CHAPTER 4 First-Party Insurance

JurisdictionUnited States
Publication year2019


First-Party Insurance

§ 4.01 Overview

First-party insurance is an extremely complex and enormously interesting area of insurance coverage law.1 Although there are many varieties of first-party insurance policies,2 many of the coverage issues are common to all of them, diverse as they may be. Accordingly, an understanding of the inner workings of each of the types of first-party insurance policies is neither required nor necessary.

This chapter focuses on the first-party insurance most often associated with real estate-related entities—namely, property insurance and builders risk insurance. This chapter will first discuss the definition of first-party insurance.3 In the context of property and builders risk coverage, the ensuing discussions will cover some of the most significant legal issues, including, among other things, the issues set forth in the insuring agreement:4 (1) the meaning of “covered property,” (2) “direct physical loss or damage,” and (3) “covered causes of loss.” It will conclude by looking at additional coverages,5 conditions,6 and exclusions in the insurance policy.7

§ 4.02 First-Party Insurance Defined

“First-party insurance” is a term of art.8 As previously stated,9 first-party insurance policies provide insurance coverage that compensates the policyholder for losses that are suffered to the person or to the property of the policyholder.10

In this vein—namely, in the sense of whose person or property suffers the injury—first-party insurance is distinguishable from third-party insurance.11 Unlike first-party insurance, where the policyholder seeks reimbursement for losses suffered to the person or property of the policyholder, third-party insurance provides insurance coverage to the policyholder for liability related to losses suffered to the person or property of third parties, i.e., parties who are not part of the insurance contract between the policyholder (a.k.a, the “first party”) and the insurance company (a.k.a., the “second party”).12

For example, homeowners or renters insurance is a first-party insurance policy because it compensates the policyholder for damages to the policyholder’s real and personal property at premises occupied by the policyholder. Likewise, commercial property and business interruption insurance is another form of first-party insurance because it compensates a business for both: (1) damages to its real and personal property; and (2) the consequential loss of its business income and continued operating expenses as a result of a covered accident during a period between the date the property damage started and the date the property is repaired to its pre-loss state. Additionally, builders risk insurance provides first-party insurance coverage for developers and contractors for losses that take place to the property they are developing or building until the project is completed. Of course, once operations are completed, the property should be covered by a residential or commercial property insurance policy.

§ 4.03 First-Party Property/Builders Risk Insurance Issues

[1]—Insuring Agreement

Insurance can be written in manuscript-form or standard-form policies. Under manuscript-form policies, each provision can be drafted from scratch or pre-approved language can be cut and pasted together to form a unique policy particular to the policyholder or risk at issue.

The majority of insurance policies are standard-form agreements in the sense that the agreements are contained in pre-printed forms that contain the same or substantially similar provisions. The Insurance Services Office, Inc. (“ISO”) is an association of approximately 1400 domestic property and casualty insurers and operates as the “almost exclusive source of support services in this country for CGL [Comprehensive General Liability] insurance,” drafing and submitting for approval these standard forms for the insurance companies it represents.13

A standard-form first-party property insurance policy may provide as follows:

We will pay you for direct physical loss or damage to covered property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.14

Builders risk insurance has the same basic insuring agreement designed to cover property that is damaged while under construction.15

Thus, there are three coverage issues that arise from the standard-form first-party property insurance policy’s insuring agreement:

1. “Direct physical loss or damage”;
2. “Covered property”; and
3. “Covered cause of loss.”

[2]—“Covered Property”

The first issue derived from the insuring agreement is whether there has been a loss to “covered property.”

[a]—Tangible Property

To determine whether there has been damage to “covered property,” a policyholder should first look at the policy’s definition of “covered property,” which is ordinarily defined to include the policyholder’s building, equipment, tangible personal property and stock, as well as the tangible personal property of others.16 “Covered property” may also be defined more broadly, to include, for instance, “property owned, controlled, used, leased or intended for use by the insured.”17 However, land and landscaping are generally excluded.18 Thus, “covered property” generally includes most forms of improvements to real property and of tangible personal property.19 Therefore, in normal circumstances, it is a rather simple exercise to determine whether the damaged property is “covered property.”

[b]—Intangible Personal Property

Intangible property, such as bonds, notes, money, and intellectual property, is generally excluded from the definition of “covered property,”20 although careful review of the policy is necessary because some policies cover businesses for losses suffered to intangibles.

Computer losses present an interesting example where the “covered property” issue is not completely settled. In fact, in computer loss cases, courts are generally in agreement that computer hardware is considered “covered property.”21 It is “covered property” because it constitutes tangible personal property. However, where intangible property is excluded from the definition of “covered property,” there is some disagreement as to whether electronic data and software is “covered property.”22

Despite this disagreement, in loss of electronic data cases, a policyholder is often able to avoid the conflict altogether by couching the description of the damage as damage to the computer system itself, which, as previously stated, is universally considered “covered property.” For instance, where there has been damage to electronic data, a policyholder often successfully argues that the loss of electronic data results in the shutdown or inability of operation of the computer hardware.23 In such circumstances, the issue then becomes whether such “covered property” has suffered “direct physical loss or damage.”24

[c]—“Blanket” and “Scheduled” or “Specific” Coverage

Another question with regard to the “covered property” issue is whether particular property needs to be specifically identified. For example, even where improved properties may be covered by the general definition of “insured property,” large developers may be required to identify properties they want covered. In this vein, large developers with rapid and frequent turnover of real property will need to consider two general types of property insurance policies: (1) “blanket” and (2) “specific” or “scheduled” policies.

[i]—“Blanket” Insurance Policies

A “blanket” policy provides coverage for all locations of a policyholder without the requirement that the locations be specifically identified, or provides coverage for many locations without specifying the valuations of the items to be covered under the premise that coverage is afforded for each property up to the large “blanket” limits of the policy.25

[ii]—“Specific” or “Scheduled” Policies

On the other hand, a “specific” or “scheduled” policy covers specific locations identified by the policyholder or specific locations identified by the policyholder up to the values stated for each specific location.26

[d]—Newly Acquired and Unnamed Locations

Large developers with rapid and frequent turnover of real property who cannot purchase “blanket” coverage need to be aware of the “newly acquired locations” and “unnamed locations” provisions. Large developers who cannot access “blanket” coverage need to know about “newly acquired” and “unnamed locations” provisions because such provisions could impact the coverage available to locations they may inadvertently fail to identify.

[i]—Newly Acquired Locations

Policies generally provide either full or limited coverage for “newly acquired” locations for a specified period of time, with the requirement that the policyholder notify the insurance company of the “newly acquired” property within that specified time period.27 Litigation often centers around the meaning of “newly acquired” location, with the vast majority of courts holding that a “newly acquired location” only includes property acquired after the onset of the policy period.28

Other issues may arise as to the effect of failure to follow the notice requirements. Failure to notify the insurance company of the acquisition likely causes the newly acquired property either to: (1) become an “unnamed location”29 or (2) not be covered at all under the insurance policy.30

Losses that occur during the notice period present an interesting unresolved question as to the application of a reduced limit for “newly acquired” locations. Does the reduced limit apply until notice (and acceptance of the risk) occurs, or does the reduced limit apply where there is a failure of notice? No reported case has addressed this issue. Consequently, great care should be given to understanding the meaning of the particular contract at issue.

[ii]—Unnamed Locations

Policies might also contain reduced limits—in the form of sublimits—for “unnamed locations.”31 An “unnamed...

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