expense or increase in business income loss resulting from delay in building or repairing property or resuming operations due to the action of strikers or other persons. The interference caused by the action of the strikers must occur at the location of the repair, rebuilding, or replacement. If the insured business owner is having repairs made to the insured dwelling following a covered loss, and a strike occurs at the contractor's office, then this exclusion would not apply.

Coverage is also precluded for extra expense or loss of business income resulting from a lapse or cancellation of a license, lease, or contract unless the suspension, lapse, or cancellation is the result of the suspension of operations. Then the insurer would cover business income loss during the period of restoration. For example, a covered loss results in a three-month long period of restoration. The insured was contractually obligated to supply crafts to a shop each month. Because of the loss, the contract is canceled. Business income is therefore payable for three months but not for what would have been the life of the contract.

Any other consequential loss, such as loss of market following a covered direct physical loss, is also excluded.

d. Accounts Receivable And Valuable Papers And Records

The following exclusions apply to Section I Additional Coverages E.12.a. Accounts Receivable and/or E.12b. Valuable Papers And Records in the following manner:

(1) With respect to both Accounts Receivable and "Valuable Papers and Records":

(a) The following are the only Section I — Exclusions of the policy to which this endorsement is attached that apply to these Additional Coverages:

(i) Neglect;

(ii) War;

(iii) Nuclear Hazard; and

(iv) Intentional Loss.

(b) All Section I — Exclusions added by this endorsement apply except Exclusion c. Business Income and Extra Expense above; and

(c) We will not pay for:

(i) Loss caused by or resulting from electrical or magnetic injury, disturbance or erasure of electronic recordings that is caused by or results from:

i. Programming errors or faulty machine instructions; or

ii. Faulty installation or maintenance of data processing equipment or component parts.

We will, however, pay for direct physical loss caused by lightning; or

(ii) Loss to contraband, or property in the course of illegal transportation or trade.

(2) With respect to "Valuable Papers And Records" only:

We will not pay for loss caused by or resulting from any of the following:

(a) Errors or omissions in processing or copying. But we will pay for direct physical loss caused by resulting fire or explosion; or

(b) Wear and tear, deterioration or latent defect.

(3) With respect to Accounts Receivable only:

We will not pay for:

(a) Loss caused by or resulting from 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;

(b) Loss caused by or resulting from bookkeeping, accounting or billing errors or omissions; or

(c) Any loss or damage that requires any audit of records or any inventory computation to prove its factual existence.

Analysis

Although the underlying homeowners exclusions apply to the HO 07 01, this section clarifies that the only homeowners section I exclusions that apply to the additional coverages of accounts receivable and valuable papers and records are neglect, war, nuclear hazard, and intentional loss. This means that loss resulting from earth movement, water damage, or power failure is covered. So if a flood damages valuable papers and records, the resulting loss is covered. The other exclusions that are added by the HO 07 01 still apply except 10c. business income and extra expense.

Loss to accounts receivable or valuable papers and records resulting from electric or magnetic disturbance, injury, or erasure of electronic recordings caused by faulty programming or faulty installation or maintenance of data processing equipment is not covered. However, direct physical loss or damage caused by fire or lightning is covered. Loss or damage to contraband or property in the course of illegal transportation or trade are also not covered.

In addition to the other exclusions, certain exclusions apply only to valuable papers and records coverage while others apply only to accounts receivable coverage. For valuable papers and records coverage, loss resulting from errors and omissions in processing or copying (except those caused by fire or explosion), wear and tear, deterioration, or latent defect are excluded. Latent defect is generally held to be any quality within something that causes it to destroy itself.

For accounts receivable coverage, in addition to those already discussed, excluded are loss or damage caused by or resulting from actions taken to conceal wrongful giving, taking, or withholding of money, securities, or other property. The exclusion applies only to the extent of the wrongful giving, taking, or withholding, so that other accounts receivable are not affected by the exclusion.

Also excluded from accounts receivable coverage are losses caused by or resulting from bookkeeping, accounting, or billing errors; and any loss requiring any audit of records or inventory computation as proof of its existence.

Section I Conditions

As was the case with section I exclusions, the home business insurance coverage form adds conditions to those in the underlying homeowners policy. These conditions are in addition to those of the underlying policy.

J. Loss Payment

Under Condition J. Loss Payment, the following are added:

1. Property Of Others

We will determine the value of property of others that is in your care at actual cash value, but this property is not covered for more than the amount for which you are liable, plus the cost of labor, materials or services furnished or arranged by you on personal property of others.

Analysis

This condition defines how certain items are valued for the purposes of loss payment. For property of others in the insured's care, the value is determined on an actual cash value basis, even if the insured has added replacement cost coverage for personal property (HO 04 90 03 22). For example, if a sofa is left with the insured to be reupholstered and it burns in a covered fire, the customer's loss of the sofa is settled on an actual cash value basis. If the sofa has been finished but not yet returned to the customer, the cost of the new fabric and labor is taken into account. The insurer will not pay more than the amount for which the insured is liable, plus the cost of labor, materials, or services furnished.

2. Valuable Papers And Records

We will determine the value of "valuable papers and records", including those which exist on electronic or magnetic media (other than prepackaged software programs), at the cost of:

a. Blank materials for reproducing the records; and

b. Labor to transcribe or copy the records.

This condition does not apply to "valuable papers and records" that are actually replaced or restored.

Analysis

A covered loss to valuable papers and records is settled on the basis of the cost of blank materials for reproducing the records plus the cost of labor to transcribe or copy the records. However, this provision applies only to those papers and records that are not replaced or restored. The additional coverage for valuable papers and records provides $2,500 direct physical loss to such property, including the cost to research lost information when duplicates do not exist.

3. Accounts Receivable

a. If you cannot accurately establish the amount of accounts receivable outstanding as of the time of loss, the amount will be determined as follows:

(1) Determine the total of the average monthly amounts of accounts receivable for the 12 months immediately preceding the month in which the loss occurs; and

(2) Adjust that total 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.

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;

(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.

Analysis

If the insured cannot accurately establish the value of the lost or damaged accounts receivable at the time of loss, the insurer will determine the average monthly value of the accounts using the 12 preceding months and adjust for any monthly fluctuations such as an increase in sales because of the holiday season for the month in which the loss occurred.

From the total amount of accounts receivable, the following should be deducted: a sum based on undamaged accounts; accounts the insured can reestablish or collect; probable bad debts the insured is normally unable to collect; and unearned interest and service charges.

M. No Benefit To Bailee is replaced by the following:

M. No Benefit To Bailee

No person or organization, other than you, having custody of covered property will benefit from this insurance.

Analysis

The no benefit to bailee provision in the underlying homeowners policy states that the insurance will not be for the benefit of a bailee or other person or organization holding, storing, or moving property for a fee. This provision is amended to grant the insured coverage as a bailee while having custody of the property of others.

Q. Policy Period is replaced by the following:

Q. Policy Period And Coverage Territory

This endorsement applies only to loss which occurs during the policy period within the applicable "coverage territory".

Analysis

The homeowners forms state, "This policy applies only to loss which occurs during the policy period." The endorsement adds the further stipulation that it applies only within the applicable coverage territory, further discussed below.

T. The following conditions are added:

(This is Paragraph S. in Form HO 00 04.)

1. Coverage Territory

For the coverage provided under this endorsement, we cover loss commencing within the "coverage territory" or, with respect to "business" property in transit, while it is between points in the "coverage territory".

Analysis

In addition to the conditions of the underlying homeowners policy, three conditions are added by the HO 07 01. The first of these amends the policy period condition to also include a coverage territory. In the base homeowners policy, personal property is covered anywhere in the world.

The coverage territory of the HO 07 01 for the purposes of Section I is defined as America, Puerto Rico, and Canada. Coverage applies to a loss to business property when the loss is within the coverage territory, or while business property is in transit between points in the coverage territory. There would be no coverage if, for example, there was loss to business personal property while in transit to Europe, even if currently within the coverage territory, since the end destination is not part of the coverage territory.

2. Resumption Of Operations

We will reduce the amount of your:

a. "Business income" loss, other than "extra expense", to the extent you can resume your "operations", in whole or in part, by using damaged or undamaged property (including merchandise or stock) at the "residence premises"; and

b. "Extra expense" loss to the extent you can return "operations" to normal and discontinue such "extra expense".

Analysis

The second additional condition is the resumption of operations. If the insured can resume operations, in whole or in part, by using any damaged or undamaged property (whether business property or other) at the residence premises, then the business income loss will be reduced to that extent. For example, if a business income loss can be reduced through the sale of slightly damaged merchandise, then the insured is obligated to do so.

Extra expense coverage will also be reduced to the extent that operations can be returned to normal, and any related extra expense is discontinued.

3. Limitation – Electronic Media And Records

a. We will not pay for any loss of "business income" caused by direct physical loss of Electronic Media and Records, as described in b. below, after the longer of:

(1) 60 consecutive days from the date of direct physical loss; or

(2) The period, beginning with the date of direct physical loss, necessary to repair, rebuild or replace with reasonable speed and similar quality, other property at the "residence premises" due to loss caused by the same event.

For example, a Peril Insured Against damages a computer on June 1. It takes until September 1 to replace the computer and until October 1 to restore the data that was lost when the damage occurred. We will only pay for the "business income" loss sustained during the period June 1 through September 1. Loss during the period September 2 through October 1 is not covered.

For example, a Peril Insured Against results in the loss of data processing programming records on August 1. The records are replaced on October 15. We will only pay for the "business income" loss sustained during the period August 1 through September 29 (60 consecutive days). Loss during the period September 30 through October 15 is not covered.

b. Electronic Media And Records are:

(1) Electronic data processing, recording or storage media such as films, tapes, discs, drums or cells;

(2) Data stored on such media; or

(3) Programming records used for electronic data processing or electronically controlled equipment.

Analysis

The third additional condition places limitations to payment of loss of business income caused by direct physical loss of electronic media and records. Electronic media and records are defined as electronic data processing, recording, or storage media; data stored on such media; and programming records used for electronic data processing or electronically controlled equipment.

Coverage is limited to the longer of 60 consecutive days from the date of direct physical loss, or the period, beginning with the date of direct physical loss, necessary to replace, rebuild, or repair other property at the residence premises due to loss caused by the same event.

The form lists two examples, quoted above. In the first example, the business income lost is paid from June 1 through September 1 (longer than 60 days from the date of loss), because the period necessary to replace the damaged computer was longer than 60 days.

Includes copyrighted material of Insurance Services Office, Inc., with its permission.