Chapter 3 The Commercial First Party Property Insurance Policy

• Library: The Commercial Property Insurance Policy Deskbook (ABA) (2018 Ed.)

CHAPTER 3 The Commercial First Party Property Insurance Policy

No business can operate profitably without insurance to protect it against contingent or unknown catastrophic losses. By spreading the risk among many businesses, insurers can charge reasonable sums to protect against losses to the business or its real and personal property. A businessperson with the ability to read and understand the insurance policies they acquire has an advantage over every other businessperson who cannot read and understand a policy. The businessperson who is able to interpret a commercial property insurance policy will obtain the best possible coverage available at the most reasonable price and will have an advantage over a businessperson who does not.

Understanding the rules of contract interpretation set out in Chapter 2, the commercial property insurance policy needs a complete analysis.

How Can a Lay Person Read an Insurance Policy?

Recognize that an insurance policy is a contract. Specifically, an insurance contract is a contract whereby one (the insurer) undertakes to indemnify another (the insured) against loss, damage, or liability arising from a contingent or unknown event.

Most people not experienced about insurance believe that an insurance policy is difficult to read and hard to understand. One court agreed, saying:

The insurance company gave the insured coverage in relatively simple language easily understood by the common man in the marketplace, but attempted to take away a portion of this same coverage in paragraphs and language which even a lawyer, be he from Philadelphia or Bungy, would find difficult to comprehend.¹

Today, unlike what the judge in Hays said, unlike most commercial contracts the modern insurance contract is written in simple, Sesame Street English that, by statute, is required to be understood by anyone with a fourth-grade education.

Like every other contract, an insurance contract requires, to be effected, an offer, acceptance of the offer, and payment of consideration—the premium.

The Formation of the Insurance Contract

All three elements must exist before an insurance contract can be issued. If any element is missing, there is no contract. Most contracts can be written or oral. Insurance contracts, by statute, must only be written. An oral contract, other than an insurance contract, is just as binding as a written contract. It is just harder to prove.

Insurers are prohibited by statute from creating oral contracts of insurance. A binder is often oral but is not a contract of insurance. A binder is merely evidence of an insurance policy to be reduced to writing later, and is interpreted, if a loss occurs before the policy is printed, to contain all of the terms and conditions that the normal policy, as ordered, would provide.

The following are included in the written agreement, the policy:

• The declarations page
• The conditions
• The warranties
• The limitations
• The exclusions
• The definitions
• Anything else that makes the agreement of the parties clear

Each and every part of the policy must be read and understood.

What Is the Declarations Page?

The declarations page is usually the first page of every commercial property policy and it contains a listing of all of the coverages available to the insured. The declarations page (often abbreviated as a "Dec Page") will advise the reader of the policy about:

• The name of the insurer
• The name of each person insured
• The effective dates the policy will be in effect from—12:01 a.m. standard time on the first date to 12:01 a.m. standard time on the last day
• The mailing address of the insured
• The identity of the insurance agent or broker
• The policy number
• The limits of liability
• The deductible or self-insured retention, if any
• The forms and endorsements that are attached to the declarations page and make up the policy
• Who to notify about any claim
• Where to send other notices
• Signatures of the secretary and president of the insurer

Each of the important parts of the commercial property insurance policy is set out in the following sections:

The Basic Insuring Agreement

Attached to the declarations page, the commercial property insurance policy starts with the addition of the basic insuring agreement. The basic building and personal property coverage form sets forth the basic coverage as follows:

We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.²

Simple, direct language. The insurer agrees to pay the insured in case there is direct physical loss to "covered property" at the location listed in the declarations page. This is the rewrite of the older forms that insured against "all risks of direct physical loss."

Since the policy insures against the risk of loss of covered property it then explains what it means.

Covered Property

The policy by ISO Form CP 00101091 recites that "Covered Property, as used in this Coverage Part, means the following types of property for which a Limit of Insurance is shown in the Declarations . . ."³

• Building

• The structure described in the declarations
• Completed additions
• Permanently installed

• Fixtures
• Machinery
• Equipment
• Outdoor fixtures
• Personal property owned by the insured and used to maintain the building
• Additions under construction
• Business personal property located in or on the building
• Furniture and fixtures
• Machinery and equipment
• Stock
• All other personal property owned by the insured and used in the business
• Leased personal property
• Personal property of others that is in the care, custody, or control of the insured and is located in the building.

The list is open so when deciding what insurance to buy the insured reading the policy must consider whether the structures and business personal property fits within the listing provided by the policy wording. If everything is covered by the policy wording the standard language is sufficient. If, on the other hand, the insured has property at risk not listed in the policy it is necessary that the insured immediately contact the agent, broker, or insurer to amend the policy to cover the property at risk not mentioned in the standard policy language.

Property Not Covered

As much as insured people would prefer, no insurance policy insures against every possible loss to every possible kind of property. The property policy lists the types of property that the insurer will not cover regardless of the peril that causes loss to the property. They include

a. Accounts, bills, currency, deeds, food stamps or other evidences of debt, money, notes, or securities. Lottery tickets held for sale are not securities.
b. Animals, unless owned by others and boarded by you, or if owned by you, only as "stock" while inside of buildings
c. Automobiles held for sale
d. Bridges, roadways, walks, patios, or other paved surfaces
e. Contraband, or property in the course of illegal transportation or trade
f. The cost of excavations, grading, backfilling, or filling
g. Foundations of buildings, structures, machinery, or boilers if their foundations are below

(1) The lowest basement floor or
(2) The surface of the ground, if there is no basement

h. Land (including land on which the property is located), water, growing crops, or lawns
i. Personal property while airborne or waterborne j. Pilings, piers, wharves, or docks
k. Property that is covered under another coverage form of this or any other policy in which it is more specifically described, except for the excess of the amount due (whether you can collect on it or not) from that other insurance
l. Retaining walls that are not part of the building described in the declarations
m. Underground pipes, flues, or drains
n. The cost to research, replace, or restore the information on valuable papers and records, including those which exist on electronic or magnetic media, except as provided in the coverage extensions
o. Vehicles or self-propelled machines (including aircraft or watercraft) that

(1) Are licensed for use on public roads; or
(2) Are operated principally away from the described premises.

This paragraph does not apply to
(a) Vehicles or self-propelled machines or autos you manufacture, process, or warehouse;
(b) Vehicles or self-propelled machines, other than autos, you hold for sale; or
(c) Rowboats or canoes out of water at the described premises.

p. The following property while outside of buildings:

(1) Grain, hay, straw, or other crops;
(2) Fences, radio or television antennas, including their lead-in wiring, masts or towers, signs (other than signs attached to buildings), trees, shrubs or plants (other than "stock" of trees, shrubs, or plants), all except as provided in the coverage extensions.

The prudent insured, recognizing the policy does not insure the risk of loss of multiple types of property for which the insured may need insurance protection, will confirm that the types of property at risk are specifically made the subject of the policy. If not available in the body of the policy the prudent insured will ask that an endorsement is added to cover the risk of loss of the specified property.

If any of the property not covered in the basic form are needed by the insured, it is necessary to ask the insurer to modify the policy to provide that insurance protection for a reasonable additional premium.

What Are the Covered Causes of Loss?

The policy attaches an extra form setting forth the covered causes of loss. Those causes can be any of the following:

• All risks of direct physical loss not specifically excluded
• Direct risks of physical loss not specifically excluded
• Certain named perils like

• Fire
• lightning
• Windstorm
• hail
• Aircraft
• etc.

All three types of covered causes of loss are subject to exclusions, limitations, and conditions.

The basic policy also provides additional coverage, including

• Debris removal
• Preservation of

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