Property Insurance and Casualty Insurance

08/03/2021

Part of every business plan should be the management of risk, which comes in many forms. A commercial enterprise can self insure, i.e., set aside a certain amount of its revenue to provide for any losses that occur from its operations. On the other hand, a business can utilize the insurance industry to protect it from potential losses. Property insurance is designed to help businesses manage a certain kind of risk: damage to the business’ own property – in whatever form – which may result in property damage or business interruption.

In an insurance contract in which the insurer promises to protect the insured from harm suffered directly to the insured’s person or property, there are only two parties to such an agreement: the insured, who is the first-party, and the insurer, who is the second-party. Such “first-party” insurance is commonly referred to as “property insurance.” We use the term “first-party” to refer to an insurance agreement where the insurer agrees to pay claims submitted to it by the insured for losses suffered by the insured. In contrast, a “third-party” situation is one where the insurer contracts to defend the insured against claims made by third-parties against the insured and to pay any resulting liability up to a specified dollar amount. We will discuss third-party liability insurance in the next section below. “Third-party” insurance is commonly referred to as “casualty insurance.”

Commercial Property Coverage:
Many insurers provide first-party property insurance in standardized insurance policies. The Insurance Services Office (ISO) is a common source of policy forms for “Commercial Property Coverage” issued by most standard insurers. Commercial Property Coverage provides coverage to a policy holder for “direct physical loss or damage” to covered property, at an insured location (usually listed on the Declarations page or in a schedule of properties), that arises from a “covered cause of loss,” which is a term usually defined in your insurance policy.

Generally, under first-party property coverage, the insured must establish a direct physical loss to covered property proximately caused by a peril insured against during the policy term. Most standard homeowners and commercial business property policies limit recovery to physical damages.

The standard building and personal property coverage form issued by insurers typically describes the property protected in the policy as the buildings listed, business personal property and the personal property of others. The term “building” is usually not defined in the policy. Check your policy to make sure that “fixtures” are listed in both the building property section and in the business personal property section of the policy.

An additional area of covered property under your policy should be “personal property of others” that is in the care, custody or control of you or your business. The ISO property coverage form extends this grant of coverage to property of others not just to property located in a covered building, but also to personal property within 100 feet of the described premises.

Any commercial property policy you obtain should specify the type of property that is covered and what types of property will not be covered. The typical commercial property policy should cover most types of property commonly used by or owned by commercial businesses. (Always review the terms of your commercial property coverage with your insurance agent so that you understand what is and what is not covered in your business operations. For example, some property policies do not cover damage to foundations of buildings if the foundations are below the surface of the ground if there is no basement. There is no substitute for asking your agent for clarification.)

You need to be aware that under most standard commercial property policies, certain types of business property have limited coverage. Often, electronic data, valuable papers and records, and fine arts (statuary, porcelains and china) as well as jewelry, watches and precious stones, will have restrictive coverage.

As noted above, your property insurance will indemnify you for a “covered cause of loss.” Most commercial property policies are available with either a basic cause of loss form or a broad cause of loss form. As with all things, the scope of your coverage is dependent upon how much you are willing to pay in your premium. Your basic cause of loss form should include such perils as fire, lightning, explosion, windstorm or hail, smoke, vandalism, sprinkler leakage or sinkhole collapse. Sometimes you may see limited coverage extended for fungus, wet rot, dry rot and bacteria.

In insurance, however, what is more important than what is covered is what is not covered. Often, property policies will exclude all coverage for flood damage and most other types of water damage. Another exclusion seen on almost all commercial property policies is damage from earth movement/earthquake. You may be able to obtain an endorsement adding earth movement coverage, which will vary in cost depending upon your location.

Almost every property coverage policy contains what is called the “Vacancy Clause” in one form or another. This vacancy clause provides that there is no coverage for certain enumerated risks if the building where the loss or damage occurs has been vacant for some specific period of time (60 days in the ISO Commercial Property form). (If you know that a building you own or lease is going to be vacant for any substantial length of time, talk to your insurance agent. There are endorsements you can buy for a policy that will provide some measure of coverage for your unoccupied building.)

Another common exclusion in business property policies is for damage to your premises resulting from an interruption in utility service that originates away from your business premises. For example, if the utility substation that provides power to your business is hit by lightning, the damage caused to your operations by the interruption in power is usually not covered by the standard business policy. Many of these standard exclusions can be addressed through endorsements which provide some type of coverage for the claim.

One of the most important forms of property coverage you may want to obtain is “business income and extra expense coverage.” From the standpoint of insurers, the term “business income” usually means the net profit or loss before income taxes that would have been earned or incurred by you had there been no loss, plus the continuing normal operating expenses that you incur when running your business.

Basically, business interruption coverage provides that the insurance company will pay the actual loss of business income that you sustain due to the necessary suspension of your operations during the “period of restoration.” The suspension must be caused by direct physical loss of or damage to property at premises which are described in the Declarations of the insurance policy and for which a “Business Income Limit of Insurance” is shown in those Declarations. The loss or damage must also be caused by or result from a “covered cause of loss.”

In other words, a commercial property insurer will pay for your loss of business income that results from the stoppage or slowdown of your business operations during the time needed to repair or replace the damaged property. (The importance of providing adequate business records relating to your operations cannot be overemphasized. It is good business practice to keep good records, and it will be invaluable to you in proving your business interruption claim.)

The term “period of restoration” is often defined in commercial property policies to begin 72 hours after the time of the direct damage loss and the period of restoration ends when the property is (or should have been, given the exercise of due diligence) repaired or replaced, or when you have resumed operations at a new permanent location. The time that the period of restoration starts can be varied with an endorsement.

It is important for you to understand what insurers mean when they say the “necessary suspension” of your business operations. This term is defined in the standard business policy to mean either a slowdown or cessation of your business activities. In other words, you do not have to be completely put out of business in order to have coverage for business interruption.

Commercial Inland Marine Insurance:
First-party property coverage for businesses comes in a variety of forms. As noted above, the standard – and most common – form of property coverage addresses coverage for the buildings, business personal property and potential income loss a business may sustain. Businesses, however, often have property risks involved in the transportation of goods or relating to a business property that is not kept at the premises and is not a building or what is defined as business personal property. One type of insurance that addresses this exposure to a business is called “Commercial Inland Marine” insurance. Historically, most transportation of products and goods in the United States were handled over waterways (by ships moving in the ocean city to city, or by barges on rivers or canals).

As the United States expanded, and products and goods began to move over railroads, and then motor vehicles and aircraft, insurance companies took the older marine forms of coverage and applied them to inland transportation. Although there are many different categories of commercial inland marine policies, the basic types of coverage available to businesses are for domestic goods in transit; bailee’s customers; movable equipment and unusual property; property of certain dealers; and instrumentalities of communication and transportation.

Inland marine insurers provide coverage for your property shipped domestically by rail, tractor/trailer, aircraft, or even while in the possession of the United States Postal Service.

A “bailment” exists when merchandise is left to be held in trust for a specific purpose and returned when that purpose has ended. The “bailor” is the owner of the goods or merchandise, and the “bailee” is the one in possession of the merchandise. Most commercial general liability insurance policies (which we will discuss in the next section below) exclude the exposure your business will have when it holds in bailment goods or merchandise of another under what is called the “care, custody, and control” exclusion. A form of inland marine coverage, however, provides that necessary protection.

Certain types of mobile equipment may constantly be moving from location to location and subject to transportation exposures that are not covered by standard commercial business policies. Certain kinds of property that is not considered to be “equipment,” like cattle or expensive artwork your business may own, are eligible for endorsements called “floaters.” Again, these are risks that may not be covered under the standard commercial policy, but which you should be able to cover under inland marine coverage.

Certain specialty businesses, e.g., jewelers, high-end special equipment sellers, retailers who specialize in the sale of fur stoles or fur coats, etc., may find that their inventory is not adequately covered by the standard commercial property policy. These types of specialty dealers can find coverage under inland marine policies.

There are reasons to purchase Commercial Inland Marine coverage even when your Commercial Property form might provide some protection. Inland Marine coverage forms are generally broader in scope of coverage for this particular type of coverage. You can purchase Inland Marine coverage in an “all risks” form, which will probably contain fewer exclusions than the standard property policy. Any business that imports or exports products should talk to its insurance agent about Inland Marine coverage. (A variation on the two types of polices we have discussed above is the “Commercial Output Policy.” This policy combines in a single policy features from both Commercial Property forms and Inland Marine coverage. If your business involves the manufacturing and transportation of products, talk to your agent about whether a COP policy will work for you.)

 

Commercial Crime Insurance:
Another type of property coverage which every business should consider is commercial crime insurance. In your standard Commercial Property form, employee dishonesty is almost always an excluded cause of loss. For many years, a substantial percentage of small business bankruptcies were caused by some form of crime. Some insurers treat the type of business differently, making distinctions between retail operations and financial institutions.

Although Commercial Property forms cover the theft of some property, most crime insurance policies address some combination of “money,” “securities,” or “property other than money and securities.” Money is often defined to mean currency, coins and bank notes in current use and having a face value, as well as traveler’s checks, registered

checks and money orders held for sale to the public. “Securities” are often described as negotiable and non-negotiable instruments or contracts representing either money or other property.

Crime policies usually address two distinct types of risk: (i) business organizations other than financial institutions, and (ii) financial institutions. The former type of coverage is usually provided on a commercial crime coverage form. The latter type of coverage is usually provided on some sort of fidelity bond or financial institution coverage form. (Your insurance agent should be able to tell you whether the ISO commercial crime forms, the Surety Association of America crime protection forms or the American Association of Insurance Services commercial crime program best suits your business’s needs.)

As with all insurance, crime policies contain exclusions. Certain types of property are excluded from coverage. Always be sure to review your policy to read the definitions of “money,” “securities,” and “property other than money and securities,” so that you understand what property is included and what property is excluded from your crime coverage.

Some of the areas often covered under crime policies are employee dishonesty, forgery and alteration, theft, robbery, and computer fraud. The last mentioned is not the least important. Some commercial crime policies exclude coverage for theft performed with a computer. If your policy form excludes computer fraud, talk to your agent about a computer fraud coverage form or endorsement. (Remember, crime coverage, including computer fraud coverage, does not typically insure against loss from theft of your trade secrets or other confidential business information you may have. Also, generally computer fraud coverage does not extend to damage from the introduction of a computer virus unless you have purchased a separate endorsement for that risk. Again, talk to your agent.)

How the loss occurs is often crucial to invoking crime coverage. Crime policies generally look at losses caused by either employees or “anyone but an employee.” Employees are usually defined broadly under crime policies. Almost always, losses caused by two categories of persons are always excluded from crime policies. Usually this will include the named insured and any partners of the named insured whether acting alone or in collusion with other persons.

 

Casualty Insurance

For better or for worse, litigation has become the number one dispute resolution mechanism in the United States. There are a variety of ways to manage the risk that comes when someone claims that your business has harmed them in some fashion.

One mechanism businesses can use to address litigation risk is “self-insurance.” This solution requires the business to set aside a certain amount of its revenue to provide for any losses that occur, i.e., losses that could usually be covered under a general liability insurance policy. Revenues that would normally be used for premium payments are added to a segregated fund that is used to pay incurred damages to third parties. This is a solution centered on the business retaining the risk rather than having an insurer take that risk for the business in exchange for a premium payment.

For most small businesses, self-insurance is not a practical solution from an administrative standpoint. It is much easier to purchase liability insurance. When we talk about purchasing liability insurance, we are talking about a contractual arrangement under which the insurer agrees to defend and indemnify the insured against loss or damage arising from injuries to third parties. Under this arrangement, insurance is purchased in order to transfer the risk of harm to others to a professional risk bearer by means of the underwriting process.

Commercial General Liability Coverage:
One of the most common ways that businesses protect themselves from third-party claims is through the purchase of a policy based on the Insurance Service Office’s (ISO) Commercial General Liability coverage form (CGL form).

The current version of the CGL form provides coverage for a business for its “premises/operations” and its “products/completed operations” activities. There is a distinction in these extensions of coverage that you need to understand.

For example, liability insurance protection for a manufacturer for the process of producing or manufacturing goods is generally termed “premises liability” while liability protection coverage for the manufacturer once the goods are finished and moved away from the manufacturing premises is generally referred to as products liability coverage. Similarly, a business that performs a service on the premises of others, such as a general contractor, can obtain coverage while his work is in progress in the form of operations liability coverage insurance and, after the work is completed, by completed operations liability coverage. The premises liability portion of a CGL policy provides a manufacturer with the same type of coverage that an operations liability portion of a CGL policy provides the service business. The CGL form melds both types of coverages together as “premises/operations” coverage.

Likewise, products liability coverage for a manufacturer equates to completed operations coverage for the service business. That type of coverage, “products/completed operations,” is also built into the contemporary CGL form. The insured can delete products/completed operations coverage by endorsement, and thereby lower its premium.

We need to be clear that premises/operations coverage and products/completed operations coverage are not separate or distinct types of coverage, rather they are the same type of coverage for bodily injury and property damages, just for a different time period. In other words, by building in premises/operations coverage and products/ completed operations coverage into one policy, the ISO has enlarged the timeframe in which an event may occur that damages a third-party and still be covered by the same liability policy.

In the contemporary ISO CGL form, coverage for claims against your business for bodily injury or property damage is contained in what is called “Coverage A” (bodily injury and property damage), and includes premises/operations and products/completed operations hazards caused by an occurrence. The term “occurrence” is a defined term in the CGL form that requires that the incident giving rise to the claim be accidental in nature.

One of the primary purposes of CGL coverage is to protect businesses from third-party claims for bodily injury or property damage resulting from accidents. A typical CGL policy broadly defines the damages to which it applies and then specifically lists exclusions to the broad grants of coverage. Some of the typical exclusions found in Coverage A of the CGL form are for intentional acts, harm to your own employees (that is why you should have Workers Compensation insurance), the threatened or actual dispersal or release of pollutants from your premises, property damage to property in the care, custody or control of the business and property damage (with some notable exceptions) to the business’s own work. (There are numerous exclusions in Coverage A, Coverage B and Coverage C which you need to carefully review to understand what is not covered under your CGL form.)

Personal Injury and Advertising Injury:
The contemporary CGL form contains two additional coverage grants: Coverage B (personal and advertising injury) and Coverage C (medical payments). The event giving rise to coverage under personal and advertising injury is an “offense” committed during the policy period. Coverage B does not require bodily injury or property damage as a predicate to invoke its application. “Personal and advertising injury” is a defined term that includes false arrest, malicious prosecution, wrongful eviction, libel, slander, invasion of privacy and – if done in the named insured’s advertisement – infringement of copyright, trade dress, or slogan, and misappropriation of another’s advertising ideas. (Note that the current CGL form specifically excludes coverage for personal and advertising injury arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights, except that the exclusion does not apply to infringement, in the business’s “advertisement,” of copyright, trade dress or slogan.)

The types of offenses listed in the CGL form as necessary predicates to invoke coverage for personal and advertising injury are, generally speaking, behavioral predicates involving intentionality to complete them. This does not mean that traditional insurance requirements, such as moral hazard and the fortuity requirement with respect to harm caused by these intentional acts, are not still necessary.

The scope of Coverage B is constrained by a number of specific exclusions implicating moral hazard. For example, there is an exclusion that bars coverage for personal and advertising injury that is caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict “personal and advertising injury.” While the offenses that define personal and advertising injury will occur as a result of deliberate acts, the harm caused by the offenses cannot be intended and still invoke the benefits of Coverage B.

Medical Payments Coverage:
Coverage C (medical payments) requires an insurer to pay medical expenses for bodily injury caused by an accident on the insured’s premises, or related areas, or because of the insured’s operations, all regardless of fault if the expenses are incurred and reported within one year of the accident. This coverage is like no-fault premises liability insurance. This coverage is intended to pay for injuries sustained by members of the general public while on your business premises or exposed to your business operations. The fundamental distinction between Coverage C and Coverage A and Coverage B is that while both of those grants of coverage are fault based, Coverage C pays without regard to the fault of the insured. Modern business practices, however, may call for additional protections, separate and apart from the traditional CGL form.

Cyber Coverage: A prime example of a newly emerging risk that all businesses need to be aware of is the problem of incurring liability for data breach and privacy violations. Unfortunately, attacks by criminal data hackers is becoming more and more prevalent.

To protect against this type of harm, a business can obtain different forms of cyber and privacy insurance coverage. Available from some insurers is privacy notification and crisis management expense coverage. This coverage form will pay the costs to determine the cause of the data breach and secure the site to prevent further intrusions, notify customers that their personally identifiable information has been compromised, set up a call center for them, monitor their credit, and hire a public relations firm to assist your business in dealing with the crisis.

A separate type of coverage you may want to consider is regulatory defense and penalties coverage. This form of insurance protection pays the expenses required to deal with the multitude of state and federal regulators who become involved when a breach occurs and also covers the fines and penalties leveled by these agencies (one of the few forms of insurance that provides such coverage). Lastly, you may want to consider information and privacy liability coverage, which pays the costs (e.g., settlements or judgments and defense costs) that your business incurs when it is held liable for the unauthorized disclosure of its customer’s personally identifiable information.

These types of liability coverage may sometimes be made available by different insurance companies under a variety of names: privacy and network security insurance, security and privacy protection insurance, information security and privacy insurance. You will need to review the proposed coverages carefully to make sure that the Insuring Agreements provide to your business the type of coverage you really want. You may want to check with your commercial property insurer to see if they sell special endorsements you can add to your commercial property coverage which may provide you with the same or similar types of insurance coverage.

Business Auto Coverage: A common risk exposure many businesses face arises from any operation in which that business utilizes its own fleet of motor vehicles. If this is an exposure you face, your business will want to obtain commercial automobile insurance, or what is known as “business auto coverage” (BAC).

The BAC policy usually consists of declarations, common policy conditions, the business auto coverage form and any endorsements that will add or expand your coverage. There will usually be a section in the policy which is labeled “Covered Autos” and calls for the entry of one or more numerical symbols for each type of coverage to be provided. These symbol entries indicate the types of coverage obtained by the insured. Each type of coverage will have a limit of liability and, where applicable, deductibles applicable to each coverage.

Depending upon the size of your fleet, the types of autos or trucks used, and other conditions, your business should be able to tailor the type of BAC it obtains. One of the first categories you need to consider is the type or class of covered auto you want to insure. Is it just automobiles or trucks that your company owns? Is it autos and/or trucks that you lease or rent? Does your business operate mobile equipment, such as bulldozers or front loaders? Do you want to extend coverage to vehicles your business does not own but which your employees may be using from time to time? These are all issues you need to discuss with your insurance broker to make sure you obtain the correct protection for your business operations.

Garage Coverage: If your business is involved in the repair of motor vehicles, equipping motor vehicles with accessories, or the garaging of motor vehicles, the exposure of such a business to third parties can involve risks that are sometimes covered by CGL forms and sometimes covered by BAC forms, but may be excluded by both forms.

In such a situation, your insurance broker will recommend that your business obtain what is called garage and truckers insurance. The garage liability policy was developed for auto-related businesses to provide three basic coverages: (1) liability insurance, a general and auto liability coverage in a single insuring agreement; (2) physical damage insurance, coverage for damage to those covered autos specified in the policy; and (3) garage keepers insurance, which provides coverage when the insured business is legally responsible for damage to non-owned vehicles, such as those belonging to customers.

Directors and Officers Coverage: Finally, it is important to remember that not just the business, but corporate officers as well, face third-party liability claims in the operation of the business. To manage the risk of the liability of directors and officers, insurance can be purchased separate and apart from corporate indemnification agreements. Most standard directors and officers liability policies (“D&O policies”) provide two grants of coverage. The first provides coverage to past, present and future directors and officers of the corporation and the second grant of coverage is for the parent corporation and, depending on the wording, insured subsidiaries for amounts paid by the corporation to indemnify a director or officer for loss.

Almost all D&O policies are “claims made” policies. Claims made policies are insurance policies under which coverage is invoked only for a claim first made during the policy period against a director or officer. This is different from the “occurrence” type of policy discussed above.

Most D&O policies now specifically define the types of wrongful acts for which they provide coverage. Historically, D&O policies provided coverage for any breach of duty, neglect, error, misstatement, omission or other act done by directors and officers alleged by a claimant as a result of their actions as directors and officers.

As noted, some insurers have very specific definitions of what they consider to be a wrongful act. Some policies only provide coverage for negligent acts or errors. It will be very important to carefully review the Insuring Agreement so that you understand the scope of coverage that is being made available to corporate management and to the company under the D&O policy you purchase.

There are a number of well-established consequences of corporate behavior for which D&O coverage is not available. Specifically, most D&O policies do not provide coverage for the return of financial gain or benefits that are improperly received by the company and/or its officers. Usually, bodily injury and property damage (which is covered under your CGL form) will be excluded from a D&O policy. Any judgment that is enforced against the company or its officers as a result of active and deliberate dishonesty is not covered under the policy. Also, unless you get a special endorsement, your D&O policy will not cover liability for the company or its officers arising out of any violation of the Employee Retirement Income Security Act of 1974. To protect the business against ERISA liability claims, a separate policy is usually required.

Professional Liability Coverage: If your business provides professional services, you will need a professional malpractice policy (what is commonly referred to as an “errors and omissions” policy). Almost all professional malpractice policies: policies for healthcare providers, design professionals, attorneys, accountants or others, are presented to their purchasers in the format of a “claims made” policy, as opposed to the “occurrence policy” discussed with reference to CGL policies (although CGL policies can also come in a claims made format).

A claims made policy protects against claims made during the term of the policy irrespective of when the act giving rise to the claim occurred. Because transmittal of the notice of claim to the insurer during the policy period triggers coverage under the policy, it is considered to be an important aspect of the claims made policy. In other words, failure to comply with the reporting requirements of a claims made policy has been held by many courts to bar coverage. Although a harsh consequence, the reporting requirements in claims made policies are enforceable.

Malpractice policies often provide coverage for an insured’s “wrongful act,” which is often defined in the insurance contract as any breach of duty, neglect, error, misstatement, or omission in the furnishing of professional services. Please read the policy terms carefully. Malpractice policies often include provisions which reduce the available policy limits by the amount expended on defense of the claim.

 

REFERENCES:

Robert B. Holtom, Underwriting Principles and Practices (3d Ed. 1987)

 

International Risk Management Institute, Commercial Liability Insurance, Volumes 1-3 (2013) International Risk Management Institute, Commercial Property Insurance, Volumes 1-3 (2012)

Gary L. Johnson, The Practical Art: On the Archeology and Architecture of Liability Insurance Contracts, 78 Defense Counsel Journal 133 (2011)

Gary L. Johnson, The Contours of Property Coverage: Some Reflections on the Vacancy Clause, 21 Coverage No. 5 (2011)

Richard D. Turner, Steven Hom, II, Peter R. Kensicki, Multiple-Lines Insurance Production, Volumes 1 and 2 (2d Ed. 1986)

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