Recap of Chapter Nine

The Commercial Package Policy (CPP) allows a commercial insured to customize an insurance program by selecting the coverage parts that fit the needs of the business. Each CPP is subject to the Common Policy Declarations and the Common Policy Conditions. These components apply to the entire policy, regardless of which coverage parts are included. The Declarations page identifies important policy information, including:

• The named insureds
• The first named insured
• A description of the business
• The policy effective and expiration dates
• The premium charged for each coverage part

This structure allows different commercial coverages to be combined under one policy while still using common policy information and conditions.

The Common Policy Conditions contain provisions that apply to the entire Commercial Package Policy. These conditions address important policy rights and responsibilities, including:

• How the policy may be canceled
• How changes may be made to the policy
• The insurer’s right to examine the insured’s books and records
• The insurer’s right, but not obligation, to conduct inspections and surveys
• Premium payment requirements
• Assignment of rights and duties under the policy

The first named insured has special rights and responsibilities under the policy. The first named insured is responsible for paying the premium, is the insured authorized to cancel the policy, and will receive any return premium owed on a pro rata basis.

Commercial property policies are also subject to the Commercial Property Conditions. These conditions apply in addition to the Common Policy Conditions. The insurer may void the policy if any insured intentionally conceals or misrepresents a material fact concerning:

• The coverage provided
• The covered property
• The insured’s interest in the covered property
• A claim made under the policy

The policy also addresses subrogation, which is the insurer’s right to recover from another party after paying a covered claim. The insured may waive their right of recovery against another party under certain permitted conditions. However, if the insured has not waived that right, the right of recovery transfers to the insurer to the extent of the insurer’s claim payment.

Every commercial property policy must include at least one Causes of Loss form. The Causes of Loss form identifies the perils that are covered, as well as any applicable limitations, Additional Coverages, and exclusions. This form is essential because it explains what types of loss or damage may be covered by the policy. The Causes of Loss — Basic Form provides coverage for, or specifically excludes, certain perils as described below.

Perils Insured Against	Exclusions
Fire or lightning	Earth movement, limited coverage available by endorsement
Windstorm or hail	Water
Aircraft or vehicles	Utility services, meaning power failure off the insured’s premises
Riot or civil commotion	Governmental action
Explosion	Ordinance or law, unless added by endorsement
Smoke	Nuclear hazard
Vandalism	War or military action
Sprinkler leakage	Fungus, wet or dry rot, and bacteria
Sinkhole collapse	Artificially generated electromagnetic energy
Volcanic action, like lava flow	Explosion of steam boilers

The Causes of Loss — Broad Form includes the covered perils provided by the Basic Form and adds coverage for additional causes of loss, including:

• Falling objects
• Certain types of water damage
• Weight of ice, snow, or sleet

Water damage coverage applies only to certain accidental water losses. Coverage is not provided for water that leaks, backs up, or overflows from a sump pump, sump, or related drain.

The Causes of Loss — Special Form covers property on an open perils basis. This means direct physical loss is covered unless the cause of loss is specifically excluded or limited by the form. The Special Form also provides coverage for chemical damage to glass. As a Coverage Extension, the form provides up to $5,000 for covered property in transit, subject to the terms and conditions of the form. In addition to the exclusions found in other Causes of Loss forms, the Special Form includes additional exclusions, such as:

• Delay
• Loss of use
• Rust
• Smog
• Damage caused by pollutants

Because the Special Form provides broader coverage, it is important to review the exclusions carefully to determine which causes of loss are not covered.

Building and Personal Property Coverage Forms

The Building and Personal Property Coverage Form is the primary coverage form used to insure commercial property. It may provide coverage for:

• Buildings
• Business personal property
• Personal property of others

The insured may choose which of these coverages will apply to the policy. Building coverage includes the described building or structure, completed additions, outdoor fixtures, permanently installed machinery and equipment, and personal property used to service or maintain the insured building. Business personal property coverage includes items such as furniture and fixtures, stock, machinery and equipment, and tenants’ improvements and betterments. To be covered, business personal property and personal property of others must generally be located in or on the described building, or within 100 feet of the premises. This includes property located in the open or in a vehicle within that distance.

The Building and Personal Property Coverage Form excludes certain types of property from coverage. Property not covered includes:

• Accounts, bills, currency, money, notes, and securities
• Animals, unless an exception applies
• Automobiles held for sale
• Bridges, roadways, walks, patios, and other paved surfaces
• Underground pipes, flues, and drains
• Land, water, lawns, and growing crops
• Outside fences and antennas, including satellite dishes and related equipment

These exclusions are important because some types of property require separate coverage forms or endorsements to be properly insured.

The Building and Personal Property Coverage Form includes six Additional Coverages:

• Debris Removal
• Preservation of Property
• Fire Department Service Charge
• Pollutant Clean Up and Removal
• Increased Cost of Construction
• Electronic Data

The form also includes six Coverage Extensions:

• Newly Acquired or Constructed Property
• Personal Effects and Property of Others
• Valuable Papers and Records
• Property Off Premises
• Outdoor Property
• Non-Owned Detached Trailers

When the requirements for the Coverage Extensions are met, the Property Off Premises Coverage Extension may cover property temporarily located at a fair, trade show, or exhibition. The Non-Owned Detached Trailers Coverage Extension provides up to $5,000 of insurance for covered non-owned detached trailers, subject to the conditions of the form.

Commercial property policies typically include Additional Loss Conditions that explain the duties of the insured and the insurer after a loss. After a loss occurs, the insured must:

• Notify the police if a law may have been broken
• Provide prompt notice of loss to the insurer
• Take reasonable steps to protect the property from further damage
• Submit a signed proof of loss when required

Under the Loss Payment condition, the insurer will make payment within 30 days after receiving the sworn proof of loss or reaching an agreed settlement with the insured. Losses are generally valued on an actual cash value basis unless an Optional Coverage, such as Agreed Value or Replacement Cost, has been selected and applies to the covered property.

The Vacancy Condition limits coverage when a building has been vacant for more than 60 consecutive days before a loss. If the vacancy condition applies, the policy will not cover loss or damage caused by:

• Vandalism
• Sprinkler leakage
• Building glass breakage
• Water damage
• Theft or attempted theft

The meaning of vacancy depends on the insured’s interest in the property. If the insured is a tenant, the rented unit or suite is considered vacant when it does not contain enough business personal property to conduct customary operations. If the insured is the building owner or general lessee, the building is considered vacant unless at least 31% of the total square footage is being used to conduct customary operations. This condition is important because vacancy can eliminate coverage for certain causes of loss and may reduce the amount payable for other covered losses.

Coverage under the Building and Personal Property Coverage Form is generally subject to a deductible and a coinsurance requirement. The deductible applies to covered losses before the insurer makes payment. The coinsurance requirement is commonly 80%, meaning the insured must carry insurance equal to at least 80% of the value of the covered property to avoid a coinsurance penalty after a partial loss. If the insured does not carry the required amount of insurance, the insurer may reduce the amount paid for a covered loss.

Other Commercial Property Coverage Forms

The Builders Risk Coverage Form is a commercial property form designed to insure buildings and structures while they are under construction. This coverage may apply to foundations, fixtures, machinery, building materials, construction supplies, and temporary structures used in the construction process. Coverage may also be extended to building materials and supplies owned by others, but only when that property is intended to become a permanent part of the completed building or structure. Builders risk coverage is commonly written on a Completed Value Form. Under this approach, the insured is required to carry insurance equal to 100% of the building’s completed replacement value. This requirement helps ensure that the amount of insurance reflects the full value of the project once construction is finished. A Reporting Form Endorsement may be added to the Builders Risk Coverage Form. This endorsement allows the insured to report values on a monthly basis so the coverage amount can increase gradually as construction progresses. A similar endorsement, known as the Value Reporting Form, may be used with other commercial property policies. This form is especially useful for businesses whose business personal property values fluctuate throughout the policy period.

The Condominium Association Coverage Form is a commercial property form used to insure property owned or managed in the name of a condominium association. This form provides coverage for the condominium building and fixtures, according to the requirements stated in the Association Agreement. The form may also provide business personal property coverage. This coverage applies to personal property that is collectively owned by all of the unit-owners, rather than property owned by individual unit-owners separately.

The Condominium Commercial Unit-Owners Coverage Form is used to insure business personal property owned by commercial condominium unit-owners. This form is designed for businesses that own and occupy commercial condominium units, rather than insuring the entire condominium building. Businesses that occupy commercial spaces may also need the Legal Liability Coverage Form. This form provides coverage for the insured’s legal liability for loss or damage to real or personal property owned by others while that property is in the insured’s care, custody, or control.

Commercial property policies may also include coverage forms that insure indirect losses, such as loss of business income and extra expense. These losses do not involve direct damage to property itself. Instead, they result from the interruption of normal business operations after covered property is damaged by a covered cause of loss.

Business income means the net income, or net profit before income taxes, that the business would have earned if the loss had not occurred. It also includes continuing normal operating expenses, such as payroll, that the business must still pay during the interruption.

Business income coverage applies during the period of restoration. For business income losses, this period begins 72 hours after the direct physical loss occurs and continues for the time reasonably required to repair, rebuild, or replace the damaged property. Extra expenses are additional costs the insured incurs to reduce or avoid a suspension of business operations. Examples may include expenses to temporarily relocate, rent equipment, or continue operations from another location. Extra expense coverage also applies during the period of restoration. However, unlike business income coverage, extra expense coverage begins immediately after the direct physical loss occurs.

The Spoilage Coverage Endorsement is used to cover loss to perishable stock when the stock spoils because of a covered cause of loss. This endorsement commonly applies when spoilage results from a refrigerator or refrigeration equipment breakdown, or from an on-premises or off-premises power outage that is beyond the insured’s control. The Peak Season Limit of Insurance Endorsement is used when a business needs a higher business personal property limit during certain times of the year. This endorsement increases the limit of insurance for a specified period, such as a holiday season, busy sales season, or other period when inventory levels are higher than usual.