Liability Insurance
Chapter 5
Miscellaneous Liability Coverage
Miscellaneous property and liability insurance is a broad field. In this chapter aviation insurance, boiler and machinery insurance, glass insurance, credit insurance and title insurance will be covered separately from the others because there are some unusual features not found in other insurance contracts. One of the biggest challenges to this type of insurance is unlimited variety of exposures and coverage, so an agent must be familiar with dozens of contracts covering substantially different perils.
An agent's daily agenda may normally just involve automobile, fire and liability insurance needs of the clients, but it will also require their immediate attention to at least several other kinds of insurance exposures or losses. A policyholder may need a special "all risk" policy for jewelry and furs. Agents could be faced with a merchant's need for theft insurance or coverage for a private yacht or airplane.
Aviation Insurance
The first aviation insurance contract issued made use of the fire and automobile forms. The impact of airplane travel on life in the world is evident by the billions of miles flown every year. In terms of safety, there is no comparison with automobiles. But when accidents do happen, they are serious and well publicized.
There are thousands of airplanes and helicopters used by businesses and for personal uses. The increased use of aircraft is sufficient to label this the aerospace age. Other uses of airplanes/helicopters include rentals, crop spraying, advertising, cattle herding, pipeline patrols, firefighting, hovercraft, and many others.
Not all insurance companies sell aviation insurance, but several hundred insurance companies do. For many years nearly all aviation risks were written by insurance companies organized into underwriting groups, also known as syndicates. These syndicates account for a substantial part of the business, especially the protection for the large airline transportation and aircraft manufacturing companies. Some of the larger insurance companies now cover many planes and helicopters that are privately owned or used by business firms.
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For many years nearly all aviation risks were written by insurance companies organized into underwriting groups, also known as syndicates. |
The passage of the federal regulatory legislation such as the Civil Aeronautics Board and the Federal Aviation Administration have made mandatory safety measures that might otherwise be disregarded. Control is exercised with respect to the certification of pilots, and regulations covering aircraft flights in the United States.
With the cost of the aircraft itself combined with the liability limits carried on each plane, one might logically wonder if adequate insurance facilities exist. The Concord is valued at more than $50 million which is almost double the cost of the Boeing 747. The desired liability limits on an aviation policy can be as high as $300 million or higher which illustrates the large and increasing exposures in the aviation insurance field. There are insurance facilities that adequately handle most aviation risks. With the increasing risks and costs, adequate market capacity for aviation insurance often requires many insurers and reinsurers throughout the world.
Basic Nature
Aviation insurance is closely related to ocean marine and automobile insurance in that the aircraft owner needs both physical damage (hull) and liability insurance. They can be divided into two classifications:
1. direct loss, and
2. liability coverages.
The major difference would obviously lie in the perils covered. Aviation insurance perils are very distinct.
Another difference between aviation risks versus automobile risks is that aviation insurance involves primarily a total loss business, and much larger sums of money. A jet liner equipped to carry more than 300 people can easily cost $30 million or more. Direct loss insurance, depreciation, and obsolescence are factors of tremendous importance. Losses in many instances are much greater than and totally different from those attached to the automobile. One of the most important of the factors influencing aircraft losses is the physical condition, training and experience of the pilot. Although it is true that inexperienced drivers of automobiles are responsible for many accidents, incompetence of a pilot can be disastrous. Airplanes are equipped with warning systems to try to reduce pilot error of many kinds. Some of these warning systems include radar and ground proximity warning systems.
The liability peril for U.S. domestic passengers stems from the same source as that of automobile liability and is based on the accepted common-law rules of negligence. However, several international agreements hold many foreign operators of aircraft absolutely liable and sometimes even apply a limit of liability of about $75,000 per person. The debate that may go on for years with the infamous Flight 800 is whether or not the plane went down in international waters or the United States’ waters. Deciding this will determine the settlements given to the families. The destinations and the original departure country of these victims will also determine the settlement amounts. This is because the international agreements of liability and the ones imposed by the United States can be very different.
Because of the large settlement amounts being awarded to the victim's families and the peculiar nature of the risk, underwriting problems are usually handled by agents or managers who are specialists in aviation insurance coverages. The aviation insurance business has become an unusual blend of combining aspects of automobile, fire, liability, and inland marine insurance in a specialized insurance area which also has closed dependence on reinsurance availability around the world.
Airplanes are classified into five different categories by the plane's use.
1. Air Carriers: this applies to large scheduled and nonscheduled air carriers.
2. Private Business or Pleasure: this applies to individually owned aircraft.
3. Industrial Aid: this applies to corporate owned aircraft used to transport employees, executives and guests.
4. Commercial: this applies to charter aircraft operated by a fixed base operator.
5. Special-Uses: this applies to a number of risks involving unusual conditions, such as flying clubs, crop dusting, photography, law enforcement, and dealers.
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The aviation insurance business has become an unusual blend of combining aspects of automobile, fire, liability, and inland marine insurance. |
Types of Contracts
The following contracts and a comprehensive light plane policy which combines many of the below coverages are each discussed separately later in the chapter. The basic policy forms include:
1. Hull Policies: this covers the risks of loss or damage to the insured aircraft itself. This type of insurance is available on a specified-peril basis (or named-peril) or all-risk basis and may cover the plane while:
a) stationary only,
b) stationary or taxiing, or
c) on the ground or in flight.
Hull policies generally contain a deductible of five to ten percent of the covered value. Some policies are issued on a participation form in which the insured pays a percentage of each loss.
2. Aircraft Liability Coverages: this is written to cover public and passenger liability and property damage liability. The pilot needs protection against liability suits arising from operation or ownership of the plane. Basic aviation policies do not automatically cover the passenger bodily injury hazard, although that coverage can be purchased by endorsement. A pilot who flies planes belonging to others may buy liability insurance to cover the exposure while flying these planes.
3. Admitted Aircraft Liability Coverage: this provides for voluntary settlements to injured passengers.
4. Passenger Liability Insurance: this provides medical expenses regardless of liability. Medical payments coverage for the pilot and passengers is available with passenger liability insurance.
In addition to these, special forms are written for:
1. Hangar Keeper's Liability: covers the bailee's liability with respect to aircraft stored for safekeeping or repair. This coverage protects these operators from claims arising from losses that occur to planes left in their custody. This coverage is similar to the garage keepers' Liability policy.
2. Airport and Air Meet Liability: this provides protection similar to the owners', landlords' and tenants' forms generally written for property owners.
3. Product Liability: covers manufacturers and sales or repair organizations against liability claims attributable to defective products or works.
4. Aircraft Workers' Compensation and Employers' Liability
5. Aviation Personal Accident Insurance
6. Cargo Liability: covers legal liability for loss or damage to cargo or baggage. Insurers against liability for damage to another's cargo which is distinguished from property insurance covering the insured's own cargo. Cargo insurance is not classed as an aviation line, but is written by inland marine departments. Cargo liability is written as a separate form and covers the aircraft owner for loss or damage to merchandise for which the airline may be legally liable. Passenger baggage liability covers aircraft owners' liability for loss or damage to passengers' baggage.
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Cargo liability is written as a separate form and covers the aircraft owner for loss or damage to merchandise for which the airline may be legally liable. |
Aviation insurance makes a major distinction between ground coverages and flying coverages. Ground coverages include such things as hanger fire, windstorm, and theft perils, which covers the aircraft while the plane is not in motion. Flying coverages include accidental damage or crash insurance, public and passenger liability and property damage, covering the aircraft's actual takeoff run and continuing until it has safely completed its landing run.
The only aircrafts eligible for insurance by the insurance companies are ones licensed by the U.S. Department of Commerce. It has been said that the skill and experience of the pilot constitutes 90 percent of the insurer's risk, particular emphasis is centered on the qualifications and character of the pilots who will fly the insured planes.
Basic Policy Forms
Hull Insurance
The hull insurance policy provides coverage against direct loss or damage from the perils defined on the schedule of coverages attached to the policy. Policies are written on either specified-peril basis or an all-risk basis.
When a policy is written on a specified-peril basis, it may be arranged to include any or all of the following coverages. The following perils are similar to coverages under other property insurance contracts. Crash insurance is merely a different name for the same type of protection afforded by automobile collision coverage. The specified-perils can include:
1. fire,
2. crash insurance,
3. stationary land damage,
4. windstorm, and
5. theft.
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Crash insurance is merely a different name for the same type of protection afforded by automobile collision coverage. |
When a policy is written on an all-risks basis, the policy includes such perils as fire, crash damage, windstorm, earthquake, flood and every other conceivable risk which may damage the plane. The more normal all-risks hull coverages include:
1. all risks while the aircraft is not in motion,
2. all risks except while in flight, including taxiing, and
3. all-risks ground coverage extended to include all risks while in flight. This last form is the most comprehensive.
The usual exceptions are wear and tear, deterioration, conversion (taking without authority) by a person in possession of the aircraft and loss due to mechanical breakage or structural failure.
Fire is essentially a ground hazard. The insured plane is covered against fire from any cause, as well as against explosion and lightening, while not in flight. The fire hazard in aviation is particularly great not only because of the plane itself but also because of the conditions usual to the hangars in which planes are stored. There can be many causes of fires, which include backfiring engines, short circuits and the development of static electricity. All airplane fire rates are loaded because of the conflagration hazard. A hangar fire, once started burns furiously because of gasoline and the chances of saving planes stored inside are very low.
Windstorm is strictly ground coverage and covers no loss occasioned by flight, which is covered under crash insurance. The aircraft is covered while in the hangar or in the open for damage caused by hail, storm, rain, sleet, snow, earthquake, flood or water. Windstorm insurance is an essential coverage for airplanes. Planes are carried into the air on strong winds and completely wrecked. An airplane safely housed in its hangar may also be seriously damaged by collapse of the hangar.
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Windstorm insurance is an essential coverage for airplanes. |
Crash Insurance covers loss or damage that may occur to the insured aircraft by collision with the ground or another object during flight. The policy provides that the insurance company will pay the insured value of the plane, including its equipment, in the event of total loss. The rates for hull insurance are based on the assumption that the aircraft is insured for 100 percent of the value. No coinsurance clause actually appears in the insurance contract, but the practice of requiring insurance 100 percent to value is similar to the inland marine business. Total loss payments are reduced by depreciation. In the case of partial loss, the liability of the insurance company is limited to the cost of repairing the damaged property with material of like kind and quality.
Deductibles apply in a variety of ways and amounts. For light plans, five percent of the insured value often applies as a deductible if the loss occurs while the aircraft is in motion. For other losses, a dollar amount, such as $500, usually applies. For larger aircraft, five to ten percent deductibles of the insured value apply.
The participation form of a policy is offered to provide participation of the insured in all losses and at the same time limiting small claims. Instead of reducing the loss by a flat amount deductible, the participation form requires the insured to be responsible for a percentage of each claim, regardless of its size. The insured has two choices, they must decide whether:
1. it is more important to eliminate all partial losses up to a certain amount and collect everything in excess of that, or
2. to bear a percentage of all losses, which increases in dollar amount as the amount of the loss increases.
The use of deductibles and participation forms has the effect of modifying the rate in favor of the insured. The higher the deductible or the rate of the participation, the lower the premium that is charged to the insured.
Aircraft Liability
Public and property damage liability, with a few exceptions, afford essentially the same insurance protection as similar coverages in automobile insurance. However, the automobile insurance policy generally covers the passenger bodily injury liability hazard automatically, in aviation policies the insured chooses separate coverages for:
· bodily injury liability excluding passengers, and
· for passenger bodily injury.
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In aviation policies the insured chooses separate coverages. |
The bodily injury liability coverage excluding passengers does not cover:
· liability imposed on or assumed by the insured under any workers' compensation act or plan, or
· liability for injuries sustained by employees or pupils of the insured.
In the case of property damage liability coverage, the policy does not cover:
· property belonging to or in the custody of the insured or the insured's employees or pupils,
· property which is rented or leased and for which the insured is legally responsible, and
· property carried in or on the insured aircraft.
There is an additional insured clause similar to that found in the automobile liability policy, extending coverage to other persons while they are flying the plane of the insured. The policy also provides a flying-other-aircraft provision which protects the private owner insured while flying a borrowed plane. The policy excludes any liability in connection with racing, aerobatics, crop dusting, spraying, seeding, hunting, herding, or dropping objects from the aircraft.
Basic policy limits for bodily injury other than passenger liability are $100/300,000 because of the values involved and the possibility of catastrophic accidents. Property damage limits are often above $100,000. Passenger liability coverage is written with a standard limit of $5,000 per passenger seat, the pilot's seat is not counted. The Civil Aeronautics Board's (CAB) minimum requirements are $75,000 per seat for smaller aircraft, and $300,000 for major, commercial airlines. Although, many policies are written for multi-million dollar limits. The immense damage that a crashing airplane can do to both humans and property emphasizes the need for even higher limits than those mentioned. Single death or disability cases have been settled for amounts well over three million dollars. Multiple death claims from one aircraft accident have exceeded easily $150 million. Property damage requirements are, sometimes overlooked, but higher limits are needed there as well.
Admitted Liability Coverage
Admitted liability coverage is not common. However, it is sometimes purchased by business aircraft owners. This type of coverage is added by endorsement, and can also be referred to as voluntary settlement coverage. The coverage states that in the event of bodily injury to a passenger, the insurance company will offer a settlement on a definitely determined basis regardless of whether the insured is legally liable. In consideration of payments of the benefits, the claimant releases the insured from any further liability. If the injured passenger refuses to release the insured from any further liability, the policy will pay any legal claims for damages that may be established up to the amount of the benefits indicated by the policy.
Medical Payments
Medical payments are offered to the injured passenger without the necessity of establishing liability. This is similar to admitted liability coverage. However, under the admitted liability coverage the policy limits are high enough to pay for more than just medical costs and a release is required from the injured party. Whereas, under medical payments coverage a release is not required. Medical payments coverage not only covers the passengers, but the pilots as well. Coverage is written only in connection with passenger liability insurance. The limits for each passenger and the pilot are often $2,000 or more. Payments are made for reasonable medical and funeral expenses, as with automobile medical payments coverage.
Comprehensive Light Plane Policy
A special hull policy has been developed for light planes weighing under 10,000 pounds fully loaded to cover comprehensive risks, including a crash. The perils are specifically named, but the policy covers a wide variety of additional risks, such as earthquake, flood, denting, marring and so forth. Unlike the automobile comprehensive, this is usually not an all-risks cover. The insured is responsible for a portion of the crash loss in the form of participation and in return secures a considerably lower rate. A $100 deductible or more usually applies to all ground coverages except fire, theft and transportation and normally a deductible of $250 or more applies to in-motion coverages.
Aviation Premium Rates
Aviation insurance provides no common rating schedule for insurance companies showing rates applicable to different classes of aviation risks. This is a contrast to other property fields. Rates, therefore, are not standard and are to a large degree based on judgment. The final rate quotation is made only after the underwriter has been given an opportunity to appraise the planes:
1. physical condition,
2. age,
3. weight,
4. flying characteristics, and
5. value.
If the plane is used in connection with a business operation, the operator with good equipment, a good reputation and a good loss experience secures the most favorable premium rate consideration.
Premium rates are ordinarily quoted on an annual basis. Typical hull coverage premium rates may be one percent or more of the aircraft values. Dealers or business organizations that have an active turnover in the number of aircraft owned, may secure a policy providing the periodic reporting of risks, with premiums computed from the reports of the number and nature of the planes at risk. In some instances, crash insurance may be written based on number of hours the insured planes are flown. Most of the coverages for scheduled airlines are written on a reporting basis.
Boiler and Machinery Insurance
Most property insurance contracts exclude steam boiler and machinery losses leaving that protection to boiler and machinery policies (B&M). Insurance companies issuing boiler and machinery policies are among the oldest in existence. In 1860 a group of engineers in Hartford, CT formed an organization known as the Polytechnic Club, which in 1866 organized Hartford Steam Boiler Inspection and Insurance Company to locate latent causes of explosion and provide indemnity in case an explosion or a related loss occurred. The tradition of boiler and machinery insurance continued and today insurance companies provide extensive safety engineering and inspection services.
Insurance policies issued to many businesses upon boilers, turbines, electrical machinery and similar objects provide coverage for two classes of loss:
1. direct loss, and
2. indirect loss.
A single policy may cover boilers or machinery, or both. Another name for boiler and machinery insurance is Engineering, Breakdown and Power Plant insurance.
Examples of loss causes would include explosions, cracking pressure vessels, electrical short circuits (without fire), lack of proper lubrication, bursting flywheels, and many more. The size of loss is large, often $200,000 up to millions of dollars. The exposures continue to grow.
Direct Loss
Direct loss provides indemnity in the following cases:
1. damage to the insured's property, whether to the insured object or to other property,
2. damage to the property of others for which the insured may be liable,
3. liability for loss of life and injury to employees when the coverage is not provided by compensation laws of the jurisdiction, and
4. liability for loss of life and injury to persons who are members of the public. This does not include the employees.
The use of the words DIRECT LOSS are different from its use in other types of property insurance. This is because it includes several kinds of liability losses, like property damage liability, employers' liability and bodily injury liability.
Steam Boilers & Vessels - Direct Loss
Coverage for steam boilers is written on the basic boiler and machinery contract and provides coverage for loss or damage caused directly by the explosion, collapse or rupture of the insured boilers or vessels. The policy defines explosions as a sudden substantial tearing asunder of the boiler caused by the internal pressure of steam, air, gas, or liquid. Boiler insurance may provide limited coverage or broad coverage. Limited coverage would include coverage against explosion caused by internal pressure and broad coverage would include coverage against losses caused by the accidental burning, bulging, cracking or collapse of the boiler. The boiler policy is not confined to steam boilers. It can also insure numerous other vessels which may explode from internal pressure, such as air tanks, kettles, refrigerating and air conditioning systems, steam pipelines and water heaters.
An identifying schedule listing the objects covered, the pressure approved by the insurance company for each, the kind of boiler and other essential data is made a part of the insurance contract. The boiler policy does not cover explosions in the firebox or tubes of the boiler unless such explosions are optionally included in the schedules or the contract in endorsed to cover furnace explosions.
The boiler coverage excludes loss or damage to property of the insured resulting from an explosion caused by the burning of the structure containing the boiler, or loss or damage of the insured's property by fire. Fire damage to the property is covered by the fire policy insuring the property owned by the insured. The liability coverage includes the insured's legal liability for damage to the property of others resulting from an explosion caused by fire or from a fire caused by an accident which is covered under the policy. The policy excludes liability for loss or damage from the explosion of a boiler if any safety valve limiting the pressure in it is (with the insured's knowledge and consent) removed, inoperative or set at a pressure in excess of that rated in the policy schedule.
Engines, Electrical Machinery & Turbines
Coverage may be written to insure breakdown of engines that derive their power from steam, oil, or gas. Pumps, compressors and refrigerating machines are objects insurable under the form. The insurance contract covers damage caused by sudden and accidental breaking, deforming, burning out, or rupturing of the insured machine or any of its parts. Lack of lubrication, loosened parts, or crystallization of moving parts by fatigue can result in such losses. Flywheel insurance covers many types of revolving machinery, such as wheels, fans, blowers, dryers, and separators. Insurance for electrical machinery and turbines provides similar protection for breakdown losses. Motors, generators, transformers, switchboards, and circuit breakers are examples of this coverage.
Indirect Loss
There are four forms of boilers and machinery insurance covering indirect damage. Indirect loss provides indemnity in the following cases:
1. consequential loss to perishable materials when caused by accident to the boiler or other object insured,
2. business interruption under a use and occupancy form,
3. indemnity for indirect losses caused by an accident when there is no business interruption under the outage form, and
4. power interruption due to loss or power from a source off the premises.
Consequential Loss
This form protects the insured against spoilage due to interruption of heat, burnout of motors, interruption of power, or failure of refrigeration caused by an accident to the insured object. In types of risk where there is a danger of spoilage to perishable goods, the consequential loss may far exceed the direct damage caused by an accident. Losses of these types are not covered unless an additional premium is paid and the consequential loss endorsement is attached to the policy.
Use and Occupancy
This form covers any of the objects insured under power plant forms which are normally added to the direct damage policies by endorsement. In principle, the coverage is the same as that of other business interruption forms. Its purpose is the payment of continuing fixed charges and indemnification for loss or profits due to the shutdown as a result of the accident. The insurance contract may be written on either a stated basis (also referred to as valued) or an actual loss basis (also referred to as nonvalued). Use and occupancy insurance for power sources is often overlooked. The violence that attends explosions sometimes leads to an undue emphasis on direct damage and liability coverages and the neglect of the potential business interruption losses.
Outage
This form covers indirect loss for the period an insured object is out of use. Interruption of business is not a factor. Outage insurance differs from the use and occupancy insurance, which provides only for loss caused by the interruption of business. Outage insurance provides coverage for the payment of a stated hourly benefit for each working hour that the insured object is incapacitated because of an accident of the kind insured against. The insurance is only written by attaching an outage endorsement to the direct damage policy.
Power Interruption
This form covers an accident in a power plant off the insured's premises, which experiences an interruption of service. Power interruption insurance provides indemnity against loss arising from the total or partial deprivation of usable services furnished by a public utility. The policy is written separately from other boiler and machinery coverages and may include the service of electricity, steam, water, gas, or refrigeration. Two forms of coverage are available:
1. hourly indemnity for loss of use, and
2. property loss due to spoilage, which is paid on the basis of the actual loss sustained. Business interruption is not a factor to the establishment of a claim under either form.
Boiler and machinery insurance is very important for the loss-prevention and engineering services of the insurance company. About one-third of the premium dollar is devoted to inspection costs, exposure analysis, repair suggestions and other risk management techniques.
Types of Contracts
Boiler and machinery insurance is normally written in a separate contract. Increasing use of the multiple-line contracts for businesses has rapidly expanded its inclusion, normally on an optional basis, in such contracts as the special multi-peril policy, which will be discussed later in the chapter.
The standard provisions of different insurance companies are not identical word for word contracts. The basic policy is used for all power plant insurance, including the use and occupancy and the consequential loss forms, as well as direct damage coverages.
The basic policy is completed by attaching a number of schedules. Most of the newer contracts do not require the listing of separate objects, covering groups of pressure equipment and machinery for the generation of power. These groups covered are insured by blanket definitions. A common definition for accident is applied to most objects insured.
The standard provisions allow for six forms of coverage in the insuring agreements, with all but the bodily injury liability coverage being mandatory:
1. Coverage A: Property Damage: this section provides insurance for damage to the insured object, as well as damage to other property owned by the insured.
2. Coverage B: Expediting Charges: this section reimburses the insured's reasonable costs incurred in effecting the speediest possible replacement of the damaged property. These charges include expenses incurred for temporary repairs, for overtime work, or for rushing the transportation of material by an agency more expensive than would ordinarily be used. A limit for expediting charges is in place.
3. Coverage C: Property Damage Liability: this section defends the insured against claims and makes payment when liable for damage to the property of others caused by an insured accident.
4. Coverage D: Bodily Injury Liability: this section is the only optional coverage, but if included covers the insured against bodily injury to persons injured by an insured accident. The usual defense and settlement provisions are included. Liability under any workers' compensation law is not covered, but there is no other exclusion with respect to liability to employees.
5. Coverage E: Legal Expenses: this section covers the cost of defending liability claims, including interest on unpaid judgments, premiums on attachment and appeal bonds and witness and attorney fees. These costs do not reduce the amounts available for claim payments.
6. Coverage F: Automatic Coverage: this section provides protection for newly acquired objects similar to those described in the schedules. The clause requires written notice to the insurance company within 90 days after a newly acquired object is put in operation, and the premium is computed accordingly.
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The bodily injury liability section is the only optional coverage. |
Some insurance policies will exclude coverage D by endorsement with a reduction in premium, while other policies add this coverage for additional premium.
Boiler and machinery insurance is primarily a material damage coverage. The six coverages apply in sequence as needed. The policy limit is the maximum amount payable per accident. The immediate medical and surgical care provided by coverage D and the legal expenses and supplementary payments provided by coverage E are not subject to or deducted from this limit. The insurance company pays losses first under A, then B, and so one. If the losses under coverage A consume the limit, then nothing is available for B, C or D. Bodily injury liability provided by the boiler and machinery policy is considered as excess and noncontributing insurance when there is other liability insurance.
One important exclusion is consequential damage. Boiler or machinery damage may cause property spoilage from lack of power, light, heat, steam or refrigeration. These indirect losses are not covered by the basic policy. Consequential damage coverage may be endorsed on the basic policy or provided for by a separate insurance contract. Another exclusion is loss caused by business interruption. This loss is covered by boiler and machinery use-and-occupancy insurance.
Property damage and bodily injury liability coverage was standard in boiler and machinery policies for many years. In the last few decades coverage has been restricted, eliminated or made optional. The insured's general liability insurance covers the boiler and machinery liability hazard, except for property in the insured's care, custody or control. This part of the boiler and machinery liability coverage has been retained to fill the void in the general liability insurance contract.
The policy contract defines the term one accident to include all resultant or concomitant accidents, regardless of the number of objects involved, as long as these accidents are the outgrowth of a single general occurrence. If two or more objects are involved, the highest limit applying to any one of the objects governs. Large deductibles are commonly used. Separate deductibles may apply to direct and indirect losses, or a single one may be used for both coverages.
Glass Insurance
Glass insurance is not limited to just covering the ordinary window or plate glass. The comprehensive glass policy may also cover many special types of glass bricks and blocks, Thermo-pane, safety glass and other building glass. Stained glass set in leaded sections may be covered under a form that also includes marring, scarring, and scratches. Neon and glass signs may also be insurable under the comprehensive glass policy. Such signs are written on either as a deductible basis or on a full-coverage basis. The deductible varies. It can be up to $100 for each insured object, with a corresponding reduction in premium as the deductible increases.
Glass insurance covers the business use of glass in buildings and interiors for light, display and ornamentation. The growing use of large plates tends to concentrate substantial values. Glass is easily subject to breakage, especially when used in show windows. Riots, windstorms, explosions, strikes, runaway automobiles, accidental breakage or even deliberate breakage by vandalism are some the common hazards covered by glass insurance.
Policy Coverage
The comprehensive glass policy provides a coverage that is an all-risks insurance contract, with very few exceptions. Similar coverage is available in one of the special multi-peril (SMP) forms. The insurance contract pays the insured for all damages to glass, lettering, and ornamentation insured due to breakage of the glass or accidental or malicious application of chemicals. Scratching of the glass is not included. The insurance contract also provides three coverages for losses that may be incidental to glass damage:
· damage to frames and bars,
· installation of temporary plates, and
· removal of obstructions.
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There are only three exclusions in the glass insurance contract. |
There are only three exclusions:
1. fire,
2. war, including invasion, civil war, insurrection, rebellion, or revolution, and
3. nuclear or radioactive energy.
The multi-line package contracts now insure many glass exposures. Residence glass breakage is covered in the homeowners' policy and either automatically or optionally, limited glass breakage is included in the special multi-peril (SMP) policies for many businesses.
Broken Glass
The insurance contract provides that the insurance company will replace broken glass described in the schedule and any lettering or ornamentation insured under the policy. Rapid and efficient replacement service is one of the prime benefits of glass insurance for many insureds. Insurance companies can usually obtain service glaziers more quickly and even at a lower cost, than property owners can arrange for themselves.
Glass broken from a windstorm, expansion cracks, flying substances, the settling of a building, earthquake, or other accident is covered by the policy. Protection is afforded for deliberate breaks, such as those caused by a burglary, malice or vandalism. The insurance company may opt to pay for the replacement in cash. Once the insured replaces a broken plate, the insurance contract automatically covers the new plate and no additional premium is required.
Frames, Temporary Plates & Obstructions
The cost, which is not to exceed a certain policy limit determined by the insurance contract, is included for several incidental costs. Repairing or replacing window sashes contiguous to the insured glass with the like material is covered if this is made necessary by damage to or breakage from the insured glass. Coverage is also provided for the cost of boarding up or installing temporary plates made necessary by unavoidable delay in replacing the damaged glass. Removing or replacing fixtures or any other obstruction in order to replace the damaged glass is covered by the insurance contract, except for the cost of removing show window displays.
In the event of a loss, immediate written notice must be given either to the insurance company at its home office or to their authorized agent. Such notice gives the insurance company the opportunity to investigate the loss and possibly to use their subrogation rights against persons responsible for the loss. The insured is further required to make reasonable efforts to preserve the glass for salvage and to prevent further loss or damage.
Credit Insurance
Credit insurance protects eligible types of businesses from excessive credit losses due to debtor insolvency. Legal insolvency or bankruptcy of a debtor is not required for a claim. Claims may occur when a debtor leaves town quickly or hides from the debt. Claims can also occur if a sole debtor dies, a sole debtor is declared insane and so on. The protection is available to manufacturers, wholesalers and service organizations but not to retailers. Credit insurance does not extend to normal credit losses. The normal loss percentage is determined by the insured's experience or that of a similar business.
Most credit insurance contracts are written under the optional collection form. At the insured's option, past-due accounts are turned over to the insurance company for collection. The insurance company charges a collection fee for this service. If the insurance company fails to collect the accounts and the debtor is insolvent the insurance company must pay the insured. Credit insurance normally covers all accounts of the insured although it is possible to cover only particular account classes or even just a specific account.
Most businesses insure their physical property assets against a loss caused by perils such as fire or windstorm. Credit insurance is surprisingly under-used by businesses to insure their assets against uncollectible accounts and bad debts, in spite of the records number of bankruptcies seen in the last few years. This year, it is expected that people will file for bankruptcy at an all-time high. If a business does not collect on enough debts, the business itself could fail, thus not be able to pay their own debts. Most businesses rely on selecting the customers to whom they extend credit and writing off normal bad debts as a part of operating expenses. This is not always the wisest choice for the businesses that have a much greater exposure to larger credit losses.
Credit insurance is a contract under which the insurance company covers the insured against abnormal credit loss occasioned by the insolvency of debtors. The percentage of most insureds purchasing this kind of insurance are wholesalers. However, as stated before, it is available to manufacturers or distributors with annual sales of $500,000 or more.
In the early days of credit insurance, the question was raised as to whether it was a contract of insurance or a surety guarantee. The courts have held, though, that credit insurance agreements are contracts of insurance for two reasons:
1. the credit risk is not based on the individual standing of the primary debtor but rather on the credit experience of a large group of debtors belonging to a certain class, and
2. in credit insurance, the policy may be obtained without any knowledge or consent on the part of the debtor, rather than as an accommodation to the debtor in securing credit.
Foreign or Export Credit Insurance
With increased improvements in transportation and communication, the world seems to be getting smaller, thus international business is growing. One of the barriers is the availability of credit. Starting in the early 1960s, the United States began to encourage the expansion of exports with the first large-scale U.S. foreign or export credit insurance plan. The Foreign Credit Insurance Association (FCIA) was established.
The foreign or export credit insurance plan differs in some ways to the credit insurance contracts already discussed. Foreign credit was designed as a credit guarantee plan for exports and often included coverage for losses from nonpayments due to political as well as commercial risks. Insolvency and default which result in the lack of payment for goods and services sold in foreign markets are the major perils insured.
The Foreign Credit Insurance Association (FCIA) is a working partnership between the private insurance industry and the U.S. government-owned Export-Import Bank of Washington (Eximbank). Insurance companies bear the normal commercial credit risks of the buyers' insolvency, while Eximbank covers such hazards as the inconvertibility to dollars of local currency, war, revolution, expropriation and other political risks.
Short-term credit insurance lasts up to six months whereas medium-term credit insurance lasts six months to five years. They are insured for up to 85 percent of losses due to commercial risks and up to 95 percent for political risks. The insurance company desires the exporter to have a vested interest in the potential losses. The exporter must furnish credit information to FCIA on the purchasers. The normal approximate cost of the commercial risks is less than one percent of the value of the goods, depending on the:
· length of credit,
· the type of risks insured, and
· the country to which the goods are being sent.
Accounts Receivable Insurance
A firm may be unable to collect all outstanding accounts following the destruction of its records. Insurance is available to cover this loss plus additional expenses that may result such as extra collection expenses, cost of reconstructing records and interest on money borrowed to offset impaired collections. The policy contract is written as all-risk coverage. The exclusions include:
1. dishonest acts of the insured, officers, directors or partners,
2. loss caused by manipulation of records to conceal another dishonest act,
3. loss due to bookkeeping, accounting or billings mistakes,
4. loss from electrical or magnetic injury of electrical recordings, except by lightening,
5. nuclear and war hazards, and
6. loss where proof is entirely dependent on an audit or inventory computation.
Valuable Papers & Records Insurance
A business can cover inscribed documents and records, including books, maps, films, drawings, abstracts, deeds, mortgages, media for electronic data processing and manuscripts against all risk, either on a scheduled or blanket basis under a valuable papers and records insurance policy. Property covered on a schedule basis is written for an agreed amount while property on a blanket basis is written for its actual cash value. The exclusions are those found in inland marine policies, plus dishonesty of the insured, partner, officer or director. Irreplaceable property is excluded under blanket coverages but covered when scheduled. For libraries, loss by failure of borrowers to return books or other documents is excluded. Rate decreases of 10 to 40 percent are allowed if particular types of safes or vaults are used.
Title Insurance
Perils Insured
The peril covered by a title insurance policy is loss growing out of undiscovered defect in the title to the insured property. The insurance contract guarantees the title search to a purchaser, mortgagee or other interested party covering the insured against loss arising from any undiscovered defects in existence at the time the policy was issued.
In contrast to other forms of insurance, title insurance looks backwards for the source of the claim rather than forward. The usual insurance contract covers loss growing out of the happenings of some unfavorable contingency subsequent to the issuance of the policy. Title defects which may arise following the issuance of a title policy are not within the scope of the coverage. To support a claims, the defect must have been in existence and undiscovered when the policy was issued.
Is there a need?
The term real property refers to land and to rights issuing from the possession of land. Title to real property may be acquired in a number of ways, the more common being transferred with the consent of the owner, by will and by descent regulated by statute. To secure title to the rightful owner, the law sets up certain formalities governing transfers which must be followed with in detail, otherwise the transfers may be considered defective.
The Title Insurance Company
Unlike other insurance companies, title insurance companies need to investigate local legal records which causes most of them to confine their activities to a limited territory. Loss ratios are very small, less than five percent of earned premiums because one half of the premium dollar is devoted to the title search and the abstract. The cost of defense also takes up a substantial portion of the premium dollar.
Since the abstract of title is the basis for the contract, title companies have built up and maintained up-to-date records for the real estate of the territory in which their operations are conducted. These records are referred to as an abstract plan and this eliminates the necessity of making a complete search of title every time a transfer is made. The writing of a new policy on a property formerly insured involves only a reference to the records covering changes affecting the issuance of the last policy.
Title insurance contracts are not uniform at all, but the usual forms issued to owners and mortgagees are alike in certain essentials. The insuring clause provides coverage to the insured, heirs, and devisees, subject to an indicated limit:
· by reason of any defect of the title of the insured to the estate or described interest,
· by reason of the unmarketability of the title of the described insured, or
· because of liens or encumbrances (burden with legal claims or claim on a property) at the date the policy except for those specifically excluded.
The schedule describing the subject matter of the insurance sets forth:
· the estate or interest of the insured,
· a description of the property whose title is insured, and
· the deed or other instrument by which the title or interest is vested in the insured.
A second schedule sets forth discovered defects that are not within the scope of insurance coverage.
Title Insurance Contract Provisions
The final section of the contract contains the conditions and limitations of the policy between the insurance company and the insured. Assignment of a title policy is not normally permitted unless the policy is held by the owner of a mortgage or other encumbrances, in which case the contract may be transferred to an assignee of the insured. Even when permitted, the only safe method for obtaining adequate and full protection in the case of the transfer of equity is to secure a new policy or to have the current policy brought up to date.
When a claim is settled by the insurance company, the insurance contract provides that the insurance company shall be entitled to all subrogation rights and remedies which the insured would have had in respect to the claim. The insured is obligated to transfer these rights to the insurance company and to permit the insurance company to use the name of the insured in any necessary action in connection with recovery or defense.
Title insurance defends the insured against all actions or proceedings founded on a claim of title or an encumbrance prior to the policy date. The insurance contract then sets forth in some detail the conditions under which loss may arise such as action of ejectment, dispossession or eviction founded on a claim of title, a lien, or an encumbrance.
In order to recover under a title contract, the insured must show that a loss has actually been sustained. One of the following situations must occur:
1. When the insured is without the title yet, the measure of damage under a title insurance contract normally would be the purchase price.
2. When the title actually passes but a lien is discovered after the fact, the measure of damage is the cost of discharging the lien.
3. When the defect is in the form of an encumbrance, the measure of damage is the difference between the value of the property encumbered and its value with the encumbrance. Arbitration is used to settle cases of disagreement as to damage amounts.
The title insurance contract is personal and does not follow the property. It is normally perpetual. However, sometimes the coverage is limited to 25 years. When the insured property is transferred, the insurance terminates and if the new owner desires coverage, a new policy is issued. Premiums are paid in a single premium payment at the time the policy is written and issued, and no further payments are required during the term. The cost varies by location, type of policy, amount of insurance, and other factors.
Group Title Insurance
A group title insurance policy is used for the convenience of large users of title policies. Life insurance companies and mortgage companies are issued a master policy with certificate indicating each risk to be covered. The group policy has particular appeal for the mortgagee who wants to know the type of coverage on every risk but who does not want to examine a number of different forms or policies.
Special Multi-peril (SMP) Program
Early contracts of the special multi-peril program were for mercantile properties, including retail and wholesale establishments. Special multi-peril (SMP) contracts also became available for businesses whose primary function was to provide services rather than goods.
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An outstanding feature of the SMP contracts is the provision of property and liability coverages in one policy. |
An outstanding characteristic of these types of policies is the provision of property and liability coverages in one policy. Normally, these coverages are mandatory and include both real and personal property. The SMP policies are a combination of the package and schedule approaches to insurance. The basic package includes some fire and liability insurance, but the insured optionally selects other coverages, such as theft, business interruption, boiler and machinery, glass, valuable papers, and other miscellaneous perils. The policies include either named property or all-risks perils. The basic liability form is not comprehensive, but the limitation of coverage to specified premises and only incidental operations can be changed to comprehensive general liability coverage. Combined single limits, without a separate per person limit, apply on a per occurrence basis and on an aggregate basis for bodily injury and property damage liability, which includes premises, protective, and products exposures.
Simplified SMP Package
In 1977 a new simplified SMP package was adopted to eliminate the duplicate coverages that had developed in the many separate policies in proving coverage of business personal property. The SMP uses a policy jacket in a booklet form of the declarations, insuring agreements and general provisions common to all but a few contracts. To this a form is added with basic conditions and definitions (MP-00-90) and a form to insure buildings (MO-00-10) and personal property (MP-0012) on a named peril basis. Similar forms can be used to broaden the coverage to all-risks coverage for buildings (MP-00-13) and for contents (MP-00-14).
The special multi-peril contracts can now be used for almost any type of commercial or institutional operation. The only exceptions are farms, motor vehicle businesses, bowling alleys, rooming houses, apartment dwellings with fewer than three units and very large business properties which may qualify for a special plan for highly protected risks. The most important addition is eligibility of the SMP for contracting risks.
A revised manual of rules is divided into five parts:
1. general policy rules
2. rules for the four specific coverage areas of property
3. casualty
4. crime
5. boiler and machinery
Policy term of one, two, or three years are permitted.
An alternative to the SMP for many small and medium sized businesses of apartment, office and retail store types is the business owner’s policy (BOP) which has been available since 1976. The business owner’s policy (BOP) combines property and liability exposures. If differs from the SMP by including:
1. More limited eligibility, specified types of businesses with a smaller building size and occupancy area,
2. A more fixed package of coverages, with somewhat less flexibility in choosing limits and coverages,
3. Broader protection through the use of several automatic provisions for replacement cost coverage and the absence of coinsurance requirements, and
4. A more readable style of contract, replacing the 165 lines of the old standard fire contract with revised format and wording.
Eligible risks are described to include only buildings classified as apartment buildings not more than six stories high and with no more than 60 dwelling units, office buildings not higher than three stories nor exceeding 100,000 square feet, and mercantile buildings not over 7,500 square feet in area. The insured under the BOP contract makes relatively few choices of coverage. Two alternative forms are used for property coverages:
· Standard for (BU-0001) insuring named perils
· Special form (BU-0002) insuring all-risks
The insured selects a full replacement value for insurance on buildings and/or its contents, which like the homeowner's policies then automatically includes much additional coverage for a package of protection with an indivisible premium. Loss of income and rather high liability coverage are also built into the BOP.
Premium rates for the BOP package are based on an indivisible premium for the basic coverages. As compared with costs of individual contracts for fire, theft, liability and other perils, these rates provide savings similar to those of the SMP packages.
End of Chapter 5