section 6. flood, earthquake, and specialty forms

SECTION 6. FLOOD, EARTHQUAKE, AND SPECIALTY FORMS

Topic 14: National Flood Insurance Program and ISO Flood Coverage Endorsement

Topic 15: ISO Earthquake Endorsements and Difference in Conditions (DIC) Coverage

Topic 16: Specialty Policies

본 디지털에디션은 매 페이지마다 핵심용어가 삭제되어 강의를 수강하고 필기하여야 합니다. 동영상강의 수강회원 이외에는 활용이 불가하므로 무단 복제, 배포, 판매를 삼가하시기 바랍니다.

Topic 13: Other Commercial Property Coverage Forms

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Topic 14: National Flood Insurance Program and ISO Flood Coverage EndorsementCPCU 551 Review Notes / Assignment 6. Flood, Earthquake, and Specialty Forms / EO 1, 2

14.a. Eligibility for the National Flood Insurance Program (NFIP)National flood insurance is accessible to owners of property positioned in

communities that participate in the NFIP. To participate, communities are needed to regulate new construction and substantial alterations and improvements of existing structures by adopting and enforcing community floodplain management ordinances.

Special flood hazard areas (SFHAs) are areas that are determined to have a 1% or greater probability of flooding in any given year. Federal regulations mandate flood insurance in these areas.

Flood Insurance Rate Maps (FIRMs) show boundaries of SFHAs, the various flood zones, and base flood elevations (BFEs).

A community that becomes qualified to apply for NFIP participation is placed in the emergency program until the required floodplain management plan and necessary Flood Insurance Rate Maps (FIRMs) are developed. Coverage in the emergency program is offered at subsidized rates. Maximum limits of insurance are much higher in the regular program, in which the community agrees to adopt flood-control and land-use restrictions.

14.b. Maximum Amounts of Insurance AvailableUsing the regular program, the maximum amount of insurance available for

nonresidential properties is $500,000 for building coverage and $500,000 for personal property.

Using the emergency program, the maximum amounts are $100,000 on buildings ($150,000 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands) and $100,000 on contents.

Residential condominium associations can purchase building coverage up to $250,000, times the number of units in the building. However, contents coverage is restricted to a maximum of $100,000 per building.

SECTION 6. Flood, Earthquake, and Specialty Forms

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14.c. NFIP General Property FormThis form can be used to insure most commercial building and contents risks,

such as factories, retail businesses, warehouses, or residential condominium buildings that are not qualified to apply for coverage under the Residential Condominium Building Association Policy (RCBAP).

It covers direct physical loss caused by flood, as defined in the policy, at the premises described on the declarations form.

14.d. Key Features of NFIP General Property FormThe NFIP General Property Form and standard commercial property coverage

forms involve some key differences: (1) The Form covers building and contents on an actual cash value (ACV) basis with no option for replacement cost. The NFIP does offer a replacement cost option on residential risks. (2) The Form does not include a coinsurance provision. (3) The Form cannot be written on a blanket basis. All buildings must be separately described and insured. (4) The Form excludes loss of use and loss of income. These optional coverages are not available from the NFIP. (5) The Form excludes several types of property such as property located in, on, or around water; underground structures. The policy also excludes coverage for contents in a basement, with the exception of building service equipment.

14.e. Coverages of NFIP General Property FormCoverage A: Building Property provides coverage for building property which

is generally more limited than coverage offered under a standard commercial property form. Under the NFIP policy, a covered building must include two or more outside rigid walls and a secured roof.

Coverage B: Personal Property covers either household personal property or other than household personal property, but not both.

Coverage C: Other Coverages includes three insuring agreements (without deductible); (1) The Debris Removal coverage includes removal of debris of other property, not just debris from covered property. Under the flood policy, the insured may use the entire policy limit toward debris removal if needed. (2) Coverage for loss avoidance measures pays for measures to protect property from imminent flood damage, allowing reasonable expenses, up to $1,000. (3) Pollution damage coverage pays up to $10,000 for damage to the covered property caused by the discharge, seepage, migration, release, or escape of pollutants because of flood.

Coverage D: Increased Cost of Compliance (ICC) pays for compliance costs related to floodplain management for qualifying structures. This coverage pays up to $30,000 for activities necessary to comply with state or local floodplain management laws or ordinances that meet NFIP minimum standards.


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14.f. Residential Condominium Building Association PolicyCommonly called "REBAP or RCBAP," this policy insures residential

condominium associations as well as contents belonging to the unit owners in common or by the condominium association. A residential building has a minimum of 75 % of its floor area occupied for residential purposes.

Coverage under the REBAP is comparable to that found in the General Property Form, but differs in three distinct ways: (1) A higher limit of insurance may be purchased. The maximum limit of coverage under the REBAP is $250,000 times the number of units. (2) The NFIP offers replacement cost coverage on building property insured under a REBAP. (3) The REBAP includes an 80% coinsurance requirement on building property coverage.

14.g.Flood coverage is accessible by endorsement to commercial property policies.

The ISO Flood Coverage Endorsement is part of the commercial property policy to which it is attached and follows the policy's terms and conditions, except when the endorsement states otherwise.

The ISO Flood Coverage Endorsement can offer broader coverage than the NFIP coverage in these ways: (1) The ISO endorsement can cover a greater variety of property than the NFIP policies. (2) The ISO endorsement can provide the full range of commercial property coverages, whereas the NFIP policies provide no business income coverage and only very limited extra expense coverage. (3) NFIP policies are primarily written on an ACV basis, whereas the ISO endorsement can be written subject to the replacement cost or functional valuation options available under commercial property forms.

14.h. Limits of InsuranceThe flood endorsement is usually subject to a separate limit of insurance which

may be substantially lower than the regular policy limit(s). If the insurer is hesitant to provide the higher limits, the insured can obtain higher layers of flood coverage in excess property or difference in conditions (DIC) policies.

The limit shown for flood is the most that the insurer will pay in a single occurrence. An annual aggregate limit normally applies. Unless a higher limit is specified, the aggregate limit is the same as the flood occurrence limit.


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14.i. Ensuing Loss and DeductibleEnsuing Loss provision: Some losses may bring up the question of whether the

limits for each coverage are cumulative and can be "stacked." The endorsement states that, in the case of an ensuing covered loss (such as an explosion or a fire resulting from a flood), the most that the insurer will pay is the limit applicable to fire. The insurer will not pay the sum of the fire and flood limits.

Deductible: Knowing the flood zone in which the property is located, as determined from the applicable flood insurance rate map, assists the underwriter in setting the deductible. (1) For properties not located in special hazard zones, a deductible as low as $10,000 or $25,000. (2) For properties in special hazard zones, the deductible for these properties could be $100,000 or more.

14.j. Other InsuranceThis condition is essential because many insureds have flood coverage under

two or more policies. The Other Insurance condition in the Flood Coverage endorsement has these effects: (1) The endorsement coverage will contribute proportionately with insurance except for NFIP coverage. (2) The endorsement coverage is excess over the maximum limit that could have been insured under an NFIP policy.

14.k. Exclusions and LimitationsWith only a few exceptions, the Flood Coverage Endorsement is governed by

all of the exclusions and limitations found in the causes of loss form attached to the policy.

These are the exceptions: (1) This endorsement does not cover flood damage unless the flood begins more than 72 hours after the inception of the endorsement. (2) This endorsement does not cover damage to property in the open unless specified by the flood schedule or declarations. (3) The flood endorsement does not cover all of the causes of loss excluded by the Water exclusion discovered in the commercial property causes of loss forms. It excludes damage resulting from underground water or the backup of sewers, drains, or sumps. The endorsement does not cover loss caused by underground water unless the underground water is related with a flood.


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14.l. Property Not CoveredThe Property Not Covered section of the Flood Coverage endorsement differs

in several ways from the Property Not Covered section of the BPP. The flood endorsement does not cover these items: (1) Property in the open

unless specifically listed in the flood coverage schedule or declarations. (2) Property not qualified for flood insurance pursuant to the Coastal Barrier Resource Act or the Coastal Barrier Improvement Act. (3) Boat houses and open structures if positioned on or over a body of water. (4) Bulkheads, pilings, piers, wharves, docks, or retaining walls even though they have been removed from the property not covered list for other causes of loss

The flood endorsement does not exclude (and therefore covers) these items: (1) Foundations below the lowest basement floor (2) Underground pipes, flues, and drains.

14.m. Additional Coverages and Coverage ExtensionsAll additional coverages and coverage extensions offered by the commercial

property coverage forms attached to the policy apply to the flood endorsement with the exception that the amounts payable under the additional coverages and coverage extensions do not increase the limit of flood insurance.

Only the Debris Removal and Newly Acquired Property provisions are modified by the flood endorsement. Debris removal: The flood endorsement covers the insured's expense to remove debris of covered property and other debris as a result of a flood, together with the expense to remove debris of covered property.

Newly acquired or constructed property: (1) With regard to flood coverage, the extension does not apply to any building or structure that is not fully enclosed by walls or roof. (2) The limit of insurance for newly acquired or constructed property is changed to 10% of the total of all limits of insurance for flood coverage provided by the endorsement, but this additional coverage does not increase the total limit for flood insurance.


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Question 14.1. The National Flood Insurance Program (NFIP)Which of the following statements is incorrect with regard to the National

Flood Insurance Program (NFIP)?

I. Using the National Flood Insurance Program (NFIP), flood insurance is available directly from FEMA or through private insurers who participate in the NFIP's "Write Your Own" program.

II. Eligibility for the National Flood Insurance Program (NFIP) is restricted. National flood insurance is available only to owners of properties in communities which have met requirements established by the NFIP.

III. The General Property Form covers direct physical loss caused by "flood" at the premises listed in the declarations form. This policy excludes loss by flood to contents placed in a basement.

IV. A community that becomes qualified to apply for National Flood Insurance Program (NFIP) participation is placed in the emergency program until the required flood management plan and necessary Rate Maps are developed.

V. In the General Property Form of the National Flood Insurance Program (NFIP), debris removal coverage mirrors the coverage of the standard commercial property forms.

(A) I and II only

(B) III and IV only

(C) V only

(D) All of the above

AnswerUnder the NFIP General Property Form, debris removal coverage includes the

removal of debris of other property that floats onto covered property during a flood.

The correct answer is (C) V only.


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Question 14.2. The National Flood Insurance Program (NFIP)Which of the following statements is incorrect with regard to the National

Flood Insurance Program (NFIP)?

I. A small local store that is presently insured under a Businessowners Policy is located near the coast of the Atlantic Ocean. The owners desire to make certain that they have the appropriate coverage for its building and personal property due to its proximity to ocean. In cases like this, The Residential Condominium Building Association Policy (RCBAP) is suitable.

II. A factory in New Jersey is insured under the regular program of the National Flood Insurance Program (NFIP). There is a flood loss which causes $500,000 in building damage and $350,000 damage to the machinery and equipment in the factory. Ignoring any possible deductible and considering the maximum available limits, $500,000 for the building and $350,000 for contents are the most likely payment to the factory owner for damages.

III. In the continental United States, a flood may occur in a town that has recently become qualified for participation in the National Flood Insurance Program (NFIP). If Flood Insurance Rate Maps have not been developed for the area at that time of the flood, the NFIP would provide insurance coverage under the emergency program with a maximum amount of $100,000 in building coverage and $100,000 in contents coverage.

(A) I only

(B) II only

(C) III only

(D) None of the above

AnswerI. NFIP General Property Form is used to insure most commercial building and

contents risks, such as factories, retail businesses, warehouses, or residential condominium buildings that are not eligible for coverage under the Residential Condominium Building Association Policy (RCBAP). The Residential Condominium Building Association Policy (RCBAP) insures residential condominium buildings, as well as contents that are owned either by the unit owners in common or solely by the condominium association.

The correct answer is (A) I only.


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Question 14.3. The ISO Flood Coverage EndorsementWhich of the following statements is incorrect with regard to the ISO Flood

Coverage Endorsement?

I. The ISO Flood Coverage Endorsement is different from other coverages in the commercial property coverage part. One of these differences is that it is often subject to separate and lower limits than the policy limit.

II. Unless waived, the ISO Flood Coverage endorsement provides payment proportionally with any insurance carrier coverage limits, including NFIP under the underlying policy.

III. The ISO Flood Coverage Endorsement is subject to exclusions and limitations. One of exclusion is that damage to property in the open that is not specified by the flood schedule

IV. Foundations below the lowest basement floor are covered under the ISO Flood Coverage Endorsement.

V. The ISO Flood Coverage Endorsement does not cover loss caused by underground water or the backup of sewers, drains, or sumps unless the underground water is related with a flood.

(A) I and III only

(B) II and IV only

(C) II only

(D) V only

AnswerII. Unless waived, the ISO Flood Coverage endorsement provides payment

excess of the maximum coverage available under the NFIP policy, even if the insured has not purchased NFIP coverage.

The correct answer is (C) II only.


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Question 14.4. The ISO Flood Coverage EndorsementWhich of the following statements is true with regard to the ISO Flood


I. A retail store is a new insured under a commercial property form with an ISO Flood Endorsement with a policy effective date of July 1. The building is insured at a $450,000 limit and the personal property is insured at $325,000. On June 30, the oceanfront beside the retail store swells due to a long rainstorm and floods the store. Over the next two days, the building incurs damage totaling $300,000, and the personal property incurs damage totaling $200,000 along with a $50,000 loss of income. The loss is covered for the building at $300,000, personal property at $200,000 and loss of income at $50,000.

II. The Lakeside Restaurant insures its buildings and personal property under a commercial property program with an ISO Flood Coverage Endorsement. An insured flood occurs from the adjacent river, and Lakeside has the following losses: silt and debris on the restaurant floor; boat pier washed away; chairs and tables housed in the fully enclosed carport lost in the nearby river; the golf cart used to service the grounds is washed away in the river. The loss to the boat pier is not covered since it is over water. The rest of the losses are covered.

III. Lotte Mall covers its building and personal property for a $2,000,000 blanket limit with a Building and Personal Property (BPP) Causes of Loss-Special Form. The National Flood Insurance Program (NFIP) will act as the primary carrier for flood, despite the fact that Warehouse, Inc. purchased an ISO Flood Coverage Endorsement with a $1,000,000 limit. The insured property suffered a covered flood loss of $250,000. As a result of the flooding, a fire ensued within the building that destroyed the whole building and personal property. The total loss for the flood and fire is $3,000,000. Ignoring deductibles and any coinsurance, $3,000,000, the total loss for flood and fire would be covered.

(A) I only

(B) II only

(C) III only


AnswerI. There is no coverage. The policy does not cover any loss caused by a flood

already in progress when the policy period begins.III. $2,000,000, the blanket limit for building and personal property would be

covered. Due to the ensuing loss clause that, in the event of an ensuing covered loss (such as an explosion or a fire resulting from a flood), the most that the insurer will pay is the limit applicable to fire. The insurer will not pay the sum of the fire and flood limits.

The correct answer is (B) II only.


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Question 14.5. The ISO Flood Coverage EndorsementWhich of the following statements is incorrect with regard to the ISO Flood


I. Torrential rains caused severe flooding and washed away an insured's boat house and pier. At the time of loss, the insured had valid property coverage with a $1 million limit, a five percent deductible, and an ISO Flood Coverage Endorsement. The boat house and pier are covered for the full policy limit.

II. An insured owns a property located near a flood zone. The town where the property is located participates in the National Flood Insurance Program (NFIP) regular program. The insured has requested coverage at replacement cost, rather than actual cash value, and also has requested loss of use and loss of income coverages. The insurance agent handling the account is looking for the easiest way to amend the insured's current commercial property coverage. Given this case, the ISO Flood Coverage Endorsement would best respond to the insured's and agent's needs?

III. The owner of an office building has a Building and Personal Property (BPP) Coverage Form insured with a $3,000,000 blanket limit written for replacement cost and an ISO Flood Coverage endorsement with a $700,000 limit and a $25,000 deductible. The owner also has the National Flood Insurance Program (NFIP) General Property Form with a $500,000 limit. A river near the building overflowed due to torrential rains and a flood occurred. The building damage is $700,000 at replacement cost. The NFIP pays $500,000 and the ISO Flood endorsement pays $175,000, the excess above the NFIP less the deductible.

(A) I only

(B) II only

(C) III only


AnswerI. The boat house and pier are excluded by being over the water.The correct answer is (A) I only.


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Topic 15: ISO Earthquake Endorsements and Difference in Conditions (DIC) CoverageCPCU 551 Review Notes / Assignment 6. Flood, Earthquake, and Specialty Forms / EO 3, 4

15.a. Structure: Two ISO EQ EndorsementsEarthquake and Volcanic Eruption Endorsement (the coinsurance form)

Earthquake and Volcanic Eruption Endorsement (the no-coinsurance form or sublimit form)

Limit on earthquake loss Must insure for same limit applicable to other covered perils

May insure for lower limit than regular policy limit.

No. Yes. May be equal to one or two times the occurrence limit.

Deductible for property specifically insured

Percentage of the amount of insurance on the affected property

Percentage of the value of the affected property.

Coinsurance Coinsurance applies unless suspended by agreed value option

No coinsurance.

Ensuing Loss provision (stacking limitations in the event of covered ensuing loss, such as fire)

Not needed. The limit of insurance is the most that will be paid.

Yes. Payment is limited to the highest limit for either covered peril.

15.b. ExclusionsBoth ISO earthquake endorsements are subject to the standard exclusions

concerning ordinance or law, governmental action, nuclear hazard, utility services, and war and military action.

Loss caused by landslide, mine subsidence, tidal wave, tsunami, flood, mudslide, or mudflow, even if as a result of an earthquake or volcanic eruption, is excluded.

The endorsements also exclude loss caused by an earthquake or a volcanic eruption that begins prior to the inception of the insurance.


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15.c. Underground Property and Masonry VeneerUnderground foundations, underground pipes, flues, drains, and similar kinds

of property are highly vulnerable to earthquake damage. When purchasing earthquake coverage, the insured must consider utilizing the Additional Covered Property endorsement to cover such items. Adding the excluded items insures them against damage by any covered peril, not just earthquake.

Masonry veneer (such as brick facing on a frame structure) is particularly vulnerable to earthquake. The earthquake endorsements exclude coverage for loss to masonry veneer unless the veneer is limited to 10 percent or less of the exterior wall area. Masonry veneer coverage can be added by placing the words "including masonry veneer" in the premises description in the declarations and by paying an appropriate additional premium.

15.d. Earthquake Sprinkler Leakage Coverage optionUnder both of the earthquake endorsements, the insured can elect to restrict

coverage to loss caused by sprinkler leakage resulting from earthquake or volcanic eruption.

15.e. Difference in conditions (DIC) policiesDifference in conditions (DIC) policies can serve various needs. They are

available to almost any insured and fill in gaps left by the insured's other property insurance.

Property Covered: The property covered by a DIC policy usually is the same property covered by the insured's other policies: buildings and business personal property.

Perils Covered: Most DIC policies cover on a special-form basis. However, it is possible for an insured to get a DIC policy that covers a unique or a catastrophic loss exposure on a named peril(s) basis. Often, the perils covered by a DIC policy are broader than those found in standard policies.


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15.f. Earthquake and flood coverageA primary reason for buying a DIC policy is often to obtain either primary or

excess coverage for earthquake and flood losses. DIC policies often limit the insurer's exposure to earthquake or flood loss in

the same manner as the ISO endorsements: limiting earthquake and flood coverage to $5 million or less per occurrence and applying substantial deductibles, or requiring the maximum amount of NFIP coverage as underlying insurance.

When covering property in high-risk areas, a DIC policy may cover only a stated percentage (as low as 50 %) of earthquake or flood loss above the deductible.

Earthquake coverage may be provided under an "all risks" DIC policy simply by omitting any exclusion of earthquake or other earth movement.

DIC policies differ in the extent of floods or water damage coverage they offer. Many DIC policies provide broad water damage coverage, including coverage for most of the causes excluded in the standard causes of loss forms.

15.g. Exclusion of basic perils for being used as Inland Marine coverageTo be regarded as inland marine, the DIC policy must exclude fire and the

extended coverage perils. The extended coverage perils are windstorm, hail, smoke, explosion, riot, riot attending a strike or civil commotion, aircraft, vehicles, and in some cases vandalism and malicious mischief.

15.h. Equipment breakdown and Crime exposuresDIC policies commonly exclude loss caused by steam boiler explosion or

mechanical or electrical breakdown. For some insureds, a principal reason for selecting a DIC policy is to cover

significant theft exposures that are not covered in the insured's commercial property policy.

15.i. General ProvisionsCoverage territory: The fundamental approach of the DIC policies is to cover

property located inside the United States and Canada. Worldwide coverage can usually be provided when required.

Other insurance: the DIC policy will be excess over any other insurance. When two policies are both written to be excess, the conflict is often settled through negotiation.

Insurance-to-value conditions: DIC policies seldom require coinsurance. The amount of coverage provided by a DIC policy is, on many occasions, only a portion of the total insurable values exposed to loss.


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15.j. Advantages of DIC insurance for the insuredThe possible benefits of a DIC policy to the insured include these: (1) DIC can

be a cost-effective technique of obtaining flood and earthquake coverage. (2) DIC policies generally do not require coinsurance. (3) DIC policies are non filed in many states and are therefore often much easier to modify to meet the insured's particular needs. (4) DIC forms may offer broader coverage for some perils, and some exclusions may be less restrictive.

15.k. DIC-Type EndorsementsDIC-type endorsements do not provide open perils coverage; they are named

perils forms, typically covering the perils of earthquake, flood, or other specified perils.

Just like a separate DIC policy, the DIC-type endorsements have these qualities: (1) They do not include coinsurance provisions. (2) They usually provide coverage for an amount of insurance lower than that carried on the property under the insured's regular commercial property policy. (3) They are subject to higher deductibles than the commercial property policies to which they are attached.

DIC-type endorsements provide two advantages compared to separate DIC policies: (1) The simplicity of one policy (2) The avoidance of minimum premiums for the DIC coverage


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Question 15.1. ISO Earthquake and Volcanic Eruption EndorsementsWhich of the following statements is incorrect with regard to the ISO

Earthquake and Volcanic Eruption Endorsements?

(A) The Earthquake and Volcanic Eruption Endorsement (the Coinsurance Form) includes a provision entitled "Ensuing Loss." This endorsement prevents stacking of the commercial property limit and the earthquake policy limit when an earthquake loss leads to a fire which also damages the property.

(B) Both ISO earthquake endorsements state that all earthquake shocks or volcanic eruptions occurring within a 168-hour period will be considered a single earthquake or volcanic eruption. Therefore, most aftershocks will be considered part of the original event.

(C) Both ISO earthquake endorsements are subject to the standard exclusions concerning ordinance or law, governmental action, nuclear hazard, utility services, and war and military action.

(D) Both ISO earthquake endorsements state that loss caused by landslide, mine subsidence, tidal wave, tsunami, flood, mudslide, or mudflow, even though as a result of an earthquake or volcanic eruption, is excluded.

Answer(A) The Earthquake and Volcanic Eruption Endorsement (the No-Coinsurance

Form, or Sublimit Form) contains a provision entitled "Ensuing Loss."The correct answer is (A).


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Question 15.2. ISO Earthquake and Volcanic Eruption EndorsementsWhich of the following statements is incorrect with regard to the ISO

Earthquake and Volcanic Eruption Endorsements?

I. An office building is insured for and valued at $4,000,000 under the ISO Earthquake and Volcanic Eruption Endorsement (Sub-Limit Form) added to a commercial property policy with a $1,000,000 limit and a five percent deductible. An earthquake occurred and caused damage valued at $550,000. The insurer would pay $500,000 for the damage.

II. A manufacturing company has an insurable value for its building and personal property of $3.5 million. It has a $3 million earthquake limit under the ISO Earthquake and Volcanic Eruption Endorsement along with an 80 percent coinsurance clause and a five percent deductible. The amount payable for a $300,000 of earthquake loss would be $150,000.

III. An insured owns a building that is covered by the Earthquake and Volcanic Eruption Endorsement (Sub-Limit Form) with no coinsurance. The policy has a 10 percent deductible, a $3,000,000 insurable property value, and a $1,500,000 earthquake sublimit. The building has suffered a $350,000 of earthquake loss. The policy would pay $50,000.

(A) I only

(B) II only

(C) III only


AnswerI. Loss payment = $350,000 = loss $550,000 - deductible $200,000 (Value

$4,000,000 x 5%).The ISO Earthquake and Volcanic Eruption Endorsement (Sub-Limit Form)

apply deductible as a percentage of the value of the affected property. The ISO Earthquake and Volcanic Eruption Endorsement (Coinsurance Form) apply deductible as a percentage of the amount of insurance on the affected property.

II. Loss payment = $150,000 = loss $300,000 - deductible $150,000 (the EQ limit $3,000,000 x 5%)

III. Loss payment = $50,000 = loss $350,000 - deductible $300,000 (the value $3,000,000 x 10%)



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Question 15.3. Difference in Conditions (DIC) CoverageWhich of the following statements is incorrect with regard to the Difference in

Conditions (DIC) Coverage?

I. Insurers may attach DIC-type endorsements to their commercial property policies. A DIC-type endorsement fills some of the same coverage gaps that a separate DIC policy provides, for example flood and earthquake coverage.

II. Difference in Conditions (DIC) policies seldom require coinsurance. The lack of coinsurance allows the insurer to write the policy for a lower limit than the full value of the property.

III. A business positioned in a flood prone area is reviewing whether a difference in conditions-type (DIC) endorsement or a DIC policy would provide the most beneficial coverage for flood. The business will likely choose a DIC-type endorsement due to broadened water damage coverage.

IV. A Difference in Conditions (DIC) policy might exclude basic perils in order to be regarded as an inland marine policy allowing greater flexibility.

V. A difference in conditions (DIC) policy can have property valued at an amount that is mutually agreeable to the insurer and insured.

(A) I and II only

(B) III only

(C) IV only

(D) V only

AnswerIII. A disadvantage of Difference in Conditions (DIC)-type endorsements

compared to separate DIC policies is that the coverage is often not as broad as that of a separate DIC policy.

The correct answer is (B) III only.


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Topic 16: Specialty PoliciesCPCU 551 Review Notes / Assignment 6. Flood, Earthquake, and Specialty Forms / EO 5

16.a. Output PoliciesAn output policy combines all or almost all of the property coverages a

commercial organization needs. Output policies provide broader property coverage than standard commercial property forms but do not provide liability coverage.

These policies are generally judgment rated as opposed to manual rated, which provides flexibility in pricing. Virtually all output policies either omit or suspend coinsurance requirements.

16.b. Covered Property of Output PoliciesUnder output policies, these four sorts of property are covered differently than

under other commercial property forms:(1) Buildings and other structures: Some output policies express their coverage

as "business real property" rather than "buildings," thus covering all real property except that which is specifically excluded. Coverage often reaches to materials and equipment within 1,000 feet of the described premises as opposed to 100 feet.

(2) Personal property at unspecified locations: Personal property can be covered anywhere within the policy territory without listing the location in the policy, unlike standard commercial property policies that generally cover only personal property at listed locations.

(3) Personal property in transit: A typical feature of most output policies is broad transit coverage, including personal property on the insured's vehicles and in the custody of the insured's salespeople. Most output policies, however, do not provide coverage for overseas transit of exports and imports.

(4) Personal property of others: Some output policies provide coverage for personal property of others only when the insured has agreed before the loss to insure it or the insured is legally liable for the damage.


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16.c. Other Coverage Options of Output PoliciesThese three optional coverages can be obtained under output policies and not

ordinarily contained in standard commercial property policies: (1) Auto physical damage coverage: This is an option for those insureds with

large fleets of automobiles who are at risk of a loss involving several vehicles at one time.

(2) Equipment breakdown coverage: Some insurers provide equipment breakdown coverage by eliminating the commercial property exclusions regarding equipment breakdown exposures rather than by adding a separate coverage form.

(3) Flood and earthquake coverage: Most output policies have an option to add flood and earthquake coverage, reducing or eliminating the need for a difference in conditions (DIC) policy.

16.d. Insurance for Highly Protected Risks (HPRs)Highly protected risks (HPRs) insurance is generally used exclusively for large

property accounts. Insurers that offer HPR insurance provide intensive risk control services that would be too expensive for insurers to provide on smaller accounts. HPR rates are considerably lower than the typical commercial property rates. Most HPR insurance is written by a few large insurers with substantial property insurance expertise.

16.e.(1) Most HPR policies define covered property as "real property and personal

property" as opposed to as "building and personal property."(2) HPR policies extend coverage to property located within 1,000 feet, as

opposed to 100 feet, of the described locations.(3) Most HPR policies provide open perils coverage with fewer exclusions than

in the Causes of Loss-Special Form and many HPR policies still contain "all-risks" wording.

(4) HPR policies usually cover backup of water through sewers or drains, together with seepage. Damage caused by artificially generated electric current or electric arcing is also usually covered.

(5) HPR policies usually contain an unintentional errors clause, which provides coverage for properties that have been unintentionally omitted or erroneously described in the listing of covered locations.

(6) HPR policies also frequently provide more debris removal coverage than standard forms. Typically, HPR forms provide up to $5 million for debris removal or 25 % of the amount of the loss, whichever is greater.

(7) HPR forms commonly include demolition and increased cost of construction coverage, consequential damage coverage, and broad coverage for newly acquired property.


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16.f. Layered Property Insurance ProgramsWhen an insured wants high limits of liability insurance, they are generally

obtained by purchasing one or more umbrella or excess policies above the insured's primary liability policies. Each separate policy, providing $1 million or more of coverage, is commonly termed as a "layer." Generally, the first layer is supposed to cover frequency losses, and the upper layers are intended to provide catastrophe coverage.

16.g. Advantages of layered property insurance(1) It provides the chance to obtain adequate limits and flexibility in setting

layered limits due to lack of a coinsurance clause. (2) It provides lower overall premiums because the layered approach does not

require insurance to value.(3) It makes broader coverages available than in a standard policy.(4) It provides a bigger market in which to purchase insurance because many

insurers that cannot provide the high overall limits required can participate in the lower layer.

16.h. Disadvantages of layered property insurance(1) Conflicts in wording and interpretation among the various layers can result

in coverage disputes among claim representatives responsible for different layers.(2) A business with a layered property program might have difficulty in

finding insurers willing to cover, making it very difficult and expensive for an insured to place all the desired layers of coverage.

(3) Minimum premium requirements for each layer may make the cost of layered coverage higher than the cost of a standard policy.


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16.i Flood, EQ, and Specialty Forms Practice

NFIP General Property Form

ISO Flood Coverage Endorsement

ISO EQ Endorsements

DIC Coverage

Output Policy

Main Coverage

Flood Flood Earthquake, Volcanic Eruption

Flood, EQ, Inland Marine, Crime, etc.

Personal Property in Transit, EQ, Flood, Equipment Breakdown

Limit of Insurance

$500,000 each Building, Contents

Sublimit excess NFIP

Sublimit, only for Sublimit Form

Usually $5M for EQ, Flood

Full limit

Coinsurance No, ACV only

Yes Only for Coinsurance Form

No No

Contents in a basement

Not cover Cover Cover, if EQ damage

Cover Cover

Underground structure

Not cover Cover Cover, only with Endorsement

Cover Cover

Property in the open or on, around water

Not cover Not cover Cover, if EQ damage

Cover Cover

Damage from underground water

Not cover unless with flood

Not cover unless with flood

Not cover, with BPP

Cover Cover

Civil structure Not cover Not cover Not cover, with BPP

Not cover, with BPP

Possible


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Question 16.1. Output PolicyWhich of the following statements is incorrect with regard to the Output

Policy?

I. An output policy provides coverage for personal property anywhere within the policy territory without listing the locations.

II. For the output policy, coverage is extended to cover automobile liability for a large fleet of vehicles.

III. A national telecommunications company is in the midst of constant change. They frequently are opening new locations in various cities. Once they establish themselves in a sector, they will close some of their locations initially intended for the acquisition and set-up of new accounts. The type of policy that would best suit this type of business is an Output policy.

IV. A commercial farm with insurance coverage under an output policy stores the majority of its crop in its primary warehouse. Excess seasonal crop is transported to other overflow warehouse locations. Produce ready for transport or sale can also be left in a 1,500 square foot holding area outside the warehouse until it is ready to be moved. When a covered loss occurred damaging one of the overflow warehouses and also damaging the entire excess crop in the outside holding area, the output policy will provide coverage for loss to the property at the overflow warehouse and to all property in the holding area.

(A) I only

(B) II only

(C) III and IV only

(D) I and III only

AnswerII. Additional output policy coverage options that are not ordinarily included

in standard commercial property policies are auto physical damage coverage not the automobile liability coverage



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Question 16.2. Specialty PoliciesWhich of the following statements is incorrect with regard to the Specialty

Policies?

I. Highly protected risk (HPR) policies contain some supplementary coverage. Unintentional errors clause is a commonly included supplementary coverage.

II. The owner of a large property account believes that Highly Protected Risks (HPR) insurance may be to their benefit. This would be appropriate for them because the staff is passionate about loss control and the HPR carrier has the capacity to tailor to the unique needs of the account.

III. A potential disadvantage of a layered property program is conflicts in wording among insurance carriers on the various layers can lead to coverage disputes.

IV. Dylan Company owns a chain of office complexes throughout the United States. The largest property exposure for anyone complex is $40 million. Insurance company A provides the first combined layer of $800,000 above a $200,000 deductible. Insurance company B provides a $5 million second layer, beginning at a $1 million attachment point. Insurance company C provides the third $10 million layer beginning at a $6 million attachment point. Company D provides the forth layer attaching at $16 million. Dylan has made claim for a fire that destroyed an office complex causing $15 million in damage. Under this participation, Insurance company A pays $800,000, Insurance company B pays $5 million, Insurance company C pays $9 million, and Insurance company D pays nothing.

(A) I and II only

(B) III only

(C) IV only

(D) None of the above.

Answer IV. A: $800,000 xs $200,000, B: $5M xs $1M, C: $10M xs $6M, D: Unlimited xs

$16M. The correct answer is (D) none of the above.


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SECTION 7. BUSINESS INCOME INSURANCE

Topic 17: Business Income Loss Exposure and Coverage Form

Topic 18: BIC Additional Coverages, Conditions, and Optional Coverages

Topic 19: Business Income Coverage Options and Endorsements



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Topic 17: Business Income Loss Exposure and Coverage FormCPCU 551 Review Notes / Assignment 7. Business Income Insurance / EO 1~4

17.a. Business Income InsuranceBusiness income insurance covers the decrease in an organization's income

when operations are interrupted by damage to property as a result of covered peril.

A business income loss can be measured as the reduction in the firm's net income (the difference between what the firm would have earned had no loss occurred and what the firm actually did earn during the time period of interruption).

Three examples of normal operating expenses that could continue during a short interruption are payroll of key employees, debt repayments, and taxes.

Three examples of extra expenses are the cost to rent temporary work space, overtime wages to employees, and overnight air shipment of needed repair parts.

To ensure that business income insurance to apply, there must be an interruption of operations caused by property damage from a covered peril to property at locations or situations described in the policy, resulting in a loss of business income and/or extra expense.

17.b. Pre-loss Analysis of business income and extra expense loss exposures.

Events That Could Cause a Business Income LossEvents That Could Cause a Business Income LossDamage to Property at the Organization's Own PremisesDamage to Property at the Organization's Own Premises

Damage to Property Away from the Organization's Own Premises

1. Organization's own property off premises


2. Dependent property exposuresDamage to Property Away from the Organization's Own Premises

3. Interruption of utility servicesDamage to Property Away from the Organization's Own Premises 4. Acts of civil authorities


5. Adverse weather1. Time required to replace damaged property

2. Time required to restore normal level of operations

Small Physical Damage Loss, Long Interruption

1. BottleneckSmall Physical Damage Loss, Long Interruption 2. Seasonal fluctuations

Distinguishing Between Continuing and Noncontinuing ExpensesDistinguishing Between Continuing and Noncontinuing Expenses

Measuring Potential Loss SeverityMeasuring Potential Loss Severity

SECTION 7. Business Income Insurance

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17.c. Dependent property exposuresA business could incur business income and/or extra expense losses as a result

of damage to property at the premises of a firm upon which the organization depends, sometimes termed as a "contingent business income" exposure. Four types of dependency that can generate a business income exposure are (1) outsourcing, (2) dependency on key suppliers, (3) dependency on key buyers, (4) dependency on leader properties in a retail setting.

17.d. Measuring Potential Loss SeverityThe safest method of estimating the possible severity of business income losses

is to think about a shutdown at the worst possible time of the year, lasting for the maximum amount of time that can be foreseen (1) to replace a destroyed building and equipment, (2) to restore inventory and personnel to their pre-loss status, (3) to regain lost customers.

An organization's potential business income and extra expense loss estimated in this way is referred to as the estimated maximum loss (EML).


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17.e. Estimating Maximum Loss of Business Income

Calculating Coinsurance Basis

The coinsurance basis is the sum of the insured's estimated net income and operating expenses for the 12 months, minus only those expenses listed in the Business Income Worksheet as deductions (Coinsurance Basis = Net Income + Continuing Exp. for 12 months)

+/- Noncontinuing Expenses

When computing EML, any noncontinuing expenses (not just those listed in the worksheet) can be deducted

+/- Time Required to Restore Property

EML should be adjusted to correspond to the maximum period of restoration anticipated

+/- Peak PeriodsThe amount that could be lost at the peak period should be accounted for when calculating the EML

+ Extended Business Income Loss

The EML should include the EBI exposure only to the extent that it is insured

+/- Anticipated Changes in Expenses and Profits During the Period of Restoration

This may yield a significantly different EML if an insured's operations are rapidly changing

Anticipated extra expenses should be included in the EML to the extent that it is insured

+ Compensating for Possible Errors

Increase the EML by a selected percentage (such as 10 percent buffer) to allow for possible underestimates.

Selecting Coinsurance Percentage*

After the coinsurance basis and the EML has been established, a coinsurance percentage and a limit of insurance can be selected

*The insured may choose business income coinsurance percentages of 50, 60, 70, 80, 90, 100, or 125 percent under CLM rules.

17.f. Business Income CoverageThe insured can select any of three alternatives for business income coverage,

and the coverage should be clearly indicated on the Declarations page. These options may be selected: (1) Business income including rental value (2) Business income other than rental value (3) Rental value only: The coverage form defines "rental value" to include anticipated net rental income from tenants.


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17.g. Key Requirements in the Business Income (And Extra Expense) Coverage Form

(1) Actual loss of business income you sustain(2) As a result of necessary suspension of your operations(3) During the time period of restoration(4) Caused by direct physical loss of or damage to property at the described

premises(5) Loss or damage caused by a covered cause of loss

17.h. Actual loss of business income you sustain: Key Requirement (1)The policy definition of business income is designed to clarify what sums can

be included when calculating the amount of loss.Business Income means the Net Income (Net Profit or Loss before income

taxes) that would have been earned or incurred, and the continuing normal operating expenses incurred, including payroll.

Calculating the difference between the net income that could have been expected for the period of restoration (had no physical loss occurred) and the actual net income during that period takes into account all of the components of the business income definition.

These calculations are made without considering the effect of income taxes because any loss payment that the insured receives will itself be subject to tax. If the business income loss were calculated on an after-tax basis, the insured would not be fully indemnified.

17.i. As a result of necessary suspension of your operations: Key Requirement (2)

Insurance adjusters have generally interpreted the expression "suspension of your operations" to encompass business income coverage for either partial or total interruption of operations.

The ISO business income forms define "operations" as the named insured's business operations at the described premises and the tenantability of the premises (only when the policy covers rental value).


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17.j. During the period of restoration: Key Requirement (3)Business income coverage does not include actual loss sustained prior to the

period of restoration begins or right after the period of restoration ends. As defined, the period of restoration for business income coverage begins 72

hours after the physical loss or damage occurs. This 72 hours waiting period is usually called an elimination period or a time deductible.

The 72 hours waiting period for business income coverage can be either eliminated entirely or reduced to twenty-four hours by using the Business Income Changes-Beginning of the Period of Restoration endorsement.

The 72 hours waiting period does not apply to extra expense losses; coverage for such losses begins at the time the loss occurs because many extra expenses are incurred in the first few days after the damage.

The time period of restoration ends on the earlier of these dates: (1) when the property should, with "reasonable speed and similar quality," be repaired or replaced or (2) when business is resumed at a new permanent location.

17.k. Caused by direct physical loss of or damage to property at the described premises: Key Requirement (4)

The damaged property can be any real or personal property at the described premises, or personal property in the open or in a vehicle within 100 feet of the described premises. The property can be owned by the insured or by others. It need not be property that is covered under the insured's commercial property insurance.

17.l. Extra Expense CoverageThe second of the two main coverages offered by the Business Income (and

Extra Expense) Coverage Form is extra expense. The form defines "extra expense" as necessary expenses the insured incurs throughout the period of restoration that would not have been incurred if there had been no physical loss caused by a covered peril.

The coverage provisions describe three types of covered extra expenses: (1) Extra expenses incurred to prevent or minimize the suspension of business and to continue operations, at either the described premises or at temporary or replacement premises (2) Extra expenses incurred to minimize the suspension of business if the insured cannot continue operations (3) Extra expenses incurred to repair or replace any property, but only to the extent that it reduces the amount of loss that would otherwise have been payable.

The extra expenses described in the first and second categories are covered no matter whether they reduce the business income loss. Thus, they provide the type of extra expense coverage suitable for organizations that have a strong need to continue operations or to deliver their services, even though that would cost more than suspending operations.


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17.m. Special Exclusions Applicable to Business Insurance and Extra Expense Forms

The commercial property causes of loss forms contain some special exclusions that apply only to the ISO business income and extra expense coverage forms:

(1) Finished stock: This excludes loss caused by damage to or destruction of finished stock and time necessary to reproduce finished stock. It does not apply to extra expense coverage. Because, Finished stock can be covered for its selling price by endorsing the BPP.

(2) Labor strikes: This excludes any increase in loss resulting from delay in rebuilding, repairing, or replacing the property because of interference by strikers or other persons at the location of the rebuilding.

(3) Loss of license, lease, or contract: This excludes any increase in loss as a result of the suspension, lapse, or cancellation or any license, lease, or contract.

(4) Antennas (5) Consequential loss


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Question 17.1. Business Income Loss ExposureWhich of the following statements is incorrect with regard to the Business

Income Loss Exposure?

I. A flood temporarily closes a restaurant until repairs can be done to the building. Throughout the three-week period that the restaurant is temporarily closed for repairs, the business continuously pay its insurance premiums on the facility. Premium payments can best be regarded as continuing expenses.

II. An earthquake has damaged the building housing a local bakery. Owners temporarily rent an entirely equipped facility until necessary repairs can be made to the building. Rent of the temporarily facility can best be classified as an extra expense.

III. An explosion occurred at a bottled spring water manufacturing unit. As a result, a machine which tests the water for acceptable degrees of toxins and metals was disabled. In this situation, the ensuing potential business income loss is best described as interruption in production due to a bottleneck.

IV. When estimating maximum loss of business income that could be incurred, several factors are considered. The coinsurance basis is the beginning point for estimating maximum loss.

V. A business has determined its estimated maximum loss (EML) to be $2,700,000 and its coinsurance basis to be $4,000,000. The limit of insurance that should be purchased by the business is $2,700,000.

(A) I and II only

(B) III only

(C) IV only

(D) V only

AnswerV. The insured may choose business income coinsurance percentages of 50, 60,

70, 80, 90, 100, or 125 percent under CLM rules. With 70% coinsurance the limit of insurance would be $2,800,000

The correct answer is (D) V only.


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Question 17.2. Business Income Coverage FormWhich of the following statements is incorrect with regard to the Business

Income Coverage Form?

I. The Business Income (and Extra Expense) Coverage Form gives a method to insure business income and extra expense loss exposures. A part of the definition of business income is net income after tax that would have been earned or incurred.

II. A business is covered by a Business Income (and Extra Expense) Coverage Form. They suffer an extra expense loss following a physical loss at their insured location. The extra expenses last for 52 days. Subject to policy limitations, their expenses will be covered for days 4 through 52.

III. In an unendorsed Business Income (And Extra Expense) Coverage Form, the period of restoration begin for business income coverage begins 72 hours after the physical loss

IV. A local cafe has decided to undergo renovations to its facility to appeal to a larger customer base. During a one month period, the cafe rented a vacant adjacent space as a temporary location. The cafe files a claim with its insurer for consideration under the Business Income (and Extra Expense) Coverage Form for the rent during the one-month period. The loss will not be covered because there was not a needed suspension of the operation.

(A) I only

(B) I and II only

(C) III only

(D) III and IV only

AnswerI. Business Income means the Net Income (Net Profit or Loss before income

taxes) that would have been earned or incurred, and the continuing normal operating expenses incurred, including payroll. These calculations are performed without considering the effect of income taxes because any loss payment that the insured receives will itself be subject to tax.

II. The 72 hours waiting period does not apply to extra expense losses; coverage for such losses begins at the time the loss occurs because many extra expenses are incurred in the first few days after the damage.

The correct answer is (B) I and II only.


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Question 17.3. Business Income Coverage FormWhich of the following statements is incorrect with regard to the Business

Income Coverage Form?

I. In the business income coverage form, the period of restoration ends when the property is or should have been restored.

II. Under the ISO Business Income Coverage (without Extra Expense) Coverage Form, extra expenses covered only to the extent that they actually reduce the business income loss

III. In the ISO Business Income Coverage forms (BIC), the term “suspension” is defined as the slowdown or cessation of business activities or, in the case of rental value coverage, means that a part of the premises is rendered untenantable (unfit for occupancy).

IV. The possibility of the insured incurring an uninsured extra expense loss other than the reduction in business income loss is greatly reduced by the Business Income (and Extra Expense) Coverage Form.

(A) I only

(B) I and II only

(C) III and IV only


AnswerThe correct answer is (D) none of the above.


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Topic 18: BIC Additional Coverages, Conditions, and Optional CoveragesCPCU 551 Review Notes / Assignment 7. Business Income Insurance / EO 5 ~ 8

18.a. Structure: BIC Additional CoveragesExpenses to Reduce Loss

This addition covers necessary expenses incurred by the named insured to reduce business income loss, other than the cost of extinguishing a fire. This is only for Business Income (Without Extra Expense) Coverage Form.

Civil Authority additional coverage

Include actual loss of business income and necessary extra expenses incurred by the insured because access to the insured's premises has been cut off by action of civil authority

Alterations and New Buildings additional coverage

Insures loss of business income sustained because of physical damage to New buildings or Alterations to existing buildings at the described premisesAdds a 30 days period for which the insured will be reimbursed for loss of business income

Extended Period of Indemnity Option

Extend the limitation on EBI coverage in 30 days increments to as long as 730 days (or 2 years).

Interruption of Computer Operations additional coverage

Neither business income nor extra expense coverage applies when a suspension of operations is caused by damage to electronic data except as provided under this additional coverage (up to $2,500 agg. limit, with cause of a virus, harmful code)

Newly Acquired Locations coverage extension

Provides up to 30 days' temporary coverage at a new location, up to $100,000 at each location, with more than 50% coinsurance

18.b. Expenses to Reduce LossThe insured can incur the same types of expenses that are covered under the

BIC and extra expense form, but they are covered only to the extent that they reduce business income loss. A danger of the BIC without extra expense form is that the insured may incur extra expenses other than the reduction in business income loss. The BIC and extra expense form greatly reduces this possibility. Because the rate for the BIC and extra expense form is not much greater than the rate for the BIC without extra expense form, many businesses opt for the broader coverage form.


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18.c. Civil Authority additional coverageThe Civil Authority additional coverage extends the Business Income (and

Extra Expense) Coverage Form to include actual loss of business income and necessary extra expenses incurred by the insured because access to the insured's premises has been stopped by action of civil authority.

For the Civil Authority additional coverage to apply, four criteria must be met: (1) A covered cause of loss must have caused damage to property other than property at the described premises. (2) Access to the area immediately around the damaged property must be prohibited by action of civil authority due to the damage. (3) The described premises must be within the area just described and not more than one mile from the damaged property (within a one-mile radius). (4) The action of civil authority must have been taken either in response to dangerous physical conditions resulting from the damage or continuation of the covered cause of loss that caused the damage; or to enable a civil authority to have unimpeded access to the damaged property.

18.d. Conditions: ISO Civil Authority additional coverageFor business income losses, the Civil Authority additional coverage begins 72

hours after the time of the first action of civil authority that prohibits access to the described premises and continues for up to 4 consecutive weeks after coverage begins.

For extra expenses resulting from acts of a civil authority, the coverage begins right after the time of the first action of civil authority and ends at the later of these times: (1) Four consecutive weeks after the date coverage begins. (2) When civil authority coverage for business income coverage ends. (up to 4 weeks and 3 days)

The Civil Authority Changes endorsement can be used to increase the 4 weeks limitation and/or the 1 mile restriction. The four-week limitation can be increased to 60, 90, or 180 days.


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18.e. Alterations and New Buildings additional coverageBusiness income can be lost in case completion of a new building or alterations

to an existing building are delayed because the building is damaged during construction. In the same way, if alterations to an existing building are not completed on schedule, operations will not begin when planned and a loss of income may result.

The Alterations and New Buildings additional coverage insures loss of business income sustained because of physical damage to either of these: (1) New buildings or structures at the described premises (2) Alterations or additions to existing buildings or structures at the described premises

If the physical loss or damage delays the beginning of operations, the "period of restoration" for business income coverage begins on the date operations would have begun if the direct physical loss or damage had not occurred.

The period of restoration for Alterations and New Buildings is not subject to the waiting period and is not limited to 30 days.

18.f. Extended Business Income (EBI)On many occasions, the period of restoration ends prior to the insured's

business volume has returned to normal. A business that has been shut down does not immediately regain all its customers when its doors reopen. The damaged property may be restored, but business activity may still be depressed.

EBI adds a 30 days period for which the insured will be reimbursed for loss of business income.

EBI begins on the date when the property is actually repaired, rebuilt, or replaced and operations are resumed. The starting date of EBI is not necessarily identical to the date on which the period of restoration ends. EBI does not begin until the property is actually restored and operations are resumed.

EBI is divided into two parts, one part applies to business income other than rental value, and the other part applies to rental value.


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18.g. Limits of InsuranceThe limit of insurance stated in the declarations is the maximum amount the

insurer will pay for loss in anyone occurrence. Any amounts payable under these coverages of the BIC do not increase the limit of insurance: (1) Extra Expense (in the Business Income and Extra Expense Coverage Form only) (2) Expenses to Reduce Loss (in the Business Income Without Extra Expense Coverage Form only) (3) Civil Authority (4) Alterations and New Buildings (5) Extended Business Income.

The Interruption of Computer Operations additional coverage and the Newly Acquired Locations coverage extension are payable subject to their own limits. Any amounts the insurer pays for these two coverages do not reduce the limit of insurance shown in the declarations.

Limits of insurance for business income can be written on either a specific or blanket basis. If they are written on a specific basis, a specific limit is set for each building insured. If they are written on a blanket basis, the limit applies to all buildings at one location or to all buildings at multiple locations.

18.h. Loss Conditions: Appraisal, Duties in the Event of Loss, and Loss Payment

Appraisal: The Appraisal condition allows either the insured or the insurer to demand an appraisal of a loss if the insured and the insurer disagree on the amount of loss, but not in disputes as to coverage.

Duties in the Event of Loss: The Business Income (and Extra Expense) Coverage Form and the BPP require the same duties after loss with the exception that the Business Income (and Extra Expense) Coverage Form additionally requires the insured to resume all or part of its operations as soon as possible (if the insured intends to resume operations).

Loss payment: The insurer agrees to pay for a covered loss within thirty days after the date on which the amount of loss is agreed to. The insured must have complied with all policy conditions, including filing a sworn statement of loss. If the insured does not resume operations as quickly as possible, the insurer pays the loss based on the length of time it would have taken the insured to do so. If the insured does not resume operations at all, the period of restoration is based on the time it would have taken to resume operations as quickly as possible.


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18.i. Loss Conditions: Loss Determination ConditionThe first part lists the various factors that will be considered in determining the

amount of business income loss: (1) The insured's net income before the loss occurred (2) The likely net income if no loss had occurred (3) Operating expenses, including payroll, needed to resume operations at the same level of service that existed just prior to the loss occurred (4) Other relevant sources of information, including (but not limited to) the insured's financial records, bills, and invoices

The covered extra expense loss consists of all expenses in excess of normal operating expenses that would have been incurred if the physical loss had not taken place.

The insurer will subtract from this total the salvage value of any property bought for temporary use during the period of restoration, as well as extra expenses covered by other insurance.

18.j. Additional Condition: CoinsuranceThe Coinsurance condition applies only to business income coverage, not to

extra expense. The business income Coinsurance condition operates identical to the BPP Coinsurance condition, with two important exceptions: (1) The business income insured can select from a wider choice of coinsurance percentages of 50, 60, 70, 80, 90, 100, or 125 percent under CLM rules. (2) The business income coinsurance percentage is applied against the total of net income and operating expenses that would have been earned or incurred (had no loss occurred) for the 12 months starting with the later of policy inception or the last previous anniversary date. (This dollar amount is called the "coinsurance basis.")

18.k. Maximum Period of Indemnity OptionMaximum Period of Indemnity is a reasonable alternative for organizations

that are unlikely to sustain a business interruption of greater than 4 months. When this option is in place, the Coinsurance condition does not apply.

Instead, the insurer guarantees to pay whatever business income loss is sustained for up to 120 days following the physical damage loss or until the limit of insurance is exhausted, whichever comes first.

Premium rates are substantially higher with this option, but lower limits of insurance may be chosen to cover the estimated maximum loss of business income.


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18.l. Monthly Limit of Indemnity OptionMonthly Limit of Indemnity also suspends the Coinsurance condition. Using

this option, the most the insurer will pay for each period of 30 consecutive days is the actual business income loss sustained, not to more than the limit of insurance times the fraction shown in the declarations.

The fractions ordinarily used are 1/3, 1/4, and 1/6. In the Monthly Limit of Indemnity option, "month" means a period of thirty consecutive days, not a calendar month.

A rule-of-thumb method can be used to choose the fraction and the amount of insurance. Using the estimated number of months necessary for restoration in a worst-case scenario as the denominator, with 1 as the numerator, a fraction is selected. Thus, 1/3 is used for 3 months, 1/4 for 4 months, and 1/6 for 6 months or any period of restoration exceeding 6 months.

18.m. Agreed Value OptionThe Agreed Value option in business income forms suspends the Coinsurance

condition, and the insured and the insurer agree to a list of values reported in a written statement: (1) If the limit of insurance is not less than the agreed value at the time of the loss, the insured's loss will be covered in full. (2) If not, the payment will be a portion of the loss determined by dividing the amount of insurance by the agreed value and multiplying the result by the loss.

The Agreed Value option of the ISO business income forms is different from that of the BPP in some ways: (1) The CLM requires that the insured complete, sign, and submit to the insurer the business income worksheet. (2) If the amount of business income insurance is changed without submitting a new worksheet, coinsurance is reactivated.

18.n. No Coinsurance OptionThe CLM includes an option to choose a No Coinsurance option instead of a

coinsurance percentage. This option eliminates the Coinsurance condition.Because of the increased rate for the No Coinsurance option, it is unattractive

to insureds and seldom used.Some coverage options, including agreed value, dependent properties, and

premium adjustment, are not available with the No Coinsurance option.The insured is not required to file business income worksheets with the

insurer. The policy does not impose a 120 days restriction on the duration of the period of restoration. The policy does not impose a fractional limit of recovery, in anyone month.


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18.o. Insureds' Assumptions About Extra Expense OnlyThe Business Income (and Extra Expense) Coverage Form provides the same

extra expense coverage as the separate Extra Expense Coverage Form (EECF) in addition to business income coverage. The Maximum Period of Indemnity, Monthly Limit of Indemnity, and No Coinsurance options provide alternative means of avoiding the purchase of the high limits sometimes required to comply with the Coinsurance condition.

The Business Income (and Extra Expense) Coverage Form has the added advantage of not including the Limits on Loss Payment condition of the EECF, which limits the amount of coverage for extra expense to a certain percentage per month of the amount of insurance. The 120-day limitation in the Maximum Period of Indemnity option applies to extra expense as well as business income coverage. Two other options of the Business Income (and Extra Expense) Coverage Form-Monthly Limit of Indemnity and No Coinsurance-provide unrestricted extra expense coverage up to the limit of insurance.

18.p. Extra Expense Coverage Form (EECF)The only real difference between the extra expense coverage in the Business

Income (and Extra Expense) Coverage Form and the separate Extra Expense Coverage Form is the Limits on Loss Payment condition found only in the Extra Expense Coverage Form.

The Limits on Loss Payments condition limits recovery for certain time periods to stipulated percentages of the overall limit of insurance and therefore encourages insurance to value. The CLM shows many combinations of percentages, with a corresponding rating factor for each combination: (a) 100%-100%-100% (factor of 3.40) (b) 40%-80%-100% (factor of 1. 70) (c) 35%-70%-100% (factor of 1.62)

If the extra expense percentage chosen for the first two months is other than 100 percent, the insured must make three estimates: (1) The maximum loss in the first 30 days (2) The maximum loss in the first 60 days (3) The maximum loss for the entire period of restoration

The minimum amount of insurance that should be carried can be calculated by dividing the estimated extra expense for the first 30 days by the percentage chosen for the first month. The insured would then have to make sure that the amount available in the first 60 days and for the entire period is sufficient. If not, the amount of insurance should be increased.


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Question 18.1. Business Income Additional CoveragesWhich of the following statements is true with regard to the Business Income

Additional Coverages?

I. Under the Business Income (And Extra Expense) Coverage Form, one of the coverage extensions is Newly Acquired Locations. An insured suffers a loss 21 days after acquiring a location, the new location was not reported to the insurer, and the policy carries 70 percent coinsurance. The loss would be covered under this extension.

II. A county highway department closed a road for 7 days because of routine resurfacing. Access to the insured's premises was stopped. Under the Business Income (and Extra Expense) Coverage Form with the Civil Authority additional coverage, the loss would be covered under this additional coverage.

III. A local shipping mall is damaged by a hurricane on August 29. The building is restored 21 days later on September 18. The mall is not fully repopulated until 60 days after the loss, on October 27 because of lack of power in many areas. Under the Business Income (With Extra Expense) Coverage Form with the Extended Business Income additional coverage, there is coverage for the insured until 51 days later, on October 18.

(A) I only

(B) II only

(C) II and III only


AnswerI. The loss would be covered under Newly Acquired Locations coverage

extension which provides up to 30 days' temporary coverage at a new location, up to $100,000 at each location, with more than 50% coinsurance.

II. The loss would not be covered, because there was no damage from a covered cause of loss. For the Civil Authority additional coverage to apply, four criteria must be met: (1) A covered cause of loss must have caused damage to property other than property at the described premises.

III. There is coverage for the insured until 21days later, on September 18, because EBI would not be applied. EBI begins on the date when the property is actually repaired, rebuilt, or replaced and operations are resumed. The beginning date of EBI is not necessarily the same as the date on which the period of restoration ends. EBI does not begin until the property is actually restored and operations are resumed.



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Question 18.2. Business Income Additional CoveragesWhich of the following statements is true with regard to the Business Income

Additional Coverages?

I. Jones Retail has a Business Income (and Extra Expense) Coverage Form with a $100,000 limit and a 50 percent coinsurance clause. At the time of a $40,000 covered business income loss, Jones estimates its net income plus all operating expenses (minus certain deductible items) for the one year policy period to be $400,000. In this case, the insurer would pay $20,000.

II. Under a business income form, if the Maximum Period of Indemnity coverage option is selected, it limits loss payment to the lesser of the policy limit or the amount of loss sustained during the 120 days immediately following the beginning of the period of restoration.

III. The Business Income Agreed Value coverage option in the business income form is an option that suspends the coinsurance clause as long as the insured carries an amount of business income insurance that is equal to the value agreed on by the policyholder and the insurer.

IV. An insured has a Business Income (and Extra Expense) Coverage Form (BIC) with an Extended Period of Indemnity coverage option for 180 days. Following a covered loss, the period of restoration is 120 days. It takes an additional 90 days for revenue to return to normal. Ignoring waiting periods, the BIC would cover the business income loss of 210 days.

(A) I only

(B) I and II only

(C) III and IV only




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Question 18.3. Business Income Coverage ConditionsWhich of the following statements is incorrect with regard to the Business

Income Coverage Conditions?

I. The duties that the insured must perform after a business income and extra expense loss are virtually the same as those under the Building and Personal Property Coverage form except business income forms with one important difference. This difference requires the insured to resume all or part of its operations "as quickly as possible."

II. A local bakery is in the process of rebuilding after its facility was damaged by a covered loss. The bakery has rented space in a building and has purchased a used oven to help with resuming its operations while repairs are being made to the bakery. Under the Loss Determination condition in the Business Income (and Extra Expense) Coverage Form, salvage value of the oven will be deducted from the total of the covered loss.

III. A business sustained a business income loss from June through November, shutting down all operations. Prior to the loss, net income was $225,000 monthly. During their peak season of June through August, their net income rises to $250,000 monthly. They incur $32,000 per month in payroll and $15,000 in operating expenses during the shutdown. Using the loss determination condition of the Business Income (and Extra Expense) Coverage Form, the business income loss to the business would be $297,000 per month for June through November.

(A) I only

(B) II only

(C) III only


AnswerIII. June through August: $250,000 + $32,000 + $15,000 = $297,000, September

through November: $225,000 + $32,000 + $15,000 = $272,000. The correct answer is (C) III only.


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Question 18.4. Optional Coverages for Modifying CoinsuranceWhich of the following statements is incorrect with regard to the Optional

Coverages for Modifying Coinsurance?

I. One option available under the Business Income (And Extra Expense) Coverage Form is the No Coinsurance option. An insured with an estimated maximum loss (EML) that is a small percent are of the amount necessary to fulfill the coinsurance requirement would be best suited to use a No Coinsurance option.

II. Under the Agreed Value option in business income forms, if the amount of business income insurance is changed without submitting a new worksheet, coinsurance is reactivated.

III. Hyundai steel manufacturing company suspended operations due to a covered loss. It has the Monthly Limit of Indemnity option on its business income coverage. The company is shut down for 4 months. The highest month of net profit and continuing expenses for the company is $75,000. The company has selected a fraction of 1/4 with an indemnity limit of $250,000. Under the Monthly Limit of Indemnity option, their insurer would pay up to $75,00 for each month of shutdown.

(A) I only

(B) II only

(C) III only


AnswerIII. The insurer would pay up to $62,500 = 1/4 x limit of $250,000. The correct answer is (C) III only.


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Question 18.5. Extra Expense Coverage FormWhich of the following statements is incorrect with regard to the Extra Expense

Coverage Form?

I. A community elementary school wants to obtain insurance coverage for operational extra expenses in the case of a covered peril. In reviewing whether an Extra Expense Coverage Form or Business Income (and Extra Expense) Coverage Form is the most suitable, the school should likely review whether its business income exposure is also served by covering lost income and expenses.

II. The only material difference between the extra expense coverage provided by the Business Income (and Extra Expense) Coverage Form and the extra expense coverage provided by the Extra Expense Coverage Form is that the limits on Loss Payment condition found only in the Extra Expense Coverage Form

III. The Extra Expense Coverage Form is developed for organizations that want to do continue operations at any cost and want to cover loss of business income.

IV. An organization suffers a loss, creating a business interruption lasting 45 days. The organization suffers a loss of $60,000 the first month and $15,000 the second month. If the organization's Extra Expense Coverage Form has 40%-80%-100% limits on loss payments and a $100,000 limit of insurance, the organization would be indemnified for its losses of $75,000.

(A) I only

(B) II only

(C) III only




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Topic 19: Business Income Coverage Options and EndorsementsCPCU 551 Review Notes / Assignment 7. Business Income Insurance / EO 9

19.a. Structure: Business Income Coverage Options and EndorsementsBlanket business income insurance

One limit of insurance applies to all of the insured's locations

Payroll coverage options Ordinary payroll can be handled in any of three ways by the options

Power, Heat, and Refrigeration Deduction endorsement

The cost of such energy used in production operations is not included in the definition of business income

Business Income Premium Adjustment endorsement

Serves to base the premium on actual exposure as reported by the insured at twelve-month intervals

Endorsements for dependent property exposures

Cover business income losses (or extra expenses) resulting from physical damage to the dependent property described in the endorsement scheduleBusiness Income From Dependent Properties Limited International Coverage and Extra Expense From Dependent Properties Limited International Coverage

Business Income Changes-Educational Institutions endorsement

Modify business income forms to make them more appropriate for covering schools' business income loss exposures.

Utility Services-Time Element endorsement

Cover losses from a suspension of operations at the described premises caused by an interruption in utility service to those premises.

Ordinance of Law-Increased Period of Restoration endorsement

Cover losses resulting from the enforcement of building laws or ordinances.

Food Contamination Endorsement

The endorsement is designed to address some of the costs an insured such as a restaurant or grocery store is likely to incur if the food it sells is or is suspected to be contaminated. The costs that are covered include the expenses to clean equipment, replace contaminated food, have the insured's employees tested for infection, and advertise to restore the insured's reputation. Coverage is triggered when a governmental authority orders the insured to close.


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19.b. Blanket Business Income InsuranceWith blanket coverage, one limit of insurance applies to all of the insured's

locations, and a blanket rate can be used. This avoids the trouble of organizations that conduct operations at more than one interdependent location. If one location is damaged or destroyed, the organizations' other locations may also suffer a reduction in output, sales, or other revenue-earning activity.

Based on the Commercial Lines Manual (CLM), to be eligible for blanket business income insurance, all premises must be substantially owned, managed, or controlled by the insured. A dependent property under separate ownership or management cannot be added to the blanket description.

19.c. Payroll Coverage OptionsOrdinary payroll, as defined in the Ordinary Payroll Limitation or Exclusion

endorsement, is the entire payroll expense, including employee benefits, Federal Insurance Contributions Act (FICA) taxes paid by the employer, union dues paid by the employer, and workers compensation premiums for all employees of the named insured except officers, executives, department managers, and employees under contract.

Ordinary payroll can be treated in any of three ways: (1) Ordinary payroll can be covered in full, but only to the extent that such expenses are needed to resume operations. (2) Ordinary payroll can be excluded by using the Ordinary Payroll Limitation or Exclusion endorsement. (3) Ordinary payroll can be restricted by using the Ordinary Payroll Limitation or Exclusion endorsement to cover ordinary payroll for a limited period of time. The coverage can be limited to either 90 or 180 days.

19.d. Power, Heat, and Refrigeration Deduction EndorsementThe Power, Heat, and Refrigeration Deduction endorsement available

exclusively for manufacturing and mining firms, provides some relief for those confronted with sizable gaps when these energy expenses do not continue under contract.

With the endorsement, the cost of such energy used in production operations is not included either in the definition of business income or in coinsurance computations, on condition that such expenses do not continue under contract.

When energy expenses are excluded, the insured can purchase a lower limit of insurance; however, the endorsement increases the rate.


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19.e. Business Income Premium Adjustment EndorsementThis endorsement can be used to address the problems insureds face in

determining the proper amount of insurance necessary to fulfill the Coinsurance condition.

The endorsement serves to base the premium on actual exposure as stated by the insured at twelve-month intervals. The Business Income Premium Adjustment endorsement does not suspend coinsurance.

Within 120 days following each successive period of 12 months, the insured must submit a report of actual business income values for that period. According to the reports, the premium is adjusted to reflect actual business income values.

19.f. Endorsements for Dependent Property ExposuresThe endorsements cover business income losses (or extra expenses) due to

suspension of the insured's operations because of physical loss of or damage by a covered cause of loss to the dependent property described in the endorsement schedule. The dependent property must not be owned, controlled, or operated by the insured.

Three basic endorsements are obtainable for insuring dependent property exposures: (1) Business Income From Dependent Properties-Broad Form: the same limit that applies to business income loss resulting from damage at its own premises (2) Business Income From Dependent Properties-Limited Form: the separate limits or only cover business income from dependent properties. (3) Extra Expense From Dependent Properties: only cover extra expenses because of direct loss or damage at other properties.

Each endorsement contains definitions, summarized here, for four types of dependent properties: (1) Contributing locations: these deliver materials or services to the insured (2) Recipient locations: these receive products or services from the insured (3) Manufacturing locations: these manufacture products for delivery to the insured's customers under contract of sale (4) Leader locations: these attract customers to the insured's business.

19.g. International coverageISO has developed dependent properties forms that offer international

coverage: Business Income From Dependent Properties Limited International Coverage and Extra Expense From Dependent Properties Limited International Coverage.

The insured must choose a specific limit for contributing locations or manufacturing locations. The endorsements provide no option to cover recipient locations or leader locations.


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19.h. Educational InstitutionsThe Business Income Changes-Educational Institutions endorsement can be

used to modify business income forms to make them more suitable for covering schools' business income loss exposures.

The definition of period of restoration is amended to end on the earlier of these times: (1) The day prior to the opening of the next school term following the date when the property should be restored (2) The date when the school term is resumed at a permanent new location

The endorsement includes an Extended Business Income (EBI) provision that states that if damaged property is actually repaired, rebuilt, or replaced within 60 days or less before the scheduled opening of the next school term, the policy will cover the actual loss of business income sustained during that entire school term.

An option titled Extension of Recovery Period can be used to cover business income loss sustained for up to 12 months right after the end of the period of restoration.

19.i. Utility Services-Time Element EndorsementThe endorsement modifies the coverage form to include loss of business

income and/or extra expense resulting from a suspension of operations at the described premises caused by an interruption in utility service to those premises.

It is important for the producer and insured to make sure that each of the categories the insured wants to cover are checked off in the schedule. These are the categories of supply properties that can be checked off: (1) Water supply (2) Wastewater removal (3) Communication supply (including overhead transmission lines) (4) Communication supply (not including overhead transmission lines) (5) Power supply (including overhead transmission lines) (6) Power supply (not including overhead transmission lines).

The 2017 edition of the Utility Services-Time Element endorsement allows selection of a waiting period that can differ from the waiting period that applies to the insured's business income coverage. The insured can choose no waiting period or a waiting period of 12,24,48,72,96,120,144, or 168 hours.


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Question 19.1. Business Income Coverage OptionsWhich of the following statements is incorrect with regard to the Business

Income Coverage Options?

I. An insured with operations performed at more than one location and with interdependency among those locations would be best suited to utilize Blanket business income insurance coverage option.

II. The Power, Heat, and Refrigeration Deduction endorsement is exclusively available for manufacturing and mining firms.

III. In a risk management analysis of potential business income loss, a service-oriented business determines they have a significant expense in payroll. The risk manager realizes this expense likely would not continue until operations are restored in the case of a significant loss. To be the most cost effective in premium payment, this business should add the Ordinary Payroll Limitation or Exclusion endorsement tailored to exclude coverage for payroll on a business income claim.

IV. A computer manufacturer has an exclusive contract with a microchip manufacturer. After manufacture, the computers are shipped to a warehouse owned by a third party. The computers are then sold at a national retailer that pays the computer manufacturer directly for units sold. This retailer is responsible for 85 % of the manufacturer's sales. The manufacturer has a Business Income From Dependent Properties endorsement on its business income policy. The endorsement will cover business income losses as a result of damage to the microchip manufacturer and the national retailer only.

(A) I and II only

(B) III only

(C) IV only


AnswerIV. The endorsement will cover business income losses as a result of damage to

the microchip manufacturer, warehouse, and national retailer only. The endorsement contains definitions, summarized here, for four types of dependent properties: (1) Contributing locations: these deliver materials or services to the insured (2) Recipient locations: these receive products or services from the insured (3) Manufacturing locations: these manufacture products for delivery to the insured's customers under contract of sale (4) Leader locations: these attract customers to the insured's business.

The correct answer is (C) IV only.


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Question 19.2. Business Income Coverage CaseWhich of the following statements is incorrect with regard to the Business

Income Coverage Case?

I. Smith Stores had net income of $5,000 per month in the 12 months before a covered business income loss. The store is unable to reopen for three months. During that time, continuing expenses totaled $6,000. In this case, the amount of Smith Stores' business income loss would be $21 ,000.

II. Sandy's Surf Shop, which is insured under a Business Income (and Extra Expense) Coverage Form, was damaged from a hurricane. It took her four months to repair the damages and resume operations. Normally, Sandy would have had revenues of $10,000 per month, and expenses of $8,000 per month. While closed, she was unable to operate at all. She incurred a total of $5,000 in overtime labor and express mail charges to replenish her inventory. In this case, the amount of her business income loss would be $13,000.

III. Carol's Dance Studio (CDS) is insured under a Business Income (and Extra Expense) Coverage Form with a $1 million Business Income limit of insurance. None of the optional coverages of the Business Income (and Extra Expense) are in effect and no endorsements apply to CDS's Business Income (and Extra Expense) Coverage Form. The one year policy period shown in the declarations began on July 1, 20X1. On October 1, 20X1, access was denied to CDS for four weeks by civil authorities because of fire damage to a shop next door to CDS. The resulting loss of business income that CDS sustained was $45,000. The business income loss for the first 72 hours following the time of action by civil authority totaled $4,000. After the first 72 hours, CDS sustained $9,000 business income loss in week 1, $10,000 business income loss in week 2, $11,000 business income loss in week 3 and $11 ,000 business income loss in week 4. In this case, CDS's business income loss of $41,000 would be covered under the Business Income (and Extra Expense) Coverage Form.

(A)! I only(B)! II only(C)! II and III only(D)! None of the above



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Question 19.3. Business Income Coverage CaseWhich of the following statements is incorrect with regard to the Business

Income Coverage Case?

I. Sam's Dry Cleaners (SOC) is insured under a Business Income (and Extra Expense) Coverage Form with a $1 million Business Income limit of insurance for the dry cleaners location, subject to option (2) Business Income Other Than "Rental Value", None of the optional coverages of the Business Income (and Extra Expense) are in effect and no endorsements apply to SOC's Business Income (and Extra Expense) Coverage Form. The one year policy period shown in the declarations began on July 1, 20X1, On October 1, 20X1, SOC suffered a direct physical loss to its building and contents due to a fire, The resulting loss of business income that SOC sustained was $800,000, including a $5,000 loss for the first 72 hours following the physical loss. After the period of restoration ended and SOC resumed operations at the insured premises, the dry cleaners continued to sustain loss of business income loss for 90 days due to customers using other dry cleaners in the neighborhood. The first period of 30 days after reopening was $15,000, second period of 30 days was $10,000 and third period of 30 days was $5,000. In this case, SOC's business income loss of $820,000 would be covered under the Business Income (and Extra Expense) Coverage Form.

II. Martin's Dry Cleaners (MOC) is insured under a Business Income (and Extra Expense) Coverage Form with a $1 million Business Income limit of insurance for the dry cleaners location, subject to option (2) Business Income Other Than "Rental Value". None of the optional coverages of the Business Income (and Extra Expense) are in effect and no endorsements apply to MOC's Business Income (and Extra Expense) Coverage Form. The one year policy period shown in the declarations began on July 1, 20X1. On October 1, 20X1, access was denied to MOC for five weeks by civil authorities because of fire damage to a shop right next door to MOC. The resulting loss of business income that MOC sustained was $70,000, including a $5,000 loss for the first 72 hours following the time of action by civil authority. After the first 72 hours, MOC sustained $11,000 business income loss in week 1, $12,000 business income loss in week 2, $13,000 business income loss in week 3, $14,000 business income loss in week 4 and $15,000 business income loss in week 5. In this case, MOC's business income loss of $50,000 would be covered under the Business Income (and Extra Expense) Coverage Form.

(A)! I only(B)! II only(C)! I and II (D)! None of the above



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SECTION 8. INLAND MARINE AND OCEAN CARGO

Topic 20: General Characteristics of Inland Marine Insurance

Topic 21: Types of Inland Marine and Ocean Cargo Insurance Policies



195

Topic 20: General Characteristics of Inland Marine Insurance CPCU 551 Review Notes / Assignment 8. Inland Marine and Ocean Cargo / EO 1~3

20.a. Nationwide Marine DefinitionIn order to resolve the disputes between fire underwriters and marine

underwriters, insurance regulators in 1933 introduced the Nationwide Marine Definition. It restricted marine insurers to covering the loss exposures contained in the Definition. Today, the Definition continues to be used for classification purposes and stays useful in determining the types of insurance that are exempt from filing requirements. Except for imports and exports, everything listed in the Definition is normally eligible for inland marine insurance.

Summary of Nationwide Definition, last revised in 1976

A. Imports.

B. Exports.

D. Instrumentalities of transportation and communication, such as bridges, power and telephone lines, and etc.

E. Various types of property owned or used by individuals, such as jewelry, furs, and etc.F. Various types of property pertaining to a business, profession, or occupation, such as mobile equipment, builders risks, property in the custody of bailees, and the filed classes.

SECTION 8. Inland Marine and Ocean Cargo

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20.b. Filed Classes of Inland Marine InsuranceFiled classes of inland marine insurance are those for which forms or rates or

both must be filed with the insurance regulatory officials of a particular state in order for an insurer to issue policies for that class of business in that state.

Classes of Commercial Inland Marine Insurance Filed by ISO and AAIS

(a)Accounts receivable (b) Camera and musical instrument dealers (c) Film (d) Floor plan merchandise (e) Equipment dealers (implement dealers) (f) Jewelers block (jewelry dealers) (g) Mail (ISO only) (h) Musical instruments (i) Photographic equipment (j) Physicians, surgeons, and dentists equipment (k) Signs (l) Theatrical property (m) Valuable papers and records

Generally, a filed class of business is one that has a numerous insureds with quite similar loss exposures. Filed classes of inland marine insurance are those for which forms or rates or both must be filed with the insurance regulatory officials of a particular state in order for an insurer to issue policies for that class of business in that state.

The non-filed classes allow more flexibility due to the fact the form can contain whatever provisions the insured and the insurer agree on. Moreover, the form does not have to be filed for approval with the state insurance department.

20.c. Role of Judgment RatingRating methods for the filed commercial inland marine forms are based on

procedures contained in the ISO Commercial Lines Manual (CLM). The CLM does not contain rating methods for the traditionally nonfiled classes of inland marine insurance. However, many nonfiled inland marine policies are so widely written that both their coverage provisions and rates have become standardized to an extent.

Judgment rating is used by underwriters to rate one-of-a-kind risks. Judgment rating requires a thorough knowledge of the class of business for which coverage is being written. An inland marine underwriter might have to draw on expertise in any of several specialized fields (fine arts, heavy equipment, construction, or communications) to determine an adequate rate for the unique risks that are eligible for coverage.


197

20.d. Coverage for Property in TransitCovering property in transit or at other locations is the primary function of

several inland marine forms, such as annual transit, trip transit, and contractors' equipment policies. In other inland marine forms, the transit coverage is incidental. Inland marine policies that cover property of a mobile or "floating" nature are usually called floaters. Example includes the contractors' equipment floater and the commercial articles floater.

20.e. Loss Exposures CoveredAlthough many marine policies are restricted to covering physical loss, some

policies cover loss of business income and extra expense in addition. Inland marine builders' risk policies are frequently extended to cover time element losses resulting from damage to or destruction of the insured building during the duration of construction.

Some inland marine policies cover the insured against legal liability for damage to property of others.

20.f. Broad Coverage of PerilsAlthough open perils coverage is typical to inland marine, it is not universal.

Some inland marine policies apply on a named perils basis. The open perils coverage provided in inland marine policies is often subject to fewer exclusions.

Using the non-filed classes of inland marine insurance, the underwriter has the flexibility to delete exclusions.

20.g.Inland marine policies use the same methods to valuation of covered property

as other property policies do, including actual cash value, replacement cost, and selling price. Additionally, many inland marine policies contain special valuation provisions to handle the unique valuation problems inherent in these classes of business.

(1) Invoice value: Many policies covering property in transit between sellers and buyers use the invoice value method of valuation. With this method, the amount of loss can be concluded quickly and without dispute, and whatever profit the seller has in that price is covered.

(2) Agreed value or valued policy: With this method, the insured and the insurer agree to the value of the property at policy inception, and that amount is paid in the case of a total loss. This method is generally used for property that is hard to value objectively, such as works of art and irreplaceable documents.


198

20.h. Parties Involved in Transportation Loss ExposuresLoss exposures involving property in transit can be uncomplicated or complex,

depending to a degree on how many parties take part in the transportation.Many shipments of goods are between a seller (the shipper) and a buyer (the

consignee). Many shipments of goods are transported not by the buyer or seller of the goods but by a third party termed as a carrier: an individual or organization in the business of transporting property of others.

20.i. Ownership of Goods in TransportationGenerally, the party that owns the goods at the time they are damaged holds

the loss. If a shipment is damaged in transit after title (ownership) has passed to the buyer, the buyer will suffer the loss.

The question of who owns the goods during the course of transit is answered by the terms of sale, which are usually expressed in the purchase order or contract of sale. In domestic shipments-that is, shipments between two points in the United States-the selling terms of FOB Point of Origin and FOB Destination are often used.

(1) FOB (free on board) Shipment: The seller delivers goods to the carrier at the seller's risk and expense, and the ownership then shifts to the buyer.

(2) FOB (free on board) Point of Origin: The title and the risk of loss passes from seller to buyer when the goods are accepted by the carrier for transit.

(3) FOB (free on board) Destination: Ownership passes from the seller to the buyer when the carrier delivers the goods to the buyer's premises.

(4) FOB (free on board) Vessel: Goods are loaded on board the vessel at the seller's risk and expense, and then ownership passes to the buyer.

(5) FAS (free alongside) Vessel: Ownership passes from the seller to the buyer when the seller delivers the goods alongside a vessel for loading onto that vessel.

(6) CIF (cost-insurance-freight): The seller is obligated to pay for the insurance and freight charges for delivery to the buyer.

(7) CAF (cost and freight): The seller is obligated to pay for the freight charges but not for the insurance for delivery to the buyer.


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20.j. Carrier Responsibility for LossWhen goods are transported by a carrier, the carrier may be held responsible

for any damage or loss that occurs to the goods. Carrier responsibility for loss does not eliminate the owner's loss exposure; it merely provides a possible source of recovery.

The extent of a carrier's responsibility for loss depends in part on whether the carrier is a common carrier or a contract carrier. Respective liabilities for cargo loss in each case can differ substantially.

A common carrier offers its transportation services to the general public. A contract carrier carries the goods of certain customers only, often to meet special needs that common carriers cannot meet.

Carriers' cargo liabilities also differ among the various modes of transportation that carriers use.

20.k. Common Carriers of Goods by LandCommon carriers, regardless of whether they act negligently, are usually liable

to the shipper for any cargo losses except in these certain circumstances: (1) acts of God, (2) acts of a public enemy, (3) exercise of public authority, (4) shipper's fault or neglect, (5) inherent vice. .

Although a common carrier cannot escape liability for cargo loss, it can limit the amount of its cargo liability by expressing the limitations in a released bill of lading.

20.l. Contract Carriers of Goods by LandThe contract carrier's liability is determined by the contract terms agreed to by

the carrier and the shipper. A typical approach is for the contract carrier to be liable for cargo loss that results from the carrier's negligence.


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20.m. Waterborne CarriersCarriers of goods shipped by water (either inland waterways or the sea) can

also be categorized as common carriers or contract carriers.A common carrier's liability for goods shipped in foreign trade to or from the

U.S. by sea is specified under the U.S. Carriage of Goods by Sea Act (COGSA). COGSA includes a long list of exceptions to relieve the carrier of liability. In addition to the exceptions applicable to truckers, COGSA excuses the carrier from liability for loss caused by (1) any "act, neglect, or default" of the master or crew in navigation or management of the vessel; (2) perils of the seas; (3) unseaworthiness: concept based on general maritime law that warrants that the vessel is reasonably fit for the intended use at sea. When the warranty is breached and the ship is shown to be unseaworthy, a no-fault liability is imposed on the shipowner or charterer.

Domestic shipments over either inland waterways or the coastwise sea lanes by common carrier are subject to another U.S. law, the Harter Act, unless the carrier and shipper agree to be governed by COGSA.

Contract carriage by water (chartering) occurs when a shipper charters the entire vessel (or sometimes part of the cargo space on the vessel) for either a specified voyage or a specified period of time. The shipowner's liability for damage to the charter's property is determined by the contract of carriage, which is known as the charter party.

20.n.The liability of air carriers involved in international service is governed by the

rules of the international Warsaw Convention.Under these rules, an air carrier is not liable for loss if it can demonstrate that it

took all of the necessary steps to avoid the loss or that the loss was caused by pilot error.


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Question 20.1. Nationwide Marine DefinitionWhich of the following statements is not true with regard to the Nationwide

Marine Definition?

I. The Nationwide Marine Definition was revised in 1976. This revision included types of insurance exempt from filing requirements.

II. Filed classes of inland marine insurance have a great number of insureds with similar loss exposures.

III. Many classes of inland marine insurance remain exempt from filing requirements. They are non-filed classes since the types of exposures being insured can vary considerably among insurers.

IV. Skywalker is a commercial underwriter assessing the accounts receivable coverage for a prospective customer. He wishes to make changes to various policy provisions before accepting the risk. It is a non-filed class of inland marine coverage, and he can make any alterations he needs.

V. An architectural firm has requested coverage for its vast library of valuable records of blue prints, drawings, and other documents. Their insurance agent has told them that they can provide coverage for the documents with a filed inland marine policy including some coverage restrictions.

(A) I and II only

(B) III only

(C) IV only

(D) V only

AnswerIV. The accounts receivable coverage is a filed class of inland marine coverage,

and insurers are allowed to substitute provision in the standard policies. Classes of Commercial Inland Marine Insurance Filed by ISO and AAIS: (a)Accounts receivable (b) Camera and musical instrument dealers (c) Film (d) Floor plan merchandise (e) Equipment dealers (implement dealers) (f) Jewelers block (jewelry dealers) (g) Mail (ISO only) (h) Musical instruments (i) Photographic equipment (j) Physicians, surgeons, and dentists equipment (k) Signs (l) Theatrical property (m) Valuable papers and records



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Question 20.2. General Characteristics of Inland Marine InsuranceWhich of the following statements is not true with regard to the General

Characteristics of Inland Marine Insurance?

I. In the early 1900s, U.S. insurers were restricted to writing one of three general kinds of insurance: fire, casualty, or marine.

II. The Nationwide Marine Definition was no longer needed following the enactment of legislation in the 1950s that permitted a single insurer to offer fire, casualty, and marine coverages.

III. Rates for the traditionally nonfiled classes of inland marine insurance have become standardized to an extent for policies that are widely written.

IV. There are many kinds of inland marine policies covering many classes of business. The reason some classes are referred to as filed classes is because these are the classes for which the rates and/or policy forms are filed with the state insurance department.

V. In the 1900s, marine insurers were willing to provide broad perils or "all-risks" coverage on the types of property that fire insurers avoided covering, because they were accustomed to covering ocean cargoes of all types against many different causes of loss, including theft, while the property was either at sea or ashore.

(A) I and II only

(B) III only

(C) IV and V only


Answer The correct answer is (D) none of the above.


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Question 20.3. General Characteristics of Inland Marine InsuranceWhich of the following statements is incorrect with regard to the General

Characteristics of Inland Marine Insurance?

I. Inland marine policies generally provide an element of coverage for property in transit or at other than the insured's premises.

II. A shipping company contracted with Luxury Cruise Ship Galleries for delivery of artwork to be sold on the ship. The shipping company delivered the artwork directly to each port of call. Coverage for the artwork was under an inland marine policy. The valuation provision that would best be applied to a loss to the artwork prior to delivery would be the agreed value method.

III. Invoice value is often used as a valuation method for property in transit. Invoice value covers a specified value on the property in transit.

IV. Inland marine policies contain many of the general characteristics found in most insurance policies. The characteristic that provides coverage for inland marine floaters is coverage for property in transit

V. One of the reasons inland marine insurance developed in the United States is that it met a demand for "all-risks" coverage for property in transit.

(A) I and II only

(B) III only

(C) IV only

(D) V only

Answer III. Many policies covering property in transit between buyers and sellers use

the invoice value method of valuation. With this method, the amount of loss can be determined quickly and without dispute, and whatever profit the seller has in that price is covered. The specified value generally means the agreed value.



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Question 20.4. Parties Involved in TransportationWhich of the following statements is incorrect with regard to the parties

involved in transportation?

(A) Transit loss prevention measures can fall under several categories. Establishing employee work rules is one of theft risk control measures for transportation losses.

(B) A dispute between a buyer and seller over the ownership of goods in transit can be resolved by the terms of sale.

(C) Common carriers normally have a higher degree of responsibility for customers' property than a contract carrier. Common carriers, irrespective of whether they have been negligent, are usually liable to the shipper for most cargo losses.

(D) An event goods wholesaler has inventory in Asia and has it shipped to its headquarters in New York. It requires several parties in the transportation process to finally get the goods to New York. The parties engaged in the transportation process are the consignee, the owner, and the buyer.

Answer (D) The parties involved in the transportation process are the shipper, the

consignee, and the carriers. Many shipments of goods are between a seller (the shipper) and a buyer (the consignee). Many shipments of goods are transported not by the buyer or seller of the goods but by a third party called a carrier-an individual or organization in the business of transporting property of others

The correct answer is (D).


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Question 20.5. Ownership of Goods and Terms of SaleWhich of the following statements is incorrect with regard to the ownership of

goods and terms of sale?

I. An inter-ocean transit vessel is transporting dry goods to a buyer at a named destination with the buyer paying an agreed price for the goods which includes all insurance and transportation charges to the named destination. The terms of sale also state that the buyer is in charge of any damage to the dry goods right after they are boarded onto the vessel. The term of sale that applies to this situation is CIF (Cost, Insurance, Freight).

II. An inter-ocean transit vessel picked out up bulk liquid products at a major port, which was named in the terms of sale. The buyer of the bulk liquid products agreed to the terms that made the buyer responsible for loss to the goods right after they are placed onto the vessel. The term of sale that applies to this scenario is FOB (Free on Board) Vessel.

III. A manufacturer of shoes is planning a shipment of shoes from their manufacturing facility in Illinois to a warehouse owned by their buyer in New York. The manufacturer does not want to assume any liability once the shoes are accepted by the carrier for transit to New York. The shoe manufacturer should select FOB Point of Origin.

IV. A pallet of computer keyboards was destroyed while sitting along side an ocean freighter in Asia to be loaded for the Port of San Diego per the terms of sale. The seller of the computer keyboards called the buyer and advised them that the keyboards were ruined and that the buyer will have to bear the loss. Assuming the seller is true, FAS (Free Along Side) Vessel were the terms of sale.

(A) I and II only

(B) III only

(C) IV only




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Question 20.6. Carrier Responsibility for LossWhich of the following statements is incorrect with regard to the carrier

responsibility for loss?

I. A manufacturer chose to ship its goods by land and used a common carrier trucking company. During the duration of transporting the goods, the truck was overturned by a tornado. The driver survived the accident, but the goods were destroyed. Because it arises from an act of God, this loss is an exception to common carrier liability.

II. A shipment of container goods departed on an ocean freighter from the Port of LA bound for France. En route, the freighter and the containers are lost at sea because of weather conditions. The owner of the ship has informed the owners of the goods in the containers that they will not be reimbursed for their losses. The Harter Act provides that the carrier will not be liable for unseaworthiness of the vessel by act, neglect, or default.

III. When at a rest stop in Ohio, a lock on a common carrier's trailer was broken and the customer's cargo stolen. The common carrier trucking company and its customer became involved in a heated dispute over how much the carrier must pay for the customer's missing cargo. To resolving this dispute they should review the bill of lading for any cargo limitation between the shipper and the carrier.

IV. A common carrier delivery service delivered a shipment of furniture to a retailer who sells household furnishings. The furniture was sold to the retailer by a furniture manufacturer on terms of Free On Board (FOB) Destination. When the retailer's receiving department began placing arm chairs into its back room, they discover tears in some of the chair arms that occurred during shipping. These chairs have been shipped in the same manner previously without incident. At the time of loss and damage the chairs were owned by the furniture manufacturer who can hold the delivery service liable for the cost to repair or replace them.

(A) I only

(B) II only

(C) III and IV only


AnswerII. The Carriage of Goods by Sea Act (COGSA) provides that the carrier will

not be liable for loss due to unseaworthiness. Domestic shipments over either inland waterways or the coastwise sea lanes by common carrier are subject to another U.S. law, the Harter Act.



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Topic 21: Types of Inland Marine and Ocean Cargo Insurance PoliciesCPCU 551 Review Notes / Assignment 8. Inland Marine and Ocean Cargo / EO 4

21.a. Structure: Types of Inland Marine and Ocean Cargo Insurance Policies

Transportation Insurance

Annual transit insurance

This inland marine coverage is purchased by frequent shippers to cover all shipments (excl. overseas) made or received during the annual policy period.


Open cargo insurance

This ocean marine insurance is purchased by frequent shippers to cover overseas shipments by vessel or aircraft.


Trip transit insurance

Purchased by infrequent shippers for a particular shipment of goods such as valuable machinery, trip transit insurance covers cargo on a specified trip.


Property in the custody of the U.S. Postal Service or another country's postal service can be insured


Motor truck cargo insurance

The motor truck cargo liability policy covers the insured's legal liability (as a motor carrier) for loss to customers' property in its custody

Instrumentalities of Transportation and Communication

Instrumentalities of Transportation and Communication

Cover non-filed classes of property in transit, such as bridges, power and telephone lines, and etc.

Equipment Floaters

Contractors Equipment Floater

Covers a variety of equipment used by construction contractors

Equipment Floaters

EDP (electronic data processing) equipment floater

Coverage for mechanical or electrical breakdown, and they typically insure property while in transit. Extra expense, Business income coverage can often be added when requested.

Builders Risks and Installation Risks

Inland Marine Builders Risk Policy

A builders risk policy covers an entire building or other structure during the course of construction.

Builders Risks and Installation Risks Installation

FloaterCovers while the property is in transit and during the installation and testing.

Bailee/Bailor Policies

Bailee Liability Policies

Covers loss by an insured peril to property in the bailee's care, custody, or control only if the bailee is legally liable for the loss.

Bailee/Bailor Policies

Bailor policies Bailor policies are designed specifically to cover the insured's property while it is in the custody of a bailee.


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Dealers PoliciesDealers Policies The inventories and other business personal property of various types of dealers can be insured.

Miscellaneous Inland Marine Coverages

Sign coverage Cover neon signs, automatic or mechanical signs, and street clocks, while in use.

Miscellaneous Inland Marine Coverages Accounts

receivable coverage

Covers the amount of money the insured is unable to collect when records of accounts receivable are destroyed by a covered cause of loss

Miscellaneous Inland Marine Coverages

Valuable papers and records coverage

Covers losses of either replaceable or irreplaceable documents.

21.b. Annual Transit InsuranceThe main reason for annual transit insurance is to cover property while it is

being transported by carriers. Many transit policies also cover property shipped by any land vehicle owned or operated by the insured-the owner's goods on owner's trucks exposure. Many annual transit policies cover exclusively within the continental United States and Canada, including airborne shipments. The terminology ‘continental’ precludes the insurer from having to cover air or water shipments to or from overseas locations.

Most annual transit policies cover on an open perils basis. An annual transit policy does not contain as many exclusions as the Special Form and therefore covers a broader scope of perils. Property covered under an annual transit policy is generally valued at the amount of invoice if the property is being transported between buyer and seller. When no invoice applies, the property may be valued at actual cash value.


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21.c. Provisions of Open cargo insuranceGeneral Average Either an expenditure or a sacrifice of part of the vessel or

cargo, made in a time of danger to save the voyageSue and Labor Clause

Obligates the assured to preserve the property at a time of loss. In return, the insurer agrees to pay the cost of such measures the assured takes.

Attachment Clause The insurance will attach and cover all shipments made on and after the date and time shown in the policy. A shipment made before the date of attachment is not covered. The assured or the insurer can cancel the policy by giving 30 days' notice. Coverage terminates only for shipments that commence after that date. Property in transit before cancellation occurs remains covered until delivery.

Warehouse-To-Warehouse Coverage

Shipments are covered from the point of origin to the point of destination, even if the connecting transportation on either end of the ocean voyage is by land conveyances. But, Ocean cargo insurance does not cover land-only shipments.

Inchmaree Clause It covers loss resulting from bursting of boilers, breakage of shafts, latent defects in components of the vessel, and faults or errors in the navigation or management of the vessel.

FPA/AC (free of particular average /American conditions) Warranties

Some open cargo policies contain these warranties which restrict the scope of covered perils with regard to particular average, which is a partial loss borne by only one party to the voyage.

Provision on maximum limits (accumulation clause)

Virtually every open cargo policy places a maximum limit on the amount the insurer will pay for cargo on any one vessel or connecting conveyance or in anyone place at anyone time.

Provision on value of covered property

The value of covered property will include the amount of the invoice, including (1) all charges in the invoice, (2) any prepaid, advanced, or guaranteed freight charges, (3) an advance equal to 10% of the invoice and freight, or a higher percentage.


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21.d. All-risks or Named Peril basis Open Cargo Policies

All-Risks basis with exclusions, for most open cargo policies

Free of Capture and Seizure (FC&S) Warranty:

This eliminates coverage for losses caused by any taking of the vessel by another party or cause, including governmental taking.


Strikes, Riots, and Civil Commotion (SR&CC) Warranty

This eliminates coverage for any type of loss that results from labor disputes or riots.


Delay Clause This eliminates coverage for financial or property loss that occurs when a shipment is delayed.

Named Perils, applie applied to on-deck shipments

Perils of The Sea Any fortuitous causes of loss peculiar to the sea and other bodies of water such as rivers, lakes, and seaports


Fire Including loss resulting from measures taken to fight the fire, such as water damage.

Named Perils, applie applied to on-deck shipments A voluntary throwing overboard of in an

emergency, usually to lighten the vessel's load or to eliminate a hazard.


Assailing Thieves The theft of cargo by force and does not include clandestine theft, pilferage, or theft by the passengers or crew.


Barratry of the masters and mariners

Barratry includes any wrongful act willfully committed by the master or crew with criminal intent, to the detriment of the shipowner or charterer.


All other like perils It includes only perils similar to those described earlier. It does not provide all-risks coverage.


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21.e. Motor truck cargo insuranceOne particular type of motor truck cargo insurance (sometimes called motor

truck cargo liability insurance) covers motor carriers against their liability for loss of their customers' cargo. The other type (sometimes called owners' goods on owners' trucks insurance) covers a property owner for shipments made on the owner's own vehicles.

The property is covered only while in or on a land vehicle owned or operated by the insured (including connecting carriers) or while located at the insured's terminal. Terminal coverage is generally restricted to a certain time period.

Regulations of the U.S. Department of Transportation (USDOT) require insurers to include a special endorsement when providing motor truck cargo policies to interstate carriers. The endorsement states that the insurer will pay cargo claims for which the insured is liable, up to the limits needed by USDOT, even if such claims are not otherwise covered under the policy.

21.f. Contractors Equipment FloaterThis is actually the largest class of inland marine insurance and covers a range

of equipment used by construction contractors, in mining and lumbering operations, and in municipality-owned snow removal and road repair.

A contractors equipment floater normally has a schedule listing each piece of equipment and its corresponding limit of insurance.

Contractors equipment floaters frequently provide rental reimbursement coverage, which pays the cost of renting substitute equipment when covered property has been put out of service by a covered cause of loss.

21.g. EDP (electronic data processing) Equipment FloaterEDP equipment policies can cover perils that are not covered under

commercial property policies, for example mechanical or electrical breakdown. EDP policies may also cover property while in transit, which commercial property policies usually exclude. Because EDP policies are non-filed inland marine in many states, other favorable provisions not obtained in filed commercial property policies may be added.

The insured has the option of purchasing breakdown coverage, which insures loss to equipment as a result of such perils as mechanical failure or faulty design of the covered property. EDP policies typically cover computer virus losses if they can be assigned to a covered cause of loss.


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21.h. Bailee PoliciesBailee liability policies: One particular type of bailee policy is a bailee liability

policy, which covers loss by an insured peril to property in the bailee's care, custody, or control only when the bailee is legally liable for the loss. A typical type of bailee liability insurance is the warehouse operators legal liability policy.

A bailees customers policy covers customers' property while in the insured bailee's custody, no matter whether the bailee is legally liable for the loss. Bailees want this coverage because they face a considerable "loss of goodwill" exposure in addition to their legal liability exposure for customers' property.

21.i. Dealers PolicyA dealers policy typically covers the insured's stock in trade (inventory) and

comparable property of others, whether on or away from the insured's premises. The form can generally be extended to cover furniture, fixtures, and office materials; machinery, tools, and fittings; patterns, dies, molds, and models; and tenants' improvements and betterments.

21.j. Accounts receivable insurance Accounts receivable insurance also covers (1) interest charges on loans

required to offset the uncollectible amounts, (2) collection expenses in excess of normal collection expenses that were made necessary by the damage to the records of accounts receivable, and (3) other reasonable expenses the insured incurs to reconstruct the damaged records.


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Question 21.1. Types of Inland Marine and Ocean Cargo Insurance Policies

Which of the following statements is incorrect with regard to the types of inland marine and ocean cargo insurance policies?

I. A process to control transportation loss from human error is to have accounting systems for shipments in and out.

II. A conventional exclusion for an open cargo policy is called a warranty. One principle warranty is assailing thieves.

III. For shipments between sellers and buyers, most open cargo policies state that the value of covered property will include several elements. A provision on value of covered property being shipped in includes an advance equal to 10 % of the invoice and freight or a higher percentage if so agreed upon.

IV. Parcel post insurance provides coverage against loss due to nondelivery of a package.

V. A motor truck cargo liability policy covers a trucking company's liability for damage to goods of others while being transported by the trucker.

(A) I only

(B) II only

(C) III and IV only

(D) V only

AnswerII. All-Risks basis with exclusions, for most open cargo policies: Free of

Capture and Seizure (FC&S) Warranty; Strikes, Riots, and Civil Commotion (SR&CC) Warranty; Delay Clause.

IV. As a Mail Insurance, a parcel post policy provides coverage against loss due to nondelivery. A comparable policy can also be written to cover shipments by commercial parcel carriers.



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I. Contractor's equipment floaters are the largest class of inland marine insurance. Contractor's equipment can incorporate rental reimbursement coverage.

II. Electronic data processing (EDP) equipment floaters cover a broad array of perils. Coverage is provided for loss due to a system virus maliciously launched by an employee.

III. A builder's risk policy covers a building for the duration of construction. One of the coverage enhancements on the inland marine builders risk policy is coverage for collapse during the course of construction resulting from faulty materials.

IV. A policy that covers damage to customer's goods while in the possession of the insured, regardless of liability is a bailee liability policy.

V. Accounts receivables insurance not only covers the amount of money the insured is unable to collect when records of receivables are destroyed but also covers interest on loans to offset the uncollectible amount.

(A) I only

(B) II and III only

(C) IV only

(D) V only

AnswerIV. A bailees customers policy covers customers' property while in the insured

bailee's custody, regardless of whether the bailee is legally liable for the loss. Bailees want this coverage because they face a significant "loss of goodwill" exposure in addition to their legal liability exposure for customers' property.



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I. A worldwide consumer electronics manufacturer regularly ships large volumes of its finished products overseas for retail sale. To cover these shipments, the company will most likely need open cargo insurance.

II. A business that supplies raw materials is evaluating its options to insure a few shipments of goods per year to its distributor. In this case trip transit insurance would likely be most cost effective.

III. Manufacturer ships its goods to domestic customers and to Manufacturer's three other domestic warehouse locations all year round via a number of different modes of transit. Annual transit policy would be best fits for the needs of its business.

IV. A expensive jewelry dealer with coverage under an Inland Marine dealer's policy was victim of a break-in where jewelry inventory as well as jewelry left for repairs by customers was stolen. Furthermore, 6 months later, the business suffered another loss when it is discovered that a new line of earrings that was known to have arrived in the store has an unexplained disappearance. The dealer's policy will cover the theft loss but not the unexplained disappearance loss.

V. A French restaurant has a very costly neon sign installed outside of its location which is covered under an Inland Marine Signs Coverage Form. Part of the neon lettering was not lighting due to an internal electrical disturbance and was being repaired when the middle of the sign cracked. The Signs Coverage Form will cover none of the damage that has occurred.

(A) I and II only

(B) III and IV only

(C) V only




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(A) In addition to covering the assured's interest in property being shipped, open cargo policies cover the assured's responsibility for general average charges. A general average charge is an expenditure or sacrifice of part of the vessel or cargo made in a time of danger in order to save the voyage.

(B) Cargo shipped on-deck is subject to limited perils including barratry. Barratry is any wrongful act willfully committed by the master or crew with criminal intent.

(C) An ocean freighter with cargo on board has a fire while out at sea. One cargo container was partially damaged by the smoke damage and it needs to be repacked. The ship has some superficial damage from the fire. Particular average loss describes this loss to the cargo.

(D) While approaching a seaport, the cargo on deck of a freighter was thrown off the deck and ruined due to a collision with another freighter. Inchmaree clause describes the peril that applies under the Perils Clause.

Answer(D) A collision with another freighter is perils of the sea. Inchmaree clause

covers loss resulting from bursting of boilers, breakage of shafts, latent defects in components of the vessel, and faults or errors in the navigation or management of the vessel.



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SECTION 9. COMMERCIAL CRIME INSURANCE

Topic 22: Basic Insuring Agreements of the Commercial Crime Insurance

Topic 23: Exclusions and Conditions of the Commercial Crime Coverage Form

Topic 24: Commercial Crime Endorsements and Government Crime Forms


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Topic 22: Basic Insuring Agreements of the Commercial Crime InsuranceCPCU 551 Review Notes / Assignment 9. Commercial Crime Insurance / EO 1~3

22.a. ISO Commercial Crime Program and Financial Institution BondsThe ISO commercial crime coverage forms and policy forms are designed for

insuring any type of nongovernment commercial or not-for-profit entity other than a financial institution.

Financial institution bonds are called "bonds" because one of the key coverages that they provide is employee dishonesty insurance, which was traditionally called a "fidelity bond."

SECTION 9. Commercial Crime Insurance

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22.b. Structure: Basic 7 Crime Insuring AgreementsThe Insurance Services Office (ISO) Commercial Crime Coverage Form offers

optional insuring agreements that enable organizations to customize crime coverage to meet their business needs.

This coverage insures an employer against theft of its property or money and securities by its own employees.

2. Forgery or Alteration This insuring agreement covers loss sustained by the insured because of forgery or alteration of checks, drafts, promissory notes, or similar written promises.

3. Inside the Premises-Theft of Money and Securities

This agreement covers money and securities inside the premises or banking premises against theft, disappearance, and destruction.

4. Inside the Premises-Robbery or Safe Burglary of Other Property

This agreement covers actual or attempted robbery of a custodian and actual or attempted safe burglary.

5. Outside the Premises This insuring agreement covers money, securities, and other property while outside the premises and in the care and custody of either a messenger or an armored vehicle company.

6. Computer and Funds Transfer Fraud (2012 edition of ISO form)

The first part of this insuring agreement covers loss of covered property due to use of a computer to fraudulently transfer money, securities, and other property to the wrongdoer.

The second part of this insuring agreement covers loss of money and securities from the insured's account at a financial institution due to fraudulent instructions

7. Money Orders and Counterfeit Money

This insuring agreement covers loss due to the insured's good-faith acceptance of money orders that are not paid upon presentation or counterfeit money


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22.c. Definitions of Employee Theft Theft: Theft is the unlawful taking of money, securities, or other property to the

deprivation of the insured. Relating to the purposes of employee theft coverage, theft includes forgery.

Employee: An employee is a natural person who meets all three of these criteria: (1) The person must be currently employed by the insured or an ex-employee whose employment finished within the past 30 days. (2) The person must be compensated by the insured by salary, wages, or commissions. (3) The person must be governed by the control and direction of the insured.

The employee definition includes temporary personnel and leased employees, the insured's corporate directors, managers while they are performing duties usual to an employee.

Money: means currency, coins, and bank notes in current use and having a face value, and travelers checks, register checks, and money orders held for sale to the public.

Securities: mean negotiable and nonnegotiable instruments or contracts representing either money or other property.

Other property: means all tangible property, other than money and securities, which has intrinsic value.

22.d. Conditions of Employee TheftTermination as to Any Employee: This condition provides automatic

termination of employee theft coverage with regards to any employee who has committed a dishonest act as soon as the dishonest act is known to the insured. It also gives the insurer the right to cancel coverage with regards to any employee by providing 30 days' advance notice to the insured.

Territory: This extension provides coverage for loss caused by any employee while temporarily outside the regular policy territory (the United States, including its territories and possessions, Puerto Rico, and Canada) for a period of not more than 90 consecutive days.

Employee Benefit Plans: This condition explains how employee theft coverage applies when the policy includes one or more employee benefit plans as insureds.

22.e. This insuring agreement covers loss suffered by the insured because of forgery

or alteration of checks, drafts, promissory notes, or similar written promises.Forgery or alteration coverage does not cover loss resulting from dishonest acts

of the insured, its partners, members, directors, trustees representatives, or employees.


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22.f. Inside the Premises-Theft of Money and SecuritiesThis agreement covers money and securities inside the premises or banking

premises against theft, disappearance, and destruction. The thief must be present inside the premises or banking premises. The addition of the terms "disappearance and destruction" increases the scope of the coverage to include losses even though they do not result from an unlawful act.

Two extensions apply to loss or damage to (1) the premises, if the insured is the owner or is liable for the damage, and (2) containers holding covered property caused by safe burglary or attempted safe burglary. These extensions are not additional amounts of insurance.

22.g. Inside the Premises-Robbery or Safe Burglary of Other PropertyThis agreement covers actual or attempted robbery of a custodian and actual

or attempted safe burglary.Custodian includes the named insured, any of the named insured's partners or

members, or the named insured's employee while having care and custody of the property inside the premises, but excludes any person while acting as a watchperson or janitor .

These two coverage extensions apply: (1) damage to the premises or their exterior resulting from actual or attempted robbery or safe burglary of other property. (2) loss of or damage to a locked safe or vault located inside the premises resulting from actual or attempted robbery or safe burglary.

A special limit of $5,000 per occurrence for these types of property applies: (1) Precious metals (2) Manuscripts, drawings, or records of any kind.

22.h. Outside the PremisesThis insuring agreement covers money, securities, and other property while

outside the premises and in the care and custody of either a messenger or an armored vehicle company.

Messenger means the named insured, a family member of the named insured, the named insured's partners or members, or any of the named insured's employees while having care and custody of property outside the insured premises.

The perils insured against by Outside the Premises vary with the type of property involved. Money and securities are covered against theft, disappearance, or destruction. Other property is covered against actual or attempted robbery.



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22.i. Computer and Funds Transfer FraudThe first part of this insuring agreement covers loss of covered property as a

result of by using a computer to fraudulently transfer money, securities, and other property to the wrongdoer.

The insuring agreement does not necessarily require that the computers used to commit the fraud be the property of the insured or even that they be positioned on the insured's premises. However, this insuring agreement does not cover computer-related theft committed by the insured's own employees. A special limit of $5,000 per occurrence for manuscripts, drawings, or records of any kind.

The second part of this insuring agreement covers loss of money and securities from the insured's account at a financial institution due to fraudulent instructions directing a financial institution to transfer, pay, or deliver money and securities.

22.j. Money Orders and Counterfeit MoneyThis insuring agreement covers loss as a result of insured's good-faith

acceptance of money orders that are not paid upon presentation or counterfeit money that is acquired throughout the regular course of business. The insured must have accepted the money orders or counterfeit money in exchange for merchandise, money, or services.

22.k. Commercial Crime Coverage Form's Limit of InsuranceIn the Commercial Crime Coverage Form, a separate limit of insurance can be

shown in the declarations for each of the 7 insuring agreements that the insured selects. The Limit of Insurance provision states that the most the insurer will pay for all loss resulting directly from an "occurrence" is the applicable limit shown in the declarations.

Under a commercial crime policy, if the amount of loss exceeds the deductible, the insurer will pay the amount of the loss in excess of the deductible, up to the limit of insurance.


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22.l. Definition of OccurrenceEmployee theft’s Occurrence

The definition of occurrence requires that the act or acts must be committed by an employee (as defined in the form) acting alone or in collusion with others.

Forgery or alteration’s Occurrence

The definition of occurrence that applies to forgery or alteration requires that the act or acts must be committed by a person acting alone or in collusionThe definition of occurrence that applies to all coverages other than employee dishonesty and forgery or alteration includes not only acts but also events. The word "event" is included because some of the perils covered by these other coverages are events rather than acts committed by persons.

Each definition of occurrence comes in two different versions: (1) The loss sustained forms state that the act must be committed (or the event must occur) "during the Policy Period shown in the Declarations, except as provided" in the conditions pertaining to loss sustained under prior insurance. (2) The discovery forms state that the act must be committed (or the event must occur) "during the Policy Period shown in the Declarations, before such Policy Period or both."

22.m. Special Limit of InsuranceIn addition to the limits of insurance shown in the policy declarations for each

insuring agreement, three of the insuring agreements are subject to special limits that apply only to specified types of covered property.

Inside the Premises-Robbery or Safe Burglary of Other Property


Outside the Premises A special limit of $5,000 per occurrence for these types of property applies: (1) Precious metals (2) Manuscripts, drawings, or records of any kind.

Computer and Funds Transfer Fraud

A special limit of $5,000 per occurrence for manuscripts, drawings, or records of any kind.


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Question 22.1. Basic Crime Insuring AgreementsWhich of the following statements is incorrect with regard to the basic crime

insuring agreements?

(A) An employer wanting to secure coverage for loss due to an employee's utilization of a computer to fraudulently transfer securities should purchase a crime insurance policy with employee theft insuring agreement.

(B) Based on the ISO Employee Theft insuring agreement, the requirements that must be satisfied in order for a person to be considered an employee is that the person must be currently employed or have been employed within the last 30 days.

(C) The ISO Inside the Premises-Theft of Money and Securities insuring agreement provides two extensions of coverage. One of these extensions is the coverage for loss of or damage to containers holding covered property caused by safe burglary or attempted safe burglary.

(D) The ISO Inside the Premises-Robbery or Safe Burglary of Other Property insuring agreement defines the act of robbery as the unlawful taking of property from within a locked safe or vault by a person unlawfully entering the safe or vault as evidenced by marks of forcible entry on the external surfaces of the safe or vault.

Answer (D) Robbery is the unlawful taking of property from the care and custody of a

person by one who has caused or threatened to cause that person bodily harm or to situations in which the thief commits an obviously unlawful act that is witnessed by the custodian of the stolen property. The safe burglary is the unlawful taking of property from within a locked safe or vault by a person unlawfully entering the safe or vault as evidenced by marks of forcible entry on the exterior of the safe or vault.



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Question 22.2. Basic Crime Insuring AgreementsWhich of the following statements is true with regard to the basic crime


I. The ISO Forgery or Alteration insuring agreement coverage is applicable to acceptance of forged checks by the insured

II. The ISO Computer Fraud insuring agreement requires the computer utilized to commit the fraud to exist the property of the insured.

III. The ISO Funds Transfer Fraud insuring agreement would apply if a non employee hacker utilizes a computer message to send an instruction to a financial institution which results in the fraudulent transfer of funds.

IV. The treasurer of a contracting company wrote several checks to a friend's company and forged the president's signature on the contracting company's checks. The ISO Forgery or Alteration insuring agreement would cover this loss.

V. For ISO Money Orders and Counterfeit Money coverage to apply, the insured must have accepted the money orders or counterfeit currency in return for merchandise or services.

(A) I and II only

(B) III only

(C) IV only

(D) V only

AnswerI. The ISO Forgery or Alteration insuring agreement coverage applies to checks

made or drawn upon the insured's company that are altered. Money Orders and Counterfeit Money insuring agreement covers loss due to the insured's good-faith acceptance of money orders that are not paid upon presentation or counterfeit money that is acquired during the regular course of business.

II. The insuring agreement does not require that the computers used to commit the fraud be the property of the insured or even that they be located on the insured's premises. However, this insuring agreement does not cover computer-related theft committed by the insured's own employees.

III. Under the Funds Transfer Fraud insuring agreement. loss resulting from the use of a computer to fraudulently transfer money, securities, or other property is excluded.

IV. The ISO Employee Theft insuring agreement would cover this loss. Forgery or alteration coverage does not apply to loss resulting from dishonest acts of the insured, its partners, members, directors, trustees representatives, or employees.



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Question 22.3. Basic Crime Insuring AgreementsWhich of the following statements is not true with regard to the basic crime


I. A beauty salon employee was walking to the financial institution with a large cash deposit when she encountered a thief who robbed her at gunpoint. The ISO Outside the Premises insuring agreements would answer to this loss.

II. A manager closes up shop in a retail store located in a hotel. As the manager crossed the road on the way to the bank, an armed robber snapped up the moneybag containing the day's receipts and ran away. There were no witnesses, and a police report was not filed. The store will have coverage for the theft of the day's cash receipts up to their policy limit because the form has the Outside Premises insuring agreement.

III. A security guard and messenger at a mining company are responsible for the daily delivery of precious and semiprecious stones to a local jewelry designing firm. One Thursday, the messenger is held up at gunpoint and $12,500 price of uncut diamonds and sapphires are stolen from him. As the mining company is covered by the standard ISO Commercial Crime Form with all eight insuring agreements at the time of loss, the loss amount paid to them and the appropriate insuring agreement covering the loss would be $5,000 under the Outside the Premises insuring agreement.

(A) I only

(B) II only

(C) III only


AnswerIII. Outside the Premises insuring agreement has a special limit of $5,000 per

occurrence for these types of property applies: (1) Precious metals (2) Manuscripts, drawings, or records of any kind.

The correct answer is (D) none of the above.


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Question 22.4. Commercial Crime Coverage Form's Limit of InsuranceWhich of the following statements is not true with regard to the Commercial

Crime Coverage Form's Limit of Insurance?

I. A manufacturing company is covered under an ISO Commercial Crime Coverage Form. The policy includes a $100,000 coverage limit for employee theft. A group of three employees embezzled $100,000 from the company three times in a series of acts. The insurer will reimburse the company for this loss of $100,000.

II. An employee of Argot Architects is taking expensive $20,000 drawings to a client's location 30 miles away. While on the way to the company vehicle, a stranger accosts the employee and takes the drawings. The limit of insurance apply to this loss under the Outside the Premises insuring agreement of the ISO Commercial Crime Coverage Form would be a per occurrence limit of $5,000.

III. A small retail store, which carries a $20,000 limit for Robbery of Safe Burglary of Other Property under an ISO Commercial Crime Coverage Form, discovered its building window was damaged and the safe door was missing on Monday morning when an employee arrived at work. The storeowner immediately reported this incident to its insurance carrier. The theft consisted of precious and semiprecious gemstones that totaled $19,000 in value. In this case, the insurer should pay $5,000, the special limit for this type of property under Inside the Premises- Robbery or Safe Burglary of Other Property.

(A)! I and II only(B)! III only(C)! IV only(D)! None of the above



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Topic 23: Exclusions and Conditions of the Commercial Crime Coverage Form CPCU 551 Review Notes / Assignment 9. Commercial Crime Insurance / EO 4, 5

23.a. Structure: Exclusions of the Commercial Crime Coverage Form1. Acts Committed by You, Your Partners, or Your Members

2. Acts of Employees Learned of by You Prior to the Policy Period

3. Acts of Employees, Managers, Directors, Trustees, or Representatives

4. Confidential Information

5. Data Security Breach

6. Governmental Action

7. Indirect Loss

8. Legal Fees, Costs, and Expenses

9. Nuclear Hazard

10. Pollution

11. Virtual Currency

12. War and Military ActionsExclusions Applicable Only to Employee Theft

1. Inventory Shortages

2. Trading

3. Warehouse ReceiptsExclusions Applicable to Inside the Premises and Outside the Premises

1. Accounting or Arithmetical Errors or Omissions

2. Exchanges or Purchases

3. Fire

4. Money Operated Devices

5. Motor Vehicles or Equipment and Accessories

6. Transfer or Surrender of Property

7. Vandalism

8. Voluntary Parting With Title to or Possession of PropertyExclusions Applicable Only to Computer and Funds Transfer Fraud

1. Authorized Access

2. Credit Card Transactions

3. Exchanges or Purchases

4. Fraudulent Instructions (with this, only cover Computer Fraud)

5. Inventory Shortages


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23.b. Indirect Loss: General ExclusionsThe exclusion eliminates coverage for three types of loss that are other than

physica110ss of or damage to covered property: (1) Business income losses (2) Payment of damages for which the insured is legally liable other than compensatory damages arising directly from a loss covered by the policy (3) Expenses incurred in establishing either the existence or the amount of loss under the policy

23.c. Legal Fees, Costs, and Expenses: General ExclusionsThe exclusion eliminates coverage for fees, costs, expenses incurred by the

named insured which are associated with any legal action, except when covered under the Forgery or Alteration insuring agreement.

23.d. Trading: Exclusions Applicable Only to Employee TheftThe exclusion eliminates coverage for an employer's losses resulting from an

employee's unauthorized trading in stocks, bonds, futures, commodities, or other similar items. The exclusion eliminates losses that result from trading whether in the insured's name or in an authentic or fictitious account.

23.e. Warehouse ReceiptsThe exclusion eliminates coverage for loss resulting from the fraudulent or

dishonest signing, issuing, canceling or failing to cancel, a warehouse receipt or any papers associated with it.

This type of loss might occur when an employee, in collusion with a customer, releases merchandise without canceling the receipt or issues a receipt without having received the merchandise. The customer could then make a claim against the insured for missing goods based on the fraudulent receipts.

23.f. Exchanges or Purchases: Exclusions Applicable to Inside the Premises and Outside the Premises

This exclusion eliminates coverage for losses as a result of giving or surrendering property in an exchange or purchase. A deceptive transaction or sales scam that involves the loss of money, securities, or other property is not covered.


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23.g. Transfer or Surrender of Property: Exclusions Applicable to Inside the Premises and Outside the Premises

This exclusion addresses exposures which could warrant special coverage. The excluded exposures involve transfer or surrender of property to someone outside the premises because of unauthorized instructions or different threats against the insured.

These losses often involve computer fraud, but they may occur through voluntary parting with property under the mistaken assumption that the transfer of property is occurring properly.

23.h. Structure: Conditions of the Commercial Crime Coverage Form1. Interests Insured The Ownership of Property; Interests Covered condition

states that the insurance applies only to property owned, leased, or held by the named insured, or for which the insured is legally liable, provided that the insured was liable for the property before the loss occurred. The insurance is for the insured's benefit only.

2. Where Coverage Applies

The territorial provision for employee theft coverage is extended to include coverage for loss caused by employees temporarily outside the coverage territory (the United States, Puerto Rico, and Canada) for not more than ninety days.(1) Extended Period to Discover Loss

(2) Loss Sustained During Prior Insurance Issued by Us or Any Affiliate

(3) Loss Sustained During Prior Insurance Not Issued by Us or Any Affiliate

4. Claims-Related Duties and Procedures

(1) Duties in the Event of Loss

(2) Valuation-Settlement

(3) Recoveries: about subrogation or salvage recoveries

(4) Other Insurance5. Conditions Applicable to Employee Theft Only

(1) Termination as to Any Employee condition

(2) Employee Benefit Plans condition


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23.i. Interests Insured(1) The Joint Insured condition appoints the first named insured as agent for all

other insureds with regard to all transactions under the policy. It also provides that an employee of any insured is considered to be an employee of every insured and that knowledge possessed by any insured or any partner, officer, or limited liability company (LLC) member or manager of any insured is considered to be known to all insureds.

(2) The Additional Premises or Employees condition: If, during the policy period, the insured adds additional premises or employees other than by consolidation, merger, or acquisition, the Additional Premises or Employees condition states that policy coverage will be extended automatically.

(3) The Consolidation Merger or Acquisition condition: If the insured acquires additional employees or premises by consolidation, merger, or acquisition, the Consolidation Merger or Acquisition condition states that coverage will be extended automatically for ninety days to the new employees or premises.


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23.j. When Coverage AppliesThree conditions are principally concerned with determining when a loss must

occur in order to be covered under the loss sustained version of the Commercial Crime Coverage Form:

Extended Period to Discover Loss

Under the loss sustained form, the insurer will pay for loss that the named insured sustains through acts committed or events occurring during the policy period. The discovery period terminates immediately as of the effective date of any other insurance that the insured obtains that replaces coverage in whole or in part.

Loss Sustained During Prior Insurance Issued by Us or Any Affiliate

The insurer agrees to pay a loss with the highest limit of insurance applicable during the period of the loss, if a loss meets these criteria: (1) The loss is discovered during the policy period shown in the declarations. (2) The loss resulted from an occurrence taking place entirely during the policy period(s) of any prior cancelled insurance that was issued to the named insured by the current insurer or its affiliate. (3) The current insurance became effective when the prior insurance was canceled. (4) The loss would have been covered by the present insurance if the insurance had been in force at the time of loss.

Loss Sustained During Prior Insurance Not Issued by Us or Any Affiliate

The insurer agrees to pay a loss the lowest of the limits of insurance applicable during the period of the loss, if a loss meets these criteria: (1) The loss is discovered during the policy period shown in the declarations. (2) The loss resulted from an occurrence taking place during the policy period of any prior cancelled insurance that was issued to the named insured by another company and the discovery period under that policy had expired. (3) The current insurance became effective when the prior insurance was canceled or terminated. (4) The loss would have been covered by the present insurance if the insurance had been in force at the time of loss.


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23.k. Duties in the Event of Loss: Claims-Related Duties and ProceduresThe insured must perform these duties after discovering a loss or situation that

may be covered under the policy: (1) Notify the insurer at the earliest opportunity. (2) Submit to examination under oath at the insurer's request and give the insurer a signed statement of the insured's answers. (3) Produce all pertinent records for the insurer to examine. (4) Give the insurer a detailed, sworn proof of loss within 120 days. (5) Cooperate with the insurer in the investigation and settlement of any claim. (6) For all of the crime insuring agreements except employee theft and forgery or alteration, the insured must also notify the police if the insured has any reason to believe that a covered loss involves a violation of the law.

23.l. Valuation-Settlement: Claims-Related Duties and ProceduresThis condition explains how money, securities, and other property will be

valued for the purpose of claim settlement. Covered loss of money is paid at the face value of the money. Covered loss of

securities is paid at the market value of the securities at the close of business on the particular day the loss was discovered.

Covered loss of or damage to other property is paid on a replacement cost basis if the property is replaced. However, the insurer will pay no more than the least of these amounts: (1) The cost to replace the lost or damaged property with property of comparable material and quality and used for the same general purpose (2) The amount the insured actually spends that is necessary to repair or replace the lost or damaged property (3) The applicable limit of insurance.

23.m. Termination as to Any Employee: Conditions Applicable to Employee Theft Only

This condition states that when the named insured or any of various individuals-such as a partner, an officer, or a director-learns that an employee has committed theft or any other dishonest act, employee theft coverage ceases automatically with regards to future acts by that employee.

The condition permits the insurer to cancel coverage as to any employee by giving the named insured at least 30 days' written notice.

23.n. Employee Benefit Plans: Conditions Applicable to Employee Theft Only

The Employee Benefit Plans condition explains how employee theft coverage applies when the policy includes one or more employee benefit plans as insureds for the Employee Theft insuring agreement.

This condition modifies the Employee Theft insuring agreement and adds other provisions to the Commercial Crime Coverage Form to make its coverage compliant when this form is used to satisfy the fidelity bonding requirement of the Employee Retirement Income Security Act of 1974 (ERISA).


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Question 23.1. Exclusions of the Commercial Crime Coverage FormWhich of the following statements is not true with regard to the exclusions of

the commercial crime coverage form?

I. Vandalism is an exclusion that does apply to Inside the ISO Premises-Theft of Money and Securities Form insuring agreements.

II. The Accounting or Arithmetical Errors or Omissions exclusion applies to the ISO Outside the Premises insuring agreements.

III. Based on the ISO Commercial Crime Coverage Form, if a loss is covered by more than one insuring agreement the insurer will pay no more than the highest limit of the insuring agreements that apply.

IV. The exclusion in the ISO Commercial Crime Coverage Form that presents a major trouble when providing employee theft coverage for large professional practices, for example law firms and accounting firms, is Acts Committed by You, Your Partners, or Your Members.

V. The owner of a company, who is also a named insured on the policy, counted the quantity of bricks on several pallets and found the company was 2,000 bricks short. The owner reviewed that company's paperwork and determined that everything was in order. He then filed a claim for employee theft under an ISO Commercial Crime Coverage Policy. The insurer would deny coverage for this loss, since the Inventory Shortages exclusion eliminates coverage for an employee theft loss that is discovered solely by taking inventory.

(A) I and II only

(B) III and IV only

(C) V only




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Question 23.2. Commercial Crime ConditionsWhich of the following statements is not true with regard to the Commercial

Crime Conditions?

I. In a commercial crime policy, the fundamental requirement for a loss to be covered under a discovery form is that the named insured must discover the loss during the policy period or during the time period provided in the Extended period to Discover Loss condition.

II. A Retroactive Date endorsement to a commercial crime form excludes coverage for occurrences that occur in their entirety prior to the retroactive date.

III. A Policy Bridge condition in a commercial crime policy addresses coverage overlaps that occur when a loss sustained policy replaces a discovery policy.

IV. The Loss Sustained During Prior Insurance Not Issued by Us or Any Affiliate condition of a commercial crime policy eliminates the penalty for changing insurers, provided the limits of insurance have not changed.

(A) I and II only

(B) III only

(C) IV only


AnswerIII. Only the discovery forms contain the Policy Bridge condition. It addresses

coverage overlaps that might occur when a discovery policy replaces a loss sustained policy.



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Crime Conditions?

I. A company's Commercial Crime Coverage Policy has the discovery form and a policy period of January 1, 2012 through December 31, 2012. On December 1, 2012 the company decides to cancel the policy. On May 1, 2013 the company discovers an employee theft occurred and they contact their insurance agent to examine coverage. The company has no coverage because the employee theft loss was discovered after the extended time period allowed in the discovery form.

II. On January 22, the manager at a large banking operation informs the risk manager that there has been an employee theft of $1,500,000 at the bank. The theft occurred in December 2, the previous year when the bank was insured with the same carrier under an ISO loss sustained commercial crime policy. There was no gap between the two policies. Under this scenario, the Loss Sustained During Prior Insurance issued by Us or Any Affiliate condition provides coverage.

III. A large manufacturer discovers a shipment of platinum is missing from the premises on December 1, a day after it was delivered to them. Its commercial crime coverage period started November 30. In this case, only a discovery form would trigger coverage.

(A) I only

(B) II only

(C) III only


AnswerIII. The missing loss was occurred October 30. In this situation, either a

discovery or a loss sustained form would trigger coverage.The correct answer is (C) III only.


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Crime Conditions?

I. The Employee Benefit Plans condition of an ISO commercial crime policy expands coverage to contain benefit plans of organizations newly acquired through merger or acquisition.

II. The Valuation-Settlement condition of an ISO commercial crime form explains that all property other than money and securities will be paid on an actual cash basis.

III. An insured with an ISO Commercial Crime Coverage Policy acquired another organization during their policy period because of a merger and notifies the insurer within 90 days. The insured's policy will respond via coverage under the Consolidation-Merger or Acquisition condition.

IV. Company A's business was booming and they hired six additional employees during the first 3 months of the current policy period of its ISO Commercial Crime Coverage Form. They also had a chance to purchase company B and acquire the organization's liabilities and assets but not any of its employees. Company A did not inform their insurance agent of either of these activities. Half a year after the acquisition of Company B, Company A submits a commercial crime claim when they discover an employee theft by one of the six new employees they had hired. There is coverage because of the policy condition that applies to additional employees.

(A) I and II only

(B) III only

(C) IV only


AnswerI. The Employee Benefit Plans condition explains how employee theft coverage

will apply when the policy includes benefit plans as insureds for employee theft coverage.

II. The Valuation-Settlement condition explains how money, securities, and other property will be valued for purposes of claim settlement. Covered loss of money is paid at the face value of the money. Covered loss of securities is paid at the market value of the securities at the close of business on the day the loss was discovered. Covered loss of or damage to other property is paid on a replacement cost basis if the property is replaced. However, the insurer will pay no more than the least of these amounts: (1) The cost to replace the lost or damaged property with property of comparable material and quality and used for the same general purpose (2) The amount the insured actually spends that is necessary to repair or replace the lost or damaged property (3) The applicable limit of insurance

The correct answer is (A) I and II only.


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Topic 24: Commercial Crime Endorsements and Government Crime FormsCPCU 551 Review Notes / Assignment 9. Commercial Crime Insurance / EO 6, 7

24.a. Structure: 12 Endorsements1. Clients' Property It covers theft of money, securities, or other property

belonging to any client of the insured by an identified employee of the insured. The insurer covers such losses only if they are presented to the insurer by the insured.Cover against loss by the surrender of property as a result of a threat of harm to the named insured, an employee, or a relative or guest of the insured or the insured's employees

3. Inside the Premises -Theft of Other Property

It covers theft, instead of being limited to covering robbery and safe burglary. The definition of "theft" is broad enough to include robbery, safe burglary, regular burglary, or any other instance of theft while the premises are open or closed, regardless of whether there are signs of forcible entry or exit.

4. Inside the Premises -Robbery of a Watchperson or Burglary of Other Property

It covers robbery of a watchperson, instead of covering robbery of a custodian. It also covers burglary, defined as the unlawful taking of property from inside the premises by a person unlawfully entering or leaving the premises as evidenced by marks of forcible entry or exit.

5. Employee Theft - Name or Position Schedule

It covers employee theft committed by an employee whose name or position is listed in the policy.

6. Lessees of Safe Deposit Boxes

This endorsement enables a customer to insure property that the customer keeps in a safe deposit box on the premises of a bank or other depository.

7. Securities Deposited with Others

This endorsement enables the owner of securities who places them in the temporary custody of another organization to insure themThis endorsement is designed for lodging facilities-such as hotels, motels to protect themselves against liability for property loss sustained by their guests.


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9. Destruction of Electronic Data or Computer Programs

This endorsement covers the costs to replace electronic data or computer programs stored in the insured's computer system if such property is damaged by a computer virus or by vandalism.

10. Unauthorized Reproduction of Computer Software by Employees

It protects insureds against the cost of fines and penalties for the unauthorized reproduction of computer software by an employee in violation of a licensing agreement with a third-party vendor.

11. Fraudulent Impersonation

It provides an optional insuring agreement that covers loss directly resulting from the insured's having, in good faith, transferred money, securities, or other property in reliance on fraudulent instructions from an imposter.

12. Include Virtual Currency as Money

It addresses the emerging popularity of virtual currency (also referred to as digital or electronic currency or as cryptocurrency) that some organizations use as a form of payment.

24.b. Lessees of Safe Deposit Boxes endorsementThis endorsement enables a customer to insure property that the customer

keeps in a safe deposit box on the premises of a bank or any other depository.The endorsement provides that (1) securities can be covered against theft,

disappearance, or destruction and that (2) property other than money and securities can be insured against burglary, robbery, and vandalism.

The coverage enables the lessee (customer) to recover from its insurer for losses to covered property without needing to prove that the lessor (bank or depository) was liable for the loss.

24.c. Securities Deposited with Others endorsementThis endorsement enables the owner of securities who places them in the

temporary custody of another organization to insure them while they are in the custodian's possession or on deposit by the custodian for safekeeping in a depository.

The covered causes of loss are theft, disappearance, and destruction.

24.d. Guests' Property endorsementThis endorsement is developed for lodging facilities-such as hotels, motels,

and bed-and-breakfasts to protect themselves against liability for property loss suffered by their guests.

The Guests' Property endorsement covers loss to guests' property for which the insured is legally liable, subject to applicable exclusions. Covered legal expenses are payable beyond the limit of insurance.


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24.e. Destruction of Electronic Data or Computer Programs endorsementThis endorsement covers the expenses to recover or replace electronic data or

computer programs stored in the insured's computer system if such property is damaged or destroyed by a computer virus or by vandalism committed by a person who has gained unauthorized access to the insured's computer system.

The typical crime policy exclusion of acts of employees, managers, directors, trustees, or representatives does not apply to this coverage.

24.f. Unauthorized Reproduction of Computer Software by Employees endorsement

This endorsement can protect insureds against the expense of fines and penalties for the unauthorized reproduction of computer software by an employee violating a licensing agreement with a third-party vendor.

The violation must be with no knowing of the insured, any of the insured's partners, limited liability company members, officers or directors, and any other person responsible for compliance with the terms of the software licensing agreement.

24.g. Fraudulent Impersonation endorsementThe insured can select either or both of these two basic coverage options: (1) I.

Fraudulent Impersonation of Employees Included: If Option I is selected, coverage is provided if the insured transfers money, securities, or other property in reliance on instructions issued by someone impersonating an employee or any of the insured's partners, members or managers (if the insured is a limited liability company), officers, directors, or an individual named insured.

(2) II. Fraudulent Impersonation of Customers and Vendors Included: If Option II is selected, the endorsement provides coverage if the fraudulent transfer instructions are issued by someone impersonating a customer or vendor of the insured.

Under either option, the insured selects one of these three additional options: (a) Option A: requires verification for all transfer instructions (b) Option B: requires verification for all transfer instructions for transfers that exceed a certain amount, as shown on the schedule (c) Option C: does not require verification of any transfer instructions

Because Options A, B, and C require different levels of verification, they also influence underwriting and pricing. Under ISO Commercial Lines Manual rules, the rating factor for Option C is reduced if Option B applies, and it is further reduced if Option A applies.


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24.h. Include Virtual Currency as Money endorsementThe endorsement modifies certain provisions of the policy to which it is

attached to enable its Employee Theft insuring agreement and/or Computer and Funds Transfer Fraud insuring agreement to cover loss of virtual currency under the terms of those insuring agreements. In the endorsement schedule, a virtual currency limit of insurance can be shown for each of the two insuring agreements the insured wishes to purchase.

The Virtual Currency exclusion is modified with an exception that allows coverage to apply to loss of virtual currency up to the virtual currency limit of insurance shown in the endorsement schedule.

The endorsement amends the Valuation-Settlement condition to state that loss of money in the form of virtual currency is valued at the rate of exchange published by the exchange shown on the schedule, as of the close of business on the day that the loss was discovered. The insurer may, at its option, either pay the value of the virtual currency in the United States dollar equivalent or replace the virtual currency in kind.

24.i. Alternative Employee Theft Insuring Agreement in the Government Crime Forms

Each government crime form contains two Employee Theft insuring agreements as opposed to a single Employee Theft insuring agreement in the commercial crime forms. One of these insuring agreements provides "per loss coverage," and the other provides "per employee coverage."

With per loss coverage as like in the commercial crime forms, the limit of insurance is the most that the insurer will pay for a single loss.

With per employee coverage, the limit of insurance is the most that the insurer will pay for all loss caused by a single employee. The per employee form is obtainable for government entities because the statutes in some jurisdictions require that coverage apply per employee.

24.j. Territory Condition in the Government Crime FormsThe Territory condition in the government crime forms does not include

Canada, and the forms' coverage territory is therefore limited to the United States, its territories or possessions, and Puerto Rico. However, the Forgery or Alteration and Computer and Funds Transfer Fraud insuring agreements in the government crime forms are subject to worldwide coverage, as in the commercial crime forms.

In addition, under the Employee Dishonesty insuring agreements, the insurer agrees to pay for loss caused by an employee while temporarily outside the U.S., its territories or possessions, or Puerto Rico for a period not to exceed ninety consecutive days.


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24.k. Termination as to Any Employee Condition in the Government Crime Forms

In the government crime forms, this condition applies to any employee whose theft or other dishonest act is noticed by the named insured or any official or employee authorized to manage, govern, or control the insured's employees. The government crime forms encompass a broader group of employees whose knowledge is imputed to the insured.

As an example, knowledge by a supervisor who is not an officer would not trigger automatic termination under the commercial crime forms but would do so under the government forms.

24.l. Additional Exclusions in the Government Crime FormsThe government crime forms contain two additional exclusions that are not

contained in the commercial crime forms. These exclusions eliminate coverage for loss caused by (1) any employee required by law to be individually bonded or (2) any treasurer or tax collector.

24.m. Indemnification and Faithful Performance in the Government Crime Forms

The government crime forms contain an Indemnification condition, not contained in the commercial crime forms. The condition states that the insurer will indemnify any of the insured's officials who are required by law to provide faithful performance bonds against loss resulting from theft committed by employees who serve under these officials.

When such bonding requirements exist, the official may be held responsible towards the insured public entity for loss resulting from theft committed by the official's subordinates. The Indemnification condition confirms that the insurer will indemnify the official for such losses, enabling the official to indemnify the insured as required by law. This condition prevents the insured from having to proceed against its own officials to recover for employee theft committed by the officials' subordinates.


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Question 24.1. Commercial Crime EndorsementsWhich of the following statements is not true with regard to the Commercial

Crime Endorsements?

I. The Lessees of Safe Deposit Boxes endorsement provides that securities could be covered against burglary, robbery, and vandalism.

II. Covered causes of loss under the Securities Deposited With Others endorsement of the ISO Commercial Crime Coverage Form include theft, disappearance, and destruction.

III. The Guests' Property endorsement to the ISO Commercial Crime Coverage Form is developed to cover the liability of a lodging facility for property damage to guests' belongings.

IV. The Destruction of Electronic Data or Computer Programs endorsement to the ISO Commercial Coverage Form covers the cost to restore or replace electronic data of computer programs under specific situations.

V. A local civic club carries $10,000 per occurrence coverage for loss due to employee theft under the ISO Commercial Crime Coverage Form. The club president reported to the insurance company there were seven separate acts of theft by the same two employees acting in collusion throughout the course of the policy year. The losses totaled $60,000. The insurer should pay $10,000 for one occurrence, regardless of the number of employees.

(A) I only

(B) II only

(C) III only

(D) IV and V only

AnswerI. The Lessees of Safe Deposit Boxes endorsement provides that (1) securities

can be covered against theft, disappearance, or destruction and that (2) property other than money and securities can be insured against burglary, robbery, and vandalism.



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Question 24.2. Commercial Crime EndorsementsWhich of the following statements is true with regard to the Commercial

Crime Endorsements?

I. A small retail shop, which has a $20,000 limit for safe burglary of other property under an ISO Commercial Crime Coverage Form, discovered its building window was damaged and the safe door was missing on Monday morning when its employee arrived at work. The shopowner immediately reported this incident to its insurance agency and the theft consisted of precious and semiprecious gemstones that totaled $29,000 in value. The insurer should pay $5,000, the special limit for this sort of property under Inside the Premises-Robbery or Safe Burglary of Other Property.

II. A bank found out that electronic data had been tampered with and filed a claim under the bank's ISO Commercial Crime Coverage Form for the resulting damage to the data. It was suspected that a disgruntled employee had tampered with the computer files and created a virus. The bank would only be covered if it had a Destruction of Electronic Data or Computer Programs endorsement.

III. An employee at an accounting firm uses a third-party vendor's accounting software every day. During the course of employment at the firm, it is discovered that the employee published a copy of the accounting software on an open-source software site. Consequently, the accounting firm must pay damages of $150,000 for the unauthorized reproduction of the software. The loss is covered by the Unauthorized Reproduction of Computer Software by Employees endorsement.

(A) I only

(B) II only

(C) III only


AnswerThe correct answer is (D) all of the above.


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Question 24.3. Commercial Crime EndorsementsWhich of the following statements is not true with regard to the Commercial

Crime Endorsements?

I. The term "client" in the Clients' Property endorsement refers to an entity for whom the insured performs services under a written contract.

II. The commercial crime endorsement that has three options for the insured's level of verification of transfer instructions is the Fraudulent Impersonation endorsement.

III. The Destruction of Electronic Data or Computer Programs endorsement helps close the coverage gap of most commercial property policies that provide inadequate coverage for the cost to restore damaged electronic data.

IV. For an extortion threat to be covered under the endorsements, the first communication of the threat must occur during the policy period, and the surrender of the ransom must occur away from the insured premises.

(A)! I only(B)! II only(C)! III and IV only(D)! None of the above



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Question 24.4. Government Crime FormsWhich of the following statements is not true with regard to the government

crime forms?

I. The unendorsed ISO government crime forms under the ISO commercial crime insurance program are different from the unendorsed commercial crime forms in that the government forms provide Employee Theft coverage on a "per employee" basis and eliminating coverage for loss caused by any employee required by law to be individually bonded

II. A major city has an unendorsed ISO government crime policy and sustains a loss when the city auditor discovers that the city treasurer and a tax collector has been embezzling from the city's funds. There is no coverage because of a policy exclusion that eliminates coverage for a loss caused by a treasurer and any tax collector.

III. A computer hacker gained access to a U.S. city's computer system. While in the system, this hacker directed shipments of goods ordered by the city to another address located on the continent of Europe. The city had previously purchased an ISO government crime policy that had computer fraud coverage with a $100,000 limit. The hacker, as they discovered, was not an employee and lived in Europe. There is no payment because the hacker is not located in the U.S.

(A) I only

(B) II only

(C) III only


AnswerIII. There is coverage up to a $100,000 limit because computer fraud is covered

worldwide.The correct answer is (C) III only.


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SECTION 10. EQUIPMENT BREAKDOWN INSURANCE

Topic 25: Equipment Breakdown Loss Exposures and Insuring Agreements

Topic 26: Policy Provisions in Equipment Breakdown Coverage


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Topic 25: Equipment Breakdown Loss Exposures and Insuring AgreementsCPCU 551 Review Notes / Assignment 10. Equipment Breakdown Insurance / EO 1, 2

25.a. Boilers and pressure vesselsA fired pressure vessel is any container which is heated by the direct fire of

burning fuel and can withstand internal pressure. Boilers would be the most typical type of fired pressure vessel.

These are the basic common types of breakdown losses to fired pressure vessels: (1) Explosion due to excessive internal pressure of steam (2) Overheating caused by continued firing when there is insufficient water in the vessel (3) Cracking of cast iron sections as a result of expansion and contraction stresses (4) Bulging or bagging (swelling), usually caused by improper heat transfer because of buildup of scale or sediment

An unfired pressure vessel can withstand internal pressure or vacuum however is not heated by the direct fire of burning fuel. The steam boiler explosion exclusion in commercial property policies does not extend to explosion of unfired pressure vessels, which is therefore covered under commercial property forms and in most cases excluded under equipment breakdown policies.

25.b. Other Equipment Breakdown Loss Exposures(1) Boiler explosion, (2) electrical equipment breakdown, (3) mechanical

equipment breakdown including rupture from centrifugal force, (4) air conditioning and refrigeration equipment breakdown, and (5) office equipment and systems breakdown are covered by equipment breakdown policies and not by commercial property policies.

Combustion explosion is generally not a covered cause of loss under an equipment breakdown policy because commercial property policies specifically cover it.

Commercial property policies do not cover electric breakdown of motors caused by short circuits but do cover breakdown if it is the result of lightning.

Electrical line surges, electrical arcing, deterioration of insulation, electrical overload, excessive moisture, operator error or abuse, and the presence of foreign objects are some of the causes of loss for office equipment systems breakdowns. (Other causes of loss are possible.)

SECTION 10. Equipment Breakdown Insurance

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25.c. Equipment Breakdown Exposures by Market SegmentEquipment breakdown coverage can satisfy the somewhat different loss

exposures of market segments which range from small business, or what are sometimes called "Main Street" insureds; midsize commercial insureds; and large industrial insureds.

Main Street (small) insureds typically need equipment breakdown coverage for heating and air conditioning equipment.

The exposures for midsize commercial insureds change from principally heating and air conditioning equipment to production machinery and processing equipment. Equipment is generally larger and requires a much more detailed inspection by the insurer.


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25.d. Structure: Equipment Breakdown Insuring Agreements

Property DamageProperty Damage The insurer agrees to pay for direct damage to covered property.

Expediting ExpensesExpediting Expenses The insurer agrees to pay such expenses that the insured necessarily incurs to speed the repair or replacement of covered property.Covers spoilage damage to raw materials, property in process, or finished products.

Time Element Coverages

Business Income and Extra Expense-Or Extra Expense Only

The insurer agrees to pay the insured's actual loss of business income during the period of restoration resulting from breakdown to covered equipment.


Utility Interruption Covers loss resulting from breakdown of covered equipment owned, operated, or controlled by the local private or public utility or distributor.


Contingent Business Income and Extra Expense-Or Extra Expense Only

Covers loss arising from breakdown to covered equipment at the location, shown in the declarations, that is not owned or operated by the insured.

Newly Acquired PremisesNewly Acquired Premises Extends coverages to apply at newly acquired premises the insured buys or leases.

Ordinance or Law CoverageOrdinance or Law Coverage Covers the cost of demolishing undamaged parts of a building or the increased cost of construction

Errors and OmissionsErrors and Omissions Covers any error or unintentional omission in the description or location of insured property.Covers costs the insured incurs in stamping merchandise with the word salvage or removing brands and labels.

Insuring Computers and Electronic DataInsuring Computers and Electronic Data

Use an inland marine electronic data processing (EDP) equipment floater.


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25.e. Property DamageUnder this insuring agreement, the insurer agrees to pay for direct damage to

covered property. The policy definition of "covered property" is dissimilar to, and much broader than, the policy definition of "covered equipment." Covered property must be situated at a location described in the declarations: (1) Property that the named insured owns or (2) Property that is in the named insured's care, custody, or control and for which the named insured is legally liable. In both case, the property must be situated at a location described in the declarations.

25.f. Expediting ExpensesAccording to the Expediting Expenses insuring agreement, the insurer agrees

to pay such expenses that the insured necessarily incurs to accelerate the repair or replacement of covered property, for example the payment of overtime wages to make repairs.

25.g. Spoilage DamageThis insuring agreement covers spoilage damage to raw materials, property in

process, or finished products while in storage or in the course of being manufactured. The spoilage damage must result from the shortage or excess of power, light, heat, steam, or refrigeration, and the insured must own or be legally liable for the property.

The insurer also agrees to pay expenses the insured incurs to cut back the amount of spoilage loss, not to exceed the amount that would otherwise have been payable.

25.h. Utility Interruption: Time Element CoveragesThis insuring agreement extends any business income, extra expense, or

spoilage damage coverage given by the policy to include loss resulting from breakdown of covered equipment owned, operated, or controlled by the local private or public utility or distributor from whom the insured receives electrical power, communication services, air conditioning, heating, gas, sewer, water, or steam.

25.i. Errors and OmissionsThis coverage commits the insurer to pay for loss or damage not otherwise

covered under this form solely as a result of any of these reasons: (1) Any error or unintentional omission in the description or location of insured property (2) Any failure through error to add any premises owned or occupied by the insured on the policy's inception date (3) Any error or unintentional omission by the insured that ends in cancellation of any premises insured under the policy.

No coverage is available as a result of any error or unintentional omission in the reporting of values or the coverage that the insured requested.


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Question 25.1. Equipment Breakdown Loss ExposuresWhich of the following statements is not true with regard to Equipment

Breakdown Loss Exposures?

I. In equipment breakdown insurance, one frequent type of a typical loss to electrical equipment is bearing failure in rotating equipment.

II. An equipment breakdown loss connected with an air conditioning and refrigeration system includes a compressor valve failure and coils failure.

III. An example of an equipment breakdown loss for office equipment and systems is electrical arcing.

IV. A company recently purchased a new computer system which controls the desktop computers, phone lines, fax lines, copiers and security systems. The city upgraded the electrical lines and an electrical overload damaged the computer's motherboard. Equipment breakdown policies would most fully answer to the loss.

V. A company is insured using a commercial property policy and an equipment breakdown policy. The company has two claims while both policies are in effect. The first claim is for a furnace explosion and the second claim is for an explosion of unfired pressure vessels. Each loss would be covered under the equipment breakdown policy only.

(A) I only

(B) II only

(C) III and IV only

(D) V only

AnswerV. Combustion explosion is typically not a covered cause of loss under an

equipment breakdown policy because commercial property policies specifically cover it. The steam boiler explosion exclusion in commercial property policies does not extend to explosion of unfired pressure vessels, which is therefore covered under commercial property forms and usually excluded under equipment breakdown policies.



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Question 25.2. Equipment Breakdown Insuring AgreementsWhich of the following statements is not true with regard to the Equipment

Breakdown Insuring Agreements?

I. Equipment breakdown insurance has insuring agreements that could be characterized as a option of insuring agreements that is determined either by the insured's need to purchase the individual coverages or the insurer's willingness to cover the exposure.

II. Spoilage damage to finished products while in storage is covered by the Spoilage Damage insuring agreement in an equipment breakdown policy.

III. In an equipment breakdown policy, the insurer agrees to pay for direct damage to covered property under the Property Damage insuring agreement. It includes property under the insured's care, custody, or control for which the insured is legally liable.

IV. The Equipment Breakdown Protection Coverage Form, expediting expenses include the cost to rent computer equipment.

V. The Contingent Business Income and Extra Expense insuring agreement of an equipment breakdown policy extends business income coverage provided by the policy to include loss resulting from the breakdown of equipment belonging to a local utility.

(A) I only

(B) II and III only

(C) IV only

(D) IV and V only

AnswerIV. Under the Expediting Expenses insuring agreement, the insurer agrees to

pay such expenses that the insured necessarily incurs to speed the repair or replacement of covered property, such as the payment of overtime wages to make repairs. Coverage for expediting expenses overlaps extra expense coverage to some degree, but expediting expenses coverage is not as broad as extra expense coverage.

V. The Utility Interruption insuring agreement of an equipment breakdown policy extends business income coverage provided by the policy to include loss resulting from the breakdown of equipment owned by a local utility. The purpose of the Contingent Business Income and Extra Expense insuring agreement in an equipment breakdown policy is to provide business income and extra expenses arising from the breakdown of covered equipment at identified locations not owned or operated by the insured.

The correct answer is (D) IV and V only.


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Question 25.3. Equipment Breakdown Insuring AgreementsWhich of the following statements is not true with regard to the Equipment

Breakdown Insuring Agreements?

I. A food & beverage company suffers a loss because of the local utility's electrical transformer turning off electrical power to the insured premises for several days. The loss includes damage to raw materials and loss of business income. Under their Equipment Breakdown Protection Coverage Form, the insuring agreements that cover these losses are Spoilage Damage and Utility Interruption.

II. A company carries the Equipment Breakdown Protection Coverage Form including all ten insuring agreements. In the event the company's steam boiler explodes, damage to a neighboring building not in the company's care, custody, and control, caused by the steam boiler explosion would be covered by the form.

III. A refrigerator repair store owns a building in which a steam boiler exploded damaging the building and the customers' refrigerator. Property Damage insuring agreements in the Equipment Breakdown Protection Coverage Form would best answer to the loss of the customers' refrigerator if the insured is legally liable.

(A) I only

(B) II only

(C) III only


AnswerII. Damage to the company's business personal property would be covered by

the Property Damage insuring agreement. Covered property must be situated at a location described in the declarations: (1) Property that the named insured owns or (2) Property that is in the named insured's care, custody, or control and for which the named insured is legally liable. In either case, the property must be situated at a location described in the declarations.



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Topic 26: Policy Provisions in Equipment Breakdown CoverageCPCU 551 Review Notes / Assignment 10. Equipment Breakdown Insurance / EO 3

26.a. ExclusionsThe ISO form excludes these causes of loss:(1) Fire or combustion explosion that results in a breakdown, that occurs

simultaneously as a breakdown, or that ensues from a breakdown(2) Water or other means of extinguishing a fire(3) Breakdown caused by any of the following perils if coverage for that peril is

provided by another policy of the insured's, whether collectible or not: aircraft or vehicles; freezing caused by cold weather; lightning; sinkhole collapse; smoke; riot, civil commotion, or vandalism; or weight of snow, ice, or sleet

(4) Breakdown caused by windstorm or hail(5) Time element exposures relating to the business income, extra expense, and

utility interruption coverages caused by; the insured's failure to use due diligence and dispatch in operating the business; the suspension, lapse, or cancellation of a contract.

(6) Damage to covered equipment which undergoing a pressure or electrical test.


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26.b. Limit of InsuranceOrdinarily, every policy has one overall limit, which is the most that the

insurer will pay for loss or damage caused by anyone breakdown. The ISO form describes this limit as the "limit per breakdown" and defines "one breakdown" to add all additional breakdowns that result from an initial breakdown at the same premises.

Unless a higher limit is shown in the declarations, the most the insurer will pay for each of these exposures is $25,000:

(1) Spoilage damage to covered property resulting from ammonia contamination.

(2) The reduction in value of undamaged portions of a product that becomes unmarketable because of physical loss or damage to another part of the product.

(3) The cost to research, replace, or restore damaged computer data or media, including the cost to reprogram instructions used in any computer equipment.

(4) Additional expenses the insured incurs to clean up, repair, replace, or dispose of covered property which is damaged or contaminated by a hazardous substance.

(5) Damage to covered property by water. However, no coverage applies to water damage as a result of leakage of a sprinkler system or domestic water piping.

26.c. DeductibleWhen a policy has an insuring agreement with separate deductibles, they will

apply separately for each applicable coverage. If the declarations show "Combined" deductibles for two or more coverages, the insurer will subtract the combined deductible only one time from the aggregate amount of loss under the coverages to which the combined deductible applies.

Deductible amounts will be decided for four possible types of deductibles: (1) Dollar deductible (2) Time deductible (3) Multiple of daily value deductible (4) Percentage of loss deductible: this is most frequently used with spoilage damage coverage.


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26.d. ValuationUnder this condition, coverage applies on a replacement cost basis. By

endorsement, the underwriter can modify the valuation for particular items, typically outdated equipment, to an actual cash value basis. If manufactured by the insured, property held for sale by the insured is valued at its selling price, less any discounts and expenses the insured otherwise would have had.

Insureds often upgrade their equipment after a loss. To cover the additional expense, the policy provides that the insurer will pay the added cost up to 25 % of the property damage amount to replace equipment with equipment that is better for the environment, safer, or more efficient than the equipment being replaced.

For purposes of spoilage damage coverage, separate valuation methods apply to raw materials, property in process, and finished products. (1) Raw materials are valued at replacement cost. (2) Property in process is valued at the sum of the replacement cost of the raw materials, the labor expended, and the proper proportion of overhead charges. (3) Finished products are valued at their selling price, less any discounts and expenses.

26.e. SuspensionIf the insurer or its representative finds that covered equipment is in, or

exposed to, a dangerous condition, the Suspension condition permits the insurer or any of its representatives to promptly suspend the insurance against loss to that equipment.

The insurer can suspend coverage by delivering or mailing a written notice of suspension to the named insured. Once coverage has been suspended, it can be reinstated only by endorsing the policy.

26.f. Joint or Disputed Loss AgreementThe agreement applies only when the commercial property policy includes a

similar provision with substantially the same conditions. When all the requirements of the condition are met, each insurer will pay the entire amount of loss that each agrees is covered under its own policy plus one-half of the amount in dispute. In this way, the insured is fully paid without needing to wait for the insurers to reach agreement on their respective liabilities.

After the insured has been compensated, the agreement requires the insurers to settle their differences through arbitration.

26.g. Jurisdictional InspectionsA jurisdictional inspections condition typically states that if any covered

equipment requires inspection to conform to state, county, or municipal boiler and pressure vessel regulations, the insurer will conduct jurisdictional inspections on the insured's behalf.


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Question 26.1. Policy Provisions in Equipment Breakdown CoverageWhich of the following statements is not true with regard to the Policy

Provisions in Equipment Breakdown Coverage?

I. Breakdown resulting from windstorm or hail is excluded peril by the policy definitions in the ISO Equipment Breakdown Protection Coverage Form.

II. Spoilage damage resulting from ammonia contamination has sublimit of $25,000 under the ISO equipment breakdown policy.

III. Percentage of loss deductible is the type of deductible most frequently used for spoilage coverage in the Equipment Breakdown Protection Coverage Form.

IV. The Valuation condition of the Equipment Breakdown Protection Coverage Form generally provides coverage for property on replacement cost if the insured repairs or replaces the property within 24 months after the loss.

V. The ISO Equipment Breakdown Protection Coverage Form covers damage to Covered Equipment undergoing a pressure or electrical test.

(A) I only

(B) II and III only

(C) IV and V only

(D) V only

Answer V. The ISO Form excludes damage to Covered Equipment undergoing a

pressure or electrical test. When such testing occurs in a newly constructed building, it is often covered by endorsement to the builders' risk policy covering the entire construction project. Builders' risk equipment breakdown forms are also available, and these forms typically omit the testing exclusion.



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Question 26.2. Policy Provisions in Equipment Breakdown CoverageWhich of the following statements is not true with regard to the Policy

Provisions in Equipment Breakdown Coverage?

I. The steam boiler at a hotel explodes because of excessive internal pressure causing damage to the hotel's basement, laundry facility, the first floor rooms, and the parking garage of the mall next door. Loss of income as a consequence of first floor rooms being out of service, damage to guest's property in rooms on the first floor, damage to the steam boiler that was the cause of the loss, and damage to the parking garage next door would be covered under the Equipment Breakdown Protection Coverage Form.

II. The secretary for a company inadvertently neglected to declare a newly purchased property to the insurer. The air conditioning system was significantly damaged because of an electrical malfunction. Errors and Omissions insuring agreements under the Equipment Breakdown Protection Coverage Form would be best for this situation.

III. Throughout a routine inspection at an elementary school, an insurer discovers a faulty shut-off valve on the steam boiler. The inspector orally advises the insured that coverage is suspended until such time as the valve is replaced. No written notice is given and no endorsement was processed suspending coverage. Prior to the valve is replaced an explosion occurs damaging the boiler and boiler room. The loss is covered because written notice suspending coverage was never sent by the insurer to the school.

(A) I only

(B) II only

(C) III only


AnswerI. Damage to the parking garage next door would not be covered under the

Equipment Breakdown Protection Coverage Form.The correct answer is (A) I only.


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SECTION 11. BUSINESSOWNERS AND FARM INSURANCE

Topic 27: ISO Businessowners Property and Liability Coverage

Topic 28: ISO Farm Program and Specialty Farm Coverages


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Topic 27: ISO Businessowners Property and Liability CoverageCPCU 551 Review Notes / Assignment 11. Businessowners and Farm Insurance / EO 1~3

27.a. BOP CharacteristicsA businessowners policy (BOP) typically provide building and business

personal property coverage, business income and extra expense coverage, and the same as commercial general liability coverage. Other coverages can be included automatically or available as options.

BOPs provide these advantages: (1) For insurers, they reduce adverse selection and handling costs. (2) For producers, there are simplified rating procedures. (3) For insureds, there is the convenience and economy of one policy for their property and liability insurance needs.

Under Insurance Services Office, Inc. (ISO) rules, eligible risks generally may not exceed 25,000 square feet in total floor area or exceed $3 million in annual gross sales at each location. Automobile-related businesses, bars, and buildings occupied for manufacturing types of businesses are not eligible for the ISO Businessowners Program.

Rating a BOP is much less complicated because BOP property coverage is rated based on the amounts of coverage provided for building and personal property. BOP property rates include loadings (built-in charges) for business income and any additional coverages that are automatically included. As a result, the rates do not have to be computed separately for each of those coverages.

27.b. Covered Property: ISO Businessowners Coverage Form (BCF)The BCF is different from the BPP regarding coverage in these ways: (1) The BCF description of building property includes the named insured's

personal property in apartments or rooms equipped by the named insured as landlord. Such property is not included under building coverage in the BPP.

(2) The BCF covers personal property of others in the insured's care, custody, or control under the same limit that applies to personal property belonging to the named insured. In contrast, the BPP divides coverage for personal property of others in a separate section.

(3) The BCF has a much shorter list of property not covered. As an example, the BCF does not exclude excavations and foundations, which are excluded by the BPP. Thus, such items are covered by the BCF but not covered by the BPP.

SECTION 11. Businessowners and Farm Insurance

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27.c. Covered Causes of Loss: ISO Businessowners Coverage Form (BCF)The BCF uses the identical approach as the Causes of Loss-Special Form with a

few differences: (1) The BCF provides broader coverage than the Causes of Loss-Special Form for computers and electronic data and media. More particularly, the BCF Power Failure exclusion does not apply to loss or damage to computers and electronic data. (2) the BCF Electrical Apparatus exclusion states that the insurer will pay for loss or damage to computers resulting from artificially generated electrical current under certain situations. (3) the BCF exclusion of mechanical breakdown does not apply to the breakdown of computers.

Three extra exclusions eliminate coverage for computers and electronic data under the BCF: (1) Errors or omissions in programming, processing, storing data, or processing or copying valuable papers and records (2) Errors or deficiencies in design, installation, testing, or repair of computer systems (3) Electrical or magnetic injury, disturbance, or erasure of electronic data, except as provided for under the additional coverages.

27.d. Additional Coverages: ISO Businessowners Coverage Form (BCF)Business Income and Extra Expense

Same as ISO business income and extra expense forms, but differ: BCF subject to a one-year limit instead of dollar limits; not subject to coinsurance; limit ordinary payroll coverage to sixty days

Extended Business Income (EBl)

Same as the ISO EBI additional coverage except that the 30-day time limit can be increased, eliminating the need for a separate Extended Period of Indemnity option.Similar to civil authority coverage in ISO business income forms except that BCF applies only for 3 weeks (as compared with 4 weeks) and does not contain the one-mile radius limitation

Business Income From Dependent Properties

Similar to endorsements to ISO business income forms, up to $5,000.

Money Orders and Counterfeit Money

Similar to coverage in ISO commercial crime

Forgery or Alteration Similar to coverage in ISO commercial crimeGlass Expenses Unique to BCFFire Extinguisher Systems Recharge Expense

Unique to BCF, up to $5,000.

Electronic Data Similar to the BPP, but it covers a broader range of perils and has a higher aggregate limit; $10,000 rather than $2,500 as in the BPP.

Interruption of Computer Operations

ISO business income forms, but with a higher aggregate limit; $10,000 rather than $2,500.

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27.e. Coverage Extensions: : ISO Businessowners Coverage Form (BCF)Newly Acquired or Constructed Property

Like the BPP, up to 30 days, buildings $250,000, contents $100,000.

Personal Property Off Premises

Similar to the BPP extension with the same $10,000 limit, but broader than the BPP includes coverage for property while it is in the course of transit or temporarily at premises not owned, leased, or operated by the named insured.Similar to the BPP, but higher limit; $2,500 ($1,000 in BPP) limit for outdoor property, $500 ($250 in BPP) for anyone tree

Personal Effects Same as the Personal Effects and Property of Others extension in BPP, up to $2,500.

Valuable Papers and Records

Provides broader perils and higher limits than the Valuable Papers and Records extension in the BPP; limits of $10,000 on premises and $5,000 off premises ( $2,500 limit in BPP)

Accounts Receivable Similar to the Inland Marine Accounts Receivable Form; no equivalent extension in BPP

27.f. Limits of InsuranceThe Limits of Insurance provisions applicable to the BCF's property section

include two provisions not contained in the BPP: (1) The Building Limit-Automatic Increase: which increases the stated limit for buildings by an annual percentage shown in the declarations. The BPP has a comparable Inflation Guard provision, but it is optional. (2) The Business Personal Property Limit-Seasonal Increase: which has no equivalent in the BPP. It automatically increases the business personal property limit to cover increases in inventory values, no matter whether they result because of peak seasons or other reasons.

27.g. DeductiblesUnder CLM rules, a standard deductible of $500 applies to all BOP property

coverages other than Business Income, Extra Expense, Civil Authority, Fire Extinguisher Systems Recharge Expense, and Fire Department Service Charge. Optional deductibles are obtainable.


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27.h. Property Loss ConditionsThe BCF covers buildings and personal property on a replacement cost basis.

The BCF does not have a Coinsurance condition like the BPP but rather has an insurance-to-value requirement. Although less stringent than coinsurance, it encourages insureds to insure to at least 80 % of the covered property's value. No agreed value option is available with the BOP, but the insurance-to-value requirement can be eliminated by endorsement.

For full replacement cost coverage to apply under the BOP, the amount of insurance at the time of the loss must equal at least 80 % of the full replacement cost of the covered property immediately before the loss.

27.i. Optional CoveragesThe BCF includes provisions for four optional coverages that can be put into

effect by appropriate entries in the declarations: (1) The Outdoor Signs optional coverage (2) The Employee Dishonesty optional coverage (3) The Mechanical Breakdown optional coverage (4) Money and Securities optional coverage.

27.j. Liability Insuring AgreementsLiability of the BCF is comparable in most ways to the occurrence version of

ISO Commercial General Liability (CGL) Coverage Form. (1) Business Liability insuring agreement: which provides the same as

Coverage A, Bodily Injury and Property Damage Liability and Coverage B, Personal and Advertising Injury Liability of the CGL coverage form

(2) Medical Expenses insuring agreement: which provides the same as Coverage C, Medical Payments of the CGL coverage form

27.k. Limits of InsuranceThe BOP, the same as the CGL, has two aggregate limits, which apply in the

same way as (1) the General Aggregate Limit and (2) Products-Completed Operations Aggregate Limit of the CGL.

The Products-Completed Operations Aggregate Limit in the BOP may be increased to three times the Liability and Medical Expense Limit by endorsement. As opposed, the CGL's aggregate limits can be set at various multiples of the each occurrence limit.

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27.l. Professional Services ExclusionThe Businessowners Coverage Form (BCF) excludes coverage for professional

services liability. However, optional professional liability coverage can be added by endorsement for several professional service providers including barbers, beauticians, veterinarians, funeral directors, optical and hearing aid stores, pharmacies, and printers.

27.m. Hired Auto and Nonowned Auto LiabilityThis endorsement provides coverage like that offered by symbols 8 and 9 of

the Business Auto Coverage Form. In addition to covering the named insured for hired or nonowned autos, the endorsement includes the named insured's employees, partners, or executive officers as insureds for the use of hired or nonowned autos in the named insured's business.


268

Question 27.1. BOP CharacteristicsWhich of the following statements is not true with regard to the BOP

Characteristics?

I. BOP eligibility ru les are based on criteria that relate to business size and complexity of loss exposures.

II. Some insurers have expanded the eligibility for their BOP programs to include restaurants and contractors.

III. Automobile-related businesses, bars, and buildings occupied for manufacturing types of businesses are not eligible for the ISO Businessowners Program.

IV. Most insurers that offer businessowner-type policies for contractors rate the liability coverage for eligible contractors separately from the property coverages by applying a separate liability rate to the insured's payroll, receipts, or number of full- and part-time employees.

(A) I only

(B) II and III only

(C) IV only



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Question 27.2. ISO Businessowners Property CoverageWhich of the following statements is not true with regard to the ISO

Businessowners Property Coverage?

I. Damage to excavations, foundations, underground pipes and flues are covered under Businessowners Coverage Form.

II. Insurer eligibility rules for the businessowners policy refer to business size and complexity of loss exposures.

III. A Businessowners Policy (BOP) is beneficial to insureds from a variety of respects, but is disadvantageous on the grounds that a BOP does not lend itself to customization as readily as a CPP.

IV. The Businessowners Coverage Form (BCF) is different from the Business and Personal Property Coverage Form (BPP) in how it covers the personal property of landlords in apartments or rooms they furnish for tenants. Property in furnished rooms must be scheduled on the Businessowners Coverage Form to be included.

V. The Year Of 2010, the Insurance Services Office (ISO) introduced multiple changes to its Businessowners Coverage Form (BCF) eligibility and coverages. One of these changes is that more types of restaurants are eligible.

(A) I and II only

(B) III only

(C) IV only

(D) IV and V only

AnswerIV. The BCF includes the named insured's personal property in apartments or

rooms furnished by the named insured as landlord. The BPP does not cover such property. Under the BPP, a landlord that wants to insure that property must purchase a limit of coverage for Your Business Personal Property. Thus, Property in furnished rooms is covered by the unendorsed Businessowners Coverage Form.



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Question 27.3. ISO Businessowners Property CoverageWhich of the following statements is not true with regard to the ISO

Businessowners Property Coverage?

I. In comparison to the Business Personal Property coverage under an ISO Commercial Package Policy, the businessowners coverage form offers higher limits for the coverage extensions of Outdoor Property and Valuable Papers and Records.

II. A Businessowners Coverage Form would provide better cover for the owner of a fully furnished restaurant than a Business Personal Property Coverage Form (BPP) in the event of a loss because the BOP insures building and the contents for a single amount of coverage.

III. A company owns their building and has coverage under a businessowners policy (BOP). When damage by a covered peril to the foundation of the building is determined during a claim inspection at the building, the company's owners are surprised to know coverage would be provided and the value of the foundation must be contained in the insurance to value calculations.

IV. The Businessowners Coverage Form (BCF) is identical to the Building and Personal Property Coverage Form (BPP); however, the BCF provides unique additional coverage for Debris removal.

V. A manufacturing company has a Businessowners Coverage Form (BCF) with coverage extensions for Newly Acquired or Constructed Property and Outdoor Property. A fire causes $275,000 in damage to a building acquired within the last 30 days, but not stated on the declarations page. The fire also causes $250 of damage to each of 10 trees on the insured's listed premises. Ignoring deductibles and assuming sufficient limits, the company would be able to collect $250,500 under the policy.

(A) I and II only

(B) III only

(C) III and IV only

(D) IV and V only

AnswerIV. The BCF provides unique additional coverage for Glass Expenses, Fire

Extinguisher Systems Recharge Expense. V. Like the BPP, the BCF covers, for up to thirty days, newly constructed or

acquired buildings (up to $250,000). The BCF and BPP Outdoor Property extensions are the same, except the BCF has a $2,500 limit for outdoor property, subject to a sublimit of $500 for anyone tree. So, insurer would pay $252,500 ; $250,000 for the building loss and $2,500 for loss of outdoor 10 trees.

The correct answer is (D) IV and V only.

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Question 27.4. ISO Businessowners Liability CoverageWhich of the following statements is not true with regard to the ISO

Businessowners Liability Coverage?

I. The Liability and Medical Expenses Limit in the Businessowners Policy is the same as both the Each Occurrence Limit and the Personal and Advertising Injury Limit in the Commercial General Liability Policy.

II. An associate at a veterinary failed to give medication to a dog, and for that reason, the dog became ill and died. The dog's owner sued the veterinary. The Businessowners Coverage Form would exclude the claim, but an optional coverage is available to insure it.

III. The businessowners policy (BOP) has two aggregate limits of liability which apply in the same way as the general aggregate limit and products completed operations aggregate limit of the Commercial General Liability (CGL) policy. The Completed Operations Aggregate Limit of the BOP may be increased by endorsement to only three times the liability and medical expense limit.

IV. An K&J Accounting Company (K&J) operates a bookkeeping business insured with an unendorsed Businessowners Policy (BOP). On rare occasions an K&J assistant will use a personal auto to drop off completed tax returns at the local post office en route home from work. Recently, the assistant was involved in an at-fault accident en route to the post office. There will be no coverage since there isn't a Hired and Non Owned Auto Liability endorsement on the policy.

(A) I only

(B) II and III only

(C) IV only




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Topic 28: ISO Farm Program and Specialty Farm CoveragesCPCU 551 Review Notes / Assignment 11. Businessowners and Farm Insurance / EO 5, 6

28.a. Structure: ISO Farm ProgramFarm Dwellings, Appurtenant Structures and Household Personal Property Coverage Form

Coverage A-DwellingsFarm Dwellings, Appurtenant Structures and Household Personal Property Coverage Form

Coverage B-Other Private Structures Appurtenant to Dwellings

excludes structures, principally for farming purposes

Farm Dwellings, Appurtenant Structures and Household Personal Property Coverage Form

Coverage C-Household Personal Property

excludes farm personal property other than office fixtures, furniture, and office equipment

Farm Dwellings, Appurtenant Structures and Household Personal Property Coverage Form

Coverage D-Loss of UseCoverage E-Scheduled Farm Personal Property

includes farm machinery, livestock, and grain

Coverage F-Unscheduled Farm Personal Property

a single limit subject to an 80 percent Coinsurance condition.

Barns, Outbuildings and Other Farm Structures Coverage Form

Coverage G all types of farm buildings and structures (other than dwellings and private garages) on either a scheduled or a blanket basis.

28.b. Farm Dwellings, Appurtenant Structures and Household Personal Property Coverage Form

This form covers residential building and personal property exposures, together with additional living expenses and loss of fair rental value resulting from damage to such property.


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28.c. Coverage E-Scheduled Farm Personal PropertyThis coverage is applicable to only those classes of farm personal property for

which a specific limit of insurance is shown in the declarations. There is no coinsurance requirement. Property that can be insured under Coverage E includes farm machinery, livestock, and grain.

The scheduled classes or items of property are insured up to their specified limits while situated at the location described in the policy. An extension insures most classes of scheduled property while away from the insured premises and within the coverage territory (the United States, Puerto Rico, and Canada) for up to 10 % of their specified limits.

However, livestock and individually described farm machinery, vehicles, and equipment while off premises are covered for their full, specified limits.

28.d. Coverage F-Unscheduled Farm Personal PropertyThis coverage insures unscheduled farm personal property under a single limit

subject to an 80 % Coinsurance condition. For property at the insured location, all items of farm personal property are covered unless excluded.

A few types of property that can be excluded under Coverage F are household personal property used for the dwelling, animals other than livestock, and racehorses and show horses.

Coverage for property outside the insured location is limited to livestock, farm machinery, equipment, implements, tools and supplies, and grain, and etc.

Coverage F is written with a single limit. Despite the benefits of Coverage F, some types of farm personal property are excluded and can therefore be insured only under Coverage E. These types of property include (1) poultry, bees, fish, and worms; (2) other animals that are not within the definition of livestock; (3) portable buildings and portable structures.

28.e. Barns, Outbuildings and Other Farm Structures Coverage FormThis form has the provisions for Coverage G, which is designed to insure all

types of farm buildings and structures (other than dwellings and private garages) on either a scheduled or a blanket basis. Coverage G can be arranged on either a replacement cost basis or an actual cash value basis, as stated in the declarations. Functional replacement cost provisions are available by endorsement.


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28.f. Causes of Loss Form-Farm PropertyThe ISO Causes of Loss Form-Farm Property contains provisions for basic,

broad, and special causes of loss. These three levels of coverage correspond, generally in most ways, to the basic, broad, and special causes of loss in commercial property policies.

The farm special causes of loss match the commercial property Causes of Loss-Special Form. (1) Livestock, poultry, bees, fish, worms, and other animals are not qualified for the special causes of loss and can only be covered for the basic or broad causes of loss. (2) Grain in the open and hay, straw, and fodder are covered only against limited named perils.

Basic causes of loss

1. Theft

2. Collision-Coverages E and F only

3. Earthquake loss to covered livestock

4. Flood loss to covered livestock1. Electrocution of covered livestock

2. Attacks on covered livestock by dogs or wild animals

3. Accidental shooting of covered livestock

4. Drowning of covered livestock

5. Loading/unloading accidents (livestock only)

6. Breakage of glass or safety glazing materials

7. Sudden and accidental damage from artificially generated electrical current (Coverages A through D only)

Special causes of loss

Same as the CPP

28.g. Farm Liability Coverage FormsThe Farm Liability Coverage Form combines components of homeowners

liability coverage and commercial general liability coverage and contains special provisions that address liability loss exposures unique to farms.

The Farm Umbrella Liability Policy or Farm Excess Liability Policy can be used to provide limits of liability in excess of underlying policies for farm liability, auto liability, farm employers liability, recreational motor vehicle liability, and watercraft liability.


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28.h. Structure: Specialty Farm Coverages

Crop Hail Insurance covers hail damage to growing crops and often extended to cover additional perils: fire, windstorm, damage caused by livestock, and vehicles

Multiple Peril Crop Insurance (MPCI)

insures farmers against unexpected production losses as measured against the insured farmer's actual production history

Animal mortality insurance

covers against loss of the insured animal such as race horses, show dogs, circus animals, laboratory animals by (1) death resulting from accident, injury, sickness, or disease or (2) theft, subject to exclusions.covers animals while in the custody of a commercial feedlot operator.

Federal livestock insurance

provided by the FCIC for covering cattle, swine, and lambs in eligible states.

28.i. Crop Coverages Under ISO Farm ProgramISO Farm Personal Property Coverage Form provides only minimum coverage

on unharvested crops. Under Coverage E-Scheduled Farm Personal Property, unharvested crops are not an eligible class for coverage. Coverage F-Unscheduled Farm Personal Property excludes crops in the open, but by using an extension, provides up to 10 % of the Coverage F limit to cover unharvested crops against loss caused by fire or lightning only.

28.j. Crop Coverages Under Specialty Farm CoveragesFarmers can get broader coverage for crops through either a crop hail

insurance policy or a crop insurance plan offered by an agency of the U.S. government.

The Federal Crop Insurance Corporation (FCIC) offers several crop insurance programs that are administered by the U.S. Department of Agriculture's Risk Management Agency (RMA). These programs are marketed and serviced by participating private insurers and agents but are reinsured by the FCIC.

Multiple Peril Crop Insurance (MPCI) insures farmers against unexpected production losses (as measured against the insured farmer's actual production history). MPCI policies do not cover losses resulting from neglect, poor farming practices, or theft.


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28.k. Animal mortality insuranceThis type of insurance might be purchased to cover farm animals such as

valuable horses, registered cattle, or calves. Additionally it is bought by people who own race horses, show dogs, circus animals, and even laboratory animals.

This insurance generally covers against loss of the insured animal by (1) death resulting from accident, injury, sickness, or disease or (2) theft, subject to exclusions. It does not cover reduction in the animal's value because of its becoming incompetent at fulfilling the functions or duties for which it is kept. Most animal mortality policies cover the intentional destruction of an insured animal that is struggling with an irreversible or incurable condition, as long as the condition results from a cause that is not excluded and the intentional destruction is necessary for humane reasons.

These are other causes of loss that animal mortality policies often exclude: (1) Neglect in providing the animal with proper care or treatment (2) Elective surgery, unless the insurer has given its prior approval (3) Unauthorized instructions to transfer the animal to any person or place (4) Seizure or destruction by a governmental authority (5) War and nuclear risks (6) Acts committed by the insured with intent to cause a loss are excluded.

28.l. Feedlot insuranceThis insurance covers animals during in the custody of a commercial feedlot

operator. Feedlot operators have a bailee liability exposure for animals in their custody. They may also assume liability by contract for loss resulting from causes that would not otherwise be a bailee's responsibility.

Coverage under feedlot policies is generally restricted to named perils, such as fire, explosion, windstorm, electrocution, drowning, and attack by dogs or wild animals.

28.m. Federal livestock insuranceFederal livestock insurance is provided by the FCIC for covering cattle, swine,

and lambs in eligible states. Coverage may be obtained in either Livestock Gross Margin (LGM) policies or Livestock Risk Protection (LRP) policies.


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Question 28.1. ISO Farm ProgramWhich of the following statements is not true with regard to the ISO Farm

Program?

I. In the Farm Dwellings, Appurtenant Structures, and Household Personal Property Coverage Form, A barn used to store farm equipment is excluded from coverage by Coverage B-Other Private Structures Appurtenant to Dwellings.

II. Coverage F-Unscheduled Farm Personal Property of the ISO farm program covers specific unscheduled farm personal property under a single limit.

III. Farm buildings and structures other than dwellings and private garages is insured under the Barns, Outbuildings and Other Farm Structures Coverage Form of the ISO farm program.

IV. The Farm Liability Coverage Form of the ISO farm program covers only farm liability exposures.

V. The Farm Umbrella Liability Policy of the ISO farm program provides limits of liability in excess of all underlying liability policies.

(A) I only

(B) II and III only

(C) IV only

(D) V only

AnswerIV. The Farm Liability Coverage Form of the ISO farm program covers

residential structures and excess liability.The correct answer is (C) IV only.


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Program?

I. The broad causes of loss in the Causes of Loss Form-Farm Property are different from those covered by the Causes of Loss-Broad Form used in commercial property policies. Flood losses to covered livestock are included only in the Causes of Loss Form-Farm Property.

II. Loading/unloading perils of the broad causes of loss in the Causes of Loss Form-Farm Property relate only to livestock.

III. Electrocution of covered livestock is covered by the Causes of Loss Form-Farm Property, but is excluded from coverage on a homeowners policy.

IV. Coverage F of the Farm Personal Property Coverage is different from Coverage E in that Coverage F covers poultry, bees, fish and livestock.

V. Under the ISO farm program, Coverage B-Other Private Structures Appurtenant to Dwellings provides coverage for private garages.

(A) I only

(B) II and III only

(C) IV only

(D) IV and V only

AnswerIV. Coverage F of the Farm Personal Property Coverage differs from Coverage

E in that Coverage F is written with an 80 percent coinsurance clause. Coverage F is written with a single limit. Despite the advantages of Coverage F, some types of farm personal property are excluded and can therefore be insured only under Coverage E. These types of property include (1) poultry, bees, fish, and worms; (2) other animals that are not within the definition of livestock; (3) portable buildings and portable structures.



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Program?

I. A dairy food farm insures its farm under an ISO farm policy with the broad causes of loss. The farm's silo is damaged when a delivery truck accidentally runs into it. Coverage G-Barns, Outbuildings and Other Farm Structures would apply to this loss.

II. The Wonder Land Farm insures its livestock under Coverage F-Unscheduled Farm Personal Property of the Farm Personal Property Coverage Form, for the broad causes of loss. A cow is killed by the farm owner's dog is covered under the form.

III. A family farm has two residential dwellings containing family living quarters on the property along with a silo and a barn. Other than the two residences, all structures on the property are used for farming purposes. The farm uses rented farm machinery to grow hay. According to the information given, the farmer needs ISO coverage forms including Coverage A-Dwellings, Coverage C- Household Personal Property, Coverage E -Scheduled Farm Personal Property, and Coverage G-Barns, Outbuildings and Other Farm Structures.

(A) I only

(B) II only

(C) III only


AnswerII. The broad cause of loss cover losses result from attacks on covered livestock

by dogs or wild animals which not owned or controlled by the insured. The correct answer is (B) II only.


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Question 28.4. Specialty Farm CoveragesWhich of the following statements is not true with regard to the Specialty Farm

Coverages?

I. A conventional type of crop coverage offered by private insurers is crop hail insurance and it’s coverage can be extended to cover perils in addition to hail.

II. The coverage that standard farm policies provide for crops is inadequate for a large number of insureds. The Multiple Peril Crop Insurance (MPCI) insures a farmer's crops against unexpected crop production losses

III. Livestock coverage can be purchased from private insurers to supplement a standard farm policy. An animal mortality insurance policy covers the decreased market value due to the age of the animal

IV. Animal mortality insurance provides broader coverage than ISO farm program in which animal mortality insurance is obtainable in higher per-head limits.

V. The feedlot insurance policies are a form of bailees' liability coverage.

(A) I and II only

(B) III only

(C) IV and V only


AnswerIII. Animal mortality insurance does not cover reduction in the animal's value

because of its becoming incapable of fulfilling the functions or duties for which it is kept.



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Question 28.5. Specialty Farm CoveragesWhich of the following statements is not true with regard to the Specialty Farm

Coverages?

I. A husband and wife owns a racehorse they believe is worth $50,000. If they would want to obtain coverage for the horse for theft, Animal mortality insurance policies would best meet their need.

II. A truck driver hauling 20 head of registered cows for a rancher overturned in a curve. Five of the cows died; seven were maimed and had to be killed; three wandered off and were lost; and five survived after treatment by a licensed animal doctor. Assuming the rancher had an animal mortality insurance policy, only 12 of the cows would the policy cover.

III. A farmer is worried about an unexpected production loss in comparison to the farmer's actual production history if it is not the result of neglect, poor farming practices, or theft. Additionally, the farmer owns a prize bull. Multiple peril crop insurance and animal mortality insurance are two insurance policies that the farmer should purchase for these loss exposures.

(A) I only

(B) II only

(C) III only


AnswerII. Animal mortality policies often exclude losses resulting from neglect in

providing the animal with proper care or treatment. So, 3 wandered off and were lost steers are not covered. Also, 5 survived steers are not covered.

The correct answer is (D) none of the above.


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SECTION 12. FINANCIAL INSTITUTION BONDS AND SURETY BONDS

Topic 29: Financial Institution Coverages

Topic 30: General Types of Surety Bonds


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Topic 29: Financial Institution CoveragesCPCU 551 Review Notes / Assignment 12. Financial Institution Bonds and Surety Bonds / EO 1, 2

29.a. Structure: Insuring Agreements of Financial Institution Bond Form 24

Insuring Agreement A, the Fidelity

covers loss resulting directly from dishonest or fraudulent acts committed by an employee acting alone or in collusion with others

Insuring Agreement B, the On Premises

covers property (money, securities, and other property) located at any office or premises anywhere in the world against a broad range of named perils

Insuring Agreement C, the In Transit

covers property while in transit anywhere in the custody of certain types of individuals or organizations

Insuring Agreement D, the Forgery or Alteration

covers loss resulting from forgery of a signature or alteration involving most types of negotiable instruments and certain other listed instrumentscovers loss sustained by the insured because of the insured's reliance on certain listed instruments, such as securities held as loan collateral

Insuring Agreement F, the Counterfeit Money

covers loss when a bank, acting in good faith, receives any counterfeit or altered paper securities, money, or coins

Insuring Agreement G, the Fraudulent Mortgages

covers loss resulting from the insured's good-faith acceptance of a mortgage or deed of trust that proves to be defective

SECTION 12. Financial Institution Bonds and Surety Bonds

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29.b. Insuring Agreement A, the Fidelity insuring agreement, This agreement covers loss resulting directly from dishonest or fraudulent acts

committed by an employee acting alone or in collusion with other people. The definition of "employee" is broader than that included in commercial crime forms in that it includes (1) attorneys and their employees retained by the insured while performing legal services for the insured and (2) corporations or partnerships and their employees performing data processing of checks or other records for the insured.

This agreement needs the employee's acts to have been committed together with the active and conscious purpose to cause the Insured to sustain such loss. A provision of the insuring agreement precludes coverage for any employee benefits, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions, intentionally paid by the insured."

The agreement does not require the employee to have acted with intent to derive a financial benefit-unless some or all of the insured's loss comes from trading, in which case the loss is not covered unless the employee receives an improper financial benefit.

Losses resulting directly or indirectly from loans are not covered unless the employee colluded with one or more parties to the loan transaction and received an improper financial benefit other than any employee benefit.

29.c. Insuring Agreement B, the On Premises insuring agreementThis agreements covers "property" positioned at any office or premises

anywhere in the world against a broad range of named perils. The applicable definition of "property" is quite broad, encompassing money, securities, gems, jewelry, precious metals, and all other tangible personal property.

This agreement covers such "property" against loss by robbery, burglary, misplacement, and mysterious unexplained disappearance, together with damage to or destruction of the property, while it is "lodged or deposited within offices or premises located anywhere."

29.d. Insuring Agreement C, the In Transit insuring agreementThis agreement insures "property" while in transit anywhere in the custody of

specific types of individuals or organizations. The covered perils are "robbery, common law or statutory larceny, theft, misplacement, mysterious unexplainable disappearance, and damage thereto or destruction thereof."

The property in transit must be (1) in the custody of a "messenger" (an employee in possession of the insured's property away from the insured's premises or any other person in the role of custodian of the property during an emergency arising out of the incapacity of the employee messenger) or (2) in the custody of a transportation company and being transported in an armored vehicle.


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29.e. Exclusions of Financial Institution Bond Form 24Form 24 contains several exclusions, including these significant ones: (1) Loan

exclusion: If the insured advances funds to a borrower in the normal course of business, but such repayment is not made. (2) Exclusion of property contained in customers' safe deposit boxes (3) Trading exclusion: excludes losses associated with unauthorized securities trading, also known as rogue trading. (4) Uncollected funds exclusion (5) Extortion exclusion.

29.f. Conditions of Financial Institution Bond Form 24(1) Coverage Trigger: Financial institution bonds apply on a discovery basis,

covering loss suffered by the insured at any time but discovered during the bond period.

(2) Notice of Loss: Financial institution bonds require that the insured give prompt notice of loss to the insurer. The report must be made within 30 days after the discovery of loss.

(3) Limits of Liability: An aggregate limit of liability applies to the entire bond. This limit is the maximum that the insurer will pay under all coverages during the bond period. A single-loss limit applies to each of the basic insuring agreements.

(4) Deductibles: The SFAA manual requires a minimum $1,000 deductible. In practice, most financial institution bonds are issued with deductibles much larger than $1,000.


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29.g. Structure: SFAA and Other PoliciesSFAA Computer Crime Policy 1. Computer Systems Fraud

2. Data Processing Service Operations

3. Voice Initiated Transfer Fraud

4. Telefacsimile Transfer Fraud

5. Destruction of Data or Programs by Hacker

6. Destruction of Data or Programs by Virus

7. Voice Computer System FraudSFAA Combination Safe Depository Policy

1. Liability of Depository

2. Loss of Customers' Property; Premises DamageMortgage impairment insurance: ISO Mortgageholders Error and Omissions Coverage Form

1. Coverage A-Mortgageholder's Interest

2. Coverage B-Property Owned or Held in Trust

3. Coverage C-Mortgageholder's Liability

4. Coverage D-Rea1 Estate Tax LiabilityMortgage guarantee insurance protects the lender from loss if the borrower fails to

make payments as agreedprotect the mortgageholder and property owners against losses resulting from defects in titles

29.h. Computer Crime PolicyThe Computer Crime Policy can be written for any category of financial

institution. Computer Systems Fraud: This agreement covers loss caused by someone who

has managed to enter or change electronic data or computer, programs in the insured's computer system. However, this insuring agreement does not cover loss caused by employee dishonesty, which is covered by the financial institution bond.

Data Processing Service Operations: It covers loss sustained by the insured's clients caused by, fraudulent entries or changes in the insured's computer system if the insured is legally liable to its client.

Voice Computer System Fraud: This agreement covers loss as a result of unauthorized telephone long-distance toll charges.


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29.i. Combination Safe Depository PolicyLiability of Depository: This agreement covers virtually all causes of loss to the

extent of the financial institution's legal liability. Loss of Customers' Property; Premises Damage: This agreement includes

coverage for two exposures: (1) Loss of customers' property by actual or attempted burglary or robbery or destruction irrespective of the insured's legal liability. (2) Damage to the insured's premises and all furnishings, fixtures, fittings, equipment, safes, and vaults therein resulting from actual or attempted burglary or robbery, or vandalism or malicious mischief.

29.j. Mortgage Impairment InsuranceThis insurance protects a financial institution or mortgage servicing agency

against losses arising out of the insured's failure to maintain insurance protecting mortgaged property, together with other exposures connected with servicing mortgages.

The ISO Mortgageholders Errors and Omissions Coverage Form contains four insuring agreements that can be purchased separately, according to the insured's needs:

(1) Coverage A-Mortgageholder's Interest: covers loss to the insured's interest as mortgageholder in covered property resulting from the insured's (or its representative's) error or accidental omission when following its customary procedure to require, procure, and continue to keep insurance on the mortgaged property.

(2) Coverage B-Property Owned or Held in Trust: covers loss to property owned (such as a house on which a bank has foreclosed) or held in trust by the insured. If, as a result of the insured's error or omission, such property is not covered by property insurance, the policy obligates the insurer to pay for loss resulting from a covered peril.

(3) Coverage C-Mortgageholder's Liability: covers the insured's liability for damages as a result of the insured's duties as a mortgage fiduciary or servicing agent.

(4) Coverage D-Rea1 Estate Tax Liability covers damages for which the insured becomes liable because it failed to pay a mortgagor's real estate taxes.


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29.k. Mortgage Guarantee InsuranceThis insurance can be written for banks, savings and loan associations, and

other persons or organizations that offer mortgage loans.The insurance protects the lender from loss if the borrower fails to make

payments as agreed. The policy covers the amount of the loan, interest on the loan, taxes and insurance costs which the insured advanced in association with the loan transaction, and certain other expenses.

29.l. Title InsuranceThis insurance can be written for both mortgageholders and property owners

to safeguard them against losses resulting from defects in titles.Titles may be defective for various reasons, such as errors made by recorders of

deeds, forged signatures on prior documents, or liens that contractors have placed on the property.

Title insurance covers the cost of curing defects in the title or, in the worst case scenario, the value of the property lost because of a defective title.

29.m. ISO's Market Segments ProgramISO's Market Segments Program features a a list of endorsements to expand

commercial property and general liability coverages to satisfy the insurance needs of specific types of businesses. Although the Market Segments endorsements are developed for use with commercial package policies, the targeted businesses typically are small and midsize businesses, some of which may be eligible for businessowners policies.

The ISO Market Segment Program endorsements contain these three categories of provisions: (1) Provisions that add higher limits for coverage extensions or additional coverages (2) Provisions that add coverages available in other ISO forms (3) Provisions that add coverages not found in any other ISO forms.


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Question 29.1. Financial Institution Bond Form 24Which of the following statements is not true with regard to the Financial

Institution Bond Form 24?

I. The Financial Institution Bond Form 24 is used to insure commercial banks and savings and loan associations. It covers losses resulting from dishonest or fraudulent acts of an employee.

II. The On Premises insuring agreement of Financial Institution Bond Form 24 provides broader coverage than most commercial crime policies. It covers insured property positioned at any office or premises all over the world.

III. The In Transit insuring agreement of the Financial Institution Bond Form 24 insures "property" while in transit. It is covered when it is in the custody of a transportation company and being transported in an armored vehicle.

IV. The Forgery or Alteration insuring agreement of the Form 24 bond includes coverage for the receipt of any altered paper securities.

V. A local savings and loan association purchased Financial Institution Bond Form 24. Mandatory insuring agreements on their Form 24 include Fidelity, On Premises, In Transit, and Counterfeit Money.

(A) I and II only

(B) III only

(C) IV only

(D) V only

AnswerIV. Insuring Agreement D, the Forgery or Alteration covers loss resulting from

forgery of a signature or alteration involving most types of negotiable instruments and certain other listed instruments. Insuring Agreement F, the Counterfeit Money covers loss when a bank, acting in good faith, receives any counterfeit or altered paper securities, money, or coins.



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Question 29.2. Financial Institution Bond Form 24Which of the following statements is not true with regard to the Financial

Institution Bond Form 24?

I. The financial institution bonds require the insured give notice of loss to the insurer. The report of loss should be made within a period not to exceed 30 days after the discovery of loss.

II. The Financial Institution Bond Form 24 contains limits of liability. An aggregate limit applies to the entire bond.

III. According to the Financial Institution Bond Form 24, Insuring Agreement B-On Premises Coverage, would jewelry on deposit at a U.S. bank's Europe office be covered for burglary, because burglary is covered on premises located anywhere worldwide.

IV. A bank carried Surety & Fidelity Association of America (SFAA) financial institution bond Form 24 with an inception date of January 1, 2012, and an expiration date of January 1, 2013. On July 1, 2013, the bank discovers that an attorney it retained to carry out legal services stole money from the bank during 2011. The attorney stole the money to make an anonymous donation to his favorite charity. This loss would not be covered by the 2012 Form 24, because Form 24 applies on a discovery basis.

(A) I and II only

(B) III only

(C) IV only




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Question 29.3. SFAA and Other PoliciesWhich of the following statements is not true with regard to the SFAA and

Other Policies?

I. Combination Safe Depository policy covers loss of customers' property by actual or attempted burglary or robbery or destruction irrespective of the insured's legal liability.

II. When a mortgage company discovered that the money collected under several escrow agreements was not used to pay the mortgagors' real estate taxes, they turned to their Mortgage guarantee insurance policy developed specifically for financial institutions.

III. Losses on title insurance policies are rare because insurers require that any problems be corrected or excluded from coverage.

IV. The program ISO designed to provide endorsements to broaden standard coverage forms for many different types of businesses is called Market Segment Program.

V. The ISO Market Segments Program targets small and midsize businesses.

(A) I only

(B) II only

(C) III only

(D) IV and V only

AnswerII. Mortgage guarantee insurance protects the lender from loss if the borrower

fails to make payments as agreed. Mortgage impairment insurance provide coverages: Coverage A-Mortgageholder's Interest; Coverage B-Property Owned or Held in Trust; Coverage C-Mortgageholder's Liability; Coverage D-Rea1 Estate Tax Liability.



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Topic 30: General Types of Surety BondsCPCU 551 Review Notes / Assignment 12. Financial Institution Bonds and Surety Bonds / EO 3, 4

30.a. Characteristics of Surety BondsFour characteristics of surety bonds that distinguish them from insurance

policies are as the following: (1). Three parties to the contract are the surety, the obligee, and the principal. (Insurance policies are a two-party contract.) (2) The principal is liable to the surety for losses paid by the surety. (An insurer cannot subrogate against its very own insured.) (3) The surety should not sustain any losses on any surety contracts. (4) The surety bond coverage period is indefinite. Surety bonds terminate after the principal has fulfilled its obligations. (Insurance policies generally have a particular policy period of one year or less.)

Surety bonds are often required by municipal ordinance or federal or state regulations or statutes; the provisions of such bonds, and thus the obligations of the three parties to the bond, are spelled out in the law. The set limit of a surety bond is usually termed as penalty.


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30.b. Structure: General Types of Surety BondsContract Bonds

Bid Bonds The bidder will enter into the contract and provide a performance bond If the bid is accepted.

Contract Bonds

Performance Bonds

The contract will be performed according to plans and specifications.

Contract Bonds

Payment Bonds The project will be free of liens that is, certain bills for labor and materials will be paid

Contract Bonds

Maintenance Bonds

The work will be free from defects in materials and workmanship for a specified period.

Contract Bonds

The developer will complete the subdivision in accordance with approved proposals and at the developer's expense.

Contract Bonds

Supply contract bonds

The supplier will supply the designated items according to specifications.

License and Permit Bonds

Compliance-only bonds

Principal will comply with the laws that apply to the activity for which principal is licensed.


Compliance bonds with third-party liability

Principal will comply with the laws that apply to the activity for which principal is licensed and will pay damages to any third party that suffers a loss because of the principal's failure to comply.


Forfeiture bonds

Surety will pay (forfeit) the entire bond penalty if the principal fails to complete the bonded obligation.


Payment of tax or fee bonds

Principal will properly account for and will remit taxes or fees collected.


Merchandising and dealer bonds

Principal will conduct merchandising activities according to the law and, on many bonds, will properly account for any funds held in trust and will transfer them to the appropriate party.


Reclamation and environmental protection bonds

Principal will restore land to its original state after its operations are completed and will clean up spills or run off that pollute the land or water in the area of operation.


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Public Official BondsPublic Official Bonds Public official will faithfully discharge their duties to the best of their abilities and otherwise to protect the public interest.

Court Bonds: Judicial bonds

Attachment bond (Plaintiff bond)

If the court decides against the plaintiff, the defendant will be paid any damages arising from the attachment.

Court Bonds: Judicial bonds Release of

attachment bond (Defendant bond)

The defendant will return the property and will pay any damages and court costs if the court should decide in the plaintiff's favor.


The plaintiff who decides to appeal an adverse decision to a higher court will pay of all court costs on the appeal.


Defendant's appeal bond (Defendant bond)

The defendant will pay the entire judgment, plus court costs and interest, should a higher court sustain the initial judgment in favor of the plaintiff.

Court Bonds: Fiduciary bondsCourt Bonds: Fiduciary bonds

The persons entrusted with the care of others' property will exercise their duties faithfully

30.c. Contract BondsContract bonds are frequently required of individuals or organizations that

have contractual obligations to perform work or service for others. They serve two broad purposes: (1) The surety's willingness to furnish the bond is evidence that, in the surety's judgment, the principal is capable of fulfill the terms of the contract. (2) The surety guarantees that, even when the principal defaults, the obligations of the contract will be performed or the surety will indemnify the obligee up to the penal amount of the bond.

The Miller Act is a federal statute that governs contracts for the construction, alteration, or repair of any public buildings or public work for the federal government. When construction contracts exceed $100,000, a contractor must furnish a performance bond for the protection of the government and a payment bond for the protection of suppliers of labor and materials.


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30.d. License and Permit BondsMany enterprises need licenses to operate. Licenses provide special privileges

entitling their holders to undertake something they would not otherwise be entitled to do. Permits are somewhat like licenses. They are obtained from political subdivisions, and they serve as a methods of regulation and resources for revenue. Often they are needed as prerequisites for performing special functions that are incidental to business operations.

30.e. Public Official BondsPeople who are appointed or elected to public office are obligated to faithfully

discharge their duties to the best of their abilities and otherwise to protect the public interest.appointed or elected to public office are obligated to faithfully discharge their duties to the very best of their abilities and otherwise to protect the public interest. All such obligations are affirmed by public officials when they take an oath of office, which is one requirement they must fulfill before they can act in their official capacities.

Another condition is that these people furnish public official bonds, which guarantee honesty, faithful performance, or both. Public officials who are required to post bonds include (1) officials whose duties are administrative, (2) officials whose duties involve handling public funds, and (3) officials whose duties require direct involvement with members of the public, for example constables, sheriffs, and public notaries.

30.f. Court BondsA court bond guarantees that a person or an organization will faithfully

perform certain duties prescribed by law or by a court or will show financial responsibility for the benefit of another until the final results of a court's decision. If the principal is not able to meet such obligations, the surety must answer for damages. The two general classes of court bonds are judicial bonds and fiduciary bonds.

Judicial bonds generally arise out of litigation. They are posted by a plaintiff or a defendant (the principal) in a court case to protect the opposing party in cases when the principal does not prevail in the court action.

Fiduciary bonds generally guarantee that persons entrusted with the care of others' property will exercise their duties faithfully, will account for all property received, and will make good any deficiency for which a court may hold them liable. Persons who are necessary to post bonds include (1) Guardians, (2) Administrators and executors, (3) Trustees in bankruptcy proceedings.


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30.g. Miscellaneous BondsBond Parties

Protected Principal Guarantee Provided

Lost Securities Bonds

Entity that issues replacement securities

Owner of the lost securities

Principal will indemnify obligee for any financial loss it suffers because of the duplicate securities it issues to the principal.

Hazardous Waste Removal Bonds

Federal or state government

Owner or operator of hazardous waste facility

Principal will comply with Environmental Protection Agency (EPA) and state laws for closure and post-closure care of hazardous waste facilities.

Credit Enhancement Financial Guaranty Bonds

Investor Governmental entities

Principal will pay interest to investors as promised and will return the principal at maturity of a debt instrument.


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Question 30.1. Characteristics of Surety BondsWhich of the following statements is not true with regard to the Characteristics

of Surety Bonds?

(A) A surety bond is a three party agreement among the surety, the obligee, and the principal, as opposed to an insurance policy is between the insured and the insurer.

(B) Although surety bonds differ from insurance contracts in several ways, they do have many resemblances. One of the similarities is that issuers of both do not expect losses.

(C) If surety fears a principle will become incapable to perform the obligation that is the subject of a surety bond, require the principle post collateral.

(D) When the principal failed to fulfills its obligations, the surety answers to the obligee for the principal's failure to perform a duty.

Answer(B) Theoretically, no surety bond issues unless the surety is satisfied that the

principal can perform the obligation that is the subject of the surety bond. Before issuing a bond, a surety examines the prospective principal's qualifications, the capital, capacity, and character. In practice, sureties do sustain losses when a principal fails to perform and the principal does not have the funds to repay the surety.

The correct answer is (B)


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Question 30.2. Types of Surety BondsWhich of the following statements is not true with regard to the types of Surety

Bonds?

I. A performance bond would most likely be used by a contractor in constructing a building in accordance with plans and specifications

II. A developer likely requires a contractor to obtain performance bond and payment bond because of winning a large bid to build a mall.

III. A public official bond guarantees the public official will conduct his or her duties faithfully and honestly.

IV. A defendant appeals an adverse decision to a higher court. The court requires the defendant to post a bond that guarantees the payment of the judgment plus court costs and interest if the appeal is failed. This type of bond is called an appeal bond.

V. A defendant in a lawsuit wanting to regain possession of property attached by a plaintiff should procure which release of attachment bond.

(A) I and II only

(B) III only

(C) IV only

(D) V only

AnswerIV. Appeal bond (Plaintiff bond): The plaintiff who decides to appeal an

adverse decision to a higher court will pay of all court costs on the appeal. Defendant's appeal bond (Defendant bond): The defendant will pay the entire judgment, plus court costs and interest, should a higher court sustain the initial judgment in favor of the plaintiff.



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Question 30.3. Types of Surety BondsWhich of the following statements is not true with regard to the types of Surety

Bonds?

I. Compliance bonds with third-party liability guarantee that principal will conform to the laws that apply to the activity for which the principal is licensed and pay damages to any third party that suffers a loss because of the principal's failure to comply.

II. When Kim's nephew was made a ward of the court, Kim was named his nephew's guardian. In order to protect the rights of the minor nephew, Kim may be required by the court to obtain a license and permit bond.

III. The county fairgrounds committee is seeking contractors to build a new stable for the annual farm show. Contractors are required to guarantee that they will enter into a contract upon acceptance of the bid. Moreover, the contractor must guarantee that the project, once completed, will be free of liens. To fulfill the committee's requirements, contractors who want to participate in the project will need to provide a bid bond and a payment bond.

(A) I only

(B) II only

(C) III only


AnswerII. A license and permit bond is needed as prerequisites for performing special

functions that are incidental to business operations. The persons entrusted with the care of others' property will exercise their duties faithfully need fiduciary bonds.


[The End]


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section 6. flood, earthquake, and specialty forms

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Transcript of section 6. flood, earthquake, and specialty forms