Miscellaneous Commercial Policies

Transcription

1 12 Miscellaneous Commercial Policies LEARNING OBJECTIVES Upon the completion of this chapter, you will be able to: 1. Understand the Nationwide Marine definition 2. Identify the 6 broad classes of property that may be insured under Inland Marine contracts 3. Differentiate between controlled (filed) and uncontrolled (non-filed) lines of coverage forms 4. Recognize the Commercial Inland Marine Coverage Forms and Floaters 5. Identify the Transportation Coverages 6. Differentiate between Umbrella and Excess Liability Insurance 7. Define Professional Liability Insurance 8. Compare and contrast Surety and Fidelity Bonds 9. Identify the key components of Equipment Breakdown Protection Coverage Form 10. Recognize the Selected Endorsements 11. List the Farm Property Coverages 12. List the Farm Liability Coverages Overview This chapter will review a wide range of miscellaneous commercial policies. The Nationwide Marine Definition defines 6 broad classes of property that may be insured under marine contracts. Marine insurance addresses property that is portable in nature or at an unnamed location. Ocean Marine Insurance and Inland Marine Insurance provides such coverage for these properties. Umbrella and Excess Liability Insurance provides an additional layer of insurance protection above and beyond the limits of liability. This chapter will also describe Special or Professional Liability Insurance that is available for businesses or professionals that have a higher than average exposure for being legally liable for damages other than bodily injury or property damage. Additional miscellaneous coverages reviewed in this chapter include Bonds, Equipment Breakdown Coverage, Farm Property and Liability Coverages, Aviation Insurance, and Crop, Hail, and Windstorm Insurance Commercial Inland Marine Insurance Initially, Ocean Marine insurers provided practically all of the transportation insurance needed in this country because most major cities were located on coasts or major rivers; and most goods were shipped either by ocean or inland waterways. The advent of first the railroad, followed by motor trucks and airplanes, created a new system of transportation and, with it, a demand for insurance to protect goods in transit over land. 171

2 CHAPTER TWELVE Nationwide Marine Definition The Nationwide Marine Definition is a guideline that was established in 1953 by the National Association of Insurance Commissioners (NAIC). It was revised in 1976 for the purpose of classifying inland marine, marine, and transportation exposures into categories of insurance. All property must contain an element of transportation to be eligible under inland marine coverage forms. Specifically, it must be in transit, be moveable, bear a relationship to transportation or communication, or be held in the possession of a bailee, who is someone other than the property owner. The Nationwide Marine Definition defines 6 broad classes of property that may be insured under marine contracts. The 6 classes are: 1. Imports, which may be insured at any location and must remain segregated from other property so it can be easily identified. 2. Exports, which may be insured at any location and acquires its character when being prepared for export and must retain that character unless diverted for domestic trade. 3. Domestic Shipments and Property in Transit, which involves shipments on consignment, for sale or distribution, for approval or auction, while in transit, while in the custody of others, and while being returned and DOESN T include coverage while on premises owned, leased, or operated by the consignor. 4. Instrumentalities of Transportation or Communication, which DO cover items that are often at a fixed location because they play an important role in the transportation and communication industries. These items are NOT easily insured on traditional commercial property policies. They include the following types of property: bridges, tunnels, transmission towers, including radio and television transmitting equipment, piers, wharves, slips, docks, dry-docks, marine railways, pipe lines, outdoor cranes, loading bridges, and similar equipment. 5. Personal Property Floaters typically insure personal property on an open perils basis and, when covered on a floater, this type of property is excluded from coverage on the Homeowners and/or Dwelling policies. It involves property that is usually NOT located at the insured s residence. 6. Commercial Property Floater Risks insure property pertaining to a business, profession, or occupation. Examples include: a. Physicians and Surgeons Equipment Floaters b. Pattern, Tool, and Die Floaters c. Theatrical Floaters d. Film Floaters e. Salesman s Sample Floaters f. Tools and Equipment Floaters g. Builders Risk & Installation Floaters Inland Marine Policies 1. Generally, the property insured under these policies is property that is only covered on land. 2. The coverage is designed to protect against losses to property that is mobile in nature, primarily while the property is away from the owner s premises. 3. Inland marine policies are designed primarily to cover property in transit, moveable property, property particular to transportation and communication risks, and property in the possession of bailees. 4. The coverage is generally written on an open perils basis and contains few exclusions. 172

3 MISCELLANEOUS COMMERCIAL POLICIES 5. The policies are not used to cover furniture and fixtures at fixed locations. The only inland marine policies that insure property at fixed locations are those issued to insureds in the transportation and communications industries because such property cannot be insured on other property policies. 6. Typical exclusions on an inland marine policy include: a. Governmental action b. War and nuclear hazard c. Consequential loss d. Dishonest and criminal acts of an insured e. Weather conditions f. Acts and decisions 7. The exclusions of earthquake and water are usually found only in inland marine policies that insure buildings. Commercial Inland Marine Classes Inland Marine Coverage Forms are divided into two lines of coverage: controlled (filed) and uncontrolled (non-filed). 1. Controlled lines of coverage, or filed lines, are those that use policy forms, endorsements, and rates that are filed by insurers with the departments of insurance in each of the states where they write insurance. These forms are governed by the rules contained in the commercial lines manual, or any other approved manual. The most common forms of coverage in the controlled lines are: Accounts receivable Commercial articles floater Jewelers block coverage Sign coverage Valuable papers Records coverage, and equipment dealers coverage 2. Uncontrolled lines of coverage, or unfiled lines, are those that use policy forms, endorsements, and rates that are not filed with or through any rating bureau or state department of insurance. They are developed by individual insurers for individual risks and, consequently, the forms and coverage differ from insurer to insurer. A majority of commercial inland marine insurance is uncontrolled, such as: Builders risk coverage Contractors equipment floaters Electronic data processing (EDP) coverage Installation floaters Transportation floaters 173

4 CHAPTER TWELVE Retention Question 1 The Nationwide Marine Definition includes all of the following classes of property, except: a. Imports b. Personal Property Floaters c. Instrumentalities of Transportation d. Umbrella Retention Question 2 The Controlled Inland Marine Coverage forms provide insurance for which of the following? a. Builders risk b. Transportation floater c. Signs d. Installation floater 12.2 Commercial Inland Marine Coverage Forms and Floaters Bailees Customers Form A bailee is a person or organization that accepts into its temporary care property owned by others. Bailees typically accept personal property into their care for storage, repair, servicing, or safekeeping. Examples of bailees include a dry cleaner or an auto repair shop. The Bailees Customers Form provides open perils coverage for covered personal property of others while it s in the care, custody, or control of the insured. Covered property does NOT include certain types of property that are uninsurable or that must be insured on another policy or form of inland marine coverage, such as: Accounts, bills, records, documents, deeds Animals, birds, or fish Autos, trucks, trailers, aircraft, watercraft Furs, jewelry, watches, precious or semi-precious stones Property accepted by the insured for storage Property shipped by mail Contraband or property in the course of illegal transportation or trade Property owned by the insured Installation Floater The primary property insured under the installation floater is moveable property, such as electrical, plumbing, or heating equipment to be installed in a building. Property, such as carpeting, tile, glass, elevators, and machinery, can also be included in coverage. Insurance is provided during installation, and sometimes after installation, until construction has been completed and the property has been accepted by the owner OR when the interest of the insured ends, whichever occurs earliest. 174

5 MISCELLANEOUS COMMERCIAL POLICIES Builders Risk Coverage Builders risk coverage insures buildings and structures that are in the course of construction, along with machinery, equipment, supplies, and fixtures that will eventually become part of the insured buildings and structures. Scaffolding and temporary structures can also be included in coverage. Eligible buildings can be commercial, residential, or farm. The coverage form is similar to the Building and Personal Property Coverage Form and provides insurance on an open perils basis. The perils of theft and vandalism often contain limits and/or specific conditions, such as for accidental loss, damage, or destruction of property in which the insured has an insurable interest. Contractors Equipment Floater Contractors equipment coverage provides open perils coverage on the insured s equipment, such as mobile tools, equipment, and machinery, including forklifts, compressors, generators, and small hand tools. Coverage is also provided for similar property of others in the insured s care, custody, or control. No coverage is provided for: Autos, trucks, aircraft, boats Plans, blueprints, designs Property loaned, leased, or rented to others Contraband and personal property of employees Electronic Data Processing Coverage (Computer Systems Coverage Form) This form insures computers, component parts, associated peripheral equipment including printers and faxes, and systems used exclusively in the insured s computer operations, such as air conditioning, fire suppression, and electrical equipment. The form also insures data stored on software, tapes, discs, drums, or cells. The form does NOT provide coverage for the following types of property: Property leased to others and located off-premises Accounts, records, documents, etc. Laptops and notebooks Contraband Stock in trade Note Extra Expense Coverage is available as an optional coverage. Equipment Dealers Floater Equipment dealers coverage provides insurance for property consisting primarily of mobile agricultural and construction equipment, including property of others in the dealer s care, custody, or control, such as binders, reapers, harvesters, tractors, bulldozers, and road scrapers. The following types of property are excluded: Aircraft, watercraft, motor vehicles Accounts, bills, currency, deeds Property leased, rented, or sold. Coverage includes property owned by others in the dealer s care, custody, or control. 175

6 CHAPTER TWELVE Commercial Articles Coverage Form Commercial articles coverage provides insurance for fine arts, cameras, musical instruments, and their related equipment when used for business or commercial purposes. Jewelers Block Coverage Block policies and floaters provide insurance for both business personal property and goods for sale during the normal course of the insured s business. Coverage is typically written on an Open Perils basis with the usual exclusions: war; wear and tear; delay and loss of market; flood; and earthquake. Specific block or dealers policies have exclusions designed to meet the needs of that particular business and its exposures. A Jeweler s Block floater provides insurance for jewels, watches, gold, silver, platinum, pearls, and precious and semi-precious stones. Two optional coverages are available and, if not purchased, no coverage applies for: 1. Show Windows Provides theft coverage for articles in a show window if the window is broken or smashed. Different limits apply when the business is open or closed and whether the window is protected by a security system. 2. Money Provides coverage for theft of money from locked safes or vaults on the insured s premises. Accounts Receivable Coverage Form Accounts receivables coverage provides insurance when the insured s business records are destroyed in a loss caused by a covered peril, and the business is unable to collect money it s owed. The policy pays for the uncollected sums plus the expenses involved with reconstructing records, along with extra collection fees. Accounts receivables coverage also pays for interest on loans and other reasonable expenses. Typical exclusions include those involving dishonest acts of the insured, its employees and authorized persons; bookkeeping or accounting errors; bad debts; alteration or falsification of records; war; governmental action; and nuclear hazard. Signs Floater Signs coverage provides coverage insurance for neon signs, automatic or mechanical signs, and street clocks, as well as billboards, ordinary fixed or plastic-faced signs. Coverage is provided for property of the insured and similar property of others in the care, custody, or control of the insured. Valuable Papers and Records Floater Valuable papers and records coverage provides insurance for the destruction of valuable papers and records by a covered cause of loss. Examples of covered property include maps, blueprints, manuscripts, films, illustrations, abstracts, deeds, books, mortgages, etc. Money and securities are NOT covered. Retention Question 3 Which of the following is covered under the Electronic Data Processing Floater? a. Laptops b. Printers c. Accounts and records d. Notebooks 176

7 12.3 Transportation Coverages MISCELLANEOUS COMMERCIAL POLICIES Common Carrier Cargo Liability Motor Truck Cargo Coverage 1. Motor truck cargo coverage is provided for loss or damage to property arising from the legal liability of the carrier. It covers the interest of the trucker not the shipper, owner, or consignee when loss or damage to the cargo occurs. Coverage is written on one of two forms: a. Bill of lading form, which is written on an open perils basis. b. Named perils form, which varies by insurer. 2. When a common carrier accepts property to be transported, it issues a Bill of Lading, which serves as both a contract and a receipt for goods accepted into the carrier s care. The type of Bill of Lading determines what party is liable for damage that might occur during the transportation of the property. The two types of Bill of Lading are: a. Straight A straight bill of lading doesn t contain a value limitation for the cargo being shipped, meaning the carrier is legally responsible for the full value of transported goods while it is in the carrier s care. b. Released A released bill of lading is issued when the carrier and shipper agree that the carrier s responsibility is limited to the value stated on the bill of lading. 3. The cost for transporting a shipment via a released bill of lading is less expensive than shipping via a straight bill of lading. Motor Truck Cargo Forms 1. There are two basic types of cargo forms: a. Motor Truck Cargo Carrier s Legal Liability Form. b. The Motor Truck Cargo Owner s Form. 2. Motor Truck Cargo Carrier s Legal Liability Form The Motor Truck Cargo Carrier s Coverage Form provides property coverage for the insured s cargo under the following terms: a. The property is owned by others and is covered property (meaning it s not a type of property that s excluded in the form). b. The insured has accepted the property for transportation as a contract or common carrier. c. The insured has issued a bill of lading or a shipping receipt. d. The insured is legally liable for loss or damage to the cargo. 3. Motor Truck Cargo Owners Coverage Form The Motor Truck Cargo OWNERS Coverage Form provides OPEN PERILS property coverage for the insured s cargo under the following terms: a. The property is owned by the insured. b. The property is covered property (meaning it s not a type of property that s excluded in the form). c. The property is located in or on a land vehicle OWNED or OPERATED by the insured AND is in transit at the time of loss. 177

8 CHAPTER TWELVE Transit Coverage Forms Transit coverage forms are used when the insured purchases inland marine insurance for shipments of goods via common or contract carriers. 1. Annual Transit Coverage Form Covered property is the insured s personal property or the property of others in the insured s care, custody, or control. Property must be in transit when shipped by any type of carrier or vehicle, or in any land vehicle owned or operated by the insured. Coverage applies while covered property is in the custody of the carrier for hire until it s either delivered to its destination or returned to the insured. 2. Trip Transit Coverage Form This form is used by those who do not make regular shipments, but wish to insure a single shipment. Covered property is the property described in the Declarations and that isn t otherwise excluded. Coverage applies while covered property is in the custody of the carrier for hire or in any vehicle owned or operated by the insured while in transit. 3. Both forms may be written on an open or named perils basis Commercial Ocean Marine Insurance 1. Ocean Marine Coverage insures the transportation of property (goods and merchandise) by vessels crossing domestic and foreign waters, including inland or aviation transit connected with the shipment. This is the oldest form of property insurance. 2. There are no standard Ocean Marine policies and coverage is generally unregulated with respect to both forms and rates. 3. Property covered on an Ocean Marine policy must be insured to its full value in order for the loss to be fully covered. There is no formal coinsurance provision in an ocean marine policy, however, a penalty is assessed at the time of loss if property is underinsured. For example, if the insured purchases coverage in an amount equaling 50% of the full value of the property insured, the loss payment for partial loss will be 50% of the loss. 4. Ocean marine policies contain warranties, which are seldom found in other property policies. Warranties are promises made by the parties to the contract and the payment of losses is contingent upon those warranties. If the warranties are breached, losses aren t paid. There are two types of warranties: a. Express warranties are written into the policy contract, such as the exclusion of coverage for war, strike, riot, and civil commotion. b. Implied warranties aren t always written into the contract but are generally understood by all parties and binding upon them. Examples of implied warranties include the ship s soundness for sailing, the professional qualifications of the captain and crew, and the legal purpose of the voyage. 5. Breach of an implied warranty will void the contract. These warranties include: a. Legality All voyages must be made legally and for a legal purpose. Any loss that occurs as the result of an illegal purpose will not be covered. b. Seaworthiness The vessel must be seaworthy at the time insurance goes into effect and upon the insurer s subsequent inspections. The vessel must always be in the command of a qualified and experienced captain and crew. The vessel must comply with safety and operational requirements. c. No Deviation in Voyage The ship must sail the course that was filed with the insurer at the time the policy was underwritten. Exceptions that don t void coverage in the event a loss include a deviation in voyage to avoid bad weather, make necessary repairs, save a human life, or obtain medical care. 178

9 MISCELLANEOUS COMMERCIAL POLICIES 6. Ocean Marine Insurance provides the following types of coverage: a. Hull Insurance Covers physical damage to the vessel. Coverage may be written on a named perils basis on one of two types of policies: 1) A Voyage policy, which covers the vessel for a specific voyage, or 2) A Time policy, which covers the vessel for a specific period of time (usually 12 months). Named perils include perils of the sea, jettison, piracy, fire and explosion, and lightning. b. Cargo Insurance Covers physical damage losses to merchandise while in transit. Cargo insurance can be written on an open perils basis. Certain shipping considerations affect coverage: 1) FOB (Free On Board) Point of Shipment The seller assumes responsibility for loss or damage to the transported property until it s in the possession of the carrier and a bill of lading, or receipt, has been issued. 2) FOB Point of Destination The seller is obligated to transport property and will be responsible for loss or damage to transported property until proper delivery has been made. 3) The difference in these two methods of shipping is, essentially, who is legally responsible for the cargo at the time of the loss. If cargo is shipped FOB Point of Shipment, the shipper is responsible for insuring cargo during shipment. If cargo is shipped FOB Destination, the seller is responsible for insuring cargo during shipment. c. Freight Insurance Freight insurance, or freight revenue insurance, provides coverage when the prepayment of freight is lost due to a partial loss to cargo or a voyage that isn t completed. Freight Revenue may be insured in a number of ways and depends upon the agreement between the shipper and carrier. If the shipper is required by agreement to pay the carrier s freight bill without regard to delivery of the goods, the freight revenue is considered part of the cargo and is insured in the cargo s limit of insurance. If the freight revenue depends upon the safe delivery of the goods, it s insured as part of the hull value. d. Protection and Indemnity Insurance (P & I Insurance) is liability insurance purchased by ship owners for virtually all types of maritime liability pertaining to the use of a vessel. Coverage includes: 1) Cargo lost or damaged through the insured s negligence. 2) Damage to other property, including fixed objects, such as wharves, docks, and other vessels, when not caused by collision. 3) Damage to property on board the insured vessel when caused by collision. 4) Injuries to seamen resulting from the vessel s lack of seaworthiness, for other jobrelated injuries, and general damages subject to the Jones Act caused by negligence. 7. General Average A partial loss sustained voluntarily, but done so to save a vessel or cargo from a total loss. An example of a general average loss is jettisoning part of the cargo (throwing it overboard) to prevent a vessel from sinking. When a general average loss occurs, the owners of the vessel and all cargo share proportionally in the loss. 8. Particular Average A partial loss sustained by a specific vessel or cargo. The loss is NOT shared by anyone other than the party with insurable or financial interest in the loss. 9. The Running Down Clause Part of a hull policy that provides coverage for legal liability of the shipper or carrier for claims arising out of collisions caused by the shipper or carrier. This clause covers the negligence of the shipper or carrier that results in damage to the property of others. 179

10 CHAPTER TWELVE 10. Inchmaree Clause Covers direct damage caused by the bursting of boilers, breaking of propeller shafts, or loss due to faults or errors in navigation by the crew. When this clause is added to the policy, it broadens the types of losses that are covered for the hull. Retention Question 4 Under Ocean Marine Coverage, breach of each of the following implied warranties will void the contract, except: a. Express b. Legality c. Seaworthiness d. No deviation in voyage Retention Question 5 Protection and Indemnity (P&I) Insurance is similar to which of the following coverages? a. Physical Damage b. Liability c. Uninsured Motorist d. Medical Payments 12.5 Umbrella and Excess Liability Insurance The primary intent of purchasing any form of excess coverage is to obtain an additional layer of insurance protection above and beyond the limits of liability provided by another liability insurance policy. Umbrella liability is a specific form of excess coverage designed to insure against catastrophic losses. One of the eligibility requirements for purchasing a commercial umbrella or excess liability policy is the existence of primary, underlying insurance. 1. Excess Liability Insurance Insurance purchased for the purpose of extending the limits of liability on another policy. 2. Commercial Umbrella Insurance Commercial Umbrella Insurance provides coverage against catastrophic losses, extends liability limits, drops down to provide coverage not included in underlying primary insurance, and provides more comprehensive coverage than that contained in underlying primary insurance. 3. Primary insurance responds to a loss before all other insurance that might be in place to coverage a particular loss. An example of primary insurance is a commercial auto policy. 4. Underlying insurance is specific insurance that insures the same risk insured by excess or umbrella policy AND that will respond before the excess or umbrella insurance responds. An umbrella or excess insurer requires other commercial liability insurance to be in place to insure against the risks faced by a business person or commercial enterprise. For example, underlying primary coverage MUST be in place on the following business risks before an insurer will issue a commercial umbrella or excess liability policy: a. Commercial General Liability Provides liability insurance for the business premises, operations, products, and completed operations along with a few other exposures. b. Employer s Liability Provides liability insurance for the business in the event an employee sues the business for injuries that fall outside Workers Compensation statute. c. Commercial Auto Liability For exposures pertaining to vehicles owned, used, leased, or hired by the business. 180

11 MISCELLANEOUS COMMERCIAL POLICIES d. Liquor Liability For businesses that have this exposure. 5. NO excess or commercial umbrella policy is standard. Each policy contains its own insuring agreement, definitions, exclusions, conditions, and requirements for underlying primary insurance and limits. 6. Coverages include Bodily injury and property damage: a. Insured must be legally liable. b. Required underlying primary insurance must pay first. c. Sometimes personal injury is covered. d. Defense is provided, either inside or outside the limits of liability. e. Additional coverages are included. f. Standard limits range from $1 to $10 million; higher limits are available, usually up to $25 million or $50 million. In most cases, if the umbrella insurer requires $1 million of underlying coverage to be in place and, at the time of a loss no underlying coverage was in place, the umbrella insurer will pay damages in excess of the first $1 million. In other words, if a judgment were rendered against the insured for $2 million, the umbrella carrier would only pay $1 million of the loss and the insured would be responsible for the first $1 million even if no primary underlying policy were in effect at the time of the loss. 7. Because umbrella and excess policies are not standard, their exclusions may vary widely. Most contracts contain exclusions that mirror the exclusions in the underlying coverage, especially if the same insurer writes both the underlying and excess policies. Common exclusions found in commercial umbrella and excess liability policies include: a. Professional Services (i.e., exposures that are covered by E&O, D&O, Medical Malpractice) b. Employment Practices Liability c. Product Recall d. Workers Compensation and Employer s Liability e. War and Terrorism f. Expected or Intentional Injury g. Contractual Liability 8. Coverage is normally written on an occurrence basis and usually applies worldwide. 9. Self-Insured Retention As with personal umbrella policies, a commercial umbrella policy has a self-insured retention, which is a form of cost-sharing that applies when the policy drops down to act as primary coverage because the underlying primary policy doesn t cover a loss. Retention Question 6 All of the following underlying coverages must be purchased in order to qualify for the Umbrella and Excess Liability policy, except: a. CGL b. Employer s Liability c. Liquor Liability d. Workers Compensation 181

12 CHAPTER TWELVE 12.6 Specialty or Professional Liability Insurance 1. Some businesses and business persons possess unique characteristics that expose them to losses that are specifically excluded under other liability policies. Examples of such losses include economic loss and indirect, or consequential, loss. Specialty liability insurance is available for those businesses and professionals that have a higher than average exposure for being legally liable for causing economic or indirect loss. This means that, with a few exceptions, they re more likely to be legally liable for damages OTHER than bodily injury or property damage. These policies are written on non-standard forms with unique policy provisions and conditions. 2. Professional Liability Insurance is a generic term that refers to insurance that protects professionals from losses that arise out of their professional conduct. When professionals practice in special fields and hold themselves out to the general public as having greater than average expertise in particular areas, they are held to higher standards of care. Most losses resulting from the specialist s failure to meet reasonable standards of care in his or her field are excluded on other liability policies. Professional liability insurance does NOT provide coverage for bodily injury or property damage. 3. The most common forms of professional liability insurance are Errors & Omissions (E&O) and Medical Malpractice. 4. Fiduciary Responsibilities Directors and officers of corporations have many and varied fiduciary responsibilities. These include the duties of care and loyalty, in addition to exhibiting due diligence when handling the money and property of the corporation. Board members of non-profit institutions may have special fiduciary duties to advance the charitable goals of the institutions and protect their assets. Allegations of wrongful or tortuous conduct may require directors and officers to defend themselves personally from such claims, and to face substantial liability exposure. The most common forms of liability for insuring these fiduciary responsibilities are Directors & Officers (D&O) Liability and Fiduciary Liability. 5. Exposures Professional liability policies insure against a wide range of perils, many of which are specifically excluded under other forms of liability coverage: a. Fraud or breach of contract b. Conflict of interest c. Malpractice or neglect d. Government investigation e. Errors and omissions f. Cyber risks, such as: 1) Business-to-Business (B2B) exposures 2) Business-to-Consumer (B2C) exposures 3) Internet Service Providers (ISP), mobile, cellular exposures 4) Internal technology infrastructure exposures 5) Corporate brochure web site exposures 6. Who is an Insured As with commercial general liability policies, the insureds are those named in the declarations and can include: a. Executive officers and directors b. Stockholders and trustees c. Volunteer workers and employees 182

13 MISCELLANEOUS COMMERCIAL POLICIES 7. Duty to Defend Depending upon the type of coverage, the insurer may not have the duty to defend, as it has in most other insurance policies. Certain professional liability policies require the insurer to pay for defenses costs but do not require the insurer to actually handle defense. Because some professionals, such as doctors and attorneys, wish to have control over whether to settle a loss, it s very important to understand fully how the defense provision works in a professional liability policy. 8. Policy Triggers Professional liability policies are typically written on claims-made forms of coverage either pure claims made or claims-made and reported. The pure claims-made form requires claims to be made during the policy period. Claims-made and reported forms require claims to be both made AND reported during the policy term. Directors and Officers Liability (D&O) Directors and Officers Insurance is typically written to protect the directors and officers of a corporation or other legal entity for wrongful acts committed while acting in their capacity as directors and officers for the organization. Medical Malpractice Insurance Malpractice Insurance is typically written for medical professionals such as doctors, surgeons, nurses, and dentists whose negligent acts or omissions may injure or harm patients. Other professions covered by malpractice insurance include social workers and beauticians. This is the only type of professional liability that may include coverage for bodily injury. Errors and Omissions (E&O) Insurance Errors & Omissions Insurance is typically written for professionals who provide services, such as insurance agents, adjusters, real estate agents, architects, accountants, attorneys, surveyors, and appraisers, whose negligent acts or omissions may result in financial harm to a third party. Employment Practices Liability Insurance (EPLI) EPLI provides businesses with liability coverage against claims made by employees, former employees, and potential employees alleging their legal rights were violated. Some insurance companies provide this coverage by endorsement to the BOP; other insurance companies provide coverage on standalone policies. EPLI provides coverage against various types of claims that are typically excluded on other liability policies, including: 1. Sexual harassment 2. Discrimination 3. Wrongful termination 4. Breach of employment contract Coverage includes defense and typically excludes punitive damages and civil/criminal fines assessed against the insured. Workers Compensation and Employer s Liability are also excluded. Fiduciary Liability Insurance Provides errors and omissions insurance for businesses with respect to their administration of employee benefit plans, such as pensions, profit-sharing, and medical insurance. The Employee Retirement Income Security Act of 1974 (ERISA) increased the legal liabilities of fiduciaries that, in turn, increased many business exposures to fiduciary liability claims. 183

14 CHAPTER TWELVE Liquor Liability Insurance Provides legal liability coverage for businesses in the business of selling, distributing, manufacturing, and furnishing alcoholic beverages based on common law and statutory liability (dram shop laws). The Internet Liability and Network Protection Policy The Internet Liability and Network Protection policy provides liability coverage on a claimsmade basis for risks that are specific to business use of the internet, such as network security, electronic publishing liability, and loss of data. The policy provides the following five insuring agreements: 1. Insuring Agreement A (Website Publishing Liability) provides liability coverage for wrongful acts committed in the course of internet publishing. 2. Insuring Agreement B (Network Security) pays for the insured s liability for a networkrelated security breach. 3. Insuring Agreement C (Replacement Or Restoration Of Electronic Data) pays for loss or recovery of data resulting from a virus or other malware. 4. Insuring Agreement D (Cyber Extortion) pays for losses resulting from threats such as virus or denial of service attacks. 5. Insuring Agreement E (Business Income And Extra Expense) pays for indirect loss due to business interruption resulting from an attack or extortion attempt Bonds Retention Question 7 Which of the following perils is not insured under a professional liability insurance policy? a. Government investigation b. Cyber risks c. Discrimination d. Fraud Bonds are contracts that involve three parties: 1. Principal (Obligor) The party owing the duty, performance, or honesty and is usually the party purchasing the bond. The Principal is also called the Obligor and is usually the insurance agent s client or insured. 2. Surety (Guarantor) The party guaranteeing the duty, performance, or honesty of the Principal. The Surety issues the bond, is also called the Guarantor, and is usually an insurance company. 3. Obligee The party paid by the Surety if the Principal fails to perform (because this is the party harmed by the principal s dereliction of duty). If the Principal fails to perform as agreed, the (Surety) must perform in lieu of the Principal because of the requirements of Suretyship. Suretyship is the assumption of liability for the obligations of another; in other words, a guarantee. The Surety has a legal right of action against the Principal in the event of default until the amount of the loss is recovered. The defaulting Principal MUST repay the Surety. 184

15 MISCELLANEOUS COMMERCIAL POLICIES Surety Bonds (Performance Bonds) Surety bonds guarantee that specific obligations will be fulfilled. If the principal defaults, the surety must perform the contract, duty, or obligation of the principal, or indemnify the obligee for actual loss. Consequently, before accepting a risk, the surety considers the principal s ability to perform, financial capability, and previous contracts. Surety bonds are generally written for the duration of the contract, and they are written under the following categories: 1. Contract Bonds Guarantee that contractors perform according to a construction contract. If a contractor fails to perform according to the contract, the Surety is responsible to the Obligee for the bond limit, which usually equals the value of the completed contract. The following types of contract bonds may be required in connection with a contract: a. Bid Bond A guarantee that the contractor making the bid will, upon acceptance of the bid by the contractor s customer (the Obligee), proceed with the contract and replace the Bid Bond with a Performance Bond. Failure to do so results in default and the Surety will pay the contractor s customer (the Obligee) the difference between the contractor s bid and the next highest bid. b. Performance Bond A guarantee that the contractor will perform, as agreed in the contract. If the contractor defaults, the Surety will pay the Obligee the value of the bond, which is usually the value of the contract. c. Labor and Materials Bond A guarantee that bills for labor and materials called for in a construction contract will be paid when due. This bond can be written separately or as part of a Performance Bond. 2. Court Bonds Required by the court to enforce certain behavior. There are two types of court bonds: a. Judicial Bonds guarantee that certain parties fulfill their statutory obligations in connection with court proceedings. b. Fiduciary Bonds guarantee the honest and faithful performance of executors, trustees, and other fiduciaries. This type of bond is often required by statute in order to protect the interests of those for whom the fiduciary acts. 3. License and Permit Bond A bond required by municipalities or other public bodies as a condition for granting a license or permit to engage in a specified activity. The bond guarantees that the party seeking the license or permit will comply with applicable laws or regulations. Examples include: a. Contractor s license bonds guarantee that a contractor complies with laws pertaining to his or her trade. b. Tax bonds guarantee a business complies with laws pertaining to payment of taxes. c. Broker s bonds, such as insurance, mortgage, or title agency bonds guarantee that the broker performs according to law. d. Motor vehicle dealer bonds guarantee that the dealer performs according to law. Fidelity Bonds (Honesty Bonds) 1. Fidelity Bonds are designed to cover an employer from direct loss due to fraudulent and dishonest acts (namely theft) by their employees. They are commonly referred to as dishonesty insurance. 2. Several types of Fidelity Bonds are designed for the needs of employers. a. An Individual Bond is used when an employer wishes to bond a single employee. b. A Name Schedule Bond is used when an employer wishes to bond several employees who are all named in the bond. 185

16 CHAPTER TWELVE c. A Position Schedule Bond is available to employers that desire to bond a specific position, regardless of who fills the position, or how often the person filling the position is replaced. d. A Blanket Bond is for an employer that desires to cover all existing employees of a firm without exception, as well as any new employees. Retention Question 8 Bonds are contracts that involve all of the following parties, except: a. Obligee b. Director c. Surety d. Principal Retention Question 9 Which of the following bonds is not a type of Fidelity Bond? a. Individual b. Name Schedule c. Blanket d. Court 12.8 Equipment Breakdown Coverage Equipment Breakdown Coverage, formerly known as Boiler & Machinery Coverage, is insurance for loss due to the equipment breakdown of most types of equipment, such as boilers, machinery, refrigeration systems, air conditioning systems, electrical equipment, etc. The resulting Business Income and Extra Expense loss is often covered, as well. Equipment Breakdown is excluded in most standard property insurance policies. Coverage may be added by endorsement to a policy or written as a monoline policy. The primary form of coverage is the Equipment Breakdown Protection Coverage Form and, while individual policies and endorsements provide the same basic coverage, their forms vary among insurers. Equipment Breakdown Protection Coverage Form (EB 00 20) 1. Coverage The following types of coverage are provided by the Equipment Breakdown Protection Coverage Form: a. Property Damage The form pays for direct damage to covered property located at the premises described in the Declarations. b. Expediting Expenses The form pays for the necessary extra costs the insured incurs to make temporary repairs, and to expedite the permanent repairs or replacement. c. Business Income and Extra Expense The form pays the actual loss of business income during the period of restoration, and the necessary extra expense the insured incurs, to operate the business during the period of restoration. d. Spoilage Damage The form will pay for spoilage damage to raw materials, property in process, or finished products (provided the spoilage damage is due to lack or excess of power, light, heat, steam or refrigeration, and certain other stipulated conditions are met). e. Newly Acquired Premises This form provides automatic coverage to newly acquired premises. 186

17 MISCELLANEOUS COMMERCIAL POLICIES f. Ordinance or Law Coverage Provides coverage for loss in value of undamaged property due to enforcement of ordinances or laws concerning repair or replacement of damaged equipment. g. Errors and Omissions Coverage pays for loss or damage not otherwise payable due to an unintentional error or omission. h. Brands and Labels Provides coverage to allow the named insured to either stamp a brand of salvage or remove the label from damaged goods and re-label at the insurer s expense. 2. Definitions The following definitions apply to the Equipment Breakdown Protection Coverage Form: a. Breakdown Failure of pressure or vacuum equipment; mechanical failure including rupture or bursting caused by centrifugal force; or electrical failure including arcing that causes damage to covered equipment and necessitates its repair or replacement. Breakdown does not include: 1) Malfunction, including but not limited to, adjustment, alignment, calibration, cleaning, or modification. 2) Defects, erasures, errors, limitations, or viruses in computer equipment and programs. 3) Leakage at any valve, fitting, shaft seal, gland packing, joint, or connection. 4) Damage to any vacuum tube, gas tube, or brush. 5) Damage to any structure or foundation supporting the covered equipment or any of its parts. 6) The functioning of any safety or protection device. 7) The cracking of any part on an internal combustion gas turbine exposed to the products of combustion. b. Business Income Net income (net profit or loss before income taxes) that would have been earned or incurred, and continuing normal operating expenses incurred, including payroll. c. Objects Covered Equipment built to operate under internal pressure or vacuum; electrical or mechanical equipment that is used in the generation, transmission or utilization of energy; communication equipment, and computer equipment; and equipment for any of the preceding that is owned by a public or private utility and used solely to supply utility services to the insured s premises. d. Covered Property Property the insured owns, or property that is in the insured s care, custody, or control and for which the insured is legally liable. e. Extra Expense The additional cost the insured incurs to operate their business, during the period of restoration, over and above the cost the insured would have incurred during the same period, had no breakdown occurred. f. One Breakdown If an initial breakdown causes other breakdowns all will be considered one breakdown. All breakdowns at any one premises that manifest at the same time and are the direct result of the same cause will be considered one breakdown. g. Period of Restoration The period of time that begins at the time of the breakdown or 24 hours before the insurer receives notice of the breakdown, whichever is later, and ends 5 consecutive days after the date when the damaged property is repaired or replaced with reasonable speed and similar quality. 187

18 CHAPTER TWELVE 3. Exclusions The following exclusions appear in the Equipment Breakdown Protection Coverage Form: Combustion Explosion Ordinance or Law, except as specifically provided Earth Movement Nuclear Hazard War and Military Action Water, flood, mudslide, water backup or sump overflow Failure to protect property Failure to use dispatch in resuming business Loss resulting from a test, such as an electrical insulation breakdown test; a hydrostatic, pneumatic, or gas pressure test. Indirect loss resulting from an accident to an object. 4. Although the Equipment Breakdown Protection Coverage Form contains many conditions that are similar to the conditions in other property policies, it contains its own unique conditions. One of the most important is the Suspension condition. If covered equipment is found to be in, or exposed to, a dangerous condition, the insurance company may immediately suspend coverage against the loss. Advance notice is not required but written notice must be mailed or delivered to the insured s last known address or the address where the covered equipment is located. Once suspended, coverage can only be reinstated by endorsement. Selected Endorsements 1. Actual Cash Value (BM 99 59) This endorsement, when added to the Equipment Breakdown Protection Coverage Form, changes the property damage method of valuation to state that the insurer will pay the lesser of: a. The cost to repair or replace the damaged property with property of the same kind, capacity, size, or quality on the same site or another site, whichever is less costly. b. The actual cash value of the damaged property. Note The valuation of covered property will be as of the time of the breakdown, and the insurer will not pay for damaged property that is obsolete or useless to the insured. 2. Business Income - Report of Values (BM 15 31) This endorsement is no longer widely used, but when it is used it is completed and signed by the named insured or its authorized representative and sent to the insurer in order to establish actual total net profits, fixed charges, and expenses for the immediate 12-month policy period that is expiring and to also estimate what the same values are expected to be for the upcoming 12-month policy period. The endorsement is used to determine the amount of the insurer s payment to the insured in the event of a loss of income. Retention Question 10 The Equipment Breakdown Protection Coverage Form does not provide which of the following types of coverage? a. Earth movement damage b. Property damage c. Spoilage damage d. Errors and omissions 188

19 MISCELLANEOUS COMMERCIAL POLICIES Retention Question 11 Under the Equipment Breakdown Protection Coverage Form, the condition will apply if the covered equipment is subject to a dangerous exposure. a. Cancellation b. Period of Restoration c. Suspension d. Covered Property 12.9 Farm Insurance The Farm Forms have evolved to keep pace with the changes in farming operations. Unlike the farms of the past, farms today often are large business operations. In addition to the exposure of a farm dwelling, most modern farms are characterized by a heavy investment in land, buildings, livestock, and farm equipment. Farm insurance includes Farm Property Coverage, and Farm Liability Coverage. Additional specialized forms include the Mobile Agricultural Machinery and Equipment Form and the Livestock Coverage Form. Farm Property Coverage Form The policy will pay for direct physical loss or damage to covered property at the insured location or elsewhere, as specifically provided, caused by, or resulting from, a covered cause of loss. For coverage to apply, there must be a limit shown in the Declarations. Coverages include: Coverage A Coverage B Coverage C Coverage D Coverage E Coverage F Coverage G Dwellings provides insurance for the residential dwellings owned and occupied by the insured. It includes attached structures. Other Private Structures provides insurance for detached private garages and other private structures. These structures must be used personally and not for farm purposes. Household Personal Property provides insurance for household personal property owned by the insured and family members while on the premises. Loss of Use provides insurance for additional living expense and fair rental value. Scheduled Farm Personal Property provides insurance for specific types of property if a designation appears on the Declarations for that type of property. For example, grain and hay, farm products, poultry (other than turkeys), and computers and related equipment used for farm management. Unscheduled Farm Personal Property provides insurance for all items of farm personal property on the insured location except for those specifically excluded. A few types of property are covered off-premises, however, coverage is not provided for household or personal property usual to a dwelling (that type of property is insured under Coverage C). Other Farm Structures provides insurance for described farm buildings and structures and their attached sheds and permanent fixtures. Also covered are silos if described on the Declarations, portable fences and structures, corrals, pens, chutes, etc. 189