COMMERCIAL INSURANCE
Commercial insurance is not unlike personal insurance in the types of coverage offered and in the different variations of the basic plan. For example, commercial insurance offers protection for property loss and liability. Also, as with personal insurance, a business owner can purchase additional coverage to supplement the coverage of his or her basic policy.
However, despite any similarities that these two types of insurance share, business owners must carry commercial insurance, or insurance that is designed for businesses, since they may be exposed to considerably more loss than the personal insurance policyholder because of employees, inventory, and the constant stream of people entering the establishment.
The term multiple-line, or multiple-peril, is used to describe an insurance policy that combines different lines of insurance in a single package. Those who purchase this type of insurance are actually buying several polices for one premium. Property and liability is commonly sold as a multiple-peril policy. This type of policy is more comprehensive than a single-line policy, which offers only one type of insurance. For example, a single-line policy might offer coverage for liability or property, but it does not offer coverage for both liability and property. Finally, because this package insurance policy exists as a single entity, it may not be subdivided into several separate policies. If a person does not wish to purchase the entire package, he may consider opting for a single-line policy although he will lose the discounted price and convenience of the package policy.
In this chapter we will explore two types of commercial multi-peril policies: the special multi-peril policy (SMP) and the business-owners policy (BOP).
Package policies have been an integral part of the insurance industry for decades. Even the simple fire and extended coverage policy, one of the first insurance policies ever available, is a package in that the extended coverage endorsement (additional insurance that an insured has the option of adding to his basic policy to broaden coverage) combines a number of separate perils (wind, hail, explosion, impact by vehicles or aircraft, and riot and civil commotion) into one package. Since then, many different packages of insurance coverages have been introduced and implemented as important components of the insurance industry.
The first real commercial multi-peril packages offering protection for both property and liability did not appear until the early 1960s. Part of the reason for the late arrival of these types of policies was governmental regulations of insurance and because insurance at that time, with the exception of homeowners policies, had changed very little. For instance, for quite some time, many states were forced to comply with laws that required insurance agents to be licensed in the single-line form of insurance since most insurance companies were required to offer only single-line insurance. In other words, companies who specialized in property insurance were not allowed to sell liability coverage; therefore, insurance companies only hired agents who were licensed to sell property insurance. The same was true for other single-line policies such as liability, marine and aircraft policies. These regulations were slowly relaxed during the 1950s because by that time it was evident that many buyers of the homeowners package policy welcomed the �new� package policy.
Naturally, business owners, many of whom were also homeowners, complained that they, too, could benefit from the reduced cost and the convenience of the package policy. Up to that time business owners were only able to purchase single-line policies, just as homeowners had done until the 1950s. Furthermore, because of the increased risks of store or company ownership, business owners had to purchase a much larger number of separate policies than a homeowner had ever had to buy. In the 1960s, one decade after homeowners insurance had been available, some insurers, together with agents and brokers, focused on the desires of potential commercial policyholders and created the package concept for businesses. Only a few innovative, aggressive insurance companies had worked to develop these new packages. Therefore, when the business package policies were finally approved, these few companies, taking advantage of the principles of free enterprise, were the first to market them, thereby jumping ahead of their competitors, and attracting more business.
As with any type of insurance policy, an understanding of the basic terminology that one will encounter in the policy is crucial to understanding the policy itself and its coverages.
Commercial policies contain at least two sections, property, and liability. These are referred to, respectively, as Section I and Section II. Depending on the type of policy, some insurance contracts contain other sections (such as theft and burglary) that are a part of the basic policy. These sections may describe a particular type of optional coverage or endorsement, or additional coverages that the purchaser may consider adding to extend the basic coverage of his policy. Regardless of how many sections the policy might contain, each section describes in detail the specific types of protection that the policy covers and the specific types of damages that are excluded, or not covered, under the policy.
The �named insured,� usually stated as item one on the policy�s declarations page, is the person(s) or organization that is protected by the policy�s coverage as long as the named insured is acting either in the business�s interest or according to his role in that business.
Many times, the word �insured� is quite broad, but the term can apply to any of the following:
� A sole proprietor and his spouse.
� A partnership or joint venture.
� An organization or any executive officer.
� A member of the board of trustees, directors or governors.
� Any stockholder; any employee of the named insured.
� Any person or organization who acts as the real estate manager for the named insured.
Under the standard form policy, businesses are protected against the usual named perils, but there are special form policies that protect against multiple risks, and this type of protection is called all-risk coverage.
Named peril insurance means that the insurance policy specifically names those perils from which the business owner is protected. All-risk insurance policies state that the business is protected against all risks except those that are specifically excluded, such as earthquake coverage.
The named peril form states specifically which perils are covered, and if a policyholder feels that additional coverage is necessary, he can usually add these by endorsement or by optional coverage to broaden the coverage of his policy. The all-risk form works differently. This type of policy covers all situations except for those that are specifically excluded under the policy. As with the named peril form, additional policies, endorsements, or optional coverage may be added to the all-risk form so that insureds may more fully cover their exposures to risk.
Replacement cost means that damaged or destroyed property is covered for the amount that it actually costs to replace or to restore the item to its original condition rather than its actual cash value (ACV), which is its current market or depreciated value.
For instance, if a policy states that property is covered according to its replacement cost and if a business has a computer that originally cost $2,000, the insurance company will replace the damaged or destroyed computer with a new, similar computer even if that computer in today�s market is now worth $3,000. The insurance company does not consider that perhaps the damaged or destroyed computer is really only worth $1,500 (the original cost of the computer less its depreciation) as it would if the policy stated that damaged or destroyed property would be replaced or covered according to its present market value, or its ACV. Using the same example, when calculating an insurance company�s obligation to cover part of a loss according to the ACV method for calculation, the insurance company would pay the insured business owner $1,500, the original cost of the computer less its depreciation.
Whether the policy provides for replacement cost or ACV, the business owner is responsible for paying the deductible.
Agents must help business owners to carefully assess their insurance needs from two standpoints. First, a business owner must examine his business�s exposure to loss or risks (pertaining to both property and liability) from which he wishes to be protected. If the basic policy does not include coverage for the type of risk to which a business is exposed, business owners can usually add the necessary coverage for the risk by purchasing an endorsement or optional coverage for added protection. Secondly, business owners should also consider the limits of liability that the policy contains. Like increased protection for exposure to risk, most liability limits can be raised by endorsement or optional coverage.
Considering exposure to risk is essential since many types of exposures such as fire can severely impair the business�s normal activities or may even cause business operations to cease altogether. All risks, even those which seem unlikely, must be anticipated.
Business owners must carefully weigh the advantages of lower annual, monthly, or quarterly, premiums against having high deductibles or low limits of protection. While it is less expensive to purchase an insurance policy that has a $1,000 deductible than one which has a $250 deductible, a business owner must decide whether the higher premium for the lower deductible makes good sense for the business.
Companies that offer commercial insurance often have questionnaires that a potential policyholder must fill out. Using the information from the questionnaires the company�s agent can help the business owner pinpoint the insurance needs of the business and then suggest the best coverage to meet those needs.
As stated earlier, the evolution of commercial package policies and programs can be traced to the development and implementation of the homeowners� package which protects an individual�s personal property and personal liability.
When the first commercial policies, which were (and still are) called the special multi-peril policy (SMP), became available, small, medium and large businesses were rated in exactly the same way. The SMP was the sole commercial policy package on the market.
Thus, a small business with only ten employees and a large company with hundreds of workers were rated in the same way and were insured under identical SMP forms.
Although the SMP covered many perils, for some small and medium sized businesses, the coverage included protection against risks that these business owners would never require because these businesses, by their very size, are exposed to fewer risks than large companies. As a result, small and medium sized business owners paid for coverage they did not need and paid the same premiums that large companies paid. The SMP was a convenient, discounted policy since it combined several single-line forms of insurance. Unfortunately small and medium sized business owners wasted money because they were paying for coverage that they would likely never use.
Once rating changed to recognize the relative levels of risk for differently sized business, the SMP became the most popular policy for small and medium sized businesses.
While many small and medium sized businesses find the coverages of the SMP to be the best policy for insuring their businesses, many large businesses also find the SMP to be a viable way for insuring itself against property or liability. Although some of these large companies are not eligible for the SMP program, many large businesses do indeed qualify for the program. However, some large companies, which are otherwise eligible, have insurance requirements beyond the scope of the SMP program. This is, of course, to be expected if these companies are exposed to risks that the SMP does not include as part of its protection. Or, interested business owners who operate large companies may discover that even though they are interested in the plan, they are not able to purchase the additional required coverage through endorsements or optional coverages.
When deciding whether to go with a single-line or a multiple-line type of coverage, the commercial policyholder will discover that when his insurance needs are combined as a multiple-line package, he will benefit from lower costs, from more complete coverage in a single policy contract, and from flexibility of choice when selecting optional coverages.
Reduction in Cost
Reduction in cost, the first advantage, is probably the most important and most attractive feature of the SMP program. The reduction in premium costs can be ascribed to the following elements: the selection process, the handling of just one policy, careful examination of class characteristics and through the reduction of risks.
� Reducing costs through the selection process.
Eligible policyholders are screened during the underwriting selection. For example, businesses involved in industries experiencing a higher degree of risk will probably be eliminated immediately. Insurance companies who screen applicants so that their underwriters eliminate poor risks and select only the better risks usually will benefit from cost reductions ranging from 15 to 30 percent. These are up-front reductions in initial premiums. Because SMPs are written by both dividend and non-dividend paying insurance companies, policyholders with some dividend companies may gain additional savings through receiving earned dividends.
Another factor in cost reductions is that the insurance company�s selection process tends to ensure that a particular group of policyholders will statistically show a better than average loss ratio, meaning that SMP policyholders have less exposure to risk and, therefore, file less claims.
� Reduced paperwork and lower losses.
Cost reduction is also attributable to two additional factors. First, both the insurance company and the insurance agent or broker benefit from savings in processing reductions since they will manage only one policy instead of perhaps two to ten policies as they would have to do with single-line policies. Second, another cost reduction occurs because, overall, the losses suffered by the SMP class are less costly and fewer in number than the losses suffered by other classes with similar coverage that is written under a series of separate policies. These savings, both the cost of handling one policy rather than several and the decreased chances of the SMP class suffering a loss, are passed on to the policyholder, usually in the form of reduced premiums.
� Reducing costs by cutting risks.
The selection process, as described above, is repeated at renewal time. At that time, the loss experience (claims filed and losses suffered) and inspection reports of the condition of each business owner�s property and equipment (among other areas of examination) are taken into account when deciding whether each business still qualifies for the SMP program and its discounted premium.
Obviously, it is necessary for an SMP policyholder to maintain his premises in excellent condition and to demonstrate that he is receptive, concerned, alert to loss prevention recommendations, and willing to implement suggested improvements in an effort to reduce exposure to loss. He must exhibit these desired characteristics if he wishes to continue benefiting from the reductions in insurance costs that an SMP provides.
To illustrate this point, suppose that a business owner is advised by the insurance company�s representative to buy and to install a better locking mechanism for the cabinet where he stores the guns that he sells. The representative may even urge the policyholder to purchase one of several products that the insurance company has already deemed to be the best, or the most effective, locking mechanisms available in the current marketplace. The policyholder should comply with the representative�s suggested improvement since the representative will probably note in the policyholder�s file that the recommendation was made on a particular date. Sometimes, the representative, because he considers the risk of damage or loss to be significant, may even mandate that the locking mechanism must be installed by a specific time on a named day.
This does not mean that the insurance company will constantly be making suggestions for improvement to the business owner�s property or that the insurance company will infringe upon the business owner�s right to conduct business as he sees fit. Rather, it is one of the insurance company�s methods for reducing exposure to risk, thereby lowering premiums and reducing the chances of a loss occurring. In that way, the class�s loss experience is reduced, or at the very least not increased, because businesses are willing to implement the insurance companies� recommendations for risk reduction.
Finally, not complying with such suggestions could mean that the business might lose its SMP coverage since the insurance company may determine that the business owner is, in effect, increasing the chances of risk and loss for his class.
Single Policy Contract
A second main advantage of the SMP policy is that this policy covers most of the business operation�s exposure. One policy means only one expiration date to worry about, one premium payment (or one planned series if a payment plan is used), one insurance policy file, and, consequently, low probability that the business owner will have periods of time where coverage lapses. Also, one policy combining several coverages gives the policyholder�s account a higher profile with the insurance company�s underwriter.
Theoretically, a well-written SMP, together with a workers� compensation policy and an appropriate automobile for business usage policy, encompasses in one document all of the insurance needs (other than employee benefits) for most small to medium sized business enterprises.
However, an SMP is not a package which automatically provides business owners with all of their necessary coverages. Selecting a policy requires thoughtful decisions, review, and updating as the business owner�s situation changes. An effective insurance agent can greatly assist the business owner through this process.
Flexibility of Choice
Flexibility of choice, the third advantage, makes it necessary for the policyholder and his agent or broker to carefully review his business needs to ensure that selected coverages respond adequately to his needs.
For example, in the mandatory property section, an insured must decide whether the desired coverage is going to be all-risk, named peril, or just fire and extended coverage. If the insured chooses the latter coverage, then he must determine whether there is a need for protection against sprinkler leakage or some other water or earthquake protection by way of either an endorsement or as an optional coverage. Finally, business owners who choose either the named peril or the all-risk form must review available optional coverages or endorsements before deciding whether these extra coverages are necessary.
Today�s SMP policy program consists of eight different classification groups, each group offering its own package discount. The group in which a business is placed affects the premium that the business owner will pay. For the most part, the same policy forms are employed for each of the eight groups. The eight groups are:
� Apartment houses.
� Contractors.
� Motel-hotel operations.
� Industrial and processing plants.
� Institutions.
� Mercantile operations.
� Offices.
� Service firms.
The package discounts that apply to each group vary by group and by state. Discounts are periodically recalculated to reflect the loss experience of the group or of the class as a whole. For example, it is possible for a group to have a package factor of 1.00 (no discount) or, if the loss experience of the group is low, a factor of perhaps .65 (a discount of 35 percent).
Eligibility rules for the SMP program now permit an expansive class of insureds to qualify for the program. Only a few classes are excluded from purchasing an SMP. These include:
� Boarding or rooming houses and other residential properties that consist of fewer than three apartment units.
� Farms and farming operations (this is because a separate commercial package policy exists for farmers).
� Automobile filling or service stations; automobile repairing or rebuilding operations; automobile, motor home and motorcycle dealers; and parking lots or garages unless they are incidental to the otherwise eligible class.
� Grain elevators, grain tanks and grain warehouses.
� Properties or businesses which can be categorized in one of five ways:
� Highly protected risks.
� Petroleum properties.
� Petrochemical plants.
� Electric generating stations.
� Natural gas.
Of course, this list does not indicate that these categories of business are ineligible for any type of commercial insurance; it only defines those establishments that are ineligible for participation in the SMP program. Other policies that more adequately and comprehensively address the coverage needs of these types of businesses have been created specifically for that purpose and are available at most insurance companies that offer business owners� insurance.
There are two broad categories of property which must be considered: Real and personal business property. The agent must recognize the differences in these types and be able to clearly explain them to the business owner as this is essential for understanding property coverage.
Real Property Coverage
�Buildings� as defined in the SMP coverage forms include more than just buildings. The definition includes each of the following:
� Buildings.
� Structures.
� Additions.
� Fixtures.
� Permanent equipment and machinery used for maintenance and/or service of the building.
� Materials and supplies intended for use in construction.
� Alterations or repairs.
� Yard fixtures.
� Fire extinguishing apparatus.
� Appliances used for refrigeration, ventilating or cooking.
� Dishwashing and laundering equipment.
� Floor coverings.
All of these property types must be located on the insured�s premises if the business owner is to benefit from the policy�s protection.
Basic exclusions from building equipment are swimming pools, fences, piers, docks, wharves, walks, cost of excavation, building foundations and underground pipes. These types of properties, like other exclusions, may be protected against loss by purchasing a separate policy (depending on the type of property that it is), an endorsement, or optional coverage, depending on the type of property.
Business Personal Property Coverage
Coverage is available through the SMP for business personal property which is usual to the insured�s occupancy or to business operations. Included also are tenant improvements in buildings that are not owned by the insured, and limited extension to the personal property of others that is in the care, custody, or control of the insured at the time of the loss. In most situations personal property coverage is limited to property that is located on the insured premises.
The type of personal property covered under Section I consists of, but is not limited to, stocks (inventories) of merchandise and of raw materials, supplies and fittings, and furniture, fixtures, equipment, and machinery.
Basic exclusions are animals and pets; watercraft; automobiles, vehicles or trailers licensed for highway use; aircraft; personal property while waterborne; household and individual personal property; and accounts, bills, currency, deeds, evidence of debt, money and securities. Valuable papers, money, and securities coverage is available under Section III or by means of various crime endorsements. Each of the above exclusions may be included if the business owner opts to purchase a separate policy (if required), an endorsement or optional coverage.
There are two types of SMP forms from which a business owner might choose. A business owner might choose the standard, or named peril approach, or he may opt for the all-risk approach. Each of these forms covers different perils, so a business owner must carefully weigh whether the additional cost of the all-risk form better suits his insurance needs than the less expensive, but also less comprehensive, named peril form.
Coverage for both buildings and personal property is provided by combining several different peril forms. The basic forms are the general building form and the general personal property form. Under these two forms, insurance coverage is on a named peril basis. These perils include fire, lightning, windstorm, hail, explosion and smoke; aircraft or vehicle damage; riot, riot attending a strike, or civil commotion; and vandalism or malicious mischief. Coverage is limited by exclusions of electrical injury, interruption of power, earth movement, flood, or any enforcement of ordinance or law regarding the use, the construction, or the repair of a building.
At the insured�s or insurance company�s request, vandalism and malicious mischief, which is usually covered, may be excluded, which deletes this peril from the general form.
As an alternative to the named peril approach, an insured may consider coverage on an all-risks basis. The special building form and special personal property forms provide these types of coverages at an additional cost. Although the all-risk form offers a wide variety of coverage, certain exclusions will always be included as part of the policy.
The exclusions are losses that are caused by the following:
� Enforcement of local or state ordinances regulating construction.
� Electrical injury to electrical appliances caused by an artificially generated current.
� Flood, earthquake, sewer backup, or water below the surface of the ground.
� Wear and tear, gradual deterioration, rust, corrosion, mold, wet or dry rot, or inherent or latent defect.
� Smog.
� Smoke, vapor, or gas from agricultural or industrial operations.
� Mechanical breakdown, including rupture or bursting caused by centrifugal force.
� Settling, cracking, shrinkage, bulging, or expansion of pavements, foundations, walls, floors or ceilings.
� Animals, birds, vermin, or other insects.
� Explosion of steam boilers, steam pipes, or engines.
� Vandalism and malicious mischief to any building that is vacant or that is unoccupied for more than 30 days.
� Continuous or repeated seepage or leakage from water or steam from plumbing, heating and air conditioning or other equipment.
� Theft of any property that is not an integral part of a building at the time of the loss.
� Unexplained or mysterious disappearance of property.
� Loss that is caused directly or indirectly by an interruption of power.
An insured may purchase added endorsements or optional coverages so that he may more adequately meet his insurance needs. Because the policyholder is adding coverage to his basic policy, the business owner must pay an additional cost for each of these endorsements or optional coverages. An insured�s endorsements are usually found on the declarations page of his policy, so when the purchaser receives his policy, he must make sure that all the additional coverages he purchased are specifically listed on the declarations page so that he does not misunderstand his policy�s coverage.
Accounts Receivable, Valuable Papers, and Records Endorsements
These endorsements provide coverage on an all-risk basis and are examined on an individual basis.
The accounts receivable endorsement provides coverage for all money that customers owe a business, and these figures include interest and collection expenses in case the insured is unable to make collection because of a direct loss or because of damage to the accounts receivable records. Depending on the needs of the insured, both reporting and non-reporting forms, which are discussed below, are obtainable.
The valuable paper and records endorsement provides business owners with insurance coverage for valuable papers and records while these are on the insured premises. Included are documents and records, books, maps, films, drawings, abstracts, deeds, mortgages, and manuscripts. However, money and securities are excluded.
The perils insured against are protected on an all-risk basis from direct physical loss. A separate limit of liability is allowed for specific articles, and a blanket limit is available to provide coverages for all items which are not specified. There also exists a limited extension provision for coverage of such property while away from the insured premises (usually 10 percent of the combined limits not to exceed $5,000).
Broad Form Storekeepers Endorsement
Designed to provide limited fidelity and burglary coverage for small mercantile stores, this endorsement is applicable to business owners who employ less than five employees.
Business Interruption Insurance
Business interruption insurance includes a broad category of specific losses of use or time element insurance coverage. These are designed to indemnify, or to compensate financially, the insured for a loss of earnings (as the policy defines loss of earnings), tuition fees, rents, or the extra expenses involved in continuing operations in case an insured�s premises are damaged by an insured peril. Under the SMP program, several business interruption forms are available so that business owners may better select the necessary business interruption endorsement that their businesses require.
For example, coverage may be added to business interruption insurance by adding to the policy a gross earnings endorsement, which covers gross earnings less non-continuing expenses, for the actual loss sustained by the insured from the interruption of business. As with all gross earnings forms, included as part of the policy�s coverage is a coinsurance (sometimes called a contribution) clause in the amount of 50, 60, 70, or 80 percent of the business�s annual gross earnings. Failure of any kind to maintain an adequate amount of insurance in respect to the selected coinsurance percentage will result in a claim payment penalty for a sustained loss.
Coverage for ordinary payroll expense either may be excluded or limited to a period of 90 consecutive days following damage to the insured premises. If not specifically included in the policy as a coverage the business owner�s employees will not be paid unless he can prove that paying the payroll is essential to continuing or to speeding the resumption of business operations.
Business interruption coverage also may be written on an earnings endorsement, which protects the business owner against actual losses suffered (gross earnings less non-continuing expenses) with no coinsurance requirement. However, recovery is restricted to a percentage of the limit of liability that is applicable on a monthly basis. The business owner may select 16.67 percent, 25 percent, or 33.33 percent depending on how long he estimates that it would take to repair or to restore the premises to its original condition. Coverage under this endorsement ensures that the insured is protected against perils that might damage or destroy the building and/or its contents.
Builders� Risk Endorsement
Another endorsement, the SMP builders� risk endorsement, consists of two forms which can be applied either to the named peril or to the all-risk policy. For named peril policyholders, the appropriate form is called the completed value form, and for business owners who carry an all-risk policy, the SMP special builders� risk completed value form is available. The builders� risk endorsement is designed to provide property insurance coverages for builders� risk exposures while they are constructing a new building or an insignificant addition. All but insignificant additions or new buildings must be specifically added by endorsement.
Church Theft Endorsement
This endorsement is designed to provide coverage for a church against theft or attempted theft of money, securities, or any other property while at the church, in a bank or night depository, or in the care or custody of an authorized person. The form is subject to definitions and exclusions which should be reviewed. Coverages can be provided at an agreed value for specified articles and/or at a specified limit for all other property.
Combined Business Interruption and Extra Expense Endorsement
The combined business interruption and extra expense endorsement provides coverage for both business interruption and for extra expense losses with a single, specified limit of liability which is explicitly stated in the endorsement. An insured may select from specified percentage options such as those found in the business interruption�s gross earnings endorsement. Usually, these percentages are based on the amount of time that a business owner estimates would be necessary for restoration.
Condominium Operations Endorsement
The condominium operations endorsement has been developed through the use of several special arrangement forms which are intended to meet the needs of certain insureds.
The SMP condominium operations endorsement (an additional policy provisions endorsement) is available to provide named peril or all-risk property coverage for condominium operations. These forms follow the named peril and the all-risk forms discussed earlier with special terms and conditions that have been included to meet the needs of the condominium association that oversees the maintenance and general upkeep of its premises.
Earthquake Extension Endorsement
An earthquake extension endorsement can be added to afford coverage that is intended to meet the needs of certain insureds both under the named peril and the all-risk forms. This coverage is applicable only to the insured premises.
Extra Expense Endorsement
Some companies might find it advantageous to purchase insurance protection for extra expenses incurred so that they can continue their operations should their insured premises be damaged or destroyed. The extra expense endorsement available under the SMP program provides this type of coverage.
This coverage should be considered either in lieu of or in addition to business interruption insurance for those businesses where a shutdown is unacceptable and would cause a complete cessation of business activities. In such situations, the insured will incur expenses for leasing temporary facilities and for resources that will be necessary and that enable the insured to continue servicing customers. Coverage is limited on a monthly basis (not more than 40 percent of the endorsement�s limit for any one month or less) and generally follows the perils insured in Section I.
Remember that the expense portion of business interruption policies only covers extra expenses incurred to the extent that they reduce the loss of net profit. Accordingly, some types of businesses might need this endorsement in addition to the business interruption endorsement.
Inland Marine Coverage Endorsements
There are several optional inland marine coverage endorsements which can be added to Section I.
These provide coverage for both personal property and for the property of others that is in the care, custody, or control of the insured. Coverage is provided on an all-risk basis and is limited by specific exclusions, terms, and conditions. These endorsements closely follow the usual inland marine property floater contracts. The specific endorsements available are the radium floater, the fine arts floater, the musical instruments floater, the neon sign endorsement, the glass coverage endorsement, and the physicians and surgeons equipment endorsement.
Liability for Guests� Property Endorsement
Although this endorsement contains specific exclusions and limitations, the liability for guests� property endorsement provides coverage for an innkeeper�s liability for loss or damage to property of guests while this property is within the insured premises or while in the possession of the insured�s care, custody, or control.
Loss of Rents Endorsement
This endorsement provides coverage for loss that an insured might sustain if tenants are unable to rent his insured property because of damage or destruction to the premises by an insured peril.
Coverage is usually bound by the enacting of a predetermined contribution clause which essentially functions as a coinsurance clause. Also, the insurance company is not liable for a greater proportion of any loss than the stated limit of liability; this amount is produced by multiplying the rental values from the previous 12 months by the pre-determined coinsurance clause.
Mercantile Open Stock Burglary Endorsement
Because a business�s personal property may be exposed to loss that is caused by burglary, robbery or theft, there are several extension endorsements that can be added to Section I of the SMP policy to protect against loss by crime. These endorsements are available under Section I, or in some cases, under Section III, which deals exclusively with crime coverages and which will be discussed in greater detail later.
Coverages under this endorsement closely parallel those that a person would find in a separate, or single-line, policy. Also, the mercantile open stock burglary endorsement may be combined with the general personal property form so that coverage is provided for the business owner�s merchandise, furniture, fixtures, and equipment that exists at the insured property. This property is protected against loss caused by burglary or robbery while the premises are not open for business. If personal property is covered by the all-risk form, this endorsement is not needed because that type of policy includes this coverage as part of its basic protection.
Mercantile Open Stock Burglary and Theft Endorsement
This endorsement provides coverage for loss or damage to merchandise, furniture, fixtures, and equipment that are located at the insured property in two situations. The first is for burglary or robbery of a watchman while the premises are closed for business, and the second is for protection against theft or attempted theft regardless of whether or not the premises are open for business. As stated in the previous endorsement, this endorsement is not needed if the insured purchases an all-risk form since the all-risk form already protects the insured from this type of loss.
Mercantile Robbery and Safe Burglary Endorsement
This endorsement provides coverage for loss of money, securities and other property both inside and outside the insured premises; it includes as part of its coverage the burglary of a safe.
Optional Perils Coverage Endorsement
An optional perils coverage endorsement is available on the named perils form for both buildings and personal property protection. Additional perils covered by this form are breakage of glass (which is part of the building and subject to limitations); falling objects (loss or damage to personal property in the open is not included); weight of ice, snow or sleet; water damage and loss caused by collapse of the building structure itself. Coverage is also included for accidental discharge of water or steam from plumbing, heating or an air conditioning system, but discharge from automatic sprinkler systems is excluded from coverage.
Replacement Cost Coverage Endorsement
No matter which of the two forms (the named peril or the all-risk) that a business owner chooses, one important consideration is the method for establishing the value of insured property at the time of a loss. Unless specifically endorsed or stated in the coverage form, all property will be valued according to its ACV (actual cash value) rather than on its replacement cost. Also, the precise definition of ACV depends upon the type of property under consideration. There are variations in the application of ACV depending on whether the properties being valued are real or personal property used in the operation of the business or, finished goods or products held for sale by the business.
This basis of adjustment may be modified, however, by the attachment of the replacement cost coverage endorsement. Under this endorsement, insured property involved in a loss will be adjusted on the basis of the amount necessary to repair or to replace the damaged property, and reimbursement is restricted only to the policy�s limit of liability without regard to the actual age of the property at the time of the loss.
Business owners should be aware that this endorsement does not delete or replace any coinsurance requirement and that it is not extended to certain types of property such as stock, property of others, valuable papers, records, or fine arts. The business owner must first pay the deductible, no matter which method for establishing value the policy uses.
Reporting Forms Endorsement
Another available provision under both forms is the addition of a reporting form endorsement which converts basic property coverage forms to a reporting basis. Two separate forms comprise the reporting endorsement: The specific rate form and the average rate reporting endorsements form.
This endorsement is convenient for business owners whose personal property values fluctuate and for business owners who have difficulty in determining the correct amounts of insurance to purchase. Business owners who opt for this endorsement are allowed to identify their business cycles, which generally range from peak to slow seasons.
By using a reporting form, a business owner can establish a limit of insurance that sufficiently covers the maximum values of the insured property at a given time. The insured reports the actual value of the business at stated periods and a premium is charged on the average value at risk during the entire year rather than paying high premiums year round because of the increased risks which only exist during particular months of the year.
For example, a Christmas ornament business�s busiest season of course is around the Christmas holidays, when it, therefore, has an increased exposure to risk. Exposure to risk is significantly less during the summer since this type of store is not busy then. To calculate the premium, the insurance company calculates the business�s average risk during the year by averaging its busy times with its slow periods rather than requiring the business to pay a premium that is based solely on the increased business activity during the Christmas season.
As a result, the insured knows that the business has the benefit of adequate coverage during both peak and slower periods. Furthermore, the business owner will pay a fair premium that is based on the actual value of the annual average of risk exposure rather than paying a much higher premium that is based on higher risk exposure during only specific months of the year.
Sprinkler Leakage Endorsement
The sprinkler leakage endorsement provides protection for insured property against named perils that cause damage to the business owner�s property from leakage or discharge of water (or other substance) from an automatic fire protection system. It also includes coverage for loss or damage resulting from the collapse of a tank which is part of the sprinkler system. This endorsement contains specified limits of liability, coinsurance percentages, conditions, and exclusions and must be separately requested and priced when developing the SMP contract.
Tuition Fees Endorsement
The tuition fees endorsement provides coverage for lost tuition fees that an educational institution might suffer if the school�s physical facilities are damaged and unusable because of loss by an insured peril. The basis of recovery is the amount of the actual loss sustained from the date of loss to the opening of the school year that begins after the premises� restoration is complete. Coverage is available on an 80 percent or on a 100 percent coinsurance basis.
The SMP, in Section II, describes general liability insurance and is a mandatory coverage, just as property coverage is in Section I. Typically, coverage is written on a comprehensive general liability (CGL) basis for any occurrence which is attributable to either of two causes: one is the liability brought on by the ownership, maintenance or use of the insured premises and the second is for the liability created by business operations that are necessary or incidental to the named insured�s commercial activities. Furthermore, the SMP�s liability coverage extends to the business�s products and completed operations unless the insurance policy specifically states that these are excluded for some reason. Coverage is on a combined single limit basis although the insured may purchase separate limits for bodily injury and property damage if he feels that this better suits the particular needs of the business.
Agents and business owners should confer with the insurance companies� underwriters so that they will be well informed about their liability coverage and whether they carry the standard or the all-risk package in Section II of their policy. The agent should be aware if the insurance company has created its own form which details what is protected on the premises or in the business operations. The insured should be made aware of any other optional coverages or endorsements that are obtainable so they might broaden the scope of the policy�s basic coverage.
In the personal injury section of coverage, the following coverages are included: an employer�s non-owned automobile, an automobile fleet (the agent should know what number of cars determines a fleet), professional liability, comprehensive medical payments, contractual liability, independent contractors, and elevator collision. Of course, policies differ from company to company, so not all of these will be found in every policy�s liability section.
General liability covers exposures such as lawsuits occurring because of slips or falls on the insured premises, injuries which occur because of operating equipment, and certain liabilities which are assumed already to be under contract or agreement. As stated above, this coverage also extends to protect a business owner against liability that is caused from the use or consumption of products that the business produces or sells. However, if the underwriters feel that the product�s liability exposure is too severe to be covered under the CGL section, they will exclude the product(s) from the SMP and will require that the business owner purchase a separate products liability policy.
The SMP does not cover claims for injury to employees because this must be covered under a separate workers� compensation policy. Remember that workers� compensation is not included in the SMP policy. This is a separate policy, not available under endorsement or optional coverage, which business owners must purchase in addition to their SMP policy. This is true also for employee benefit programs and for liability that occurs as a result of operating automobiles or trucks. These coverages, like workers� compensation, are not available by endorsement or optional coverage and must be insured under an employee benefits program or under an automobile for business usage liability policy.
Several special exposures such as liability for errors or omissions by professionals are not protected under Section II of the SMP. Section II of an SMP does not cover professional errors in professions such as architecture, engineering, the medical or legal field, or accounting. Instead, a separate professional liability policy is necessary if a business owner wants to protect himself against exposure to these risks.
To avoid any future problems and to protect against common and special liabilities, the agent assisting the business owner to set up the policy should become completely familiar with the property and operations of the business.
Crime coverage, available under Section III, is entirely an optional coverage (unlike the mandatory property and liability coverages in Sections I and II of the SMP. Its purpose is to provide coverage for money and securities, negotiable instruments, and employee dishonesty. Protection against loss by crime is intended to closely parallel the single-line coverages which are available under separate policies.
As mentioned in the property section, both property forms, the named peril and the all-risk, exclude crime coverage since it is covered under Section III. Furthermore, the SMP offers only limited coverage for these exposures under the various crime endorsements at an additional cost. Some businesses, however, might decide not to include this section as part of their SMP policy because they might need broader coverage than what is available, they may desire higher limits than what this section offers, or they simply may not even be eligible for coverage under the limited endorsements that they could add because the underwriters have decided that risk of loss is too great for their business. On the other hand, the SMP package discount may make it sensible for some business owners to include the crime coverage in this section.
There are three basic coverages under this section: the comprehensive crime coverage endorsement, the blanket crime coverage endorsement, and the public employers blanket endorsement.
A blanket form is a form of contract between an insured and an insurance company which provides coverage for similar types of property at different locations or for different types of property located at the same location. Also, the public employers blanket endorsement provides coverage for all employees or for a class of employees without their being specifically named.
The main difference between the comprehensive crime and the blanket crime endorsement is that under the blanket form, all insurance agreements, which are broadly defined as the promises made by the insurance company to the insured, are mandatorily protected from loss. Under the comprehensive crime endorsement, the insured may select specific coverage agreements and varying limits of liability and coverage for employee dishonesty on a blanket position basis. The blanket position coverage for employee dishonesty under this endorsement also allows the stated limit of liability to be applied to each employee rather than to the employees as a group.
Therefore, for example, if three employees acted together to steal $30,000, a $10,000 blanket position coverage would cover the loss in full since each of the employees is considered to be a separate entity. In contrast, the blanket limit of liability applies on a per occurrence basis for any one loss, regardless of the number of employees involved. In the previous example, a $30,000 commercial blanket bond would be required to cover the loss in full.
In addition to providing coverage for loss by extortion, unless it has been specifically excluded, the following are coverages that are available under the comprehensive crime endorsement, which consists of five kinds of protection against loss caused by criminal acts. These five categories can be selected separately. In fact, business owners may opt for only some of these because certain coverages are more comprehensive than others. The five categories are:
� Employee dishonesty.
� Commercial blanket. This agreement provides coverage for loss of money, securities, and other property because of any dishonest or fraudulent acts by the insured�s employee(s). The stated limit is the amount that can be applied to each occurrence, regardless of the number of employees which may be involved. The limit would typically apply to each occurrence, not to each employee.
� Blanket position. Coverage under this agreement is similar to that provided under commercial blanket coverage; however, the limit of liability is applied per employee rather than per occurrence basis. All employees of the insured are covered and are considered to be a separate entity.
� Money and securities loss inside the premises. This provides coverage up to the specified limit for loss of money and securities by destruction, disappearance, or wrongful abstraction inside the insured premises or at any banking premises.
� Money and securities loss outside the premises. Coverage under this agreement is the same as that available under the prior coverage, except that it covers money and securities that are outside the premises that are being transported by a messenger, that are in the home of a messenger, or that are in an armored car.
� Money orders and counterfeit paper currency coverage. This agreement provides coverage for the insured against loss due to the acceptance, in good faith, of any counterfeit money or money orders while in the course of business.
� Depositor�s forgery coverage. Coverage under this agreement is provided for the insured or for a bank, when a savings or checking account is maintained, for loss that occurs as a result of forgery of checks, drafts or other negotiable instruments.
Coverage under these agreements is not always inclusive. Business owners must carefully review these forms for the endorsement�s specific limitations and exclusions. In addition, the consideration of deductibles should not be overlooked.
Boiler and machinery coverage, Section IV of the SMP, is optional and, if selected, is eligible for the SMP package discount. Usually coverage is provided or recommended on the basis of a survey that is completed by the insurance company and is based on a business owner�s responses. The specific limits, locations, and terms are outlined on a separate declarations endorsement.
When setting up a policy, the agent should always have the business owner describe the business operations in detail because the owner may not realize that normal business operations may require his purchasing insurance which protects boilers, refrigeration equipment, electrical apparatus and other kinds of machinery. By disclosing information about the way his company operates, the owner avoids future disaster that might have been protected against had he carried the proper insurance coverage.
Some insurance companies will not insure this type of coverage but, will obtain a cooperative arrangement through another insurance company who specializes in this area of insurance. The company that specializes in boiler and machinery insurance will provide the underwriting, pricing and loss control services. In fact, even though the insurance is provided through another company, this endorsement may be added to the business owner�s policy and the owner will receive a package discount.
Finally, coverage is written on an ACV basis unless the business owner prefers protecting equipment on a repair and replacement cost basis, which must be added by endorsement.
� Boilers
The SMP boiler and machinery coverage endorsement includes coverage for all boilers, unfired pressure vessels and piping that are either in use or that are connected and ready for use. Because almost all fire and extended coverage policies exclude damage that results from explosion of boilers or other pressure vessels, this coverage is needed if insured property contains any heating boiler, process boiler, or any steam generator that operates under pressure.
Another important consideration when deciding whether or not to add this endorsement is that the liability coverage in Section II specifically excludes liability which occurs as a result of these kinds of explosions. The addition of this protection also includes the insured�s liability for damage to the property of others and any associated defense costs if a lawsuit should be brought against the company or the business owner.
� Machinery
Machinery coverage insures against damage and costs that result from the breakdown of machinery while it is on the premises. The equipment to be insured must be scheduled, or itemized, on the policy. Business owners, in an effort to protect their business operations, usually insure only those machines that are abnormally expensive, time consuming to repair or are critical to their business operations.
The coverage extends to damage to surrounding property, which is excluded in basic fire and extended coverage policies. It is wise to ask if the insurance company has a good boiler and machinery inspection service, for these inspections can be as important as the coverages themselves.
Coverage on other types of machinery is usually available through an additional object groups endorsement. Equipment under this endorsement must be scheduled on the policy.
Business interruption coverage may be available under Section IV on a daily or a weekly indemnity basis. Extra expense coverage also may be purchased for the period a business owner estimates it would take for him to continue his operations elsewhere while his usual premises are being restored to their original state. In addition, coverage may be available for prevention of occupancy and consequential damage that might occur by a company who leases its premises or which occurs if a business must continue its operations at a different location while the premises are being restored to their original state.
The impact of the SMP program has been significant. This is evidenced by the notable increase in premium dollars that insurance companies have written for their policyholders. Also, one must remember that two other successful policies, the Business Owners Policy and Farmers� Insurance, originated from the SMP.
It is unlikely there will be significant change to coverage or eligibility in the SMP program. However, periodic minor changes and updates will be made to its current form. Eligibility is now quite broad, the coverage options are stabilized, and cost savings have been established. The only likely adjustments in the foreseeable future might be slight modifications made to package discounts for individual business groups.
The business owners policy plan, or BOP, is written in a way that is easy to understand and is a simple policy structure offering broad coverage at a competitive price. Attractive features of the BOP include coverages for:
� Replacement cost without coinsurance.
� Loss of income.
� The property of others in the insured�s care, custody, and control.
� Transit.
� Peak season.
� Broad business liability.
� Employees as additional insureds.
In an effort to meet the insurance needs of small and medium sized business owners, one independent insurer in 1974 filed a simplified version of the SMP. This simplified, new approach, with its simple rating structure, fixed coverages, and fixed limits of liability, was called the business owners policy, or BOP. In fact, eventually two forms of the BOP, the named peril and the all-risk, were created to satisfy the needs of these types of businesses.
Although a business must meet certain eligibility requirements to purchase a BOP, its simplified rating approach, and coverage format quickly enabled the BOP to become an important policy in meeting the insurance needs and coverages for eligible business operations.
Several factors are considered when an insurance company determines the premiums its policyholders will pay. One factor is the insurance company�s rating procedure, and another factor is based on the information an agent gathers about a business�s background and its operations during a site visit. Lastly, some policyholders may be issued credits or debits that are applied to premiums, which lower the total premium that they must pay.
The Rating Procedure
A definitely attractive feature of the BOP is its simple rating procedure. The package premium is developed from the amounts of insurance that are placed on the building (if the business owner actually has ownership of the premises) and the business�s personal property. If any optional coverages or endorsements are necessary to extend or to broaden the policy�s coverage, the business owner can add these for a separately determined additional charge. The rates for the special BOP are higher than those for the standard BOP since it is an all-risk policy which offers more comprehensive coverage.
Inspection of the Site to Determine Insurance Needs
The underwriting and rating of a business heavily relies on the information the insurance representative collects in order to best determine what types of coverage and the limits of coverage a business must have to protect itself against loss.
The insurance company�s representative usually conducts at least one fact-finding visit to the business to analyze the conditions of the premises, its equipment, and its operations. When the representative conducts the inspection, the business owner should be prepared to relay all necessary information about the business so the basic application is complete and so the business owner�s BOP premium can be determined.
Each of the following is among the information which the business owner may be asked to disclose:
� Background information about the business.
� The name of the business and its owners.
� The type of business to be insured.
� The square footage of the building.
� The percentage of the building occupied by the business.
� The grade of fire protection at the site where the business operates.
� The building and contents replacement cost values.
� The value of outside signs (if any).
� The amount of external glass.
� The preferred BOP form (named peril or all-risk).
� The policy�s effective date (if purchased).
� Information regarding the handling and storage of money.
� Any burglar alarms that might have been installed.
� The quality of protective devices such as door locks.
� Any other measures the business owner might have taken to reduce exposure to loss.
Lower Premium Debits and Credits
One final point which should be noted about BOP premiums is the possibility for premium credits or debits which are based on certain underwriting factors, including the following:
� Business�s management.
The business must be willing to cooperate in matters of safeguarding and proper managing of the property that is to be covered by the policy.
� Location.
Location refers to the accessibility and the environment of the premises.
� Building features.
Building features include the air-conditioning or any unusual structural features.
� Premises and equipment.
Insurance companies might issue credits if a business�s premises and equipment are in excellent condition, are well cared for, and are the appropriate type that is necessary for operating the business.
� Employees.
Business owners may also be questioned about the selection, training, supervision, and experience of their employees.
� Type of protection that is desired.
Business owners will be asked what other, if any, types of insurance protection they already have or if there is any coverage they would like to add that is not specifically mentioned in the BOP policy.
Finally, special credits and debits may be applied to accounts which carry a premium of $500 or more. These credits and debits are intended for use when the special characteristics of the business in question do not seem to be fully covered or recognized in the basic BOP rate structure. The maximum premium deviation for all credits and debits combined generally is limited to 15 percent.
The type of business a person owns determines whether or not that person is eligible to purchase this type of business insurance. Major insurance firms usually allow apartment and office complexes, motels, religious institutions, and certain mercantile businesses to purchase this policy. However, not all businesses qualify for a BOP.
Generally, to qualify for the BOP program, insurance companies consider a number of factors. Most, but not all, insurance companies take into consideration the following: the building�s square footage, the amount of liability that will be needed to protect the business against loss, the type of business, and the extent of its off-premises servicing and processing activities.
Also, the Insurance Services Office (ISO) has developed its own set of eligibility standards, which some insurance companies use as their standard. For example, to qualify, an apartment building may not be more than six stories tall, must consist of no more than 60 dwelling units, and may not contain more than 7,500 square feet of mercantile space. An office building may not exceed three stories, must encompass no more than 100,000 square feet, and is limited to 7,500 square feet of mercantile space. Retail stores, which include all buildings at the same location, may not have more than 7,500 square feet for the total area. Basement areas that are closed off from the public are not included in calculating the total area in any of these situations.
Some types of businesses that might qualify for a BOP are hobby stores, barber/beauty shops, bookstores, churches, direct sales shops, dry cleaners, fabric shops, ice cream shops, opticians, and photo studios. Parking lots and garages that provide parking spaces may qualify only if they are an incidental part of an otherwise eligible business.
Contractors are usually ineligible for this coverage, but if a hardware store sells merchandise such as materials for building a deck and then installs that merchandise, the hardware store may still qualify for eligibility since the contracting part of the business does not detract from what is considered to be the �essential nature� of the hardware store. In other words, the installation of materials comprises only a small percentage of the business�s revenue.
Other types of small businesses, no matter how small or even if they qualify under most of the eligibility criteria, usually have specialized insurance needs such as high levels of liability in areas for which the BOP does not provide protection.
For instance, companies whose operations are centered on cars, motor homes, motorcycles, or mobile homes are ineligible for purchasing a BOP. Bars, grills, and restaurants are also ineligible for BOP coverage as are condominiums since the ISO has developed separate coverage plans for these types of property.
Buildings which have at least part of them dedicated to manufacturing or processing are not eligible for coverage because the coverage these types of businesses require is beyond the scope of this policy. In fact, even if a business�s operations are spread over several locations, if one of those has manufacturing or processing, the whole company is barred from purchasing a BOP.
Places of amusement: fairs, carnivals, amusement parks, theaters, and bowling alleys are ineligible because their purposes are not primarily involved with the buying and selling of merchandise, which is an eligibility requirement. Finally, wholesalers are ineligible because these businesses are usually large-scale operations, and financial institutions of any sort may not purchase a BOP because their exposure to crime surpasses that of any small to medium sized business.
The BOP program does not rely on the same wording or format of its forerunner, the standard fire policy. However, the essence of those provisions is contained in both BOP policy forms.
The conditions and other provisions a policyholder will find in this section of the BOP policy are basically classified into two categories: one is general exclusions and the second is general conditions and provisions that are applicable to Section I (property) or to Section II (liability). Some of the more important provisions and conditions are discussed in the following text.
General Exclusions of War Risks, Governmental Action, and Nuclear Catastrophes
The vast majority of insurance policies exclude coverage for losses that are caused by war risks, governmental action, and nuclear catastrophes. This section of the BOP, as with most other insurance policies, is intended to exclude losses caused by hostile or warlike action in time of peace or war, insurrection, rebellion, revolution, civil war, usurped power, risk of contraband, illegal transport or trade, nuclear radiation, and radioactive contamination. These exclusions incorporate acts of terrorism.
General Conditions and Provisions
This section of the BOP policy describes numerous general provisions that are usually, with perhaps slight variances in language, found in most insurance policies. Several of these provisions have been reworded to simplify the language, but the meaning and substance of these provisions remains unchanged.
These provisions deal with:
� �Concealment or fraud,� which voids the policy immediately upon discovery of the wrongdoing.
� �Subrogation,� a term that describes the process by which an injured party pays the deductible and receives payment for the balance from the party�s own insurance company. The insurance company in turn seeks reimbursement, plus its insured�s deductible, from the insurance company of the person who caused the damage.
� �Waiver or change of provisions,� which can only be accomplished if the waiver or if the alteration of the provisions is added to the policy by written endorsement.
� �Liberalization,� which states the policy�s coverages might at any time in the future be extended or broadened to benefit this particular policy as if the policy had been altered by written endorsement.
� �Replacement of forms and endorsements,� which states the insurer may convert old contract forms to new contract forms at the policy�s anniversary date even if the old contract forms stated that the policy was a continuous policy (one without a specific termination date).
� �Inspection and audit,� which gives the insurer the right, but not the obligation, to inspect the insured business.
� �Assignment,� which means the insured cannot sign over his interest in the BOP to another party without the written consent of the insurance company. If, however, the named insured should die within the policy period, the coverage provided by the policy applies:
� To the named insured�s legal representative whose job it is to act in the interest of the named insured, but this is only effective until the legal representative�s duties are completed at which time the policy immediately ceases to be applicable to him.
� To the person who has temporary custody of the named insured�s property until a legal representative has been appointed and qualified to act in the insured�s interest.
� �Premium,� which states the premium for a BOP policy is to be computed according to the insurer�s rules, rates, and minimum premiums that are in place at the time. Furthermore, the policy may be continued by payment of successive one-year premiums even if the insured pays his premiums on a payment plan.
Provisions Specific to the BOP
Some of the other general conditions found in the BOP are not the same as similar provisions that exist in other types of insurance contracts.
� The cancellation provision.
The cancellation provision of the BOP enables the named insured to cancel the policy at some future date if the cancellation date is submitted in writing before the effective date of cancellation. Similarly, the insurance company may cancel the policy by giving written notice of the date of cancellation to the insured and to the mortgagee at least 20 days in advance of the policy�s termination.
The time allowed for cancellation under the BOP policy is much longer than the allowed time period for other policies. For instance, the standard fire policy stipulates only five days� advance notice is required for either the insured or the insurance company to cancel the policy, and the SMP requires 10 days� advance notice prior to the date of the policy�s cancellation. The BOP�s longer time period allows the insured, whether he or the insurance company terminates the policy, ample time to find adequate coverage elsewhere without any lapses in coverage.
� Calculating the return premium.
When a policy is cancelled, the insured is entitled to a return premium, which is the part of the premium already paid. The return premium that the insured receives depends on which party, the insured or the insurance company, cancels the policy. The method for calculating the return premium is the same whether the insured has already paid the premium in full or the premium is paid through a payment plan.
On the one hand, if the insurer cancels the policy, the insured�s return premium is computed on a pro rata, or prorated, basis. To determine this figure, first the total premium is divided by the number of days in the policy period. This number reflects how much the insured is paying per day for this policy. The daily cost is then multiplied by the number of days that remain in the policy period. The product of these two numbers is the return premium that the insured will receive.
On the other hand, if the insured should cancel the policy, he must pay the insurance company 90 percent of the premium that he has not yet used. This, too, is calculated on a pro rata basis. To calculate the insured�s return premium, the total premium is divided by the number of days in the policy period, and this number is then multiplied by the number of days left in the policy period. The insured is responsible for paying 90 percent of this figure, and the insurance company will return the remaining 10 percent to the policyholder as return premium.
Policy Period, Policy Territory, and Time of Inception Provisions
Two other provisions found in the general conditions section of the BOP define the policy period, the policy territory, and the time of inception.
The policy period provision of the BOP states the beginning and ending dates of the policy. The usual time of inception for a BOP is 12:00 noon, but if the BOP is replacing a policy that expires at 12:01 a.m., the BOP inception will be at 12:01 a.m. so that the insured can avoid any lapse of coverage. The policy territory includes the 50 states of the United States, the District of Columbia, and Puerto Rico.
Other Insurance Provision
The other insurance provision notifies the policyholder that his property and that the property of others which is in his care, custody or control is considered to be excess coverage, meaning that the insured�s other policy must first cover any loss and that the BOP will only cover amounts that exceed the limits of the other policy. In other words, the BOP does not work in conjunction with the other policy; it only covers the amount that remains after the other policy has been exhausted.
Unlike property coverage, the BOP�s general liability coverage is meant to be used as primary, not as excess, coverage, and any excess beyond the limits of what the BOP policy will pay may be applied to umbrella coverage since this is how umbrella coverage is intended to be used.
Duplication of Coverage Provision
The final provision states that in the event there is a loss covered by more than one part of the policy, endorsement, or optional coverage, the insurer�s limit of liability is the amount of the loss. This provision is included to enforce the fundamental principle of indemnity.
There are two types of BOP coverage, the standard (or named peril) form, and the special (or all-risk) form. The policies offer similar coverage for property coverage for buildings, business personal property, loss of income, and other optional property coverages as well as comprehensive business liability coverage.
Another similarity is that both BOP forms provide coverage without coinsurance penalties. As stated earlier, coinsurance means that the business owner shares the risk of any loss with the insurance company, and the policyholder is always responsible for paying his deductible before the insurance company will pay its percentage of the specified ratio in the policy.
Furthermore, both policies cover buildings and most business property on a replacement cost basis. However, unlike business property, ACV is an option for buildings. Owners of older buildings for whom replacement cost coverage may be difficult or too expensive to obtain might consider the ACV option. Likewise, a business owner may consider rejecting the ACV option because the building was recently constructed, and little difference exists between its replacement cost and its ACV.
What makes the forms different are the perils that each covers and the options that each offers. For instance, the standard form offers only optional coverage for burglary and robbery, and the special form offers optional coverage for money and securities.
The premium for the standard BOP is less than the premium for the special, or all-risk, form simply because of the differences in approach of named peril and all-risk coverage. However, many businesses find the standard form�s smaller premium attractive. They may also discover that the type of coverage the standard form offers is satisfactory for their insurance needs and thus may opt for the named peril rather than the all-risk form.
Deductibles in the Standard Form BOP
Of course, deductibles vary from company to company and certainly from state to state. Generally, however, under most standard BOP forms, direct property losses are subject to a $100 deductible per occurrence. This deductible applies separately to each location with an overall aggregate, or total, of $1,000 per occurrence for all locations. If the loss results from robbery or burglary or from employee dishonesty, a higher deductible of $250 applies to these two optional coverages if the business owner had added these policy endorsements prior to the loss. However, loss of income claims are handled differently; no deductible applies to this type of loss.
The property section, found in Section I of the standard BOP policy, insures against direct losses suffered from the following: fire, lightning, extended coverage perils (windstorm, hail, explosion, smoke, aircraft, vehicles, riot, riot attending a strike, or civil disturbance), vandalism or malicious mischief, and sprinkler leakage.
If the property is in transit to another location, in addition to the coverages mentioned above, it is protected against collision, derailment, or overturn of the transporting conveyance, stranding or sinking of vessels, and collapse of bridges, culverts, docks or wharves.
Finally, while many of these named perils are not subject to any limitations, the BOP does limit two classes of property, and the policy also contains several general exclusions.
General Property Limitations Under the Standard Form BOP
The standard BOP also limits the coverage of two classes of property. These two classes are:
� Valuable papers and records, meaning books of account, manuscripts, abstracts, drawings, card index systems, and other records (excluding film, tape, disc, drum, cells, and other magnetic recording or storage media for electronic data processing), which are covered for an amount not to exceed the cost of blank books, cards, or other blank material plus the cost of labor incurred by the insured for transcribing or for copying such records.
� Film, tape, disc, drum, cell, and other magnetic recording or storing media for electronic data processing which are covered for an amount not to exceed the cost of such media in an unexposed or blank form.
While the standard form of the BOP includes this coverage without a specific dollar limitation, it does not cover the costs of research, which will probably be necessary for the reproduction or restoration of the lost, destroyed, or damaged records.
General Property Exclusions Under the Standard Form BOP
Although the BOP policy covers many types of losses, none of the following are covered:
� Exterior signs.
� Growing crops and lawns.
� Aircraft, cars, motor trucks and other vehicles that are registered as motor vehicles.
� Watercraft (including motors, equipment, and accessories) while afloat.
� Bullion (gold or silver), money, or securities.
� Losses that occur either directly or indirectly when authorities enforce any ordinance or law that regulates the construction, repair, or demolition of buildings or structures.
� Losses that result from power, heating or cooling failure unless the failure is the product of physical damage to the power, heating or cooling equipment which must be located on the premises that are named in the policy.
� Losses caused by perils not otherwise excluded (such as damage resulting from an earthquake).
� Losses resulting from riot, riot attending a strike, civil commotion, or vandalism or malicious mischief.
� Electrical injury or disturbance of electrical appliances, devices, fixtures or wiring that is caused from electrical currents artificially generated unless a fire breaks out as a result of that damage.
According to most standard BOP forms, any losses that result, contribute to, or are aggravated by one of the following are covered:
� Earth movement, including but not limited to, earthquake, landslide, mudflow, earth sinking, earth rising or shifting.
� Flood, surface water, waves, tidal water, tidal waves, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not.
� Water which backs up through sewers or drains.
� Water below the surface of the ground including that which exerts pressure on or flows, seeps or leaks through sidewalks, driveways, foundations, walls, basement or other floors, or through doors, windows, or any other openings in such sidewalks, driveways, foundations, walls or floors.
� Delay or loss of market, unless fire or explosion as insured against ensues, and then the insurance company will only pay for damages suffered by the resulting fire or explosion.
In addition to limiting classes of property and to excluding some perils, Section I of the policy usually breaks down into three subsections: buildings (Section A), personal business property (Section B), and loss of income (Section C).
The building coverages offered by the BOP are usually found in Section A of Section I in the policy�s declarations. There are four types of building coverage that this section of the policy discusses; buildings and fixtures, personal property, landscaping and debris removal, and quarterly automatic insurance rates.
Buildings and Fixtures
The standard policy includes protection for the insured premises at the replacement cost, not ACV. This coverage also extends to garages, storage buildings and appurtenant structures, which are other types of buildings that might exist on the premises. Additionally, covered under this section are permanent fixtures, machinery, and equipment that the business must use to continue its normal business operations.
Personal Property
Personal property of the insured used for maintaining and for servicing the building is covered. This might include, but is not limited to, fire extinguishing equipment, floor coverings, and appliances such as those that are used for refrigeration, ventilation, cooking, dishwashing or laundering. Outdoor furniture and yard fixtures are considered to be part of the building, so they are covered as well.
If an insured is a landlord and furnishes apartments or leased rooms with his own personal property, then this property is also covered. On the other hand, the tenants, if they wish to insure their own personal property, must purchase tenants (or renters) insurance since the landlord�s insurance coverage does not extend to their property.
Landscaping and Debris Removal
Trees, shrubs, and plants at the insured premises that are not worth more than $250 are protected against loss. However, the total liability for the company may not exceed more than a total of $1,000 for any loss to landscaping.
The $250 limit that is mentioned above includes the cost of debris removal. However, if an insured would like to have additional removal coverage, it could purchase additional coverage that extends beyond the standard policy�s coverage. Sometimes this coverage can be written with no dollar limit on the total damage.
Quarterly Automatic Insurance Rates
Lastly, quarterly automatic insurance rate increases are included in this section of the BOP policy. The exact percentage that the policy may be increased in any one policy term is always included in the policy�s declarations. So if an owner at any time is concerned about how much his premium might increase in the coming year, he only needs to consult his policy to easily find this information.
Before attempting to establish limits of liability in Section B, the business owner must first understand the definition of personal property coverage. Once he understands this, he can easily identify the policy�s coverages as they apply to property that is in transit, additional areas of coverage that may be available, and seasonal automatic increases that may benefit the policy.
Defining Business Personal Property
Restricted to a specific limit of liability, business personal property coverage is different from the personal property coverage that is included under Section A.
Business personal property is property that is essential to running a business. For example, depending on the type of business, this may or may not include office equipment or other machinery that is needed for the business to function properly. Unlike other insurance policies, the definition of business personal property extends to similar property the insured has in his care, custody, or control. Property that is in the business owner�s care, custody, or control may be either solely or partially owned by another person. Whether it is the insured�s property or someone else�s, to qualify for protection against loss to business personal property, the property must be usual to the occupancy of the insured and on the insured�s premises at the time of the loss.
Although the BOP specifically grants this type of coverage, the amount covered does not increase to reflect that the insured possesses the property of others. To illustrate, if a business owner has an additional $10,000 worth of merchandise on the premises that he has been asked to repair, the coverage that the business owner carries for his own business personal property does not increase by the additional $10,000 that is now in his care, custody, or control.
Lastly, this part of the policy provides for replacement cost coverage for the insured�s business personal property, and the definition of this term applies to similar property the insured has in his care, custody or control but that belongs in whole or in part to others.
Business Personal Property That Is In Transit or Being Moved
To qualify for protection against loss, this property must be usual to the occupancy of the insured and on the premises that are named in the policy. However, business personal property or any similar property that is in the insured�s care is covered while in transit or otherwise temporarily away from the premises which are described in the declarations. Furthermore, business personal property at newly acquired locations is also covered for up to 30 days for amounts not to exceed a specified amount, usually set at $10,000.
Additional Areas of Coverage
The allowable amount also includes the value of labor, materials, and services that are furnished or performed. Also, tenant improvements, sometimes called betterments, are also covered if the business owner wants to use fixtures, alterations, installations, or additions that are found in a part of the building that is occupied, but not owned, by the insured. To qualify for coverage, the business owner must be paying rent for this area, and the insured must not be legally required to remove those improvements.
Seasonal Automatic Increases
Another distinct advantage is that the BOP offers a seasonal automatic increases provision. This provision increases the declared amounts of insurance by an extra 25 percent to provide for seasonal fluctuations in business activity. In fact, the insured does not have to specify in advance which months he expects this peak activity. So, a business person need not predict or even indicate that the Christmas season is busiest. Most policies state �this increase shall not apply unless the limit of liability shown in the declarations is 100 percent or more of the insured�s average monthly values for the 12 months immediately preceding the date of loss, or in the event the insured has been in business for less than 12 months.�
Loss of income coverage is found in Section C of most BOP policies. Different from most other types of coverage, business owners are not required to pay a deductible, are not bound by a coinsurance clause, and are not bound by a specified dollar limitation. A business person who loses his whole business due to a fire would be able to collect the amount which would otherwise have been earned from the business.
Although this coverage does not state a maximum specified dollar limitation, this coverage may not exceed the reduction in gross earnings less charges and expenses which do not occur during the interruption of business or during the reduction in rents, less charges and expenses which also do not necessarily continue during the period of disuse. For instance, if the business person�s business was destroyed by a fire, he no longer would have to pay utility bills. These normal expenses would be deducted from normal gross earnings since he does not pay those bills either during the restoration or during the relocation of facilities.
Coverage is on an actual loss-sustained basis. Loss of income coverage is limited to the period that it would take to repair, to rebuild, or to replace the damaged property, but, no matter what the circumstances are, this period may not exceed 12 months. Also, insurance companies expect the insured to minimize any income losses by resuming full or partial operations either at the premises named in the policy, if possible, or elsewhere, if practical.
The insured is further required to resume business activities as soon as possible and to use all reasonable means not to delay reopening. Obviously, insurance companies are not willing to subsidize a closed business while it should be open for normal business operations.
The BOP also states that the insurer will not be liable for any increase of loss caused by the interference of strikers or by cancellation of any lease or contract unless that loss results directly from the interruption of business.
In addition to the standard coverages, business owners may want to purchase the following coverages to supplement the standard form�s BOP coverages. The costs of these additional coverages are added to the basic premium, and these supplementary coverages must be stated on the declarations page. Depending on the insurance company�s policies regarding premium payment, sometimes the business owner pays a separate premium for these types of coverages, and sometimes the cost of the additional insurance is added to the standard form�s premium so that the business owner only makes one payment rather than two or more.
Accounts Receivable Coverage
When accounts receivable coverage is available, it is normally subject to a separate deductible provision and to a separate limit of liability. This form of coverage pays all sums that are owed to a business by its customers if those sums become uncollectible because of loss or damage to the firm�s accounts receivable records.
Boiler and Machinery Coverage
When this coverage is selected, business owners are purchasing coverage against loss to objects such as boilers, pressure vessels, and air-conditioning equipment (as defined in the policy) when this damage is attributable to an accident (as accident is defined in the policy). Coverage extends to all objects that are owned, leased, or operated under the control of the insured. This optional BOP coverage gives insurance companies the right (but not the obligation) to inspect insured equipment and to suspend coverage (which may only be done in writing) if dangerous conditions are discovered during that inspection. If suspended, premium credit will be granted on a pro rata basis.
Burglary and Robbery Coverage
When burglary and robbery coverage is selected as an optional coverage, a business owner is protecting his company against losses of business personal property (excluding money and securities) on the insured premises for an amount not to exceed 25 percent of the liability in Section B. This coverage protects businesses against losses from money and securities that are in a bank or savings institution for an amount not to exceed $5,000. Finally, money and securities either that are traveling to or from the insured premises, bank, or savings institution or that are contained within the living quarters of the custodian of such funds is covered for an amount not to exceed $2,000.
As with other types of coverage, certain types of property are subject to limited burglary and robbery protection. For instance, fur and fur garments are covered as long as the loss does not exceed an aggregate of $1,000 for any one occurrence. Also, jewelry, watches, watch movements, jewels, pearls, precious and other semi-precious stones, gold, silver, platinum, and other precious alloys or metals are covered but are subject to a limit of $1,000 for any one occurrence. However, this limitation does not apply to jewelry or to watches that are valued at $25 or less per item.
Insurance companies frequently require that certain types of businesses have an acceptable burglary alarm system in order to obtain this optional coverage for protection against burglary and robbery.
Earthquake Coverage
Earthquake coverage may be added to most BOPs by endorsement. Some insurers, however, limit the availability of this extension of coverage to the special (or all-risk) policy, which is discussed at length below. When added to a BOP, the earthquake endorsement provides coverage for the business�s building(s), for business personal property, and for loss of income. The limits of liability are the same as those for any other peril that might cause a covered property loss, but the deductible, usually calculated at two percent (2%), is a percentage of the applicable limits of liability.
Employee Dishonesty Coverage
When employee dishonesty coverage is included in the policy the declarations page also states the BOP�s limit of liability for employee dishonesty losses.
Employee dishonesty coverage contains several conditions, and the agent should always review these conditions with the business owner. For instance, one important condition excludes coverage for any losses that result from dishonest or fraudulent acts by the business owner or by any partner, officer, director, or trustee. Another condition freezes the amount for which the owner may be reimbursed to the amount that is discovered missing at the time of its discovery. In other words, once a loss has been discovered, the BOP will pay for losses only up to that date, but not for any further loss that is caused by the known culprit. Some BOPs even stipulate that the culprit, when proven guilty, must be fired. Some insurance companies warn the business owner that he now runs the risk of losing this protection should any future losses result from the acts of any employee.
Exterior Grade Floor Glass Coverage
This BOP coverage is one of the broadest, most comprehensive glass coverages available under any policy. This optional coverage provides replacement cost coverage for all exterior grade floor and basement glass, including the glass�s lettering or ornamentation and its encasing frames. This damage must be to the property of the business owner or to others who have placed their property in the care, custody, or control of the business owner. Glass is protected against damages that result from direct physical loss unless the loss is the result of wear and tear, latent defect, corrosion, or rust.
This coverage also includes reimbursement for the expenses of boarding up damaged openings, of installing temporary plates, and of removing or replacing obstructions when necessary. The usual perils and exclusions (except for the war risk, governmental action, or nuclear exclusions) do not apply.
Exterior Signs Coverage
The declarations page, as in the above coverage, states the amount of insurance that applies when this optional coverage is in effect. This coverage insures all exterior signs located on the business owner�s premises whether he owns these signs or whether they belong to others who have placed their property in the business owner�s care, custody, or control.
The usual perils and exclusions (except for the war risks, governmental action, and the nuclear catastrophe exclusions) provided by the standard BOP do not apply to this coverage. Although this coverage utilizes all-risk protection against loss, it does exclude normal wear and tear, latent defect, rust or corrosion, and mechanical breakdown.
The special BOP is similar to the standard form; however, the few differences that exist between these two forms are significant. For instance, although both policies describe coverage for buildings, business personal property and loss of income (Sections A, B and C, respectively) in precisely the same way, the special BOP makes coverages available on an all-risk basis, while the standard BOP is a named peril policy.
Furthermore, the special BOP has more subsections than the standard form. For example, the special form also automatically includes money and securities coverage (Section D) in its basic policy, which as discussed above, is available only in the standard BOP as an optional coverage. Finally, primarily because of the difference between the all-risk and named peril approach to coverage, differences between the special and the standard forms are substantial in regard to excluded property and to property that is subject to limitations.
As mentioned above, Section I and its subsections (A, B, and C) in both the standard and the special forms define building(s), business personal property, and loss of income in exactly the same way. However, the special BOP covers these categories of property against all risks of direct physical
loss rather than on a named peril basis and is bound only to specific exclusions that are included in the policy.
General Property Limitations under the Special Form
Like the standard form, the special BOP has two sets of limitations. In fact, the first of these is very similar to the standard BOP; this limits the coverage for valuable papers and records, including film, tape and other forms of electronic data storage media, to the cost of blank cards or other media form. In the case of a manual records system, the coverage also recognizes the cost of labor needed to transcribe or to copy such records, but not to reproduce the electronic data processing types of storage media.
The second set of limitations is exclusive to the special version of the BOP. Coverage for the following areas of property is limited when a loss results from a peril that is not specifically excluded from coverage; however, these limitations do not apply to losses caused by fire, lightning, any of the extended coverage perils or sprinkler leakage.
The limitations are:
� Glass constituting a part of the building is not covered against loss for more than $50 per plate, pane, multiple plate insulating unit, radiant heating panel, jalousie, louver, or shutter, nor for more than $250 in any one occurrence.
� Glass, glassware, statuary, marbles, bric-a-brac, porcelains, and other articles of a fragile or brittle nature are not covered against loss by breakage. This limitation does not apply to bottles or similar containers of property for sale or sold but not delivered or to the lenses of photographic or scientific instruments.
� Fur and fur garments are covered for amounts not exceeding loss in the aggregate of $1,000 for any one occurrence.
� Jewelry and watches, watch movements, jewels, pearls, precious and semi-precious stones, bullion, gold, silver, platinum, and other precious alloys or metals are covered for amounts not exceeding loss in the aggregate of $1,000 in any one occurrence. This limitation does not apply to jewelry valued at $25 or less per item.
General Property Exclusions Under the Special Form
The same categories of property are specifically excluded under the special BOP as under the standard policy: exterior signs unless insured under optional coverage, growing crops and lawns, and aircraft, cars, motor trucks, and other vehicles subject to motor vehicle law, registration, or watercraft (including motors, equipment and accessories) while afloat. Another exclusion under the standard BOP (bullion, money, and securities) is specifically covered under the special BOP, coverage D, as discussed earlier.
Business owners will also find that the special BOP form contains the list of perils that are not protected against loss or damage. Usually stated in the following way, losses not protected by the special policy are those which are:
� Occasioned directly or indirectly by enforcement of any ordinance or law regulating the construction, repair or demolition of buildings or structures.
� Caused by or resulting from power, heating, or cooling failure or due to change in temperature or humidity unless the change results from physical damage to the building or to the equipment contained therein caused by a peril not otherwise excluded. Also the insurance company will not cover for any such loss resulting from riot, riot attending strike, civil commotion, vandalism or malicious mischief.
� Caused by any electrical injury or disturbance of electrical appliances, devices, fixtures or wiring caused by electrical currents artificially generated, unless an insured fire ensues, in which case the insurance company will be liable for losses that are caused by the resulting fire.
� Caused by pilferage, appropriation or concealment of any property covered or any fraudulent, dishonest or criminal act done by or at the instigation of the insured, partner, or joint venturer, including any officer, director, trustee, employee or agent thereof, or any person to whom the property covered may be entrusted.
� Caused by leakage or overflow from plumbing, heating, air conditioning, or other equipment or appliances (except fire protective systems) caused by or resulting from freezing while the described building is vacant or unoccupied unless the insured has exercised due diligence with respect to maintaining heat in the buildings or unless such equipment and appliances have been drained and the water supply shut off during such vacancy or occupancy.
� Caused by any of the following:
� Wear and tear, marring or scratching.
� Deterioration, inherent vice or latent defect.
� Mechanical breakdown of machines, including rupture or bursting caused by centrifugal force.
� Faulty design, materials or workmanship.
� Rust, mold, wet or dry rot, contamination.
� Dampness or dryness of atmosphere, changes in or extremes of temperature.
� Smog, smoke from agricultural smudging, or industrial operations.
� Birds, vermin, rodents, insects and animals unless loss by fire, smoke (except smoke from agricultural or industrial operations), explosion, collapse of a building, glass breakage, or water not otherwise excluded ensues, then this policy will cover only the resulting losses. If loss by water not otherwise excluded ensues, the policy will also cover the cost of tearing out and of replacing any part of the building covered required to effect repairs to the plumbing, heating or air-conditioning system or domestic appliance, but excluding loss to the system or appliance from which the water escapes.
� Due to any and all settling, shrinking, cracking, bulging or expansion of driveways, sidewalks, swimming pools, pavements, foundations, walls, floors, roofs or ceilings.
� Caused by explosion of steam boilers, steam pipes, steam turbines or steam engines (except direct loss resulting from the explosion of accumulated gases or unconsumed fuel within the firebox, or combustion chamber of any fired vessel or within the flues or passages which conduct the gases of combustion there from) if owned by, leased by, or operated under the control of the insured, or for any ensuing loss except by fire or explosion not otherwise excluded, and then the insurance company is liable for only any ensuing losses.
� Found in steam boilers, steam pipes, steam turbines or steam engines that are caused by any condition or occurrence within such boilers, pipes, turbines or engines (except for direct loss resulting from the explosion of accumulated gases or unconsumed fuel within the firebox or combustion chamber of any fired vessel or within the flues or passages which conducted the gases).
� Found in hot water boilers or other equipment for heating water that is caused by any condition or occurrence within such boilers or equipment other than an explosion.
� Caused by rain, snow, ice or sleet to any property that is out in the open.
� Caused by, resulting from, contributed to, or aggravated by any of the following:
� Earth movement, including but not limited to earthquake, landslide, mudflow, earth sinking, earth rising or shifting.
� Flood, surface water, waves, tidal water, tidal waves, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not.
� Water which backs up through sewers or drains.
� Water below the surface of the ground including that which exerts pressure on or flows, seeps or leaks through sidewalks, driveways, foundations, walls, basement or other floors, or through doors, windows or any other openings in such sidewalks, driveways, foundations, walls or floors.
� Due to voluntary parting with title or possession of any property by the insured or others if induced to do so by any fraudulent scheme or false pretense.
� Due to unexplained or mysterious disappearance of property or shortage of property disclosed on taking inventory.
� Due to delay or loss of market.
� Due to property sold by the insured under conditional sale, trust agreement, installment payment, or other deferred payment plan, after delivery to customers.
The special BOP automatically includes coverage for theft losses with a $250 deductible. This deductible is consistent with the $250 deductible applicable to related optional coverages such as the employee dishonesty and the burglary and robbery coverages under the standard BOP.
Coverage D, Section I provides protection against on- and off-premises insurance coverage for money and securities that are used in the insured�s business. The amount of insurance that applies to this category of coverage is selected by the insured and is listed in the appropriate space on the declarations page.
The automatic inclusion of theft, money, and securities coverage under the special BOP eliminates the need for the burglary and robbery coverage option that is available under the standard BOP. However, in all other ways, the special BOP offers the same optional coverages as does the standard BOP. Among these are employee dishonesty, exterior signs, exterior glass, and boiler and machinery coverage. Some insurance companies also offer accounts receivable and earthquake coverage with their special BOP while others do not.
The liability coverage provided by the standard BOP is exactly the same as that provided by the special BOP. While some insurers may permit higher limits of liability under the special BOP, no difference exists in the types of liability covered, nor in the definitions and other provisions discussed in Section II, the liability portion of the policy for both the standard and the special forms. The liability is, in fact, quite broad. The only decision that business owners must make is whether to select the $300,000 or the $1 million limit of liability made available through either form of BOP policy.
Section E of the BOP states that it �will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury, property damage, or personal injury caused by any occurrence to which this insurance applies.�
The BOP liability insuring agreement thus provides comprehensive general liability insurance on a per occurrence basis. This includes the usual liability coverage for a business�s �premises and operations.� Coverage for �completed operations� and �products� liability are also specifically included as is coverage for personal injury liability. The latter protects business owners against alleged false arrest, libel or slander, and wrongful entry or eviction or other invasion of privacy. A special fire legal liability provision provides up to $50,000 of coverage per occurrence for all damages resulting from fire or explosion, which damage structures rented to or occupied by the named insured.
The liability coverages are written out in detail in the policy. In addition to the coverages listed above, the business liabilities exclusions section in the BOP covers other forms of liability. These may include employers� non-owned automobile liability, blanket contractual liability, and host liquor law liability.
Most insurers also provide druggists professional liability coverage when the insured operates a retail drugstore. This coverage protects the named insured, including partners, and executive officers, and the individual pharmacists who work for the insured. This coverage extends to all claims that arise out of goods or products prepared, sold, handled or distributed by the drugstore.
Another extension of coverage nearly always found in the BOP is broad form property damage coverage. This coverage is especially valuable to those businesses that service or install items away from their business location. In essence, this coverage relaxes the usual care, custody and control exclusion to specifically cover damage to property that is caused by the negligent installation or replacement of an equipment or system part. The cost of the negligently installed item is excluded from coverage.
As noted, business owners may select liability insurance limits of either $300,000 or $1 million. These limits of liability are on a per occurrence basis and are not reduced by any supplementary payments, which are discussed below. However, the selected per occurrence limit is also limited to a specific total for all occurrences during the policy period that result from completed operations and/or products liability hazards. Fire and legal liability claims are further limited to no more than $50,000 per occurrence.
As with other forms of liability insurance, insurance companies are required to defend any claim or suit against insured business owners by claimants who seek damages that are covered by the BOP even if the suit is false, fraudulent, or groundless. However, the BOP also gives the insurance company the right to investigate and to settle claims as it (the insurer) sees fit. Furthermore, when the BOP�s limits of liability have been exhausted by payment of a judgment or by a settlement, the insurance company is released from any further obligation to defend the insured or to make payments on the insured�s behalf.
Similar to other insurance policies, the BOP agrees to make certain supplementary payments, which, if made, do not count toward the policy�s limit of liability. These types of payments include:
� All expenses incurred by the company.
� All cost incurred by the insured in any suit defended by the company and all interest on the entire amount of any judgment which accrues after entry of the judgment and before the company has paid or deposited in court that part of the judgment which does not exceed the limits of the company�s liability.
� Premiums on appeal bonds in any such suit.
� Premiums on bonds to release attachments in any such suit for an amount not in excess of the applicable limit of liability of the policy.
� Expenses incurred by the insured for first aid to others at the time of an accident for bodily injury to which the policy applies.
� Reasonable expenses incurred by the insured at the company�s request in assisting the company in the investigation or defense of any claim or suit, including actual loss of earnings not to exceed $50 a day.
The BOP automatically includes medical payments coverage (Section F) in the amounts of $1,000 per person and $10,000 for all persons requiring medical attention as a result of a single accident. This coverage is provided on a per-accident (as opposed to a per occurrence) basis.
Whether the Special Multi-Peril Policy (SMP) or the Business Owners Policy (BOP), it is essential that a business owner purchase commercial multi-peril insurance which offers protection for property loss and liability and any additional coverage that may be needed to supplement the coverage of his or her personally owned policies. By understanding your client�s business and the specific benefits of the different types of commercial property policies, you can offer sophisticated service which will lead your clients to appropriate insurance protection.