Cause of Loss Forms and Commercial Property Endorsements
A commercial property coverage form says what property is covered. It does not say which perils are covered. That is the job of the cause of loss form, and endorsements then adjust the coverage to fit the business.
Cause of loss forms
Once the desired coverage forms are added, the named insured must determine which cause of loss form to attach to the policy to specify the perils insured against.
There are three available forms: Basic, Broad and Special. The Basic and Broad forms cover named perils, so a loss is covered only if a listed cause produced it. The Special form covers open perils.
Basic Cause of Loss
This form covers loss caused by eleven named causes of loss:
- Fire
- Lightning
- Explosion
- Windstorm or hail
- Smoke
- Aircraft or vehicles
- Riot or civil commotion
- Vandalism
- Sprinkler leakage
- Sinkhole collapse
- Volcanic action
Nine of these match perils available in the Dwelling Property Basic form: fire, lightning, the extended coverages (WHARVVES) and vandalism. Sprinkler leakage and sinkhole collapse are found only in the commercial form.
Several of these perils are narrower than their names. Vandalism does not include theft, except for building damage caused by burglars breaking in or exiting. Aircraft or vehicles does not include damage by vehicles the insured owns or vehicles operated in the course of its business. Sinkhole collapse does not include the cost of filling the sinkhole.
Broad Cause of Loss
This form includes all the perils of the basic form plus:
- Weight of ice, snow and sleet
- Falling objects
- Water damage
The water damage coverage does not include flood damage but does cover damage from leakage or discharge of water or steam from an appliance or the bursting of water pipes. Similar exclusions like those found in the basic form are present in this form.
The Broad form also adds an additional coverage for collapse. It pays for an abrupt collapse of a building caused by a covered cause of loss, hidden decay, hidden insect or vermin damage, the weight of people or personal property, the weight of rain that collects on a roof, or defective materials or methods if the collapse occurs during construction.
Special Causes of Loss
This is the all-risk open-perils cause of loss form. It covers all perils found in the broad form plus any other cause of loss except those specifically excluded, such as:
- Earth movement
- War
- Nuclear hazard
Under the Special form, covered causes of loss means direct physical loss unless the loss is excluded or limited in the policy.
The theft coverage of the Special form has limits of its own:
- Theft by employees is excluded, along with dishonest or criminal acts of the insured and its partners, officers and employees. Acts of destruction by employees are still covered.
- Missing property is not covered when the only evidence of loss is an inventory shortage, or when there is no physical evidence to show what happened to it.
- Building materials and supplies not attached to the building are not covered for theft, unless the insured holds them for sale.
- Special limits apply to any one occurrence of theft unless the declarations show higher ones: $2,500 for furs, $2,500 for jewelry, watches and precious metals (jewelry and watches worth $100 or less per item are not subject to the limit), $2,500 for patterns, dies, molds and forms, and $250 for stamps, tickets and letters of credit.
The Special form also extends coverage to the insured’s property in transit in a vehicle the insured owns, leases or operates, up to $5,000, for a short list of causes that includes collision and theft of an entire package by forced entry.
| Basic | Broad | Special | |
|---|---|---|---|
| Approach | Named perils | Named perils | Open perils |
| Causes of loss | 11 | The Basic 11 plus falling objects, weight of snow, ice or sleet, and water damage | Any direct physical loss not excluded or limited |
| Collapse | No additional coverage | Additional coverage | Additional coverage |
| Theft | Not covered | Not covered | Covered, with limits |
Commercial crime coverage, which insures employee theft and other crime losses, is covered in its own chapter.
Commercial property endorsements
Additional commercial property endorsements are available, which may modify the basis on which property is insured, including:
Ordinance or law
Building codes change, and an older building that is badly damaged may have to be rebuilt to the current code, or torn down entirely. The causes of loss forms exclude those costs, and the building and personal property form gives back only a small amount for increased cost of construction.
This endorsement is used to provide three types of coverage related to the enforcement of building codes: Coverage A (undamaged portion), Coverage B (demolition cost), and Coverage C (increased cost of construction).
| Coverage | What it pays | Limit |
|---|---|---|
| Coverage A: loss to the undamaged portion of the building | The loss in value of the undamaged portion when a law requires it to be demolished | Included within the building’s limit of insurance |
| Coverage B: demolition cost | The cost to demolish the undamaged parts and clear the site | Its own limit, shown in the schedule |
| Coverage C: increased cost of construction | The increased cost to repair or rebuild to the minimum standards the law requires | Its own limit, shown in the schedule |
Coverages B and C may share one combined limit. Each coverage applies only if it is selected in the schedule, only after covered direct physical damage to the building, and only for the minimum requirements of the law. Coverage C is not paid until the building is actually repaired or replaced, which must happen as soon as reasonably possible and within two years unless the insurer extends the period in writing.
For example, a city requires any building more than 50% destroyed to be torn down and rebuilt to current code. A covered fire destroys 60% of a building. The building coverage pays for the burned portion, Coverage A pays for the value of the undamaged 40% that must be demolished, Coverage B pays to tear it down and clear the site, and Coverage C pays the added cost of features the old building lacked, such as sprinklers.
Spoilage
This endorsement provides coverage for perishable stock due to power outage, mechanical breakdown or contamination.
This coverage applies to losses resulting from a change in temperature or humidity caused by mechanical breakdown of the refrigerating, cooling or humidity control equipment or by a power outage either on or off the premises, and to contamination by the refrigerant.
Without the endorsement these losses are generally not covered. The causes of loss forms exclude utility service failure and mechanical breakdown, the Basic and Broad forms do not list a change in temperature as a cause of loss, and the Special form excludes loss to personal property from changes in temperature or humidity. Perishable stock means personal property that is kept under controlled conditions for its preservation and can be damaged if those conditions change, such as food in a restaurant’s freezer or flowers in a florist’s cooler. It may belong to the insured or to others.
In the standard form, the schedule shows which of two causes of loss applies, and the insured may choose one or both:
- Breakdown or contamination: a change in temperature or humidity from mechanical breakdown or failure of refrigerating, cooling or humidity control equipment at the described premises, and contamination by the refrigerant.
- Power outage: a change in temperature or humidity from a complete or partial interruption of electrical power, on or off the described premises, due to conditions beyond the insured’s control.
The endorsement has its own deductible. It does not cover loss caused by disconnecting the equipment from its power source or by switching off the power. If the schedule calls for a refrigeration maintenance agreement, the insured must keep one in force.
Peak season limit of insurance
This endorsement increases the limit of insurance for the business’s personal property of a firm that encounters durational fluctuations in inventory during the coverage period; it allows the insured to increase his/her contents amount for specified periods of time when his/her inventory may be higher than usual (i.e., department store inventory at holidays).
The schedule shows the additional limit of insurance and the period it applies, from a first day to a last day. A toy store that carries $200,000 of stock most of the year and $350,000 before the holidays could keep a $200,000 limit and add a $150,000 peak season limit from October 1 to January 1. The higher limit applies only at the described location and only during that period.
Value reporting form
A business whose inventory changes constantly cannot pick one limit that fits all year. The value reporting form bases the premium on the values the insured actually has.
The insured must provide reporting of the changes occurring during the year. The insured must report 100% of the values of the property insured. Late reports or underestimates may result in a penalty at the time of loss.
The declarations show a reporting period (daily, weekly, monthly, quarterly or policy year) in place of a coinsurance percentage. In the standard form, reports are generally due within 30 days after the end of each reporting period. The premium charged at the start of the year is an advance premium. A final premium is determined at the end of the year when the experience is complete, based on the average of the reported values, and the insurer charges or returns the difference.
The limit of insurance does not move with the reports. If reported values exceed the limit, premium is charged on all the values reported, but the insurer pays no more than the limit.
Two penalties keep the reports honest:
- Under-reporting. The full reporting value clause states that if the insured under reports, the insurer pays only the proportion of the loss that the values reported bear to the actual values. For instance, if the insured reports only 1/3 of his/her value, the insurer will only pay 1/3 of the loss.
- Late reports. In the standard form, if the first required report is overdue at the time of loss, the insurer pays no more than 75% of what it would otherwise have paid. If a later report is overdue, the insurer pays no more than the values last reported for that location.
For example, under the standard form an insured reports values of $90,000 when the actual values were $120,000, then has a $60,000 loss with a $250 deductible. The insurer pays $90,000 ÷ $120,000 = 0.75 of the loss, or $45,000, less the deductible: $44,750. Reports cannot be corrected after a loss.
Earthquake
All three causes of loss forms exclude earth movement, which includes earthquake and volcanic eruption. Some resulting losses are covered even without an endorsement: fire or explosion that results from an earthquake, and fire or volcanic action that results from a volcanic eruption (and building glass breakage, in the Broad and Special forms). Volcanic action is damage by airborne volcanic blast, ash, dust or lava flow.
An endorsement can add earthquake as a covered cause of loss. Without the addition of this endorsement, coverage for earthquake damage is excluded. Earthquake is added by endorsement to a policy that already has a Basic, Broad or Special causes of loss form, and the endorsement commonly covers volcanic eruption as well.
The limit that applies to earthquake damage may be lower than the limit that otherwise applies to the building. Earthquake coverage is commonly written with its own deductible, stated as a percentage instead of a flat dollar amount. Earthquake endorsements commonly treat shocks that occur within a stated period as a single earthquake.
Earthquake can also be insured outside the commercial property coverage part through difference in conditions (DIC) insurance, written to cover certain perils that may otherwise be excluded by the standard fire policy or commercial package policy (usually with a large deductible). Modern DIC insurance is typically a stand-alone all-risk gap-filling policy covering flood, earthquake, and other excluded perils.
Equipment breakdown coverages are covered in their own chapter.
Chapter vocabulary
Lesson summary
- There are three cause of loss forms. Basic and Broad cover named perils, and Special covers any direct physical loss that is not excluded or limited.
- The Basic form lists eleven causes of loss. The Broad form adds falling objects, weight of snow, ice or sleet, and water damage, plus an additional coverage for collapse.
- Only the Special form covers theft, and it excludes employee theft and applies special limits such as $2,500 for furs and for jewelry, unless the declarations show higher ones.
- Ordinance or law coverage has three parts: Coverage A for the undamaged portion of the building, Coverage B for demolition cost and Coverage C for the increased cost of construction.
- Spoilage coverage insures perishable stock against breakdown or contamination and power outage.
- The peak season limit of insurance endorsement raises the business personal property limit for a scheduled period.
- Under the value reporting form, premium follows the values reported. In the standard form, an insured that under-reports is paid only in proportion, and one that misses the first report is paid no more than 75% of what the insurer would otherwise have paid.
- Earthquake is excluded as earth movement and is added back by endorsement.