Putting the Policy Together
The Standard Fire Policy tends to be general in nature by
design. The policies are made up of the
general form along with uniform groupings of basic terms, conditions, and definitions
that need to meet the requirements of each policy issued. By using all the tools available, it is
possible to transform the basic policy to meet the needs of the consumer.
Many consumers have special circumstances that they wish to
address through the insurance they buy.
Their agents will typically modify the policy or add to it. The basic policy recognizes the need for
this since it provides that any other provision or agreement not inconsistent
with the provisions of this fire policy may be provided for in writing added
hereto, but no provision may be waived except such as by the terms of this
policy is subject to change. [1] Clauses and endorsements are added to the
basic policy to satisfy the particular needs of the consumer. The clauses and endorsements are attached to
the basic policy and become part of it.
Insurance agents do this so often that many of the additions and
modifications have become standardized and are, as a result, given to the
agents in printed form. Unique
situations may be able to be prepared using a manuscript
endorsement. These
endorsements must be submitted to the insurer for approval and rating.
Insurance companies prefer to simplify the writing of policies by
using standard forms that have been prepared for broad classes of property or
types of coverage. These forms will
include such things as definitions, clauses, and endorsements. Once attached to a policy, these take
precedence over any provision in the contract that may conflict with the
attached form or endorsement. Forms and
endorsements typically are dated the same as the policy, but they may also have
a later date. The dates on the forms or
endorsements are assumed to represent the latest meeting of the company and
insured, so they constitute the last agreement on the part of the parties
represented. The state insurance
departments must, of course, approve all forms and endorsements as well as the
policies.
The types of clauses that are available for use are
numerous. There are hundreds of
endorsements used to meet nearly every imaginable situation. Although every broker, agent, underwriter,
adjuster or large buyer of insurance should try to keep up on all that is
available, that would be a tall order.
Luckily, there are professionals at the insurance companies that are
able to advise, when necessary. Through
the use of these endorsements and other options, property owners can usually
obtain quality insurance to meet virtually every insurable need. The Standard Fire Policy is actually
anything but standard.
Policy forms
Each insurance jurisdiction will develop forms that become
standardized. This is necessary for
several reasons, but one of the primary ones is financial. It is always less expensive to have a
specific form that is used repeatedly in policies. Standardized forms also allow experience data to be collected
from the various companies, which is then utilized for rating purposes. When these standardized forms are attached
to the Standard Fire Policy, they make a complete contract.
The General Property Form
was designed for nonresidential property including stores, manufacturing
plants, churches and so forth.
Apartment buildings, hotels and motels use a different form called habitational properties form. The contents of offices are insured under a
form called office personal property forms. Other forms that are used to insure
non-dwelling forms include reporting forms
and builders risk forms. There are also forms for insuring
condominiums, cotton gins, farm property, petroleum property, and tobacco
curing barns. In fact a form can be
designed to insure virtually anything.
Since there are hundreds of preprinted forms, this course will not
attempt to mention all of them. We will
look at some of the more commonly used forms.
Residential Policy
Forms
Dwelling Forms
Most of the residential property in the United States is insured
under some form of the Homeowners Policy.
This makes sense because a major characteristic of this plan is that it
combines in one package policy both the dwelling/contents and the liability
coverage needed for the premises and personal acts of the insured.
The Homeowners Policy does have eligibility requirements. When a residential property does not meet
some minimum requirement or because the insured prefers specific selections in
their coverage, an alternative approach is needed. Before the mid-70s, one alternative was to attach a Dwelling and
Contents form to the Standard Fire Policy, but today the Dwelling Policy
Program is more likely to be used. This
accomplishes the same thing as the Dwelling and Contents Form but does so in a
form that is closer to the Homeowners Program.
Dwelling and Contents
Form
The Dwelling and Contents Form, as the name suggests, insures a
building and its contents when it is used principally for dwelling
purposes. This form completes the
Standard Fire Policy Contract. It
cannot be used for structures that are used for purposes other than dwelling,
such as manufacturing, farm purposes or multi-family housing (apartment
buildings, for example). Some
jurisdictions limit the dwelling to no more than one or two family
structures. It is important to note,
however, that this form may be used to insure contents even though the building
itself may not be eligible.
The dwelling or the contents could be insured alone. When both were insured, each was a separate
policy item. If the property contained
more than one structure, each building was a separate item. The building contents could be covered as
one item or could be separately insured according to the buildings that
contained them.
The intent of the Dwelling and Contents Form is not difficult to
understand, but borderline situations do tend to create problems. The general rule is that all equipment permanently
attached to the building is real property, which means it is within the
Dwelling Coverage. Although one might
assume that everything else would be contents, the Dwelling Coverage
specifically includes building equipment and outdoor equipment pertaining to
the services of the premises if the property belongs to the owner of the
building. The same equipment could also
be included in the contents, however.
While this probably wont affect an owner-occupant, it could affect an
owner-tenant.
Dwelling Coverage
Dwelling Coverage covers the main structure, but it also covers
additions to the building and building equipment and fixtures and outdoor
equipment that pertains to the services of the premises, as long as they are
property of the buildings owner. What
do we mean by building equipment, fixtures and outdoor equipment? They would include such things as furnaces,
air conditioners, built-in appliances (such as ovens or cook-tops), hot water
heaters, or light fixtures that are attached to the ceilings or walls. In fact, the common factor of these items is
the fact that they are attached to the building in some way. Simply being plugged in would not apply. Wall to wall carpet uses some special
considerations:
Is it
permanently installed?
Can it be
removed without damaging it?
Was it
installed in lieu of a finished floor?
Was the
installed carpet specifically part of a mortgage?
Trees, shrubs and other plants, including the lawn, are
specifically excluded from coverage. In
some cases, they may be covered under a special clause that is attached to the
policy. When this is done, the
insurers liability is often limited by a dollar amount for each tree, shrub
and plant. Some forms may allow the
insured to state at the time of purchase the amount of coverage they wish for
each tree, shrub and plant.
The main Dwelling Coverage usually has two optional extensions:
Ten percent of the face amount may be applied to detached
garages and other private structures located on the premises.
Ten percent of the face amount may be applied to cover
loss of rental value, which is loss of use.
This would apply not only to the dwelling, but also to any detached
garage or other structure if it has a rental value.
The extensions would not apply to structures used
for commercial, manufacturing or farming purposes. They also would not apply to structures that are
rented or leased to someone who is merely a tenant who has no connection with
the occupants of the primary insured dwelling.
This exclusion does not apply to a rented garage.
To put this in dollar perspective: on a $20,000 policy, the
insured may, at his or her option, apply up to $2,000 or any part thereof to
any rental value loss. There is a limitation
that states that not over 1/12 of the 10 percent ($166.67 on this example) can
be applied for each month during which the dwelling is untenantable. So, in this case, the insured could collect
up to $2,000 for damages to outbuildings and up to $2,000 for rental value loss
along with the actual damage to the dwelling itself. These extensions do not represent additional insurance. Rather they are part of the total insurance
purchased in the Dwelling and Contents Form (this would not apply to the Broad
and Special Forms).
These extensions are optional.
They can be exercised by the insured following a loss, but they do not
have to be. Obviously, if the primary
dwelling ate up the entire amount of the insurance, there would be no point in
exercising the extension option. It is
always important to remember that these extensions do not represent additional
insurance; merely a redirection of the insurance that already exists.
Contents Coverage
As the name suggests, Contents Coverage includes all household
and personal property that would normally exist with dwelling occupancy. Not everything is covered. Animals, birds, fish, aircraft, and motor
vehicles are specifically excluded.
However, equipment associated with occupancy, such as a lawnmower, would
be covered.
The Dwelling and Contents Form does not specifically exclude
business property, but it is usually considered excluded because the policy
states: usual or incidental to the occupancy of the premises. Since a business is not usual or incidental
to occupancy, an agent who has their business located in their home may want to
purchase special coverage for it.
Although there have been court cases on business losses within the home,
there have not been conclusive decisions.
It is better to purchase coverage and avoid the potential legal problem.
Like the Dwelling Coverage, the Contents Coverage has two
optional extensions available. Also
like The Dwelling Coverage, these extensions in the Contents Coverage are not additional
insurance; merely a redirection of existing coverage.
The insured may apply up to 10 percent of the contents
coverage on personal property to items that were not on the premises at the
time. This is limited to the United
States and Canada.
If the insured does not own the dwelling, up to 10 percent
of the amount of contents coverage may be used to cover improvements and
betterments made by the insured to the rented property. Most often this would be such things as
built-in bookshelves, new (attached) carpeting, and so forth.
When a renter does built-in improvements ownership actually
transfers automatically to the owner at the end of the lease. Until that time, the renter does still have
an insurable interest in them, however.
The Dwelling and Contents Form, in most states, includes the Extended Coverage Endorsement and the standard mortgagee clause.[2] However, while they may be part of the form
physically, that does not mean that they are in effect. This clause applies only if the declarations
indicate it and a premium has been charged and paid for it. The declarations would have to include a
reference to the mortgagee by name.
This is commonly done, so it is a convenience for the insurer to print
them on the Dwelling and Contents form.
Some of the other clauses included in the form include:
The loss
clause
The
electrical apparatus clause
The
inherent explosion clause
The
permission-granted clause, and
The
liberalization clause.
There may also be some others besides those we have listed.
The Loss Clause states
that any payment made does not reduce the amount of insurance. The policy is continuous in other
words. The face amount of the policy
remains the same following a covered loss.
The cost of this benefit becomes a part of the basic premium charge.
The Electrical
Apparatus Clause refers to electrical devices and appliances. This clause specifically excludes damage to
appliances and devices caused by excessive electrical current due to artificial
electrical phenomena, such as short circuits, unless a fire is the result, and
then only the loss caused by the actual fire is covered. Loss caused by lightning is covered.
The Inherent
Explosion Clause extends coverage to cover explosions that happen
within the dwelling or private structures from items that exist within the
buildings. This would include such
things as water heaters and furnaces.
Explosions that originate within steam boilers, steam pipes, and other
such items are specifically excluded.
Two conditions must exist for the loss to be covered:
1. The
explosion must occur within the building, and
2. The
cause must be a hazard inherent in the occupancy.
When explosion insurance is used in a business policy, there is
typically an additional charge unless the cost is somehow figured in the
published fire rates that were used to price it.
The
Permission-Granted Clause modifies lines 31 through 35 of the underlying
Standard Fire Policy. Although this
clause may not necessarily apply to vandalism, it does allow for the usual and
incidental use of the premises as a dwelling, provides for unlimited vacancy
and unoccupancy, and permits the insured to make alterations, additions and
repairs and to complete structures in the process of construction.
The Liberalization
Clause allows alterations that could be used to broaden or
extend a policy for no additional premium to automatically go to the benefit of
the insured. This eliminates the
necessity for insurance agents to endorse all outstanding policies every time a
minor change is made in the standard forms.
It is common for changes in forms, endorsements, rules, or regulations
to be made by rating organizations as they find necessary and filed with the
appropriate authorities. This clause
makes that process more manageable.
There will be other clauses besides those listed here.
Dwelling and Contents Broad Form
The Broad Form replaces the regular Dwelling and Contents
form. It incorporates all the usual
features and adds the perils of the Extended Coverage Endorsement. The coverage is expanded to provide for
smoke damage caused by fireplaces or heating and cooking units that are not
connected to a chimney.
Dwelling and Contents Broad Form adds specific perils: sudden and
accidental cracking, burning, or bulging of a steam or hot-water heating
system; vandalism and malicious mischief, burglars, damage to the premises;
falling objects; weight of ice or snow; collapse of the buildings; accidental
discharge, leakage, or overflow of water or steam; sudden and accidental
cracking or bulging of hot-water appliances; breakage of glass; freezing of
plumbing; sudden and accidental injury to appliances from artificially
generated electrical current.
Obviously, the list of added perils is extensive, but one of the most
meaningful additions is the inclusion of Replacement Cost Coverage.
Replacement Cost Coverage
Although Replacement Cost insurance can also be written as a
separate endorsement, as part of the Homeowners Policy, and in the Commercial
Multi-Peril Policy, it is best known as part of the Dwelling and Contents Broad
Form. The replacement cost applies to
the dwelling item only. Early forms
were called Depreciation Insurance
and some of your older clients may still call it that. The addition of the Replacement Cost
Coverage clause does basically expand the policy to include depreciation.
Unfortunately, consumers often assume that their fire policy will automatically
replace whatever is lost. It may not
occur to them that only the value of the item is replaced not
necessarily the item itself (unless they have purchased insurance to replace
the actual item). The insurers
rationale of actual cash value is sound, but the application of depreciation to
consumers can mean that the insured is unable to actually replace the items
lost in a fire. Few consumers would set
aside enough cash to make up the depreciation value. Therefore, it often makes sense to purchase replacement cost
(versus actual value) coverage.
The effect of buying replacement cost value is to modify the insuring
agreement of the Standard Fire Policy, substituting replacement cost for actual
cash value. All other provisions of the
contract remain the same.
Dwelling Buildings Special Form
The Buildings-Special Form is only applicable to the structure of
the building and not to its contents.
This type deviates from the tradition of naming covered perils. The coverage basically gives coverage for all
risks of physical loss except as hereinafter excluded to the described
property. Benefits are, of
course, subject to all provisions and exclusions in the contract. The exclusions listed will be similar to
those found in any all risks policy.
This all risks coverage and those similar to it provide the broadest
insurance available for dwellings. The
exact wording and provisions will vary depending on the jurisdiction.
This type of coverage is not widely purchased. Cost is probably the main reason for
this. All risks coverage either under a
separate form or as part of the Homeowners package is more expensive than is
named-perils coverage. It may also be
due to the use of Dwelling Policy Programs, which can give primarily the same
coverage.
Dwelling Policy Program
The Insurance Services Office has developed a set of uniform
dwelling forms to be used nationwide, which replaces the dwelling forms already
listed. The intent is uniformity. These
forms can be used as stand-alone policies.
They do not need to be attached to the Standard Fire Policy, except in
those states that may require it. All
dwellings other than farms or apartments with more than four families are
eligible. Even townhouses with four
units or less may use this program. The
structure may be rented, used by the owner, completed or under construction. Even mobile homes are eligible if they are
used at a dwelling on a fixed location.
Unlike the Homeowners Policy, which often excludes coverage for
an in-home business, the Dwelling Policy Program will cover it under specific
circumstances. The business must be a
limited service business with no more than two people in the operation at any one
time. This type of insurance is
commonly used for beauty or barbershops, real estate agents and insurance
agents who operate out of their homes.
Property used for the business is insured up to the stated limits, if
separately scheduled and rated.
The Dwelling Policy Program is made up of three forms that are
used with the Standard Fire Policy, providing coverage on dwelling buildings
and/or contents through five insuring agreements. It should be noted that there is no theft coverage included in any
of the five forms. Theft may be added
by endorsement.
Coverage A Dwellings
Coverage B Appurtenant Structures (10% of item A)
Coverage C Household and Personal property
Coverage D Rental Value
Coverage E Additional Living Expense.
In the Dwelling Policy Program the amounts of coverage, unlike
the Homeowners Program, are divisible, giving the various dwelling policies a
degree of flexibility.
Under Coverage A, the
Broad Form and the Special Form include the replacement cost provision and up
to 5 percent of the amount of dwelling coverage on trees, shrubs, and plants
with a limit of $500 per item.
Under Coverage C, there
is a supplementary coverage of 10 percent for contents away from the premises
insured. In all forms there is 10 percent
coverage for improvements. In the Broad
Form and Special Form it is an additional amount of insurance.
In Coverage D, there
will be applied limits, which is typically 10 percent of Coverage A, with not
more than one-twelfth of the 10 percent to be paid in any one month. In the Broad Form and Special Form, the 10
percent limit applies to Coverage D and Coverage E combined, but the
one-twelfth limitation does not apply. The
10 percent limitation can be increased by endorsement.[3]
Under Coverage E, there
will be applied limits. Additional
living expense is not found in the Basic Form, but it can be added by
endorsement.
Commercial Forms
Commercial property requires a form that is different in many
ways from the Dwelling and Contents Form, but it still serves the same
purpose. The General Property Form was initially used, although it is
not in general use now. However,
understanding how the General Property Form works is important to the
understanding of forms currently used.
The General Property Form designed to be attached to the Standard Fire
Policy and was used this way most of the time.
Three types of property were insured under this form: (1) buildings; (2)
personal property of the insured; and (3) the personal property of others
working under or with the insured. If
included, each type would have a specific amount of insurance with its own
coinsurance application.
Property Covered
Coverage
A - Buildings
This portion insures only the building that is listed on the
declarations page of the policy.
Included in this would be machinery, fixtures, and equipment that are
permanently part of the building and pertain to the service of it.
Coverage
B Personal Property of the Insured
Coverage B, since it relates in this case to commercial forms, is
the business personal property that is owned by the insured. The property must be usual to the occupancy
of the insured. An insurance agent
could not list mechanics tools as part of his business inventory. The contents are covered as long as they are
in the insured building and also when they are within 100 feet of the premises,
in the open, in vehicles, or in railway cars.
Coverage B also applies to any use interest in tenants
improvement and betterments even if not specifically listed, provided these
were installed by and at the expense of the tenant. The improvements are also subject to any applicable coinsurance
requirements.
Coverage
C Personal Property of Others
This coverage is provided for the personal property of others in
the care, custody, or control of the insured while in the insured building or
within 100 feet of the premises. This
coverage will have limitations ($2,000).
Liability policies uniformly exclude coverage of this type. It usually requires the insured to utilize
this section of the General Property Form.
The insurer will retain the right to either settle with the named
insured for the property loss or directly with the owner of the property.
An extension to this coverage (not additional coverage) is debris
removal following a loss by an insured peril.
It Doesnt Cover Everything
No insurance covers everything.
While some are very good, there is inevitably something that is
excluded. Unless the following items are
part of the business and for sale, they are excluded from coverage:
1. Animals
and pets.
2. Watercraft,
including motors, equipment, and accessories.
3. Outdoor
trees, shrubs, and plants.
4. Any
property covered by another contract of insurance.
Some items may be covered specifically in the declarations. The following items would have to be
specifically listed or they would otherwise be excluded from coverage:
1. Vehicles
designed for use on public thoroughfares.
2. Outdoor
signs.
3. Outdoor
trees, scrubs, and plants that were not for sale as part of the business.
4. Swimming
pools, fences, piers, docks, and roadways.
If the coinsurance applies, then the following property values
are not covered by the policy:
The cost
of excavations, grading, or filling.
Foundations
that are below the lowest basement floor or if there is no basement, below
ground level.
Pilings,
pipes, and drains.
Some items may be covered by endorsement, additional forms, or
clauses. When this is done, it is
necessary to be sure that the amount of insurance is increased to avoid any
coinsurance penalty.
Extensions of
Coverage
When a policy is written at 80 percent or higher coinsurance,
Extensions of coverage may be used.
Examples of Extensions of Coverage include:
Personal Property of Others.
Off-Premises coverage.
Newly Acquired Property
Personal Effects
Valuable Papers and Records
Outdoor Trees, Shrubs, and Plants.
Personal property of others
who are in the insureds care, custody, or control can be covered for up to 2
percent of the amount of insurance included for Coverage B, which is Personal
Property of the Insured or up to $2,000 (whichever is less). This is an additional amount of insurance,
but it would not normally be elected if there were coverage under C - Personal
Property of Others.
Off-Premises coverage
only provides a limited amount of coverage for certain types of real or
personal property while temporarily off the premises for cleaning, maintenance,
or repair. There is no coverage while
in transit or while on any property owned, leased, or operated by the insured.
Newly Acquired property
has a limited coverage of up to 10 percent of Coverage A Buildings. It does not exceed $25,000 for new buildings
under construction on the same premises or newly acquired buildings elsewhere
in the United States if intended for similar occupancy.
Newly Acquired Property coverage may be used to cover newly
acquired personal property as well as buildings. It will cover up to 10 percent of Coverage B
Personal Property not to exceed $10,000.
Both types of newly acquired property (buildings and personal
property) are limited to not more than ninety days from the date of
acquisition. Past 90 days it is no
longer considered newly acquired.
While Personal Effects
are located on the insureds premises, the insured may apply up to 5 percent
(not to exceed $500) of the amount of Coverage B to cover direct loss to
personal effects belonging to officers, partners, or employees of the insured
by a peril insured against in the policy.
Coverage B is coverage for personal property. If officers, partners, or employees are likely to have more than
$500 in personal effects, additional coverage should be purchased. It is not uncommon for employees to have
their own mechanic tools, their own laptop computer, or other expensive items
in use at work. Obviously, $500 would
not be sufficient to cover such a loss.
Business enterprises often have records that represent large
amounts of money. Valuable Papers and Records coverage
represents a very limited amount of coverage to reimburse the insured for the
cost of research in reproducing valuable papers or records that are lost to a
covered peril, most often fire. Since
the limit is again 5 percent, not to exceed $500, of the amount of Coverage B
Personal Property, many businesses would need to extend this coverage to a
higher amount. A company such as ours
that provides books and tests would certainly want to insure against the cost
of recreating the manuscripts, for example.
Outdoor Trees, Shrubs, and Plants
may be insured for up to 5 percent, not to exceed $1,000, of Coverage A
Buildings and Coverage B Personal Property. There is a limit of $250 for any one item. For any business that feels their outdoor
plants are somehow an important part of their business, additional coverage may
be desired.
The General Property Form also contains in Section IV a standard
coinsurance clause that becomes operational when a percentage is stated on the
declaration page and a rate reflecting that coinsurance is part of the premium
calculation.[4] It is standard to have a $100 deductible,
which applies to all listed perils. It
is applied separately to each building.
It would be applied separately to the contents in each building if the
policy did not also insure the buildings.
It would be applied separately to contents in the open as well. There would be $1,000 combined deductible
amount for losses arising out of any one occurrence. This is usually called an aggregate deductible.
The General Property Form will contain a list of the perils
insured against. The basic perils, like
the Dwelling and Contents Form, will be covered (fire, lightning, and
removal). The General Property Form will
also list the extended coverage perils.
However, this part applies only when a specific premium for extended
coverage is shown on the declaration page.
The General Property Form will include the Vandalism or Malicious
Mischief (V&MM) clause, which will require a specified additional
premium. The V&MM clause will contain
some of its own exclusions:
No coverage for building glass or glass on outside signs.
No coverage for theft, except willful damage to buildings
by burglars.
No malicious mischief coverage if the building has been
vacant or unoccupied beyond thirty consecutive days.
There will also be the general exclusions. These include artificially generated
current, nuclear reaction or contamination, increased cost due to ordinance or
law, loss caused by power failure, war risk, or flood.
How is the policy arranged?
There are three basic ways of arranging coverage: specific,
blanket, and reporting.
Specific
Coverage writes a definite amount of insurance on any one item of
property.
Schedule
Coverage is a variation of specific insurance. As a result, a number of risks of the same
type may be insured under one policy rather than issuing separate, specific
policies for each type of risk. Even
though it is scheduled coverage, it is still specific in nature.
Blanket
Coverage makes one amount of insurance apply to two or more items
that would otherwise be insured specifically.
Blanket coverage is often used where it would be difficult to separate
types of insured items.
Is your client adequately insured?
Over the past three or four decades we have seen inflation affect
our spending dollar. As we know, bread
is no longer fifty cents and gasoline is no longer under a dollar a
gallon. Things cost more today.
Clients who took out their insurance policies many years ago and
failed to update them are often underinsured.
While this may not affect them on smaller claims, should a catastrophic
claim occur, it can have serious consequences.
Insurance companies may be able to offset the effects of
inflation on policies by insisting on insurance to value or by requiring
coinsurance where appropriate. To help
prevent loss to inflation, there are two standard forms. In the Homeowners program, the Inflation
Guard Endorsement is available. For
some commercial property insured under the Commercial Multi-Peril Program, the
Automatic Increase in Insurance Endorsement is available.
These two forms do not necessarily apply to all types of
coverage. For example, if property is
insured as contents, the increased value provision may not necessarily
apply. Endorsements nearly always have
limitations. The original amount of
insurance purchased should represent the actual value of the items or property
insured. An endorsement seldom corrects
an undervalued policy satisfactorily.
Even so, inflation endorsements can help to offset inflation as long as
the original policy addressed appropriate levels of insurance and as long as
the original policy is updated on a regular basis.
Inflation endorsements have another benefit. By discussing with your clients the need for
inflation guards in their policies, it may make them aware of the effects of
inflation. By understanding what
inflation can do to their policies, they may be more likely to keep their
policies updated.