3.1 Property Insurance Terminology
Fire Protection
Fire is one of the most important perils covered under property insurance policies. In general, property insurance provides coverage for damage caused by a hostile fire. A hostile fire is a fire that escapes its intended location, burns beyond its intended boundaries, or becomes uncontrollable. By contrast, property insurance does not typically cover damage caused by a friendly fire. A friendly fire is a fire that is intentionally started and remains within its intended place or purpose, such as a fire contained in a fireplace, stove, or furnace. Because the fire has not escaped or become uncontrolled, resulting damage is generally not considered a covered fire loss.
Example
A fire burning safely inside a fireplace is considered a friendly fire because it remains within its intended location. As a result, smoke damage to the inside of the fireplace or chimney would generally not be covered under a property insurance policy. However, if a spark from the fireplace escapes and ignites nearby furniture, the fire has moved beyond its intended boundaries. At that point, it becomes a hostile fire, and the resulting damage would generally be covered. A wildfire is another common example of a hostile fire because it is uncontrolled and burns beyond any intended area.
Classifications of Construction
Property insurance premiums are determined, in part, by the fire-resistive characteristics of the insured property. Buildings constructed with materials that are less likely to burn or contribute to the spread of fire generally present a lower risk of fire loss. As a result, these buildings may qualify for lower premiums than buildings constructed with more combustible materials. The fire-resistive quality of construction materials is especially important in areas with an increased risk of wildfire. In some cases, the level of fire resistance may affect whether an insurer is willing to offer coverage in the voluntary insurance market or whether the property must be insured through a residual market, such as a FAIR Plan. To evaluate fire risk and determine appropriate premiums, underwriters classify buildings according to their construction type. These construction classifications help insurers assess how likely a building is to catch fire, how quickly fire may spread, and how much damage may result from a fire loss.
| Construction Type | Description | Typical Uses |
|---|---|---|
| Frame | The building has a roof, floor, and supports made of combustible material, usually wood, along with combustible interior walls. | Private residences |
| Joisted Masonry | The building has exterior walls of masonry (stonework) or fire-resistive construction rated for at least 1 hour, combined with combustible floors and roofs. | Private residences and light retail buildings |
| Noncombustible | The building, including its walls, floors, and structural framework, is constructed of noncombustible materials, typically steel framing. | Warehouses and factories |
| Masonry Noncombustible | The building has exterior masonry walls, typically concrete block, with noncombustible floors and roofs. | Shopping centers and low-rise office buildings |
| Modified Fire-Resistive | The walls, floors, and roof are constructed of materials with a fire-resistive rating of at least 1 hour but less than 2 hours. | Mid-rise and high-rise office buildings |
| Fire-Resistive | The entire building and roof are constructed of reinforced concrete and steel and have a fire-resistive rating of at least 2 hours. | High-rise office buildings and parking garages |
Theft
Property insurance policies may handle theft losses in different ways. Some policies may exclude theft coverage entirely, while others may provide coverage depending on the specific type of theft involved. Theft is the broadest term and generally refers to any act of stealing property. This includes both burglary and robbery. Burglary occurs when property is taken from inside a premises, locked safe, or locked vault by someone who forcibly enters or exits the property. Robbery occurs when property is taken from a person's care, custody, or control through the use of force, threat of bodily harm, or actual bodily harm. Understanding the difference between theft, burglary, and robbery is important because property insurance coverage may vary depending on how the loss occurred and how the policy defines each term.
In some cases, property may be missing, but there is no clear evidence showing what caused the loss. This type of loss is known as a mysterious disappearance. A mysterious disappearance is different from theft, burglary, or robbery because the cause of the loss cannot be confirmed. There may be no evidence of forced entry, no witness to the property being stolen, and no indication that force or threats were used. Because the cause of loss is uncertain, property insurance policies may exclude coverage for mysterious disappearance unless the policy specifically provides coverage for that type of loss.
Unoccupancy and Vacancy
Certain property insurance policies may exclude or limit coverage based on the occupancy status of the insured property. Occupancy is important because buildings that are not regularly used or monitored may present a higher risk of loss. Unoccupancy refers to a property that still contains personal property but has no occupants. For example, a furnished home or business location may be unoccupied if no one is currently living or working there. Vacancy refers to a property that has no occupants and contains no personal property. A vacant building generally presents a greater risk because it may be more vulnerable to vandalism, theft, undetected damage, or deterioration. The Vacancy provision explains how coverage may be reduced, limited, or excluded after a property has been vacant for an extended period of time. In many property policies, this period is typically more than 60 consecutive days of vacancy.
Bailee and Bailor
A bailee is a person or organization that temporarily has possession of another person's property for a specific purpose, such as servicing, repair, storage, or safekeeping. Although the bailee has care, custody, or control of the property, the bailee does not own it. The owner of the property is known as the bailor. The bailor retains ownership while allowing the bailee to temporarily possess or handle the property for the agreed purpose. For example, when a customer leaves a vehicle at an auto repair shop, the repair shop is the bailee because it has custody of the vehicle for repair. The customer is the bailor because the customer still owns the vehicle.
An Insurance Story
The Nelsons take their work clothes to a tailor for alterations. While the tailor has possession of the clothes for the purpose of making the alterations, the tailor is considered the bailee because the clothes are in the tailor's care, custody, or control. The Nelsons are the bailors because they remain the owners of the clothes, even though the tailor temporarily has possession of them.