More Boring Insurance Stuff

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Yes, today’s posting will be boring and perhaps a little dry. And, to add insult to injury, nothing in it will be earth-shattering. But, knowledge is power. And, even if you don’t want to be powerful, you certainly don’t want to be drafting documents and making business agreements involving insurance without knowing what is available and what is possible. Do you? We didn’t think so.

Yes, today we write about insurance, and whenever we do so, we repeat this caveat: “Find and rely on a genuine insurance expert. This stuff is not intuitive.” Our primary goal is to let our followers know enough about insurance to realize that they and we don’t know enough. A secondary goal is to get those of us who include insurance requirements in our documents to know that last year’s (or even last week’s) text may no longer be what we would like to have written. Lastly, for those who buy insurance, today’s blog posting might induce you to call and say hello to your insurance broker or other advisor.

The Insurance Services Office, Inc. (ISO) promulgates most of the insurance policy forms the real estate industry sees and uses. No insurance company is required to use the ISO forms, but it is estimated that 95% of commercial property insurance policies do use them, mostly word for word, but some as slightly modified by a particular insurance carrier. So, its forms are important. When the ISO revises forms, adds forms, and withdraws forms, we in the leasing, borrowing, and lending businesses should pay attention.

[Note: most states have a process wherein policy forms must be filed and approved before they can be used. Ruminations strongly suspects that the ISO furnishes a convenient rubber stamp to each approving authority. Therefore, readers can expect that these will roll out pretty quickly. For example, as of today, the most used of the revised form remains unapproved in only 11 states.]

The ISO’s 2017 output as concerns commercial property insurance forms consists of seven revised ones, three new (tenant) ones, and one withdrawn (tenant) form. Nothing that has been done should set the world on fire, but the devil is in the details.

A basic form in almost all of the commercial property insurance policy “packages” is the Causes of Loss form and almost all policies use (and all should use) the Cause of Loss – Special Form version (ISO form: CP 10 30 09 17). This is the form that describes the kind of damage-causing events covered by the insurance policy itself. The 2017 change actually extends coverage, though not to cover anything very common. As most readers know (and all should know), basic insurance coverage for “water damage” is very limited. Some might also say, “convoluted.”  The pre-2017 form provided coverage for the “accidental discharge or leakage of water and waterborne material as a result of the breaking apart or cracking of [an off-site] municipal water or sewer pipe” where the break was caused by wear and tear. [Italics and underling is ours.] The 2017 form goes beyond “municipal” by saying: “a potable water supply system or sanitary sewer system operated by a public or private utility service provider pursuant to authority granted by the state or governmental subdivision where the described premises are located.”

[Ruminations: The excitement continues, possibly downhill.]

Another important and very common form is the ISO form: Ordinance or Law Coverage (ISO form: CP 04 05 09 17). Basically, this provides coverage to cover extra costs to restore or rebuild damaged property where those expenses are incurred to comply with laws that were not in effect when the building or other improvement was first constructed. If your form lease does not require those who are called upon to carry commercial property insurance in the first place to obtain this (endorsed) additional coverage, the draftsperson should call her or his own errors and omissions insurance provider and self-report.

Before the 2017 change, this coverage under this endorsement was measured with reference to the laws in effect on the day of the loss. Now, there is an option (think: extra charge) that moves the “changed law” date to the time of reconstruction. It also has been revised to make it a little confusing as to what coverage limit will apply, but we leave that discussion to be had between insurance buyers and insurance sellers.

The ISO Protective Safeguard endorsement (ISO form: CP 04 11 09 17) is not to be ignored. Insurance coverage is rated on a property by property basis and the existence of certain protective systems (think: sprinkler) serves to reduce what would otherwise have been the premium. So, if there is a fire (by way of example) and the sprinkler system (by way of example) was not activated at the time of loss, the insurance company will feel cheated. Consequently, policies written for building with protective safeguards say that coverage is lost if those safeguards aren’t active at the time of loss. They do, however, set forth a procedure for temporarily turning them off.

The revised form now directly states that the protective systems must be active, be turned on, and comply with any specific requirements set forth elsewhere in the policy. Some rewording was done to the procedures to be followed if the system is not operative. Generally speaking, those require notifying the carrier. In that vein, some exceptions to the notice requirements are now listed.

There is an endorsement called Burglary and Robbery Protective Safeguards. It is ISO form CP 12 11 09 17. It applies to what its name implies and, in that regard, is very similar to the Protective Safeguards endorsement. The 2017 changes parallel the changes to the Protective Safeguards endorsement. Reference to Underwriters Laboratory (UL) classifications have been eliminated and replaced with for categories of protective devices. In addition, it is slightly renamed from the pre-2017 version. So, if you are going to require this endorsement, pay attention to its new name.

Rolling right along, we now come to the ISO Increased Period of Restoration endorsement (ISO form: CP 15 31 09 17). Basically, this endorsement extends the time within which restoration or reconstruction must be completed under the various forms of Business Income or Extra Expense coverage. This coordinates with what happens if the restoration or replacement is delayed by the need to comply with changes in ordinances or law. The 2017 changes coordinate with the revised forms of Ordinance or Laws coverage, more particularly described above.

Property owners can buy coverage that will pay for business income loss when external utility services are disrupted. There is a policy endorsement known as the Utility Services – Time Element endorsement (ISO form: CP 15 45 09 17). The changes of note allow the policy holder to choose from a wider range of waiting periods and its choice will override the waiting period in the policyholder’s business income coverage form.

We promised to tell readers about three new forms, all of which are available to tenants. But, before we do so, let’s all say goodbye to ISO form CP 14 70, “Building Glass – Tenant’s Property.” It has been withdrawn. This form was added in 2007 when the standalone glass coverage endorsement was withdrawn. So, there are three take-aways. For those of us still requiring tenants to carry plate glass insurance, that’s probably not the way to ask for the coverage. Second, building glass coverage will still be available to tenants by virtue of the two of the new tenant-oriented endorsements added in this set of 2017 changes. Third, tenants required to cover their landlord’s glass will need to make sure that their insurance brokers get it covered by way of one of the two new endorsements.

Two of the new “tenant” endorsements are pretty similar as their names will reveal. They are the Scheduled Building Property – Tenant’s Policy endorsement [ISO form: CP 14 01 09 17] and the Unscheduled Building Property – Tenant’s Policy endorsement [ISO form: CP 14 02 09 17]. Each affords coverage for building glass, building fixtures or permanently installed equipment belonging to the building’s owner. So, for there to be coverage, the insured must be a tenant. More importantly, the coverage only applies if the lease or some other contractual agreement requires the tenant to carry insurance on that landlord’s property. As its name implies, the Scheduled Property form requires the insured property (belonging to the landlord) to be listed on the endorsement schedule. Insurance can be at actual cash value (careful: that term is not intuitive) or replacement value.  Glass is insured at the replacement value for safety glass if required by law) and there will be a scheduled dollar limit.

The “Unscheduled” endorsement version does not require a specific list of property to be insured. The same conditions as to being a tenant and being required to insure the landlord’s property apply to this endorsement. The difference between these two endorsements may be the cost of coverage.

Lastly, tenants can add Ordinance or Law coverage to their own commercial property insurance coverage by use of the new Ordinance or Law Coverage for Tenant’s Interest in Improvements and Betterments endorsement (Tenant’s Policy). This is ISO form: CP 04 26 09 17. It parallels the similarly named endorsement that can be added to cover one’s own property. For a refresher on what this coverage is about, click HERE.

That’s all she wrote. See you next week.

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