2013 Commercial Property Changes—Major or Minor?

ISO forms will change in 2013. There are both restrictions and broadening of coverage plus many cases where ISO says the change just reinforces its original intent. It’s tempting to regard the changes as minor, but remember a minor change is one that affects someone else’s claim. A major change is one that affects your claim.

Here are some of the commercial property changes that I think could be major:

Business Interruption Caused by Loss of Utility Services as a Result of Damage to Overhead Transmission Lines

Sandy elevated this one to the top of my list. Coverage for both property and business interruption as a result of loss of utility services can be (and should be) added to property and business interruption coverage. Coverage is available for the following types of services:

• Water Supply

• Communications Supply either including or excluding overhead transmission lines

• Power Supply either including or excluding overhead transmission lines

Although the forms show it as an option, obtaining coverage for loss due to damage to utility overhead transmission lines is rarely a viable option for most insureds. If offered at all, the price usually makes it an unrealistic choice.

The question is: Just what do you lose if your coverage is “excluding overhead transmission lines?” To clarify the coverage, ISO is adding the following wording to the utility services endorsement: “The term transmission lines includes all lines which serve to transmit communication service or power, including lines which may be identified as distribution lines.” ISO feels that there is no change in coverage; that common usage has always included distribution lines as transmission lines and this change merely applies common usage. This ISO change was written long before Sandy even though it won’t be available for use by insurance companies that use ISO forms until sometime in 2013. (Some insurers that write their own forms have already made this change—read your insureds’ policies before you discuss this with them.)

I can see ISO’s position as a possible interpretation of the term “transmission lines.” But I also see that an insured might consider transmission and distribution lines to be different. The electrical industry uses the term “transmission lines” to refer to high-voltage lines that transmit power from the generating source to bulk power stations. In that formulation, distribution lines refer to the lines that carry power from substations, transformers, etc. to the commercial or residential user1. It was destruction of distribution lines that generated much of the loss of power caused by Sandy.2

I see the basis for a claim based on ambiguity and ambiguities are resolved in favor of the insured. Only Humpty Dumpty could command that words mean what he says they mean and nothing more.3

Debris Removal—A Major Change Plus a Minor Change that Highlights a Major Problem

ISO is closing a gap in debris removal coverage. At present only the cost to remove the debris of covered property is insured. The 2013 forms broaden that to include the cost to remove other debris as well. It’s still required that the debris be caused by a covered cause of loss.

This can be important in a tenant occupied building. The tenant may not have sufficient or any insurance covering debris removal and a significant percentage (estimates run up to 50 percent) of business owners sustaining a significant loss go out of business making it difficult for the building owner to pass on the cost to remove debris resulting from damage to the tenant’s property.

It is argued that the cost to remove the debris of tenant’s property is necessary to do repairs and is therefore covered as part of the property loss. That can be a solution, but I wouldn’t want to rely on it if the cost to remove the tenant’s property is substantial.

The broadened debris coverage has some limitations. The most important appear to be:

• Any property that is property not covered including property covered by the outdoor property coverage extension. That means this won’t solve the problem of a neighbor’s tree that’s blown onto your insured’s property. Trees are not insured for windstorm damage. In regard to other perils, trees ore only insured by the outdoor property coverage extension.

• The insured’s property that’s not covered by the policy—for example an insured might insure the building, but not the contents. Over the years I’ve had a few insureds that made a conscious decision not to insure their personal property. One was a large public library that felt the cost was too high and that duplicate copies would be available at little cost. The other was a structural steel supplier who felt that the steel would not be damaged—the proverbial “pig-iron-under-water.” I should have pointed out the debris removal exposure to them.

• If no covered property is damaged, the limit for debris removal is only $5,000. This might occur when, for example, a fire destroys an adjacent building and substantial debris falls onto the insureds premises, but there is no covered damage to property insured by the insured’s policy.

ISO is also increasing the $10,000 debris removal additional coverage limit to $25,000. I am underwhelmed. From a risk management point of view, $15,000 is a non-event for most insureds, especially the larger insureds typically covered by commercial property coverage as opposed to BOP policies. What is overwhelming to me is the number of policies that I see where that limit has not been increased. Debris removal coverage is limited to 25% of the covered loss plus the additional $10,000 or $25,000. There are two ways that can be a problem: The property loss may exhaust the policy limit or a small loss may generate a large debris removal expense (picture the gang in fancy white outfits coping with polluted debris).

I’ve said it before, but it’s worth saying it again. Most insureds need more than $25,000 additional debris removal coverage. It’s not expensive, ISO has an endorsement to increase the limit (Debris Removal Additional Insurance CP 04 15), and most insurers are perfectly willing to provide it. Check to be sure your insureds are protected.

Earth Movement Moves Again

The earthquake exclusion has changed over the years to an earth-movement exclusion. As a result, claims that were once paid are now denied. Each iteration of the exclusion has tightened the exclusion and the 2013 change is no exception. The June, 2007 version of the exclusion was a substantial tightening of prior wording.

The pertinent portion of that exclusion reads:

We will not pay for loss or damage caused directly or indirectly by…

Earth sinking (other than sinkhole collapse), rising or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water under the ground surface.

That seems quite encompassing, however some courts have held that because there is no specific exclusionary wording for man-made or artificially caused earth movement there is an ambiguity as to whether or not such damage is excluded. Ambiguities of course, are resolved in favor of the insured. Blasting damage and damage caused by nearby excavations are examples of artificially caused earth movement that have been held to be covered despite the exclusion.

Damage caused by nearby excavation was the issue in a recent New York Court of Appeals decision that Larry Rogak analyzed in the October 29, 2012 issue of the Insurance Advocate. In that case, the court enforced an exclusion specifically eliminating coverage for damage resulting from man-made or other artificially-caused earth movement. The court said this distinguished it from prior cases where the earth movement exclusion did not contain that wording. The ambiguity in the previous cases had been resolved in the insured’s favor. The new wording resulted in a verdict for the insurance company. 4

The case involved Travelers, which was using its own forms, not ISO’s. To reinforce its intent, ISO is adding the following wording to the earth movement exclusion in the 2013 versions of the causes of loss forms (CP 10 10, CP 10 20, and CP 10 30):

This exclusion applies regardless of whether any of the above, in paragraphs (1) through (5) [various types of earth movement are listed in these paragraphs], is caused by an act of nature or is otherwise caused Present ISO commercial property forms do not include this wording. ISO states that this change does not change the coverage, but New York courts hold otherwise. If your insured’s policy does not contain the new wording, your insured may have a viable claim for man-made or artificially- caused earth movement damage.5

Business Personal Property Temporarily in Portable Storage Units—Coverage Increase or Coverage Reduction?

This is a funny one. A new coverage extension will cover property temporarily in a portable storage unit on the premises or within 100 feet of the premises to a limit of $10,000. The limit can be increased. Does this increase the insured’s coverage or does it decrease it?

ISO points out that many insurers pay claims on property in a temporary storage unit on the theory that it is equivalent to property in the open, which is clearly covered. For their insureds, this can be a coverage reduction since the limit will be $10.000 (unless it’s increased). Other insurers do not pay these losses under current policies, reasoning that property in a storage container is not property in the open, but rather property in another structure that is not scheduled on the policy. For their insureds it will be a coverage increase. Insureds frequently use trailers permanently to store property. This endorsement won’t help them; they’re not using “temporary” trailers. In addition, the extension only applies for 90 days, so there would be a gap in coverage for a trailer used for, say, 6 months. Best solution: try to specifically insure property in trailers on the insureds premises, whether temporary or permanent. Rely on this endorsement as a stop-gap measure. Alert your insureds to this possible gap in their coverage.

Here are short takes on a few more that made it onto my possible=major-change list:

By-Products of Production or Processing Operations (Rental Properties)

This should be called the “Meth cooking exclusion.” When a leased building that has been used as a methamphetamine laboratory is vacated whether voluntarily or because the police came pounding on the door, restoring the building to usable condition can be expensive; losses in excess of $200,000 are not unusual.6

Insurers have always held that expense to clean up the grease residue deposited on the walls by cooking in a restaurant tenant is not a covered loss. They’ve taken the same position with regard to damages resulting from a tenant’s use of the leased premises as a methamphetamine laboratory.

However, not all courts have agreed. (If you Google “insurance claim methamphetamine laboratory” you’ll find numerous law firms advertising that you can collect for damage to the building even though your insurance company has declined coverage.) To reinforce the insurers’ position, CP 10 34 – Exclusion Of Loss Due To By-Products Of Production Or Processing Operations (Rental Properties) will be attached to policies issued to owners and tenants of rental premises.

Increased Coverage for Electronic Data in Building Equipment

Currently, coverage for electronic data is limited to $2,500 on an annual aggregate basis—more of an exclusion than a coverage. Recognizing that building elevator, lighting, heating, ventilation, air conditioning or security systems now frequently depend on integrated electronic data, ISO is revising the Property Not Covered section of the Building and Personal Property form dealing with electronic data to exempt this type of data from the limitation.

Broadened Coverage for Entrusted Property

If a tenant vandalizes your insured’s building, does an ISO building and personal property policy provide coverage? It may, but only if the insured’s policy provides basic or broad form causes of loss. It won’t if the policy contains the ISO special form, because the special form excludes damage caused by dishonest or criminal acts “by anyone to whom the insured entrusts the property for any purpose.” In addition to acts by tenants, this wording would eliminate loss caused by the dishonest or criminal acts of bailees among others.

Since one of the goals of special form is provide at least as much coverage as the basic and broad forms, ISO is broadening the coverage in the special form. In the 2013 edition, special form will exclude only theft by those to whom the property is entrusted, not all dishonest or criminal acts they may commit. This matches the basic and broad form coverage as theft is not covered by those forms in any event.

Prospecting note: Commercial property forms leave a huge coverage gap for an insured’s property in the custody of a bailee. First, commercial property policies provide very little coverage away from the premises and second, theft by a bailee is a major exposure that’s not covered at all. The solution is readily available via inland marine forms. If they have property at processors, storage warehouses, etc., tell your insureds and prospects about their need for bailee floaters.

Payroll Limitation or Exclusion Option is No Longer “Ordinary”

Under current business income forms, insureds can elect to limit or eliminate coverage for ordinary payroll. When an insured believes that ordinary payroll will either not continue at all or continue for not more than a 90-day or 180-day period or the insured does not want to insure ordinary payroll at all, the insured can limit or exclude ordinary payroll coverage.

Ordinary payroll expense means payroll expenses for all employees except officers, executives, department managers, and employees under contract. This reduces the coinsurance basis and therefore the amount of insurance needed to comply with coinsurance. For many insureds this is an excellent premium-saving option.

The new form will eliminate or limit all payroll expense—the term “ordinary” is being eliminated. The insured can schedule those employees or job classifications that it does not want to eliminate making it possible to match the coverage of the previous endorsement. An advantage of the new form is that it will allow insureds to eliminate all employees, not just those meeting the definition of ordinary payroll. For an insured that is certain it’s period of restoration will not be more than 90 or 180 days, eliminating all payroll beyond those periods reduces premium while not reducing coverage— providing, of course, that the insured’s opinion of the time needed to restore operations is correct.

Important caveat: Only the edition number is changing; the form number is the same. As a result the new form may slip through unnoticed. That can create a major problem when an insured has eliminated or limited ordinary payroll using the old endorsement. The new endorsement will apply to officers and others as well. Watch for this change. Do you want to tell your insured’s principals who are facing an extensive business income loss due to a fire that you have good news and bad news? The good new is that they have business income Insurance. The bad news is that their salaries are not covered.

There are Many More Changes

There almost two dozen other changes. Arthur Flitner, CPCU, Senior Director of Knowledge Resources for the Insurance Institutes in Malvern, PA recently spoke to the Westchester-Fairfield CPCU chapter about these revisions. A copy of his Power Point will be posted on the chapter’s website. See http://westchester.cpcusociety.org. Look at the Power Point. Get a copy of the forms to see the details of the other changes. Remember, any change that affects a client’s claim is a major change so far as that client is concerned.

Thanks to Jerry Trupin for this article and to the CPCU Society’s Risk Management Interest Group newsletter for letting us reprint it.

 1 Wikipedia says this: “Electric-power transmission is the bulk transfer of electrical energy, from generating power plants to electrical substations located near demand centers. This is distinct from the local wiring between high-voltage substations and customers, which is typically referred to as electric power distribution.” http://en.wikipedia.org/wiki/Electric_power_transmission

2 Another point: In many instances following Superstorm Sandy, the loss of utilities resulted from utility sub-stations being flooded. A sub-station is not an overhead transmission or distribution line, so that’s not excluded. However the insured would need flood coverage with the utilities endorsement as well as business interruption coverage. Neither is available from NFIP, but can be written for commercial risks through regular and surplus lines underwriters

3 Lewis Carroll “Through the Looking Glass” ‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ http://sabian.org/looking_glass6.php

4 Bentoria Holdings Inc v. Travelers Indemnity Company 2012 NY Slip Op 07141 Court of Appeals of New York. October 25, 2012

5 The October 2000 edition of ISO form HO 00 03 contains however-caused wording. Prior ISO HO 3 forms did not. Because many carriers use their own forms, be sure to check the specific forms that apply before advising insureds about their coverage. The new commercial property earth movement exclusion will also be changed to add tremors and aftershocks to the list of excluded earth movements and to make all volcanic action within any 168-hour period a single occurrence.

6 See: Tualatin Valley Housing Partners v. Truck Insurance Exchange, 2006 WL 2742666, Or.App., September 27, 2006