Last week, we left off just before the “good stuff.” We wrote that the most commonly encountered commercial property insurance policy, the one promulgated by Insurance Services Office, Inc. (ISO), was a four-part insuring agreement. One of those parts, the “coverage part,” is where you find out what is covered. That’s today’s topic. If you want to start with last week’s posting, click: HERE. Otherwise, here we go.
Insurance buyers can choose from among three levels of coverage, each beginning with these four words: “Covered Causes of Loss. The three available (ISO) forms are: Special, Broad, and Basic. Here is a spoiler: “The butler did it.” For today’s purposes, that means: “Go for the Causes of Loss – Special Form coverage part.”
“Broad Form” coverage sure sounds enticing. Well, if that’s how it seems to you, pay attention to this. Basic Form coverage covers 11 specific perils. Ruminations won’t waste your time listing them. Under such coverage, if your damage wasn’t caused by one of those 11 perils, you might as well not have had insurance.
Broad Form coverage takes the list up to 14 insured perils and adds coverage for collapse.
So, what’s so special about Special Form coverage? How many more perils are covered? We can’t tell you, because what makes it special is that is doesn’t have a list of what is covered. In insurance lingo, it is “Open Peril” coverage. The scope of its coverage is defined not by what perils are covered; it is defined by what perils are excluded. Special Form assumes you have coverage unless the insurer can show that coverage is excluded.
So, what is excluded? It is a long and varied list. On the other hand, it is pretty specific and, for the most part, courts interpret insurance policies pretty narrowly and in favor of the insured. Here is a list of exclusions common to all three Causes of Loss coverage part forms. When you read the list, start every item as if it begins with: “The policy does not cover losses caused by:
Ordinances or laws
Earth movement (but there is a carve-out for volcanoes)
Water – [This one is important] such as by flood, surface water, waves, tides, mud flow, mudslide, sewer back-up or overflow, underground water seepage through floor, walls, etc.
Then there are exclusions for damaged items where the damage was caused by things that happen over time. Even though the damaged item is “uninsured,” there is coverage for other insured property that is damaged by the “uninsured” item. What are “things that happen over time”? Try these:
Wear and tear.
Rust, corrosion, fungus, decay, latent defects, etc. [This means there is no coverage for a rusted pipe, but if it broke and damaged the building, the building is covered.]
Settling, cracking, shifting, expansion.
Nesting or infestations.
Mechanical breakdown (but elevator collisions are covered).
As to personal property: marring, scratching, dampness, dryness, temperature damage.
Well, if you like lists, here are some more exclusions:
Damage to steam boilers, pipes, engines or turbines where the damage is caused by “their” explosion.
Damage caused by:
Continuous or repeated seepage or leakage of water. [Basically, that means over a period of 14 days or more, and there is no extension for “discovery.”]
Leaking powders, water or other liquids, if caused by freezing, unless the insured does its best to keep the premises heated or shuts off the building’s systems.
The insured’s dishonest or criminal acts.
Trick or device.
Rain, snow, ice, and sleet-caused damage to personal property in the open.
Collapse [but this coverage is given back as an available additional coverage.]
Discharge, etc. of pollutants.
As if that’s not enough, there are also special limitations. For example, without the purchase of special or additional coverage, commercial property insurance does not cover losses to:
Steam boilers, turbines, etc. for damages caused by the equipment itself.
Hot water boilers and water heating equipment for damages caused by the equipment itself.
Building interiors and personal property in a building for damaged caused by rain, snow, sleet, etc. unless the building is first breached by fire, etc.
Theft of building materials other than property offered for sale.
Missing property (unless there is an inventory shortage or there is physical evidence of the loss).
Not every loss will be fully covered. For example, there are special coverage limits for furs, garments, dies, molds, stamps, etc.
As we prepared today’s blog posting, we started to feel as if we were writing a television advertisement for a prescription drug where we began our ad with the lists and lists of the “side effects.” So, let us make it clear. A commercial property insurance policy with a Causes of Loss – Special Form coverage part is pretty solid insurance. It covers a lot, mostly everything. The list of its exclusions (which appears in the form itself) can be seen as a “shopping list” to be reviewed with a qualified insurance broker, agent or consultant.
Lest any reader now think that she or he knows everything there is to be known in order to understand what commercial property insurance covers or what it does not cover, Ruminations could go on for another 10,000 words and still not have said enough. That’s why there are insurance professionals. Our goal is to scare readers into linking up with one or more of those people. [And, that will be the case as well in the future as we write more on the subject of insurance.]
Now, for the promised text for a property insurance provision, one that a tenant might want to see in a lease. We offer it not for the purpose of “cut and paste,” but for readers to study and then write their own. One more caveat: the following text is not the entirety of what such a lease should say. It is only the “coverage” part of an entire “package” of insurance provisions.
From and after the Effective Date and throughout the Term, Landlord must maintain a policy of insurance covering the Shopping Center (including any of leasehold improvements installed by Tenant) against loss, damage or destruction caused by any peril covered by a Causes of Loss – Special Form coverage part (or the then industry replacement to such coverage part) to a policy of property insurance, including coverage for or endorsements for: (a) water damage; (b) Business Income; (c) Extra Expense; (d) Service Interruption; (e) Ordinance or Law; (f) Boiler and Machinery, if applicable; and (g) demolition costs. Such coverage must be written for replacement value. Such policy may not have a deductible in excess of $50,000. In addition, Landlord must maintain: (y) if any portion of the Improvements is currently or at any time in the future located in a federally designated “special flood hazard area,” flood hazard insurance in an amount equal to the lesser of: (1) the replacement value of the improvements at the Shopping Center; or (2) the maximum amount of such insurance available under the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended; and (z) earthquake insurance in amounts and in form and substance satisfactory to Landlord’s first mortgagee (or, if there is no first mortgagee, Tenant) in the event the Shopping Center is located in an area with a high degree of seismic activity, provided that the insurance pursuant to clauses (y) and (z) hereof must be on terms consistent with the Causes of Loss – Special Form coverage part required above.