Insurable Interest

• One of the key elements in determining whether

or not a particular piece of property represents
an exposure to loss is reflected by the concept
of insurable interest.

• The term is generally understood to mean any

lawful economic interest in the safety or
preservation of property from loss, destruction
or pecuniary damage.

17- 1
 Insurable Interest

Although insurable interest generally follows title,

insurable interest is not limited to owners. The
variety of financial interests that can support an
insurable interest include:
1. Owner.
2. Secured creditor (mortgagor, vendor, etc.).
3. Holder of a mechanic's or contractors lien.
4. A bailee or other representative of the owner.
5. A lessor or renter of property to the extent of a
legal obligation.

17- 2
 Insurable Interest

6. A tenant who makes improvements on real

property owned by another.
7. A party with a contractual or legal expectation of
ownership.
8. Usfruct interests

Usfruct interest is defined as "the right to utilize and

enjoy profits and advantages of something belonging
to another so long as the property is not damaged or
altered in any way." (easements, storage buildings,
private roads, and similar interests
17- 3
 Commercial Property Coverages

1. Traditional fields of “fire” and “allied lines”

2. Provides coverage for Direct and Indirect

loss

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Building and Personal Property Coverage Form

1. Standard form for insuring most personal

property

2. Used to provide direct damage coverage on

buildings and contents or both
A. Building
B. Business Personal Property - including
improvements and betterments
C. Personal Property of Others in the
insured’s custody

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 Tenants Improvements and Betterments

Insurance forms generally contemplate three

separate possibilities, with different amounts
payable in the event of each:

• If the improvements and betterments are

repaired or replaced at the expense of the tenant
within a reasonable time after the loss, the actual
cash value or replacement cost of the
improvements and betterments will be paid.

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 Tenants Improvements and Betterments

• If the improvements and betterments are

repaired or replaced by others for the use of the
insured, there is no loss to the insured and
therefore nothing is paid.

• If the improvements and betterments are not

repaired or replaced, the amount payable is the
unamortized use value, computed according to
a formula in the policy.

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 Tenants Improvements and Betterments

Original cost Unexpired term of lease

of tenants X
Period from date of
improvements installation to expiration
and betterments of the current lease

$100,000 Original Cost

10 year lease, 6 years left:

6
$100,000 X
= $60,000
10 17- 8
 Causes of Loss Forms

1. Causes of Loss - Basic Form

2. Causes of Loss - Broad Form

3. Causes of Loss - Special Form

4. Causes of Loss - Earthquake Form

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 Causes of Loss Basic Form
1. Fire
2. Lightning
3. Explosion
4. Windstorm or Hail
5. Smoke
6. Aircraft or Vehicles
7. Riot or Civil Commotion
8. Vandalism
9. Sprinkler Leakage
10. Sinkhole Collapse
11. Volcanic Action
17- 10
 Causes of Loss Basic Form Exclusions

1. building ordinance
2. earth movement
3. government action
4. nuclear hazard
5. power failure
6. war and military
7. flood and other types of water losses
8. electrical apparatus
9. leakage/discharge of water or steam except from
sprinkler systems
10. rupture of water pipes
17- 11
 Causes of Loss Broad Form

Covers all perils of the Basic Form plus

1. breakage of glass ($100 per plate)

2. falling objects

3. weight of ice, snow, or sleet

4. water damage

5. “collapse” covered as an additional coverage

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 Causes of Loss Special Form

1. Open peril coverage for risks of direct physical

loss

2. Provides coverage for Collapse as an Additional

Coverage

3. Property in Transit ($1,000 limit for certain

named perils)

4. Subject to standard open-peril exclusions

including concurrent causation exclusions

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 Causes of Loss Earthquake Form

• Earthquake

• Volcanic eruption, explosion or effusion

17- 14
 Need for Open-Peril Coverage

• Although the named peril approach to insuring

property is probably the most common practice,
it is unsatisfactory from several points of view.
• A property owner should be concerned about
damage to property by any cause, not just by fire,
tornado, riots or vandalism.
• Business property should be insured against as
wide a range of perils as possible, rather than for
some arbitrary and historical group of perils.
• The preferred approach is to insure owned
buildings and contents on an open-peril basis.
17- 15
 Mortgage Clause

Mortgagee’s Rights
• to receive payment for loss to the extent of its
interest in the property, regardless of any fault
of the property owner under the contract
• to receive separate written notice of
cancellation
• to sue under the policy in its own name

17- 16
 Mortgage Clause
Mortgagor’s Obligations (conditional)
• to notify insurer of any change in ownership,
occupancy, or substantial change in risk of
which mortgagee is aware
• to render proof of loss if the insured fails to
do so
• to surrender to insurer any claim against the
mortgagor to the extent that it receives
payment when the insurer has ruled that no
coverage exists for the owner

17- 17
 Coinsurance

Rationale for Coinsurance

• Most fire losses are partial; they represent only a
fraction of the total value insured.
• Insurance to value is required for rate adequacy
and equity.
• Some concession must be made for those who
insure property for a high percentage of its value.
• The coinsurance clause, which provides a rate
reduction if the insured agrees to carry insurance
equal to a higher percentage of the value of the
property, is designed as such a concession.
17- 18
 Relationship of Insurance to Value to Rate

10,000 buildings valued at $10,000 each =

$100,000,000 in values insured for 100% of value

2 total losses @$10,000 each = $20,000

30 partial losses @ $ 1,000 each = 30,000
50,000

$ 50,000
= .05 per $100
$100,000,000

17- 19
 Relationship of Insurance to Value to Rate

10,000 buildings valued at $10,000 each =

$100,000,000 in values insured for 50% of value

2 total losses @$ 5,000 each = $10,000

30 partial losses @ $1,000 each = 30,000
40,000

$ 40,000
= .08 per $100
$50,000,000

17- 20
 Operation of Coinsurance Clause

1. The coinsurance provision establishes a

formula for the payment of losses based on
the degree to which the insured has
complied with the agreement to insure for a
specified percentage of the property’s value.
2. Coinsurance clause may apply both to
replacement cost losses and to ACV losses.
3. Payment is based on the ratio of insurance
carried to insurance required.

17- 21
 Coinsurance Clause Illustrated

Coinsurance Formula

Insurance Carried
X Loss = Payment
Insurance Required

$100,000
X $10,000 = $10,000
$100,000

$75,000
X $10,000 = $7,500
$100,000
17- 22
 Optional Coverage

1. Replacement Cost Coverage

2. Agreed Value Coverage

3. Inflation Guard Coverage

17- 23
 Specialized Valuation Endorsements

Ordinance or Law Coverage Endorsement

Functional Building Valuation Endorsement
Functional Personal Property Valuation Endorsement
Manufacturer’s Selling Price Clause Endorsement

17- 24
 Ordinance or Law Coverage Endorsement

• An Ordinance or Law Coverage endorsement is

used to provide three types of coverage related
to the enforcement of building codes.

• Coverage is provided for three types of losses.

Increased Cost of Construction
Undamaged part of the building
Demolition cost

17- 25
Functional Building Valuation Endorsement

• Used when changes in technology or architecture

make it possible to replace a structure at a lower
cost than is required to duplicate the existing
building.
• Covers the cost of repairing with less costly
materials but in the but in the architectural style
that existed before the loss.
• For total loss, payment is made for the cost of
replacing the building with a less costly, but
functionally equivalent building.
• Coinsurance is not applicable.
17- 26
 Functional Personal Property Valuation
(Other Than Stock)

• Applies to property which can be replaced with

similar property that performs the same function
as the original, when replacement with identical
property is impossible or unnecessary.
• If the property is repaired or replaced, payment is
made for replacement with the most closely
equivalent property available.
• If the property is not repaired or replaced,
coverage is limited to the lower or actual cash
value or market value.
17- 27
 Manufacturer's Selling Price Clause

• A manufacturer with finished goods on hand

faces a loss not covered under the standard BPP
form, the loss of the expected profits on the
goods destroyed.
• The Manufacturer's Selling Price clause provides
that the value of finished stock shall be the price
at which it would have sold had no loss occurred.
• The clause is applicable only to the finished
stocks of manufacturers and is not available to
wholesalers and retailers.

17- 28
 Blanket Coverage

1. Provides one amount of insurance on more

than one type of property or property at more
than one location.

2. 90% coinsurance is usually required.

17- 29
 Reporting Form Coverage

1. Designed to meet the needs of firms whose

stocks fluctuate over time

2. Written with a maximum limit, higher than

anticipated values on hand

3. Coverage fluctuates with actual values on hand,

subject to the maximum limit.

4. Premium based on periodic reports of values

submitted by the insured - monthly, quarterly, or
annually.
17- 30
 Reporting Form Coverage (continued)

Reporting Provisions
• Insured must report 100% of the values of
property on hand
• In the event of a late report, insurance is limited
to the values contained in the last previous filing.
• Full-value reporting clause (also called the
“honesty clause”) is, in effect, a 100%
coinsurance clause.

17- 31
 Builders Risk Coverage Form

• Buildings under construction are normally

covered under a specialized contract known as
the Builders Risk Form.
• The Builders Risk Form provides coverage on a
“completed value” basis--the projected full value
of the building when completed, but the premium
is 55%of the cost for coverage on the final value.
• Coverage continues during the process of
construction but terminates automatically when
the structure is completed and occupied.

17- 32
 Plate Glass Insurance

1. Coverage on broad open-peril basis

2. May be combined with other coverage forms or
written alone.
3. Accidental breakage, except by fire, war, or
nuclear damage
4. Damage caused by acids or chemicals
5. Only glass panels specifically scheduled are
insured.
6. Lettering and ornamentation not covered unless
specifically insured
17- 33
 Boiler and Machinery Insurance

1. Originated from efforts of a group of

engineers in Hartford, highly specialized
field; requires trained engineers.
2. Insurance applies to many types of
installations including boilers, machines,
refrigerating systems and electronics.
3. A major benefit of the coverage is the
inspection service that is provided by
trained insurance company engineers.

17- 34
 Boiler and Machinery Coverage Form

1. Used with Object Definition forms and time

element forms.
2. Four Object Definition forms:
• Pressure and Refrigeration Objects
• Mechanical Objects
• Electrical Objects
• Turbine Objects

17- 35
 Boiler and Machinery Coverage Form

Provides one amount of insurance to cover

several types of loss. Payment made on
sequential basis

A: Property of the Insured and Property

Damage Liability

B: Expediting Expenses

17- 36
 Suspension

• The boiler and machinery policy contains a

provision permitting the insurance company to
suspend coverage on any or all insured objects
found to be in a dangerous condition.
• The suspension becomes effective immediately
on delivery without prior notice or waiting period.

• When coverage has been suspended, it may be

reinstated only by endorsement to the policy.

17- 37
 Inland Marine Insurance

• Inland marine insurance developed as an

extension of ocean marine insurance when ocean
marine insurers extended their policies to cover
property being shipped from warehouse to
warehouse.
• In 1933, the National Association of Insurance
Commissioners (NAIC) defined the scope of
inland marine insurance in its Nationwide Marine
Insurance Definition, specifically defining the
types of insurance marine insurers were
permitted to write.
17- 38
 Nationwide Marine Definition

The NAIC marine definition recognizes six broad

classes of property that may be insured under
marine contracts:
1. imports
2. exports
3. domestic shipments
4. instrumentalities of transportation and
communications
5. personal property floater risks
6. commercial property floater risks.
17- 39
 Nationwide Marine Definition

• Imports and exports are ocean marine risks.

• Domestic shipments consists of goods in transit.

• Instrumentalities include bridges, tunnels, and

pipelines.

• Floater risks consist of personal property

exposed to loss primarily away from the owner’s
premises.

17- 40
 Inland Marine Forms Classified

For the purpose of our discussion, it is helpful to

divide the NAIC's commercial property floater risks
class into four subclasses
Business floater policies
Dealers' forms
Bailee forms, and
Miscellaneous policies

17- 41
 Business Floater Policies

Business floater policies include three types.

1. Equipment floaters. Cover business property not
held for sale or on consignment that is in the
hands of the owner for its intended purpose.
2. Processing and storage floaters. Cover property
in temporary storage or undergoing processing
outside the owner's premises.
3. Consignment and sales floaters. Covers goods
being held for sale on consignment, being
installed, or sold under an installment plan.

17- 42
 Dealers Forms

Covers a dealer’s stock of goods. Unlike most

inland marine forms, the principal exposure is on-
premises, although coverage applies both on- and
off premises. Dealers forms include
1. Jewelers block
2. Furriers block
3. Musical instrument dealers, stamp and coin
dealers
4. Equipment dealers
17- 43
 Bailee Forms

Bailee forms, designed to cover goods that are in

the custody of someone other than the owner to
whom the goods have been entrusted.

17- 44
 Miscellaneous Inland Marine Forms

Miscellaneous policies include unrelated and

anomalous types of coverages such as
1. Accounts receivables
2. Valuable papers coverage
3. Electronic data processing policies
4. Manufacturers’ Output Policy
5. Difference-in-Conditions coverage

17- 45
 Federal Flood Insurance Program

1. Housing and Urban Development Act of 1968

established federal flood insurance program.

2. Program makes flood insurance available in

communities that pledge to adopt and enforce
land control measures designed to guide future
development away from flood prone areas.

3. Program is conducted as a partnership between

federal government and private insurance
industry.

17- 46
 Federal Flood Insurance Program

4. Cities, counties and other government units

qualify for the program by applying for the
program and agreeing to enact and enforce the
required legislation.
5. Once the community agrees to adopt the
required controls, it becomes eligible for the
Emergency program.
6. When the community actually implements the
controls and actuarial studies are complete, it
becomes eligible for the Regular program.
17- 47
 Federal Flood Insurance Limits - Non-Residential

Basic Additional Total

EmergencyInsuranceInsurance
Insurance
Program Limits Limits Available
Nonresidential Buildings $35,000 $50,000 $200,000
$250,000

Small Business Buildings 100,000 50,000 200,000

250,000

Nonresidential Contents 100,000 135,000 115,000

250,000

Small Business Contents 10,000 15,000 85,000

100,000 17- 48
 Flood Insurance Policy

Coverage provided under three items

A: Building

B: Contents

C: Debris removal

17- 49
Flood Insurance Policy - Insuring Agreement
Provides coverage for “direct physical loss from
flood” as defined in the policy.
Flood defined as:
a general and temporary condition of partial or
complete inundation of normally dry land areas,
resulting from overflow of inland or tidal waters
or the unusual and rapid accumulation or runoff
of surface waters from any source.
Includes mudslide caused by accumulations of
water on or under the ground.

17- 50
 Flood Insurance Policy - Inception

1. 30 day waiting period after application and

payment of premium, subject to 2 exceptions
2. Waiting period does not apply
• to the initial purchase of flood insurance in
connection with making, increasing,
extending or renewing a loan
• in first 13 months after revision or update of a
Flood Insurance Rate Map

17- 51
 Flood Insurance Policy - Termination

1. Insurer may cancel only for nonpayment of

premium, 20 days

2. Insured may cancel anytime, premium fully

earned if insured retains title to the property

17- 52
 Combining Transfer and Retention

• Commercial property coverages are written with

deductibles, allowing the insured to combine
transfer and retention.
• The ISO Commercial Lines Manual indicates rate
credits for deductibles up to $75,000. Usually, the
deductible applies on a per structure basis, but
may be written subject to a per occurrence
aggregate or an annual aggregate.
• Higher deductibles are available, but the premium
credits are determined by underwriters on a
judgment basis.
17- 53
 Combining Transfer and Retention

• A second approach to retention in connection

with commercial property insurance is to simply
not insure some or all property.
• Some companies, for example, do not insure
structures with a value below some specific limit,
such as $25,000.
• While this can produce economies, consideration
should be given to whether a number of
uninsured structures could be destroyed in a
single occurrence (such as a tornado).

17- 54
 Combining Transfer and Retention

• A final approach to retention of property

exposures is underinsuring.
• An insured with a $1 million building might
purchase $900,000 in coverage with a 100 percent
coinsurance requirement, thereby tacitly agreeing
to bear 10 percent of every loss.
• Under this arrangement, the coinsurance
provision, in effect, acts as a sliding deductible.
In the event of a $100,000 loss, the insured would
bear $10,000; in a $200,000 loss, the insured
would bear $20,000 of the loss.
17- 55