The Rough Notes Company Inc.

OFF PREMISES OR AT NEWLY ACQUIRED PROPERTY?

Dr. T’s Nature Company ran out of room at its two leased buildings. Its landlord offered it the temporary use of a nearby warehouse and even agreed to not charge for the temporary use. Unfortunately, a fire occurred while Dr. T’s property was at that warehouse. When Dr. T’s turned in a claim for $100,000, its carrier denied coverage because the property was stored off premises. Dr. T’s argued that it was at a newly acquired property. When they couldn’t agree, the case went to court.

See how the court ruled.

Dr. T.’s Nature Company had, on a long-term basis, had its two buildings insured under a commercial property policy issued by Southern Trust Insurance Company. Dr. T. sued Southern after the latter denied a loss involving roughly $100,000 in stock and display materials that were destroyed in a fire. After a trial court ruled in favor of Dr. T., the insurer appealed.

Dr. T.’s policy covered a building used for making its products and another for storage, both buildings were leased. Due to building storage racks in the leased warehouse, Dr. T. had temporary need for more space. The lessor gave permission to Dr. T. to use a separate warehouse that was located across the street from the leased buildings. The use was meant to be temporary and the lessor did not charge Dr. T., which placed more than 70 pallets of product and displays in the warehouse that was lent to it. The pallets and property were destroyed in a fire.

Southern denied the loss, alleging that policy language involving property located off-premises excluded the loss. Dr. T.’s argued that another portion of the policy, involving newly-acquired property, was applicable to the stored property. The lower court ruled in favor of Dr. T. based on the newly acquired property wording. Under that wording, eligible property included stock located in newly acquired property.

The higher court reviewed the matter and decided that the permitted, temporary use of the loaned warehouse met an understanding of “acquired” property. It also stated that, if the insurer intended a different meaning for newly-acquired property, it had opportunity to use more specific wording.

The lower court decision in favor of Dr. T. was affirmed.

Southern Trust Insurance Company v. Dr. T’s Nature Products Company. Court of Appeal of Georgia No. A03A0497. Filed June 19, 2003. Affirmed. Westlaw 594 S.E. 2d. 34

The battle of the extensions

The CP 00 10-Building and Personal Property Coverage Form limits coverage for building and business personal property to the premises that is listed on the declarations and for which a limit of insurance is provided. Under the Extensions of Coverage, however, this is changed. One extension provides up $100,000 coverage for business personal property at a newly acquired property but only for up to 90 days. Another extension provides up $10,000 in coverage for property when off premises. This extension applies until the expiration date of the policy. Neither extension specifically states whether or not the coverage applies to temporary storage situations.

Read the PF&M analysis of the initial description of the coverage provided by CP 00 10 and the two different coverage extensions the pertain to this court case.

(June 2016)

1. COVERAGE

The coverage form obligates the insurance company to pay for direct physical loss or damage to certain types of property. The property must be at a location listed or described on the declarations. However, this is not open-ended coverage. The loss or damage must be caused by a cause of loss described in the causes of loss form attached to the policy in order for coverage to apply.

Related Article: Basic, Broad, and Special Causes of Loss Forms Analysis

Coverage applies to only loss or damage that occurs at a definite place and time. There is no coverage for a loss event that is not tangible or that is not capable of being measured.

The reference to premises means that coverage applies to only property located in or on the premises listed or described on the declarations. This is why the declarations is a very important document. Coverage does not apply if the location and type of property is not properly listed or described.

5. Coverage Extensions

There are several coverage extensions that apply to covered property if 80% or higher coinsurance applies, or if coverage is written on a reporting basis. They are limited to protecting property located in or on buildings listed on the declarations. They also protect property in the open or in or on vehicles but only when the property is within 100 feet of the described premises.

Note: The 10 12 edition changes to the building, business personal property and personal property of others were not added to this opening paragraph so the definition of property in the open or in a vehicle is slightly different.

Any exceptions to the opening paragraph requirements are stated in the specific coverage extension.

Each extension provides additional limits of insurance. None of them is subject to the coinsurance condition.

1. Newly Acquired or Constructed Property

Because contacting an insurance agent to report a new acquisition is not automatic behavior, this extension gives the named insured some peace of mind coverage for new purchases. However, this coverage is not free. The property acquired must be reported and an additional premium paid starting from the date it was acquired.

• Buildings

If building coverage is provided, this extension applies to new buildings the insured owns and that are being constructed at a premises described on the declarations. Buildings the insured purchases at other premises are also covered but only if they are intended for use similar to other scheduled buildings or as a warehouse. The maximum limit for any newly built or purchased building is $250,000.

Note: As stated above, the newly purchased building’s use must be similar to that of existing buildings or be used as a warehouse. The insurance company accepts risks based on occupancy and should not be expected to automatically add a new location with a dramatically different occupancy than what it already covers.

 The occupancy limitation does not apply to buildings being constructed at a premises already listed on the declarations.

 Your Business Personal Property

If coverage on the named insured’s business personal property is provided, this extension applies to any and all the following:

• • Business personal property (newly acquired or existing) at newly acquired locations. Property at fairs, trade shows, or exhibitions is not covered.
  • Business personal property (newly acquired or existing) in newly constructed or acquired buildings at locations already listed on the declarations

Note: Unlike the requirement under newly acquired building, there is no requirement that newly acquired business personal property be the same as or similar to existing business personal property. However, it must qualify as eligible business personal property.

Note: The 10 12 edition no longer automatically provides coverage on newly acquired business personal property at a described location. This could be a significant reduction of coverage for businesses that have rapid and constant turnover of stock. (10 12 coverage removal)

The maximum limit per building is $100,000.

• This coverage extension does not apply to certain types of personal property of others that are in the named insured’s custody on a temporary basis. If the reason the personal property is with the named insured is because the insured is installing or performing work on it, there is not coverage under this extension. In addition, if the personal property is part of the named insured’s wholesaling or manufacturing activities there is no coverage under this extension.
• Period of Coverage

Coverage is provided on a very limited time frame. It ends on whichever of the following is earliest:

• • The policy expires
  • 30 days after the property is acquired (or construction on it begins)
  • The date the property or value is reported to the insurance company

Note: This provision is occasionally applied with unfortunate and undesirable results.

 This is especially important for the insured that requests that the 30-day time period be increased to 180 days. Even then, coverage still ends on the earliest of the above dates.

The construction date is the date the insured begins constructing a new building. Because covered property does not usually cover foundations, the 30-day limitation does not begin until construction above grade level begins.

The date that building and/or personal property was acquired is reported to the insurance company so that premium can be charged for the entire period it was covered. This extension is provided for the insured’s convenience but coverage requires a premium charge. It is better to owe premium than to have an uninsured loss.

Related Court Case: Newly Acquired Property Held Not Covered After the Automatic 90 Day Period Expired

 Property Off-Premises

Most business personal property tends to move around. This extension recognizes this fact and provides up to $10,000 as the property does so. However, this coverage applies only to property usually situated at a described location that is away from the premises for a short period. The personal property can be temporarily:

• At a location the named insured does not own, lease, or operate
• At a storage location the named insured leases but only if the lease was made after the policy period began
• At a fair, trade show, or exhibition

If storage space leased during the policy period is still leased when the policy renews, it must be added to the policy as a separate covered location. Otherwise, coverage at that leased storage space ends.

This extension has two important limitations. It does not apply to property in or on a vehicle. It also does not apply to property in the possession of the named insured’s salespersons, unless the property and the salespersons are at a fair, trade show, or exhibition.

Inland marine coverage forms are available to cover off premises property, property in transit, or property at the premises of others for storage, service, or repair.

Related Article: Who Needs Inland Marine Coverage?

Is the item a building or is it personal property?

The CP 00 10-Building and Personal Property Coverage Form is very specific as to what items are building and what items are business personal property. Items that are considered building are often charged a much lower rate than items that are considered business personal property. Assigning the values appropriately can often result in a lowering of the premium because of a client placing more in business personal property than it should.

Review a property inventory that is part of the Producer’s Commercial Lines Risk Evaluation System.

The purpose of this listing is to provide guidance in two areas:

1. a) Placing all items in the proper category
2. b) Insuring to value

Complete an inventory for all buildings at each premises.

Premises #_______ Building # _______

Location address:

____________________________________________________________

____________________________________________________________

BUILDING

The applicant might want to consider one of the optional valuation methods available if the market value is considerably less than either the Replacement Cost Valuation (RCV) or the Actual Cash Value (ACV) Valuations. Although there is a surcharge in the pricing, the difference in premium can be significant.

Fixtures – include sprinkler systems, irrigation sprinkler lights, security systems, etc.

Permanently installed machinery and equipment used in production, manufacturing, and processing:

Machinery and equipment used to maintain or service the premises: (This includes fire extinguishing equipment, outdoor furniture, and appliances used for refrigerating, ventilating, cooking, and dishwashing.)

Landlord property in furnished apartments, rooms for rent, and common areas: (This includes appliances, furniture, clothing and bedding, cookware, and consumable supplies including food.)

Note: The items listed are considered building under the Businessowners Policy (BOP) but not under the Commercial Property Coverage Form.

Add together the building, additions, fixtures, machinery and equipment, service machinery and equipment and, if applicable, landlord property to develop the building value.

BUSINESS PERSONAL PROPERTY

This is all furnishings that are not listed as building above that the named insured either owns or leases:

Note: Do not list business personal property more specifically insured under another policy. Examples are computers, electronic devices, antiques, fine arts, etc. These items can be removed from the limit of insurance because the only coverage provided for it is excess coverage.

STOCK

Stock valuation is selling price less discounts and costs that the named insured would not incur if the stock was damaged or lost. It is calculated as follows:

Note: The amount of stock on hand may vary significantly from month to month. In that case, use the highest monthly value as the starting point and consider using a reporting form.

Improvements and Betterments

If improvements and betterments are combined with business personal property as one limit, they are rated as business personal property. If there is a separate limit for improvements and betterments on the declarations, they are rated as building.

Description:

_____________________________________________________________

_____________________________________________________________

Original Cost

$________________ RCV $________________ ACV $________________

Term of lease __________

Note: If the applicant does not repair the Improvements and Betterments (I&B) at the time of loss, the valuation is determined by dividing the remaining number of days of the lease by the total number of days in the lease and multiplying that factor times the original cost of the improvements and betterments.

Add together the furnishings, stock and, if applicable, improvements and betterments to develop the business personal property value.

PERSONAL PROPERTY OF OTHERS

Personal property of others is valued at ACV unless the named insured purchases the PPO RCV extension. This RCV valuation is limited to RCV or the written contract amount value, whichever is less.

Insuring to value

Because the property insurance premium is based on property values, clients may tend to undervalue those values to lower premiums. However, when a loss occurs those same clients want the full value to be covered and are disappointed to discover that not only is the loss not fully paid because limits were too low but also that a coinsurance penalty may be imposed.

A letter or email to a client or prospect offering to review values, especially if using the property inventory described above, could encourage the client to select limits that are line with loss payment expectations.

Here is some wording you could use in a letter or email to open up this important discussion.

Dear [Name]:

Normally, wouldn’t you love the sight of a wallet or purse that is brimming with dollar bills? What if you took a closer look and found that they were just bill fragments? What good is that? You certainly aren’t in the position you thought you were in at first glance.

We want to make sure that you avoid that feeling with your property insurance. Your business property is valuable. If it is lost, seriously damaged or destroyed, you will want to be sure that it can be completely repaired, rebuilt or replaced.

Fortunately, there is a way to assure that happens, but it will take some work on your part. You need to take the step to make certain your property is insured for the amount it would take to provide full coverage after a loss.

I would like to call you within the coming week. Let’s arrange a time to discuss whether you have adequate coverage. If there’s any doubt, we can also take the steps to get your property properly valued.

Sincerely,