The CP 10 40 can be added to the Commercial Property Coverage Part and the Standard Property Policy. To provide the coverage ,the schedule on this form must be completed to show limit and the property to be covered by the endorsement, and the percentage deductible to be applied.

For specific insurance, the Limit of Insurance for earthquake must be the same as the Limit of Insurance for other causes of loss. If the limit is a blanket limit, but the coverage does not apply to all buildings or personal property included in a scheduled item, the schedule must identify to which building or personal property the coverage applies. Also, the earthquake coverage limit must be shown per item.

An option exists to include coverage for property with masonry veneer; this must be listed on the schedule as well. Another option is to only provide coverage for sprinkler leakage caused by an earthquake. Again, it must be indicated on the schedule as to which building this applies, or stated such in the declarations, with the appropriate limit of insurance which should be less than the limit that applies to other perils. The "Earthquake – Sprinkler Leakage Only" option appears under Additional Covered Causes Of Loss in the endorsement. The deductible for sprinkler leakage will be the same as the fire deductible.

A. When this endorsement is attached to the Standard Property Policy, the terms Coverage Part and Coverage Form in this endorsement are replaced by the term policy.

B. This endorsement applies to the Covered Property and Coverages for which a Limit Of Insurance is shown in the Schedule.

C. Additional Covered Causes Of Loss

1. The following are added to the Covered Causes of Loss:
a. Earthquake.
b. Volcanic Eruption, meaning the eruption,explosion or effusion of a volcano.

All Earthquake shocks or Volcanic Eruptions that occur within any 168-hour period will constitute a single Earthquake or Volcanic Eruption. The expiration of this Policy will not reduce the 168-hour period.

2. If the Schedule indicates that this endorsement covers Earthquake – Sprinkler Leakage Only, then the Covered Causes of Loss in Paragraph C.1. of this endorsement do not apply, and the following apply instead:
a. Sprinkler Leakage resulting from Earthquake.
b. Sprinkler Leakage resulting from Volcanic Eruption. Volcanic Eruption means the eruption, explosion or effusion of a volcano.

All Earthquake shocks or Volcanic Eruptions that occur within any 168-hour period will constitute a single Earthquake or Volcanic Eruption. The expiration of this Policy will not reduce the 168-hour period.

Analysis

The form begins by stating that the terms Coverage Part and Coverage Form in the endorsement are replaced by the term policy when the endorsement is attached to the Standard Property Policy. It then specified that the endorsement applies to the Covered Property and Coverages as long as a Limit of Insurance is shown in the schedule. If no limit is shown, then no coverage applies to the property in question.

Two additional causes of loss are then added to the policy as covered causes of loss. Earthquake and volcanic eruption; volcanic eruption means the eruption, explosion or effusion of a volcano. Earthquake shocks or volcanic eruptions that occur within any 168-hour period are considered a single earthquake or volcanic eruption. The expiration of the policy does not reduce this 168-hour period. Earthquakes and volcanos often have aftershocks or multiple eruptions in any one event. This defines where the policy considers one event to end.

Coverage for sprinkler leakage is an option. If that option is selected, then the coverages for earthquake and volcanic eruption do not apply. The only coverage is for sprinkler leakage that results from either an earthquake or a volcanic eruption. Again, volcanic eruption is defined as an eruption, explosion or effusion of a volcano and again, any earthquake or volcanic eruption within a 168-hour period is considered one event.

D. Exclusions, Limitations And Related Provisions

1. The Exclusions and Limitation(s) sections of the Causes Of Loss Form (and the Exclusions section of the Mortgageholders Errors And Omissions Coverage Form and the Standard Property Policy) apply to coverage provided under this endorsement, except as provided in Paragraphs D.2. and D.3.below.
2. To the extent that the Earth Movement Exclusion might conflict with coverage provided under this endorsement, the Earth Movement Exclusion does not apply.
3. The exclusion of collapse, in the Causes Of Loss – Special Form and Mortgageholders Errors And Omissions Coverage Form, does not apply to collapse caused by Earthquake or Volcanic Eruption.
4. The Additional Coverage – Collapse, in the Causes Of Loss – Broad Form, Causes Of Loss – Special Form and Mortgageholders Errors And Omissions Coverage Form, does not apply to the coverage provided under this endorsement. This endorsement includes coverage for collapse caused by Earthquake or Volcanic Eruption.
5. We will not pay for loss or damage caused directly or indirectly by tidal wave or tsunami, even if attributable to an Earthquake or Volcanic Eruption.
6. We will not pay for loss or damage caused by or resulting from any Earthquake or Volcanic Eruption that begins before the inception of this insurance.
7. The Ordinance Or Law Exclusion in this Coverage Part continues to apply with respect to any loss under this Coverage Part including any loss under this endorsement, unless Ordinance Or Law Coverage is added by endorsement.
8. We will not pay for loss of or damage to exterior masonry veneer (except stucco) on wood frame walls caused by or resulting from Earthquake or Volcanic Eruption. The value of such veneer will not be included in the value of Covered Property or the amount of loss when applying the Property Damage Deductible applicable to this endorsement.
   This limitation, D.8., does not apply if:

9. Under this Coverage Part, as set forth under Property Not Covered in the Coverage Form to which this endorsement is attached, land is not covered property, nor is the cost of excavations, grading, backfilling or filling. Therefore, coverage under this endorsement does not include the cost of restoring or remediating land.

Analysis

Exclusions D. 1., 2., and 3. serve to maintain the exclusions and limitations that are in the listed forms, except with respect to removing the exclusions that apply to earth movement and collapse that might conflict with the coverages provided by this endorsement. For example, if an earthquake causes a covered building to collapse, then exclusion D.3. would not apply to that collapse damage.

Exclusion D.4. removes the Additional Coverage – Collapse found in the applicable forms with respect to damage caused by earthquake or volcanic eruption.

Exclusion D.5. precludes any coverage for direct damage caused tidal wave or tsunami, even in event of an earthquake. Sometimes an earthquake can trigger a tsunami. So, damage done by the earthquake would be covered by the endorsement but not the water damage done by the tsunami.

Exclusion D.6. precludes coverage for any earthquake or volcanic eruption beginning prior to the inception of this coverage endorsement.Sometimes an earthquake will be preceded by small earthquake tremors, which then lead to a large earthquake. This exclusion will apply if the insured waits until the tremors have started to add this endorsement.

Exclusion D.7. serves to follow the applicable coverage part with respect to Ordinance or Law coverage. If excluded on the coverage part, then it will not apply to this earthquake coverage; but if added on the coverage part by endorsement, then that coverage will also extend to the coverage provided by this endorsement.

Exclusion D.8. only applies with respect to damage to buildings with exterior masonry veneer, where such veneer is on greater than 10% of the building. There is an option to remove this exclusion for additional premium which will apply in exception D.8.a. if the schedule indicates that the "Including Masonry Veneer" option applies or the premises description in the Declarations specifically states"Including Masonry Veneer". Exterior masonry veneer as used in this exclusion does not apply to stucco. An example of how this exclusion might apply is if a wood frame building has a brick front. The brick front makes up 15% of the building's structure. In this case, the exclusion would apply to the cost to replace the masonry veneer (brick) front, and the value of that veneer would not be calculated in the covered property loss, unless that building was shown in the schedule to "include masonry veneer".

Land in any form is excluded by D.9.-- including any excavations, grading, backfilling or filling of land; or any costs of restoring or remediating land.

E. Property Damage Deductible

1. The provisions of Section E.3. of this endorsement are applicable to all Coverage Forms except:
a. Business Income (And Extra Expense) Coverage Form;
b. Business Income (Without Extra Expense) Coverage Form;
c. Extra Expense Coverage Form.

2. If the Declarations indicates that this endorsement covers Earthquake – Sprinkler Leakage Only, then the Deductible provisions set forth in Paragraph E.3. of this endorsement do not apply to such coverage. The applicable Deductible for such coverage is the same Deductible that applies to Fire.

3. The Deductible, if any, in this Coverage Part is replaced by the following with respect to Earthquake and Volcanic Eruption:

a. All Policies
(1) The Deductible provisions apply to each Earthquake or Volcanic Eruption.
(2) Separate Deductibles are calculated for, and apply to, each building, personal property at each building and personal property in the open. Deductibles are separately calculated and applied even if:
(a) Two or more buildings sustain loss or damage;
(b) Personal property at two or more buildings sustains loss or damage; and/or
(c) A building and the personal property in that building sustain loss or damage.
(3) We will not pay for loss or damage until the amount of loss or damage exceeds the applicable Deductible. We will then pay the amount of loss or damage in excess of that Deductible, up to the applicable Limit of Insurance, after reduction required by any of the following: Coinsurance Condition, Agreed Value Optional Coverage, Additional Condition - Need For Adequate Insurance or Additional Condition – Need for Full Reports.
(4) When property is covered under the Coverage Extension for Newly Acquired or Constructed Property: In determining the amount, if any, that we will pay for loss or damage, we will deduct an amount equal to a percentage of the value of the property at time of loss. The applicable percentage for Newly Acquired or Constructed Property is the highest percentage shown in the Earthquake – Volcanic Eruption Coverage Declarations Schedule for or any in the described premises.
(5) If there is loss or damage caused by Earthquake or Volcanic Eruption, and loss or damage caused by a Cause of Loss (e.g., fire) that is covered by means of an exception to the Earth Movement Exclusion, then the only applicable Deductible provisions are those stated in this endorsement.

b. Calculation Of The Deductible – Specific Insurance Other Than Builders Risk
(1) Property Not Subject To Value Reporting Forms
In determining the amount, if any, that we will pay for loss or damage, we will deduct an amount equal to a percentage (as shown in the Schedule) of the Limit of Insurance applicable to the property that has sustained loss or damage.
(2) Property Subject To Value Reporting Forms
In determining the amount, if any, that we will pay for loss or damage, we will deduct an amount equal to a percentage (as shown in the Schedule)of the value of the property that has sustained loss or damage. The value to be used is the latest value shown in the most recent Report of Values on file with us.
However:
(a) If the most recent Report of Values shows less than the full value of the property on the report dates, we will determine the deductible amount as a percentage of the full value as of the report dates.
(b) If the first Report of Values is not filed with us prior to loss or damage, we will determine the deductible amount as a percentage of the applicable Limit of Insurance.

c. Calculation Of The Deductible – Blanket Insurance Other Than Builders Risk
(1) Property Not Subject To Value Reporting Forms
In determining the amount, if any, that we will pay for loss or damage, we will deduct an amount equal to a percentage (as shown in the Schedule) of the value of the property that has sustained loss or damage. The value to be used is that shown in the most recent Statement of Values on file with us.
(2) Property Subject To Value Reporting Forms
In determining the amount, if any, that we will pay for property that has sustained loss or damage, we will deduct an amount equal to a percentage (as shown in the Schedule) of the value of that property as of the time of loss or damage.

d. Calculation Of The Deductible – Builders Risk Insurance
(1) Builders Risk Other Than Reporting Form
In determining the amount, if any, that we will pay for property that has sustained loss or damage, we will deduct an amount equal to a percentage (as shown in the Schedule) of the actual cash value of that property as of the time of loss or damage.
(2) Builders Risk Reporting Form
In determining the amount, if any, that we will pay for loss or damage, we will deduct an amount equal to a percentage (as shown in the Schedule) of the value of the property that has sustained loss or damage. The value to be used is the actual cash value shown in the most recent Report of Values on file with us.
However:
(a) If the most recent Report of Values shows less than the actual cash value of the property on the report date, we will determine the deductible amount as a percentage of the actual cash value as of the report date.
(b) If the first Report of Values is not filed with us prior to loss or damage, we will determine the deductible amount as a percentage of the actual cash value of the property as of the time of loss or damage.

Analysis

Percentage deductibles are accommodated under Endorsement CP 10 40.

1. Specific Insurance - The dollar amount of the deductible will be equal to a percentage of the Limit(s) of Insurance applicable to the property that has sustained loss or damage.(See Examples1and 2in paragraph F.)
   
2. Blanket Insurance - The dollar amount of the deductible will be equal to a percentage of the value(s) of the property that has sustained loss or damage. The values to be used are those shown in the most recent Statement of Values on file with the company.(See Examples3and 4in paragraph F.)
   
3. Value Reporting Forms And Builders Risk Insurance - For value reporting forms, the calculation of the deductible amount is based on reported values. There are variations for the situation where loss occurs prior to the first report, and for reports of value which show less than full values. If coverage is written blanket under a reporting form, the basis of calculation is value at time of loss. For builders risk insurance, the calculation of the deductible amount is based on value at the time of loss.
   
4. Newly Acquired Or Constructed Property - When property is covered under the Coverage Extension for Newly Acquired or Constructed Property: In determining the amount, if any, that we will pay for loss or damage, we will deduct an amount equal to a percentage of the value(s) of the property at time of loss. The applicable percentage for Newly Acquired or Constructed Property is the highest percentage shown in the Declarations for any described premises.

The Statement of Values for a blanket policy should contain sufficient detail – value of each building, value of personal property at each building, value of personal property in the open – to complement the procedure set forth in the endorsements.

F. Examples – Application Of Deductible In E.3.:

EXAMPLE 1 – SPECIFIC INSURANCE (E.3.b.(1))

The amount of loss to the damaged building is $60,000.

The value of the damaged building at time of loss is $100,000. The Coinsurance percentage shown in the Declarations is 80%; the minimum Limit of Insurance needed to meet the Coinsurance requirement is $80,000 (80% of $100,000).

The actual Limit of Insurance on the damaged building is $70,000.

The Deductible is 5%.

Step (1): $70,000¸$80,000 = .875
Step (2): $60,000 X .875 = $52,500
Step (3): $70,000 X 5% = $3,500
Step (4): $52,500 – $3,500 = $49,000

The most we will pay is $49,000. The remainder of the loss, $11,000, is not covered due to the Coinsurance penalty for inadequate insurance (steps (1) and (2)) and the application of the Deductible (steps (3) and (4)).

EXAMPLE 2 – SPECIFIC INSURANCE (E.3.b.(1))

The amounts of loss to the damaged property are $60,000 (building) and $40,000 (business personal property in building).

The value of the damaged building at time of loss is $100,000. The value of the business personal property in that building is $80,000. The Coinsurance percentage shown in the Declarations is 80%; the minimum Limits of Insurance needed to meet the Coinsurance requirement are $80,000 (80% of $100,000) for the building and $64,000 (80% of $80,000) for the business personal property.

The actual Limits of Insurance on the damaged property are $80,000 on the building and $64,000 on the business personal property (therefore no Coinsurance penalty).

The Deductible is 10%.

Building1
Step (1): $80,000 X 10% = $8,000
Step (2): $60,000 – $8,000 = $52,000

Business Personal Property,
Step (1): $64,000 X 10% = $6,400
Step (2): $40,000 – $6,400 = $33,600

The most we will pay is $85,600. That portion of the total loss not covered due to application of the Deductible is $14,400.

EXAMPLE 3 – BLANKET INSURANCE (E.3.c.(1))

The sum of the values of Building 1 ($500,000), Building 2 ($500,000) and Building 3 ($1,000,000), as shown in the most recent Statement of Values on file with us, is $2,000,000.

The Coinsurance percentage shown in the Declarations is 90%; the minimum Blanket Limit of Insurance needed to meet the Coinsurance requirement is $1,800,000 (90% of $2,000,000).
The actual Blanket Limit of Insurance covering Buildings 1, 2, and 3, shown in the Declarations, is $1,800,000 (therefore no Coinsurance penalty).

Buildings 1 and 2 have sustained damage; the amounts of loss to these buildings are $40,000 (Building 1) and $60,000 (Building 2).

The Deductible is 5%.

Building 1
Step (1): $500,000 X 5% = $25,000
Step (2): $40,000 – $25,000 = $15,000

Building 2
Step (1): $500,000 X 5% = $25,000
Step (2): $60,000 – $25,000 = $35,000

The most we will pay is $50,000. That portion of the total loss not covered due to application of the Deductible is $50,000.

EXAMPLE 4 – BLANKET INSURANCE (E.3.c.(1))

The sum of the values of Building 1 ($500,000), Building 2 ($500,000), Business Personal Property at Building 1 ($250,000) and Business Personal Property at Building 2 ($250,000), as shown in the most recent Statement of Values on file with us, is $1,500,000.

The Coinsurance percentage shown in the Declarations is 90%; the minimum Blanket Limit of Insurance needed to meet the Coinsurance requirement is $1,350,000 (90% of $1,500,000).

The actual Blanket Limit of Insurance covering Buildings 1 and 2 and Business Personal Property at Buildings 1 and 2, shown in the Declarations, is $1,350,000. Therefore there is no Coinsurance penalty.

Building 1 and Business Personal Property at Building 1 have sustained damage; the amounts of loss are $95,000 (Building) and $5,000 (Business Personal Property).

The Deductible is 10%.

Building
Step (1): $500,000 X 10% = $50,000
Step (2): $95,000 – $50,000 = $45,000

Business Personal Property
Step (1): $250,000 X 10% = $25,000

The loss, $5,000, does not exceed the deductible.

The most we will pay is $45,000. The remainder of the building loss, $50,000, is not covered due to application of the Deductible. There is no loss payment for the business personal property.

Analysis

These examples are self-explanatory.

G. Business Income And Extra Expense Period Of Restoration

This Paragraph G. is applicable only to the Coverage Forms specified below:
1. Business Income (And Extra Expense) Coverage Form;
2. Business Income (Without Extra Expense) Coverage Form;
3. Extra Expanse Coverage Form.

The "period of restoration" definition stated in the Coverage Form, or in any endorsement amending the beginning of the "period of restoration", applies to each Earthquake or Volcanic Eruption. A single Earthquake or Volcanic Eruption is defined in Paragraph C. of this endorsement.

Analysis

This endorsement extends time element coverages that exist on the policy to apply to earthquake or volcanic eruption by amendment of the definition of period of restoration to include these perils.

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

For further reading:

2023 Commercial Property Earthquake and Volcanic Eruption Rules Revisions

Earthquakes and Insurance

Disaster Compendium - Earthquakes