Commercial property changes

Commercial property changes

The CSR Advisor October 2008 Edition

In the October issue, we discussed ISO’s changes to its commercial property program. Here we will discuss some of the additional changes.

Clarification of loss Settlement for party wall

Party walls divide two adjoining buildings. The owner of each building shares rights in connection with the common wall. The ownership might be shared between the two property owners, or one party might own the wall outright with the other party having easement rights, or some other legal relationship with respect to ownership rights might apply.

This joint interest in the common property can create coverage and loss-adjustment issues, particularly when one party refuses - or is financially unable - to rebuild or repair the adjoining building.

The revised CP 00 10, Building and Personal Property Coverage Form, addresses this issue in a new paragraph h. under Loss Payment. That provision addresses two scenarios. The insurer will pay a proportion of the loss to the party wall. That proportion will be based on the insured’s interest in the wall in proportion to the interest of the owner of the adjoining building.

But if the owner of the adjoining property elects not to replace or repair the building, the policy will pay the insured the full value of the wall, subject to any applicable policy provisions, e.g., limit of insurance, deductible, or coinsurance. In such case, the insurer might have subrogation rights against the owner of the adjoining property.

Electrical arcing

The causes of loss forms exclude damage caused by artificially generated electrical current, including electric arcing that disturbs electrical devices, etc. Such coverage is available under an equipment breakdown policy.

The 2008 revision expands the exclusion to more explicitly describe the power sources and associated systems that characterize today’s technology. Under the revised forms, the insurer will not pay for damage caused by artificially generated electrical, magnetic, or electromagnetic energy that damages, disturbs, disrupts, or otherwise interferes with any electrical or electronic wire, device, appliance, system, or network or any such device, etc., utilizing satellite or cellular technology.

“Electrical, magnetic, or electromagnetic energy” includes electrical current, including arcing; electrical charge produced or conducted by a magnetic or electromagnetic field; pulse of electromagnetic energy; or electromagnetic waves or microwaves. The insurer will continue to pay for any loss caused by fire that results from any of these.

It should be noted that “electrical” is a general term that includes electromagnetic fields. ISO indicates that these changes will have “no anticipated impact on claims.” Clearly, though, the revised wording expresses the broad scope of this exclusion, which often is not given much thought.

Utility Services Exclusion

The causes of loss forms exclude loss caused by the failure of utility service when the failure occurs away from the described premises. The current exclusion applies to direct damage coverage, and a slightly different version applies to time element coverages (if the failure occurs outside of a covered building). The revision removes the time element version, making the same exclusion apply to coverage for both direct damage and business income and extra expense coverages.

ISO has expanded the exclusion to also apply if the failure originates at the described premises and involves equipment used to supply the utility service to the described premises from a source away from the described premises. Utility service failure frequently involves the failure of equipment, such as transmission lines and cables, on the described premises but owned and supplied by an off-premises supplier. The revised exclusion eliminates coverage for losses related to the off-premises supplier.

The revised exclusion clarifies that it also applies to damage caused by a power surge if the surge would not have occurred but for an event causing a power failure.  Time element will have a broadening of coverage, in that the previous exclusion applied to services outside of a covered building. On-premises failure is now limited to a situation in which the failure involves equipment used to supply utility service from an off-premises source.

While the current exclusion applies to the failure of power or other utility service, the revised forms specifically mention communication and water service. Communication services include service relating to Internet access or access to any electronic, cellular, or satellite network.

Ordinary payroll limitation

While covered under the business income forms, payroll expense incurred during an insured suspension of business is limited to only those expenses that are necessary to resume operations with the same quality of service that existed before the loss. The 2008 revision introduces an endorsement, CP 15 04, that gives insureds discretion as to continuation of payroll expense. Payroll expenses for the designated employees or job classifications will be considered continuing normal operating expenses in determining the amount of business income loss “regardless of whether such expenses are necessary to resume ’operations’.”

The discretionary payroll may be specified in terms of either job classification or individual employees. Coverage may be provided for the entire period of restoration or limited to a specified maximum number of days –  which need not be consecutive. Coverage for job classifications and employees not specified in the endorsement schedule remains unaffected by the endorsement.

Additional insured endorsements for landlords

Sometimes, leases require that a tenant buy loss of rental income insurance for the benefit of the landlord. New endorsement CP 15 03, Business Income – Landlord as Additional Insured (Rental Value), can be used for that purpose. It makes the landlord an additional insured only for loss of rental value. The causes of loss form designated in the endorsement schedule applies, regardless of the causes of loss that might apply to other coverages. Under this coverage, the most the insurer will pay is the amount required by the lease, subject to the limit of insurance shown in the schedule. Any amounts paid under this endorsement will be deducted from the named insured’s business income loss.

Another new endorsement, CP 12 19, can be used to make the building owner a named insured on a tenant’s policy with respect to damage to the building.

Tenant’s building glass

The 2000 revisions eliminated the distinction between building glass and other covered property, allowing ISO to withdraw CP 00 15, Glass Coverage Form. However, sometimes, tenants are contractually required to provide coverage for building glass, even though the tenant isn’t required to insure the building itself. This situation can be handled by an entry in the declarations that describes the covered property as “building glass”, but some insurer computer systems do not have the flexibility to easily make that entry. In response, the 2008 revision introduces an endorsement to handle this exposure, CP 14 70.

Outdoor signs

The limit of insurance for outdoor signs has been increased from $1,000 to $2,500. Along with this change, ISO has eliminated the distinction in CP 00 10 between freestanding outdoor signs and those attached to buildings. The references to outdoor signs has been removed from property not covered and the coverage extension for outdoor property. Outdoor signs not attached to buildings will also be covered for the same causes of loss as other property. A revised CP 14 40 can be used to increase the dollar limit for outdoor signs.

Additional coverages

The amount of insurance for a number of additional coverages applies in addition to the limit of liability for other coverages. Under the current forms, the limit of insurance condition states that the additional coverages for fire department service charge and pollutant cleanup and removal are in addition to the limit of insurance. The revised forms state that the amounts of insurance stated in the additional coverages for increased cost of construction, electronic data, and interruption in computer operations (in the time element forms) are in addition to the limit of insurance, as well.