Commercial Property Coverage Guide, 6th Edition

George Krauss, Donald S. Malecki, Susan Massmann

• Verlag: The National Underwriter Company
• Jahr: 2015
• ISBN:
  9781941627488
• Thema: Business
• Thema: Insurance

This newest edition of the Commercial Property Coverage Guide includes expert coverage analyses of ISO and AAIS commercial property forms. This unique resource also addresses MSO commercial property programs, as well as certain provisions commonly offered by individual insurance carriers. Moreover, in addition to analyzing coverage language, the author explores other commercial property issues, including: » Chinese drywall » Green Building concepts » Marijuana manufacturing and distribution » Income disruption insurance The newly revised and fully updated Commercial Property Coverage Guide, 6th Edition provides up-to-date insights on these vital topics: » The Insuring Agreement: Covered and Not Covered Property » Additional Coverages, Coverage Extensions, and Optional Coverages » Covered Causes of Loss: Named Perils Forms » Special Causes of Loss Form » Conditions » Builders Risk » Business Income Coverage Forms » Other Coverage Forms » Commercial Property Endorsements Plus—You receive expert analysis of… » The Commercial Properties Program of ISO, AAIS, and MSO » E-Issues under the Building and Personal Property Coverage Form » Miscellaneous Commercial Property Coverage Issues

Chapter 1

The Insuring Agreement: Covered and Not Covered Property

Section A. Coverage

Apart from the policy’s declarations page, which identifies who is covered (named insured), the insurer providing the coverage, the agent of record, the period of coverage, the nature of covered property, and the covered causes of loss (perils), the first place one looks in determining coverage is the insuring agreement. It is the insuring agreement that is discussed first when determining coverage under an insurance policy. Known also as the broad grant of coverage, the insuring agreement is where the insurer pledges, in broad terms, not only the nature of the loss to be covered—direct physical loss or damage—but also the statement that coverage is to apply to certain covered property from any covered causes of loss. What needs to be addressed, following analysis of the insuring agreement, is the nature of covered property and, of course, the property not covered. Once that has been established, it is important to discuss the meaning of “direct physical loss or damage” and the causes of loss or damage covered and not covered.

What Is Direct Physical Loss or Damage?

For as long as the insuring agreement of property policies has applied to direct physical loss or damage it seems that defining what this phrase means would not be difficult. The problem, of course, is that the meaning of direct physical loss or damage is not often sought in a vacuum but, instead, dependent on the facts of each event. In a vacuum, the contractual obligation to pay for direct physical loss or damage to covered property means that the policy responds to loss or damage directly caused by an insured peril (or covered caused of loss).

Directly caused means there is a causal relationship between the event immediately responsible for the loss or damage (an insured event such as fire, theft, vandalism, or windstorm) and the damage done to property that is included within the policy meaning of covered property (building, structure, or business personal property). For example, high winds in a thunderstorm blow shingles off a roof—that damage is directly caused. Contrast that to the same storm knocking out power to the building, allowing refrigerated chemicals to spoil. That damage—to the chemicals—is consequential. The cause of the loss was not the wind but the heating of the chemicals. If loss or damage is not direct, then it is consequential; it is the distinction between the two that dictates whether damage to property is covered. (There are endorsements and coverages for some consequential losses—see Chapter 13, Commercial Property Endorsements.)

While the meaning of direct physical loss or damage in a vacuum may be helpful, when coverage is not disputed and in making one’s argument for or against coverage, much, as mentioned, will hinge on the facts. In that vein, this insuring agreement can be very troublesome.

Physical loss is not synonymous with damage or physical damage. Too often, when reference is made to this insuring agreement, physical loss is not mentioned as if it does not exist. It does exist, and it is different from physical damage. A case that appears to clarify this matter is Manpower, Inc. v. Insurance Co. of the State of Pennsylvania, No. 08C0085, 2009 WL 3738099 (E.D. Wisc. Nov. 3, 2009), which involved a dispute over a partial collapse of an office building in Paris, France. The question in dispute was whether the named insured suffered a loss within the meaning of the policy, which covered “all risk of direct physical loss of or damage to covered property.” The named insured argued that the collapse rendered its property physically inaccessible and therefore resulted in a direct physical loss. The insurer contended that the named insured did not sustain a covered loss because the collapse did not physically damage, move, or alter the property in any way.

The court rejected the insurer’s argument that a peril must physically damage property in order to cause a covered loss. The policy covered physical losses in addition to physical damage, explained the court, and if a physical loss could not occur without physical damage, then the policy would contain surplus language. The court said that a contract must, where possible, be interpreted so as to give reasonable meaning to each provision without rendering any portion superfluous. Thus, the court added that direct physical loss must mean something other than direct physical damage. Indeed, the court said that if “direct physical loss required physical damage, the policy would not cover theft, since one can steal property without physically damaging it; and ISOP did not contend that the policy did not cover theft.”

Interestingly, Ward General Ins. Services, Inc. v. Employers Fire Ins. Co., 114 Cal. App. 4th 548 (Cal. Ct. App. 2003) involved loss of stored computer data not accompanied by loss or destruction of the storage medium—a loss not covered by the policy. The court gratuitously explored the meaning of direct physical loss versus damage to covered property without reference to direct physical damage, even though this was not raised by the named insured.

Specifically, the court explained that in considering the phrase direct physical loss or damage to covered property, it wondered if this phrase should be interpreted to mean that coverage is afforded both for “damage to covered property” and for “damage to covered property, whether the damage is physical or nonphysical, direct or indirect.” The court stated that it did not adopt this interpretation because it constituted a strained and clumsy meaning—not an ordinary and popular meaning.

The court went on to say that most readers expect the first adjective in a series of nouns or phrases to modify each noun or phrase in the following series, unless another adjective appears. The court offered the following example: If a writer were to say, “The orphanage relies on donors in the community to supply the children with used shirts, pants, dresses and shoes, the reader expects the adjective ‘used’ to modify each element in the series of nouns, ‘shirts,’ ‘pants,’ ‘dresses,’ and ‘shoes.’ The reader does not expect the writer to have meant that donors supply ‘used shirts,’ but supply ‘new’ articles of other types of clothing.” Thus, the court concluded, “We construe the words ‘direct physical’ to modify both ‘loss of’ and ‘damage to.’”

Courts have ruled on a variety of losses that do not meet the criteria for being considered direct physical loss or damage. In Source Food Technology, Inc. v. U.S. Fidelity and Guar. Co., 465 F.3d 834 (8th Cir. 2006), the court held that there was no direct physical loss to property when a U.S. embargo on Canadian beef due to mad cow disease prevented an insured from receiving beef products needed for its business. The particular beef for the insured’s shipment was not contaminated.

In Port Authority of New York and New Jersey v. Affiliated FM Ins. Co, 311 F.3d 226 (3d Cir. 2002), plaintiffs argued that asbestos contamination and expenses incurred due to the abatement of asbestos-containing materials constituted physical damage to structures.

The lower court determined that physical loss or damage could be found only if the imminent threat of the release of asbestos existed, or if an actual release occurred and resulted in contamination that resulted in eliminating or destroying the property’s function. Just the presence of asbestos was not enough for coverage to apply.

The appeals court said that “unless asbestos in a building was of such quantity and condition as to make the structure unusable, the expense of correcting the situation was not within the scope of a first party insurance policy covering ‘physical loss or damage.’”

Caused by versus Resulting from

The words caused by refer to the proximate cause. The textbook definition is “the unbroken chain of events from the cause to the result.” A legal definition of proximate cause, taken from Black’s Law Dictionary, Fifth Edition, is “that which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces injury, and without which the result would not have occurred.” A simplified example is when lightning strikes a building, which causes a fire, the fire in turn produces smoke damage, with further damage occurring when the sprinklers are activated. Here, the cause that set the result into motion was lightning. As long as the proximate cause of loss is a covered cause, the resulting loss should be covered. Sometimes there can be two causes converging on covered property, one of which is covered and other not covered. In such a case, it is the efficient proximate or predominate cause that dictates whether coverage applies.

The words resulting from refer to ensuing loss. If, for example, a policy excludes direct physical loss or damage by mold, and mold is created following defective construction (also excluded) that allows water to seep through the walls, there is no coverage. Simply stated, damage resulting from a covered cause would be covered by a resulting loss provision, whereas damage resulting from an excluded covered cause remains excluded. Where reference to resulting loss can get complicated is when an exclusion makes an exception to an ensuing loss not otherwise excluded. There are a number of such ensuing loss clauses in the causes of loss forms. This is a complex subject in part because of the number of disputes and litigation this subject has generated over the years, particularly in relation to builders risk policies. Also, policy provisions dealing with ensuing loss can vary and so, too, can the issues and results.

Section A.1. Covered Property

The BPP form covers an insured’s property exposures; there is no liability coverage under the policy. Even what appears to be a type of liability coverage—coverage for the property of others in the insured’s possession—is first-party property coverage. It is not the insured’s liability for damage to property of others that is covered under the policy, but property coverage for a specific class of property—property of others on the insured premises. This excludes any coverage for loss of use claims arising out of loss or damage to property of customers, employees, or invitees.

The following three types of property are included under the BPP form:

1. building

2. the named insured’s (your) business personal property

3. personal property of others, in
certain circumstances

Coverage must be selected on the policy declarations page. A limit must also be shown in the declarations for that type of property to be covered; for example, the insured may carry $1,000,000 in building limits, $200,000 in business personal property limits, and $20,000 for property of others. The policy can be written to cover only buildings or only contents (business personal property); property of others coverage must also be separately stated on the declarations except when the property is leased under contract.

This section of the policy (A. Coverage) contains a provision (A.1) that describes covered property and another section (A.2) that describes property not covered. In policy terms, covered property means the type of property described in Section A.1., and limited in A.2., Property Not Covered, if a limit of insurance is shown in the declarations for that type of property.

Section A.1.a. Building Coverage

The BPP form covers the buildings and structures shown in the declarations. For that reason, careful underwriting requires more than a street address to describe an insured’s premises. An appropriate statement might be “The premises at 500 Main St., the principle building, two maintenance sheds, a processing pool (pools are structures), and a garage.”

A tenet of insurance contract interpretation is that words and phrases in insurance policies are governed by their common dictionary definition unless otherwise specifically defined within the policy. The BPP form contains only three defined terms: fungus, stock, and pollutants. Therefore, these terms have the meaning that is specifically given to them in the form; all other terms will be given a common usage meaning. In the absence of a policy definition, if there is a common usage meaning that is more favorable to the insured than the meaning put forth by the insurer, the insured will be allowed the more favorable definition.

Building means the building or structure described in the declarations. (It is important to keep in mind here that in some of the policy provisions, the word building does not also include structure.) As neither building nor structure is further defined in the policy, a common meaning will be implied. Inasmuch as the building or structure must be described in the declarations, not much argument can arise regarding what is a building or structure in terms of policy interpretation. The building or structure described in the declarations is the covered item of property. The issue is when there might be multiple buildings at one address; all need to be described separately in the declarations.

However, the term structure is broader than the term building, and some items that might not readily suggest themselves as buildings could be named in the declarations, thereby affording coverage. These items might include, among others, swimming pools, garages, solar arrays, wind turbines, or semi-permanent items such as a wooden stage floor covered by a tent that is used for events at a private club. The important point is that such items be listed in the declarations. Failure to list all structures for which coverage is desired will result in no insurance recovery on loss to undeclared structures.

Some confusion can arise regarding the meaning of the phrase “covered property at the premises described in the declarations.” Must the covered property be described, or just the premises? The Supreme Court of Montana tackled similar language in Park Place Apartments, L.L.C. v. Farmers Mut. Ins. Co., 247 P.3d 236 (Mont. 2010).

Following a heavy snowfall, Park Place Apartments’ carport collapsed and buried numerous vehicles. Farmers Mutual denied the claim, stating that the carport was not listed separately on the declarations page of the policy. Park Place argued that, under the plain language of the policy, all buildings and structures at the address listed on the declarations page were covered property at the premises.

The declarations page provided space for listing locations, building numbers, and descriptions of the buildings. Park Place asserted that “the insured premises are defined as the property address, and that in any case, the limit of insurance for the apartment building included the carport.”

The court said the insurer’s flawed logic stated that “the phrase means that coverage is limited to the buildings and structures described in the Declarations, as opposed to buildings and structures at the premises described in the Declarations.” The court stated that the insurer seemed to ignore “at the premises” in the definition of “covered property.”

The court held that the insured’s interpretation—all buildings and structures at the described premises are covered—was more reasonable and that the insurer’s interpretation could lead to an ambiguity.

Nonfunctioning Water Tower as Covered Property?

An insured hotel suffered extensive fire damage. On top of the hotel was a nonfunctional water tower valued at about $40,000. The insurance company adjuster believed the cost of the water tower should not be included in the insurance settlement because it was not functional and therefore had no value. The agent believed that the insurer should pay the $40,000 cost to replace it because (1) there could have been an al...