Author: Chris Boggs

Coverage provided by Insurance Services Office's (ISO's) commercial property policy (CPP) seems somewhat comprehensive and complete, but it's not; there are holes that cannot be neglected. Hidden among the more than 200 endorsements available in the commercial property program are several endorsements that expand coverage or improve coverage conditions for the insured.

Within the list of favorable endorsements, there are four many agents have likely never used; in fact, some may not even know they exist. Once you learn about these four endorsements, you will undoubtedly want to use them where appropriate. The topics for this article are the:

• CP 14 10 – Additional Covered Property;
• CP 14 15 – Additional Building Property;
• CP 15 20 – Business Income Premium Adjustment; and
• CP 19 10 – Your Business Personal Property – Separation of Coverage

CP 14 10 – Additional Covered Property

Commercial property policies (CPP) specifically exclude coverage for 18 types of real and personal property. Insureds might be surprised by some of the property specifically excluded from coverage; some agents may even be surprised by the property on this list.

2. Property Not Covered

Covered Property does not include:

1. Accounts, bills, currency, food stamps or other evidences of debt, money, notes or securities. Lottery tickets held for sale are not securities;
2. Animals, unless owned by others and boarded by you, or if owned by you, only as "stock" while inside of buildings;
3. Automobiles held for sale;
4. Bridges, roadways, walks, patios or other paved surfaces;
5. Contraband, or property in the course of illegal transportation or trade;
6. The cost of excavations, grading, backfilling or filling;
7. Foundations of buildings, structures, machinery or boilers if their foundations are below:

(1) The lowest basement floor; or

(2) The surface of the ground, if there is no basement;

8. Land (including land on which the property is located), water, growing crops or lawns (other than lawns which are part of a vegetated roof);
9. Personal property while airborne or waterborne;
10. Bulkheads, pilings, piers, wharves or docks;
11. Property that is covered under another coverage form of this or any other policy in which it is more specifically described, except for the excess of the amount due (whether you can collect on it or not) from that other insurance;
12. Retaining walls that are not part of a building;
13. Underground pipes, flues or drains;
14. Electronic data, except as provided under the Additional Coverage, Electronic Data. Electronic data means information, facts or computer programs stored as or on, created or used on, or transmitted to or from computer software (including systems and applications software), on hard or floppy disks, CD-ROMs, tapes, drives, cells, data processing devices or any other repositories of computer software which are used with electronically controlled equipment. The term computer programs, referred to in the foregoing description of electronic data, means a set of related electronic instructions which direct the operations and functions of a computer or device connected to it, which enable the computer or device to receive, process, store, retrieve or send data. This paragraph, n., does not apply to your "stock" of prepackaged software, or to electronic data which is integrated in and operates or controls the building's elevator, lighting, heating, ventilation, air conditioning or security system;
15. The cost to replace or restore the information on valuable papers and records, including those which exist as electronic data. Valuable papers and records include but are not limited to proprietary information, books of account, deeds, manuscripts, abstracts, drawings and card index systems. Refer to the Coverage Extension for Valuable Papers And Records (Other Than Electronic Data) for limited coverage for valuable papers and records other than those which exist as electronic data;
16. Vehicles or self-propelled machines (including aircraft or watercraft) that:

(1) Are licensed for use on public roads; or

(2) Are operated principally away from the described premises.

This paragraph does not apply to:

1. Vehicles or self-propelled machines or autos you manufacture, process or warehouse;
   
   (b) Vehicles or self-propelled machines, other than autos, you hold for sale;
   
   (c) Rowboats or canoes out of water at the described premises; or
   
   (d) Trailers, but only to the extent provided for in the Coverage Extension for Non-owned Detached Trailers; or

17. The following property while outside of buildings:

(1) Grain, hay, straw or other crops;

(2) Fences, radio or television antennas (including satellite dishes) and their lead-in wiring, masts or towers, trees, shrubs or plants (other than trees, shrubs or plants which are "stock" or are part of a vegetated roof), all except as provided in the Coverage Extensions.

Nine types of property specifically excluded in the CPP can be converted to “covered property" by attaching one of the Additional Covered Property endorsements. ISO offers two versions of this endorsement and usage is based on the state: 1) a “blank" form requiring the insured to specifically schedule the property to be covered; or 2) a “check box" form listing the property eligible for coverage requiring the insured to check the property for which coverage is desired.

• Forty-eight states use the “blank" form approach. The CP 14 10 allows or “requires" the insured to specifically list the property they wish to include as covered property.

• Real property eligible for specific listing and thus coverage includes the property initially excluded in subparagraphs d., f., g., j., l., and m. listed above. Fences outside the building, which is excluded in subparagraph q.(2), are also eligible for coverage using this endorsement. Additionally, this form allows protection to extend to fixtures, improvements and alterations that are part of the building in a commercial condo unit and can also include coverage for appliances in the unit (used with CP 00 17 for condo associations).
   
• Personal property eligible for inclusion as covered property by attachment of the CP 14 10 includes property initially excluded in subparagraphs b. and p. of the exclusion.
   

• Only North Carolina and Virginia use the “check box" version of this endorsement. The CP 14 11 is used in NC and the CP 14 12 is used in VA. Unlike the “blank" forms that require the specific listing of the property the insured desires to cover, these “check-box" forms list all the property available for inclusion in the list of covered property and the insured places an “X" in the appropriate boxes to indicate which property they desire to add to the list of covered property.

One property coverage option available in NC and VA not available in the CP 14 10 relates to underground pipes, flues are drains. Insureds in both states can choose between coverage for underground pipes, flues or drains (this coverage is also available in the CP 14 10), or insureds can opt to cover underground pipes, including underground tanks and connections. But if insureds choose this option, they do not get coverage for underground flues or drains.

North Carolina and Virginia differ in regard to how each defines and extends coverage to vehicles. Following is a comparison of each state's wording regarding coverage for vehicles:

Removal of any property from the “property not covered" list and its endorsed inclusion on the “covered property" list is, of course, subject to underwriter approval and an additional premium.

Interestingly, some of the real property listed as “property not covered" is generally included in the building's replacement cost calculation. Foundations and the cost of excavations, grading, filling, and backfilling are prime examples. This property and costs are excluded by the unendorsed policy at the time of a loss, but the building cannot be rebuilt unless and until the prep work is completed and the foundation is laid.

Agents should use the policy's list of “property not covered" as a tool to help them manage the client's insurance risk. Combined, the list of excluded property and the applicable endorsement can be used like a checklist to confirm that all the insured's exposures have been discovered and discussed. Besides, I'll bet dollars to donuts that no other agent has explained that property the insured thought was covered is not covered. Agents have the opportunity to present a gap and the solution in one conversation.

CP 14 15 – Additional Building Property

Is a particular piece of insured property considered “building" or “business personal property"? Unless the intent is made clear up front, the answer might be subject to interpretation following a loss. The unique purpose of the CP 14 15 - Additional Building Property endorsement is to avoid these gray areas at the time of loss by specifically covering such property as “building."

“Permanently installed machinery and equipment" is defined as part of the “building" within the CPP. But “machinery and equipment" is listed within the definition of “business personal property." The difference is obviously the term “permanently installed;" however, what constitutes permanent installation? Is it permanently installed when bolted to the floor or wall such that removal would cause damage to the building? What about equipment that is bolted to “real property" (making it real property by definition), but which can be easily removed with no signs of damage after some minor repair? A few examples of “permanently installed equipment" might include a pipe organ in a church; semi-permanently installed equipment, chairs and tables bolted to the floor in dental and medical offices; and production machinery simply bolted to a concrete floor to keep it from vibrating out of place. Although not an all-inclusive list, these are examples of the gray common to the concept of “permanently installed."

Another potentially fuzzy situation is loss to real property improvements and betterments made by the tenant in a leased space. The definition of business personal property extends to include the tenant's “use interest" in their improvements and betterments; but what about the value of the improvements and betterments if, as might be the case, the tenant is required to pay to replace the improvements and betterments following a loss?

Anytime property can be covered as “building" rather than “business personal property," the insured should seize the opportunity. One reason is that the building rate is lower than the business personal property rate. Another reason to consider this endorsement is coverage limits. If the insured considers and includes some property under the building limits, yet the insurance carrier considers such property business personal property at the time of the loss, a coinsurance penalty is possible.

“Fixtures" is another type of property that could be considered either real or personal property. Both the building and business personal property lists of covered property include fixtures.

To activate the CP 14 15 - Additional Building Property endorsement, the insured lists the building number, the premises number, and describes the property to be defined as “building." The endorsement states that the property listed in the schedule is considered part of the “building" coverage and is no longer considered “business personal property."

Most insureds have property that could be considered either real or personal property; use this endorsement to remove any question or debate that may arise following a loss.

CP 15 20 – Business Income Premium Adjustment

Businesses exist for one reason, to make money. When there is no money, there is no business – at least not for long. Insuring the building and contents is only one part of the property coverage equation. The insured's largest and most valuable asset/exposure is its revenue stream – its business income.

Of all the property coverages available, business income is the most important, and sometimes (well, most times) the hardest limit to develop. Articles, white papers and books have been written on business income, but the difficulty in developing the proper coverage limits remains.

One way to assure that proper business income limits are provided is the CP 15 20 – Business Income Premium Adjustment endorsement. Attaching this endorsement essentially makes the business income coverage form an annual reporting form.

The initial premium is based on the business income limit developed at the beginning of the policy period (derived from the CP 15 15). At the end of the policy period, the business income limit is recalculated and the final premium is developed.

Within 120 days following the end of the policy period, the insured submits a revised business income report (CP 15 15) showing actual figures for the just-expired policy period. If the reported business income limit is higher than the initial estimate, the insurance carrier bills for the additional premium. If the reported BI is lower than the initial estimate, the insured receives a return premium.

The endorsement states that the insured shall never be paid more than the policy limit. Although this is a reporting-type form, the insured must still have adequate policy limits in place at the time of the loss to cover the income lost during the entire period of restoration, and to avoid a coinsurance penalty. There is also a penalty assessed if a report has not been turned in to the carrier as prescribed in the policy; its calculation is similar to a coinsurance calculation.

Unpredictability in year-to-year business income exposures make this a valuable endorsement. Any insured using this endorsement should estimate high (paying an initially higher premium) then take advantage of the reporting procedure to adjust the premium to the actual exposure. The insured should be fully covered following a worst-case-scenario loss, yet always end the year paying the exactly correct premium because of the reporting procedure.

Note, this endorsement option cannot be coupled with the Agreed Value non-coinsurance option; nor can this be used with two of the dependent property endorsements: 1) the Business Income From Dependent Properties – Broad Form (CP 15 08); or 2) the Business Income From Dependent Properties – Limited Form (CP 15 09).

CP 19 10 – Your Business Personal Property – Separation of Coverage

Request this endorsement from the underwriter and wait for the reaction. This may be the rarest and least-used property endorsement of the four presented in this article, maybe even of all property endorsements proffered by ISO. Admittedly, I had never heard of it.

A truly unusual endorsement, the CP 19 10 allows the insured to manage specific business personal property (BPP) exposures by removing the property scheduled in the endorsement from the list of covered BPP in the underlying form. The insured is able to make three key choices regarding the property scheduled in this endorsement, they pick:

• The limit of coverage for the specified property;
• The cause of loss form applicable to the scheduled property; and
• The coinsurance percentage applicable to the scheduled property.

Property specifically scheduled on this endorsement is not included in the limits applicable to BPP in the underlying form; nor is the value of the scheduled property used in the BPP coinsurance calculation following a loss. As noted, the property listed in this form is subject to a separate coinsurance calculation.

According to ISO rules, this endorsement can be used to separately schedule:

1. Stock;
   
2. Contents except stock;
   
3. Machinery and equipment;
   
4. Furniture;
   
5. Fixtures;
   
6. Fixtures, improvements and alterations making up part of the building and owned by the insured as unit-owners (as covered in Form CP 00 18); and
   
7. Tenants Improvements and Betterments.
   

When this endorsement is used to extend coverage to tenant's improvements and betterments (TIBs), the insured garners the benefit of the building rate rather than the BPP rate for this property. The CPP specifically lists TIBs as business personal property subjecting the TIBs to the higher BPP rate. However, ISO rules related to TIBs specifically state that TIBs written as a separate item are charged the building rate.

Wrapping Up

In the right situation these are beneficial endorsements. Make use of them where appropriate and provide better protection, better conditions and, at times, better pricing for the insured.

Last Updated: August 17, 2018