a.d.banker&company crime & time element coverages pdfs/compiled... · 2014-03-20 ·...

Crime & Time Element Coverages

A.D.Banker&Company

Introduction ..................................................................................................................................... 1

Chapter 1: Crime and Surety Coverages .................................................................................... 2Definitions; Crime Insurance; Commercial Crime Endorsements; Crime Policy Terms and Conditions; Suretyship; Crime and Bond Claim Examples; Review Questions

Chapter 2: Business Interruption Insurance ............................................................................ 18Overview; Business Interruption Insurance Terminology; Business Income (and Extra Expense) Coverage Form; Endorsements and Optional Coverages; Contingent Extra Expense (CEE) Coverage; Delayed Completion Coverage; Ingress/Egress Coverage; Utility Services; Review Questions

Chapter 3: Equipment Breakdown Coverage........................................................................... 33The Policy; Review Questions

Chapter Review Answer Key ....................................................................................................... 48

Table of Contents

Crime & Time Element Coverages

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Copyright 2014© A.D. Banker & Company®, L.L.C.

This course, seminar, or publication provides general information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The publisher hereby expressly excludes all warranties. The information in this text is current as of the date of publication

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IntroductionThere are three types of property coverage that are often overlooked or misunderstood—by both consumers and producers. The professional producer is aware of many exposures and hazards facing the commercial lines client, and will do his/her best to point out these vulnerabilities. Insurance carriers also provide valuable assistance by making coverage checklists available by industry, allowing producers and clients the ability to identify and address most unique exposures a particular business is likely to face. It is only after an exposure or hazard has been identified that a business can evaluate the risks it faces and make a decision about the best manner of protecting itself from the financial consequences of unexpected events.

• Although few business actually find themselves the victim of an armed robbery, that does not mean they are any less vulnerable to criminal activity—most of which is caused by the dishonest acts of employees and other individuals. The first section of this course discusses the first party coverages available for property losses that result from criminal acts.

• The other two topics of discussion are time element coverages that address consequential loss—loss that results from direct damage to property, usually the insured’s property. If an insured business sustains property damage at one or more of its physical locations, the ensuing loss of income, along with the additional costs needed to get the business up and running at another location, often cripple the business, sending it spiraling into financial ruin if the business does not have adequate business interruption insurance in place.

• Financial devastation is an all too common occurrence for businesses without appropriate coverage in place to cover losses from equipment and systems shut down due to mechanical failure.

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Chapter 1Crime and Surety Coverages

Crime insurance, also called fidelity insurance, protects businesses from the dishonest acts of employees and other persons. Surety bonds guarantee the fulfillment of contractual obligations, usually with respect to the performance of one of the parties to the contract.

Before discussing crime insurance and surety bonds in more detail, it is important to be familiar with terminology used within these respective areas of the insurance industry. Some of the following terms may have slightly different meanings outside the context of and crime insurance contracts and surety bonds.

Definitions

Crime InsuranceCrime insurance, also called fidelity insurance, protects organizations from the loss of assets and property due to business-related dishonesty and crime. Common crime and fidelity insurance claims involve employee dishonesty, embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer fraud, counterfeiting, and other criminal acts. Fidelity insurance also indemnifies banks, bankers, brokers, and financial or moneyed corporations or associations.

Surety BondsSurety bonds guarantee the fulfillment of one party’s contractual obligations and/or its contractual obligation to perform. Despite the fact that insurance companies issue surety bonds, surety bonds are not insurance contracts.

Unlike insurance policies, which anticipate losses occurring, suretyship does NOT anticipate losses occurring. In fact, the party issuing a surety bond will only issue one if it is relatively certain losses will NOT occur. As a result of this relative certainty (an insurer can never be absolutely certain a loss will not occur), premiums for surety bonds are correspondingly less expensive than those of insurance contracts.

BurglaryBurglary is theft of property from within a building by a person who commits forcible entry into, or exit from, the property of another while trespassing—without the owner’s permission. Visible signs of forced entry and/or exit must also exist. Most burglaries occur when a premises is unoccupied. An example of a burglary would be an individual who shatters the plate glass window of a jewelry store, grabs merchandise from within the store, and flees with the stolen items.

Counterfeit MoneyCounterfeit money is an imitation of money that is intended to deceive and be considered genuine. If a man uses a computer to design ten $100 bills, prints the bills, and then uses the bills to purchase a refrigerator, he has manufactured and used counterfeit money.

In this country, the U.S. Government is the only entity legally permitted to print paper currency and create coins. The following violations of United States Code are felonies and are overseen by the U.S. Secret Service, which is a subsidiary of the U.S. Department of the Treasury:

• Manufacturing counterfeit U.S. currency or altering genuine currency to increase its value

• Possession of counterfeit currency with fraudulent intent

• Mutilating, cutting, disfiguring, perforating, uniting or cementing together any U.S. bank bill, draft, note, or other evidence of debit with the intent to destroy it or render it unusable

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A.D. Banker&Company©

CHAPTER 1: CRIME AND SURETY COVERAGES 3

CustodianA custodian is the insured—or any of the insured’s partners, members, or employees—while having care and custody of property inside the insured premises. A custodian is NOT a person acting as a janitor or watchperson. For example, the cash register clerks working in a department store are the store’s custodians.

EmployeeAn employee is a natural person while in the service of the insured—and during the first 30 days immediately after termination of service for any reason other than theft or the commission of a dishonest act. An employee must be compensated directly by the insured via salary, wages, or commissions and be under the direction and control of the insured when performing services for the insured.

An employee is also any natural person furnished to the insured temporarily as a substitute for a permanent employee who is on leave—to meet seasonal or short-term work-related needs. Employees do not include such persons while having care and custody of property outside the “premises.” The following natural persons are also employees:

• Those leased to the insured under a written agreement between the insured and a labor leasing firm

• Trustees, officers, employees, administrators, and managers (other than certain independent contractors of an “employee benefit plan”)

• The insured’s directors or trustees while engaged in handling funds or other property of an employee benefit plan

• Former employees, partners, members, managers, directors, or trustees retained as consultants

• Guest students and interns except when having care and custody of property outside the premises

EmbezzlementEmbezzlement is the fraudulent conversion of another’s property by a person who is in a position of trust, such as an agent or employee. Embezzlement does not involve trespass; however, it does involve crimes committed by individuals who are on the property with the consent of the owner.

For example, the bookkeeper at a lawn care company opens a bank account under an assumed business name. She creates invoices and issues them to her employer from a fictitious supplier of lawn care products with the name of the fake business for which she opened the bank account. The bookkeeper then pays the invoices by issuing checks to the fictitious business and deposits them into the bank account she opened for the purpose of embezzling.

Employee Benefit PlanAn employee benefit plan is any welfare or pension benefit plan appearing on the policy’s declarations and that is also subject to the Employee Retirement Income Security Act of 1974 (ERISA) and its amendments. Examples of employee benefit plans include 401(k) plans, simplified employee pension plans (SEPs), profit sharing plans, and other types of pension plans, including defined benefit and defined contribution plans.

ForgeryForgery is the signing of another person’s name—or that of an organization for which one is not authorized to sign—with the intent to deceive. Forgery is not the signing of a person’s own name, in whole or in part, with or without authority, for any purpose, in any capacity.

For example, when a woman steals a car and signs the owner’s name when transferring the title to an unsuspecting buyer who believes the woman is the car’s owner, she has committed forgery. However, if she signed her own name, she would not have committed forgery, despite the fact that she stole the car.


4 CRIME & TIME ELEMENT COVERAGES

Fraudulent InstructionA fraudulent instruction is an electronic, telegraphic, cable, teletype, facsimile, or telephone instruction claiming to have been transmitted by the insured when, in fact, it was fraudulently transmitted by someone other than the insured without the insured’s knowledge or consent. Fraudulent instructions include written instructions (other than those previously mentioned) that were issued by the insured and were forged or altered by someone other than the insured without the insured’s knowledge or consent—and that claim to have been issued by the insured when they were not. Fraudulent instructions also include electronic, telegraphic, cable, teletype, facsimile, telephone, or written instructions initially received by the insured that claim to have been transmitted by an employee, but that were fraudulently transmitted by someone else without the insured’s, or an employee’s, knowledge or consent.

An example of a fraudulent instruction is an e-mail sent by an individual falsely claiming to be the recipient’s bank or financial institution and asking for personal information to update its security measures while really intending to steal the personal information and use it for criminal purposes.

FundsFunds are money and securities, such as paper currency and stock certificates.

LarcenyLarceny is a type of theft that involves personal property that is capable of being possessed and carried away. Larceny is a crime against the right of possession and each state addresses it differently. Degrees of larceny may be described by various jurisdictions and are based on the value of the property stolen, such as petty larceny or grand larceny.

Two elements are necessary for larceny to take place: (1) the intent to take the property without paying for or returning it and (2) the actual carrying away of property after trespassing. Examples of larceny include bicycle theft, theft of motor vehicle parts, and the theft of any property not stolen when using force, violence, or fraud. Embezzlement and forgery are not forms of larceny.

MessengerA messenger is the insured, a relative of the insured, or any of the insured’s partners, members, or employees, while having care and custody of property outside the premises. For example, when a company’s employee brings cash and checks to the bank to make a deposit, or travels from the post office to the place of employment with the mail, the employee is a messenger.

MoneyMoney is currency, coins, and bank notes in current use that have a face value. Money is also traveler’s checks, register checks, and money orders held for sale to the public.

Mysterious DisappearanceMysterious disappearance is loss of property for which the cause of loss cannot be determined. Mysterious disappearance is not theft—nor is it treated as theft under crime insurance policies. For example, if any type of property disappears and the insured does not know the time, place, and manner of its loss, the cause of loss will be mysterious disappearance.

Other PropertyOther property is tangible property that is NOT money and securities that has intrinsic value. Computer programs, electronic data, and property specifically excluded under the policy are not other property, either. Examples of other property include furniture and office equipment.



PremisesThe premises is the interior of that portion of any building occupied by the insured in which the insured conducts its business. For example, if an insured rents office space, the rented space is the insured’s premises. If the insured owns and occupies the entire building in which it conducts operations, the entire building and owned property is the premises.

RobberyRobbery is the unlawful taking of property from the care and custody of a person by force, the threat of using force, or causing fear of bodily harm. A person also commits robbery when unlawfully taking property from the care and custody of a person along with committing an obviously unlawful act witnessed by the victim. For example, if a person steps up to a pedestrian, grabs her purse, and says he will shoot her if she does not relinquish the purse, he commits robbery.

Safe BurglarySafe 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 upon its exterior. Safe burglary is also the unlawful taking of an entire safe or vault from inside the premises.

SecuritiesSecurities are negotiable and non-negotiable instruments and contracts that represent either money or property. Securities include tokens, tickets, revenue, stamps in current use, and evidences of debt issued in connection with credit or charge cards—so long as the credit or charge cards are not issued by the insured.

TheftTheft is the act of stealing—or the felonious taking of personal property with the intent to deprive the rightful owner of it. Theft is a broad term that includes specific offenses, such as burglary, robbery, larceny, embezzlement, and forgery.

WatchpersonA watchperson is any person the insured retains specifically for the purpose of having care and custody of property inside the premises and who has no other duties. For example, a security guard hired to patrol the inside of the insured’s warehouse after hours is a watchperson.

Crime InsuranceStandard property insurance policies, if written on a special form basis, usually provide coverage for the peril of theft. However, all property policies include categories of property for which theft coverage is limited or specifically excluded.

For example, the ISO Building and Personal Property Coverage Form excludes coverage for accounts, bills, currency, evidences of debt, money, notes, and securities under the section, Property Not Covered. It is also important to note the Basic and Broad Causes of Loss forms do not include theft as a covered peril.

The Special Causes of Loss Form provides coverage for the peril of theft because theft is not excluded. However, the form specifically excludes:

h. Dishonest or criminal act (including theft) by you, any of your partners, members, officers, managers, employees (including temporary employees and leased workers), directors, trustees or authorized representatives, whether acting alone or in collusion with each other or with any other party; or theft by any person to whom you entrust the property for any purpose, whether acting alone or in collusion with any other party. This exclusion: (1) Applies whether or not an act occurs during your normal hours of operation; (2) Does not apply to acts of destruction by your employees (including temporary employees and leased workers) or authorized representatives; but theft by your employees (including temporary employees and leased workers) or authorized representatives is not covered.



Crime insurance, also called fidelity insurance, provides coverage for a number of theft-related perils and protects businesses from employee dishonesty and other types of dishonesty—specifically the loss of money, securities, and other property. Typical crime insurance claims allege embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer fraud, counterfeiting, and other criminal acts.

Crime insurance also indemnifies banks, credit unions, financial or moneyed corporations or associations, bankers, and brokers for loss by theft-related perils. Commercial crime coverage forms may be added to the businessowners and commercial package policies or they may be written on a standalone basis.

As explained in the Definitions section of this chapter, theft is the act of stealing—or the felonious taking of personal property with intent to deprive the rightful owner of it. Burglary, robbery, larceny, forgery, and embezzlement are all types of theft. Other similar crimes, such as theft using computers and the issuance of fraudulent financial transactions, are also covered by crime insurance.

Crime insurance may be written on one of two different types of coverage forms. Although crime insurance is property insurance, its coverage forms can be likened to the two liability insurance coverage forms. The loss-sustained and discovery crime coverage forms are similar to the occurrence and claims-made forms of coverage used to write commercial general liability and professional liability.

• The loss-sustained form provides coverage for losses that occur and are discovered during the policy period OR that take place within the policy period and are discovered within one year of the termination of the policy period. It is similar to the occurrence form of liability insurance.

• The discovery form provides coverage for losses that are discovered during the policy period but that did not necessarily occur during the policy period. Discovery forms require the use of a retroactive date and are similar to the claims-made form of liability insurance.

In addition to being written on either of two types of policy forms, crime coverage forms are written for two different types of commercial enterprises.

• The Commercial Crime Coverage Forms (both loss-sustained and discovery) are designed for private businesses. The insuring agreements of these policies and forms contain one limit of insurance for all types of employee theft.

• The Government Crime Coverage Forms (both loss-sustained and discovery) are designed for government entities. They contain two different employee theft insuring agreements. One contains a separate loss limit that applies to each employee theft loss and the other contains its own loss limit for all losses occurring due to one employee.

Not all insurers use the ISO crime coverage forms; however, their policies usually provide similar coverage. The discussion in this chapter is based on the May 2006 edition of ISO’s Crime and Fidelity forms. The Commercial Crime Policy (Loss Sustained Form) offers eight types of coverage:

1. Employee Theft2. Forgery or Alteration3. Inside the Premises – Theft of Money and Securities4. Inside the Premises – Robbery or Safe Burglary of Other Property 5. Outside the Premises6. Computer Fraud7. Funds Transfer Fraud8. Money Orders and Counterfeit Money

The commercial crime policy includes separate insuring agreements for each of the preceding eight coverages. If the insured does not wish to purchase all eight coverages, coverage can be purchased separately for each of the above perils, or in any combination—none is mandatory.



1. Employee TheftThe first of the eight coverages provided by the crime coverage forms is Employee Theft, which is also referred to as employee dishonesty coverage. Employee theft covers loss of, or damage to, money, securities, and other property when committed by an employee—whether acting alone or in collusion with others AND that results directly from theft. Coverage does not require the employee to be guilty of committing a crime. Examples of employee theft include an employee stealing money from the cash register or several employees stealing office supplies. Income that is not considered “earned” includes interest, dividends, retirement income, Social Security benefits, unemployment benefits, alimony, and child support.

2. Forgery or AlterationThe second of the eight coverages provided by the crime coverage forms is Forgery or Alteration. Forgery or Alteration insures against the forgery or alteration of checks, drafts, promissory notes, and similar items regarding the payment of a sum of money that is made or drawn by the insured or someone acting on behalf of the insured. Someone other than an employee must commit the dishonest act because employee theft is included under Insuring Agreement 1.

“Forgery” means signing of the name of another person or organization with intent to deceive; it does not mean a signature that consists in whole or in part of one’s own name signed with or without authority, in any capacity, for any purpose. An example of forgery is a vendor receiving the insured’s $1,000 check in payment for purchased supplies, and then altering the check so it reads $10,000, depositing the check, and receiving $10,000.

3. Inside the Premises—Theft of Money & SecuritiesThe third of the eight coverages provided by the crime coverage forms is Inside the Premises – Theft of Money & Securities. This coverage insures against three specific types of loss that are committed by someone other than an employee:

• Theft, disappearance, or destruction of money and securities• Damage to the insured’s premises• Damage to a locked safe or vault

The first type of covered loss is the theft, disappearance, or destruction of money and securities inside the insured’s premises, or inside a banking premises, when committed by a person present on the insured’s premises:

• This coverage only applies to loss of money and securities—not other property• This coverage only applies if the person committing the dishonest act is on the insured’s

premises—not at the bank, in a parking lot, or using a computer to commit the actThe second type of covered loss is for damage to the insured’s premises or its exterior when caused by an attempted or actual theft. For example, this coverage would apply to a plate glass window a thief smashed to gain entry to the insured’s building or belongings inside the building the thief damaged when gaining access or stealing. The third type of covered loss is for loss or damage to a locked safe, vault, cash register, cash box, or cash drawer that results from actual or attempted entry into such property.

Vandalism, if not related to a theft, is NOT covered by the crime coverage forms. Accounting errors are also excluded, as are resulting fire losses from vandalism, theft, burglary, or robbery. The reason coverage for these perils is excluded is because it is either included under the standard property insurance form or available by endorsement.



4. Inside the Premises—Robbery or Safe Burglary of Other PropertyThe fourth of the eight coverages provided by the crime coverage forms, Inside the Premises—Robbery or Safe Burglary of Other Property, covers most types of tangible property—including jewelry, firearms, computers, etc.—from loss or damage resulting from an actual or attempted robbery of a custodian—by someone other than an employee. Coverage is also provided for the actual or attempted robbery of a safe inside the insured’s premises, damage to the premises or its exterior, and damage to a locked safe, vault, cash register, etc.

Inside the Premises – Theft of Money & Securities

Inside the Premises – Robbery or Safe Burglary of Other Property

Property Covered ONLY Money and Securities ONLY Other Property, including the safe or vault

Custodian (someone who is responsible for property)

Money and security does NOT have to be in the possession of a custodian for safekeeping

Property DOES have to be in the possession of a custodian for safekeeping

A custodian is the insured or any of the insured’s partners or members, or any employee, while having care and custody of property inside the insured premises. Examples of custodians include the insured’s bookkeeper, the insured, or any employee while on the job and inside the insured location. A custodian is NOT a watchperson (a separate definition applies) or a janitor (because janitors do not have “custody” of property, they service or maintain it). A watchperson is any person the insured retains specifically for the purpose of having care and custody of property inside the premises and who has no other duties.

5. Outside the PremisesThe fifth of the eight coverages provided by the crime coverage forms, Outside the Premises, insures money and securities in the hands of a messenger or armored car service for loss resulting directly from theft, disappearance, or destruction. Loss must occur in the U.S., its territories and possessions, Puerto Rico, or Canada. Other types of property are only covered for direct loss or damage from actual or attempted robbery.

The following types of property are excluded under this coverage:

• Motor vehicles

• Vandalism or malicious mischief

• Deception or trickery

• Property transferred without authorization or under threat

6. Computer FraudThe sixth of the eight coverages provided by the crime coverage forms, Computer Fraud, covers losses when a computer is used to fraudulently transfer money, securities, and other property from the insured premises or a banking premises—OR to do so to a person or place outside the insured premises. This is not computer insurance—it is fraud insurance for criminal acts committed when using a computer. Coverage excludes deception or trickery.

7. Funds Transfer FraudThe seventh of the eight coverages provided by the crime coverage forms, Funds Transfer Fraud, covers the loss of funds resulting from a fraudulent instruction that directs a financial institution to transfer, pay, or deliver funds from the insured’s transfer account. Funds are money and securities. A transfer account is an account maintained by the insured at a lending institution from which electronic, cable, or written instructions can be initiated by the insured to transfer, pay, or deliver funds.



8. Money Orders and Counterfeit MoneyThe eighth and final of the coverages provided by the crime coverages forms, Money Orders and Counterfeit Money, covers the insured’s acceptance in good faith of money orders and counterfeit money received in exchange for merchandise or services during the course of conducting regular business activities.

Commercial Crime Endorsements A number of commercial crime endorsements are available; however, our discussion focuses on four that are most commonly used.

Extortion—Commercial Entities (Coverage Form G)Coverage is Extortion, which may be added by endorsement to the crime coverage forms or policy. This endorsement has an equivalent for government entities.) Coverage is provided if a loss of money, securities, or property occurs because a threat was made to the insured to do either of the following:

• Cause bodily harm to any of the following persons who was kidnapped, or allegedly kidnapped: a director, trustee, partner, member, manager, or employee—or a relative or guest of any of these, OR

• To cause damage to the insured premises or property inside the insured premisesAn exclusion applies if the loss occurs after the insured failed to report the extortionist’s demands to an associate, local law endorsement, or the Federal Bureau of Investigation.

Lessees of Safe Deposit Boxes (Coverage Form I)This endorsement provides coverage for loss of securities and property from inside a safe deposit box or a vault inside a financial institution named on the endorsement. It does not provide coverage for money. The insured is able to collect under this coverage without proving negligence on the part of the financial institution; however, the insured’s negligence precludes coverage.

Securities Deposited with Others (Coverage Form J)This endorsement provides coverage for loss by theft, disappearance, or destruction of securities on deposit with others but not located in a safe deposit box or bank vault. The names of the depository and custodian must be shown on the endorsement. Most owners of securities deposit them with others when they are being used as collateral.

Clients’ PropertyThis endorsement provides coverage for loss by theft of money, securities, and other property belonging to clients that is caused by an identified employee.

Crime Policy Terms and Conditions

Limits of InsuranceThe commercial crime policy declarations shows a limit of liability. That limit applies to all loss directly resulting from a single occurrence. If a loss is covered by more than one of the insuring agreements or coverage endorsements, the most the policy will pay for loss will be the largest limit of insurance available under any one of the insuring agreements or coverage endorsements.

DeductibleA deductible will appear on the declarations and applies to all losses.

ExclusionsThe commercial crime policy contains general exclusions that apply to the entire policy. It also contains exclusions applicable to the individual insuring agreements and coverage forms.



Exclusions Applying to the Entire Policy• Acts committed by the insured, the insured’s partners, or the insured’s members—whether acting

alone or in collusion with others• Acts of employees learned of by the insured before the policy period• Acts of employees, managers, directors, trustees, or representatives, whether acting alone or

in collusion with others—unless insured under the Employee Theft insuring agreement or endorsement

• Loss resulting from the unauthorized disclosure of confidential information• Loss resulting from seizure or destruction of property by order of governmental authority• Indirect loss, including loss of income• Legal fees, costs, and expenses related to any legal action—unless covered under the Forgery or

Alteration insuring agreement or endorsement• Nuclear hazard, war and military action, and pollution

Exclusions Applying by Coverage Part

1. Employee TheftThe exclusions that only apply to Employee Theft include:• Loss that depends solely upon substantiation from inventory shortages or profit and loss

computations• Loss resulting from trading• Loss resulting from the fraudulent or dishonest signing, issuing, cancelling, or failing to

cancel an warehouse receipt or related papers

3. Inside the Premises—Theft of Money and Securities, 4. Inside the Premises—Robbery or Safe Burglary of Other Property, and 5. Outside the Premises

The following exclusions only apply to Coverages 3, 4, and 5 of the commercial crime policy:• Accounting or arithmetical errors or omissions• Exchanges or purchases• Fire• Money operated devices• Motor vehicles or equipment and accessories• Transfer or surrender of property• Vandalism• Voluntary parting of title to, or possession of, property

6. Computer FraudThe only exclusions applying to Computer Fraud include:• Credit card transactions• Funds transfer fraud• Inventory shortages

7. Funds Transfer FraudThe only exclusion applying to Funds Transfer Fraud is Computer Fraud.



Policy ConditionsThe commercial crime policy contains conditions that apply to the entire policy and others that apply specifically to each insuring agreement. Discussion of these conditions is intentionally brief and only includes reference to conditions specific to crime coverage and that are not contained in standard property policies.

Conditions Applying to the Entire Policy• Newly established premises and new employees are automatically insured at no additional

premium.

• Written notice to the insurer is required if the insured consolidates, merges with, purchases, or acquires the assets or liabilities of another entity. Notice must be provided as soon as possible and the extension of coverage only applies if the insurer consents to extend coverage.

• Employee benefit plans shown on the declarations are included as insureds under Employee Theft coverage. Specific requirements apply.

• The insurer has the right to examine the insured’s books and records during the policy period and up to three years afterward.

• An extension of one year from the date of policy cancellation is provided to the insured for the purpose of [the insured] discovering losses.

• The insurer has the right to make inspections and surveys at any time, provide the insured with reports about the findings, and recommend changes to the insured.

• A condition applies to losses sustained during prior insurance issued by the insurance company and describes how the insurer will settle the loss(es).

• A condition applies to losses sustained during prior insurance issued by an insurer other than the insurance company issuing this policy and describes how the insurer will settle the loss(es).

• A condition specifies that coverage only applies to property owned or leased by the insured and property the insured holds for others. However, coverage may only benefit the insured and provides no insurance or rights to any other person or organization. All losses under the policy must be submitted by the named insured.

• A condition called Recoveries stipulates how any settlement will be adjusted after a loss has been submitted and the insured subsequently receives any type of payment from another party or any other type of recovery other than “insurance, suretyship, reinsurance, security, or indemnity” taken for the insurance company’s benefit or of original securities after duplicates have been issued.

• The policy territory is the United States, its territories and possessions, Puerto Rico, and Canada.

• A loss condition titled, Valuation—Settlement, stipulates how losses will be valued and settled.

Conditions Applying to 1. Employee Theft• Coverage terminates for any employee as soon as the insured—or any of the insured’s partners,

members, managers, officers, directors, or trustees who are not in collusion with that employee—learn about a theft or other dishonest act committed by the employee. Such termination occurs whether the act occurred during employment by the insured or before employment by the insured and is effective on the date specified in a written notice mailed to the first named insured.

• Coverage applies outside the policy territory if any employee is temporarily outside the policy territory for no more than 90 consecutive days.



Conditions Applying to 2. Forgery or Alteration• The deductible does not apply to legal expenses paid

• Electronic and mechanical signatures will be treated the same as handwritten signatures

• When a proof of loss is submitted to the insurer, it must include either any instrument involved in the loss or an affidavit setting the cause and amount of loss

• Coverage applies anywhere in the world and the Policy Territory condition does not apply

Conditions Applying to 4. Inside the Premises—Robbery or Safe Burglary of Other Property and 5. Outside the Premises• A special limit of $5,000 applies for any one occurrence for loss of, or damage to, precious

metals, precious or semi-precious stones, pearls, furs, etc. The limit also applies to manuscripts, drawings, or records of any kind.

• If a loss occurs outside the premises (under Coverage 5), the policy only pays for the amount of loss the insured is unable to recover under a contract with an armored motor vehicle company and/or the armored motor vehicle company’s insurer.

Conditions Applying to 6. Computer Fraud• A special limit of $5,000 applies to any one occurrence of loss of, or damage to, manuscripts,

drawings, or records of any kind• Coverage applies anywhere in the world and the Policy Territory condition does not apply

SuretyshipAlthough surety bonds are not insurance contracts, they provide protection for financial loss and are contracts that stipulate the terms for risk transfer. For these reasons, state insurance departments regulate surety bonds, which are issued by insurance companies. Only licensed producers may sell surety bonds. Some states allow producers to sell surety bonds if they are property and casualty licensed; other states require producers to have surety licenses before selling surety bonds.

The Parties to SuretyshipMost insurance professionals and consumers understand that insurance contracts involve two parties: the policyholder and the insurance company. Surety bonds, however, involve three parties—the principal, the surety, and the obligee—and this difference is often confusing.

The principal is the party owing the duty, performance, obligation, or honesty. In many cases, the principal purchases the bond. Another term used for the principal is obligor.

The surety is the party guaranteeing the contractual duty, performance, obligation, or honesty of the principal. If the principal does not perform as promised in the contract, the surety either performs the principal’s obligations or pays for damages suffered because of the principal’s failure to perform. The surety is usually an insurance company that issues a bond, but can be any type of entity with the financial strength and reputation to guarantee the performances it undertakes when issuing bonds. The surety is also called the guarantor.

The obligee is the party requiring the guarantee that a duty, performance, obligation, or honesty will be carried out. Obligees may be individuals, businesses, or governmental bodies.

For example, a homeowner hires a contractor to build a new home. The homeowner requires the contractor to provide a guarantee that it will complete the construction of the home by a certain date and according to certain specifications. When the contractor purchases a surety bond from an insurance company to fulfill the homeowner’s requirements—per the construction contract, the contractor is the principal, the insurance company is the surety, and the homeowner is the obligee.



If a principal fails to perform as agreed in a contract, the surety must perform in lieu of the principal because of the requirements of suretyship. Suretyship is the assumption of liability for the obligations of another—in other words, a guarantee. The surety has a legal right of action against the principal in the event of default until the principal recovers the amount of the loss. Per the language contained in the bond, the defaulting principal must repay the surety. (In reality, however, this seldom happens.)

Suretyship is similar to the extension of credit. In the same fashion that only fiscally responsible individuals and businesses are able to secure loans and lines of credit, surety bonds are only issued to individuals and businesses with good reputations, the expertise to support the contractual promises they make, and a proven history of financial responsibility.

Not every applicant for a surety bond is able to purchase one. When a surety issues a bond, it underwrites the applicant in a fashion similar to that used by loan underwriters. Because the goal of the surety is to guarantee the performance of the principal, it is only willing to guarantee the performance of individuals and businesses that are willing and able to carry out their contractual obligations.

For example, if a contractor applied for workers’ compensation or general liability insurance, and had submitted several losses to its previous insurer, it is highly likely it will be able to secure insurance with a new insurance company—if it is willing to pay the premium the new insurer wishes to charge. On the other hand, if the same contractor was sued by one or more former clients for failing to complete construction projects as agreed, it is unlikely a surety would issue a bond to the contractor.

If the surety discovered the contractor’s character and reputation were exemplary, it might still refuse to issue a bond if the contractor had recently declared bankruptcy or was involved in litigation alleging unprincipled acts. Because poor money management and unscrupulous acts are often considered irresponsible behavior, the surety would likely doubt the contractor’s ability to complete the project within the legal, ethical, and financial parameters stipulated in the construction contract with the homeowner.

Types of Surety BondsSeveral types of surety bonds exist and each serves a specific purpose. Within each type of bond category, innumerable variations are available.

Public Official Bonds protect the public from the lack of faithful performance on the part of public officials—either elected or appointed. The principal is the public official and the obligee is the city or town, county, state, or other entity requesting the bond.

Public official bonds guarantee the honesty and faithful performance of an official’s duties as prescribed by law. Some of those duties include the recovery of fines, fees, and/or expenses, along with handling money and bank accounts entrusted to the official in the pursuit of his or her duties. These bonds protect taxpayers in the event a public official fails to exercise the standard of care required of the position and financial damage results.

For example, a city’s treasurer may be responsible for the loss of city funds because she did not practice adequate security measures and, as a result, someone stole the funds. Although the treasurer did not act dishonestly, she may be deemed to have failed in her faithful performance of duties as a public official.

Court Bonds are required in connection with court proceedings and are of two types: judicial bonds and fiduciary bonds. Courts and state statues require court bonds to protect parties to lawsuits. Individuals who entrust their welfare to the care of fiduciaries are also protected by court bonds.

Judicial Bonds are sometimes difficult to obtain because of their very nature. Judicial bonds guarantee that individuals and other entities fulfill their statutory obligations in connection with lawsuits and court proceedings and are either plaintiff bonds or defendant bonds.

• Appeal Bonds are issued when one party loses in court and is required to pay damages he or she may post an appeal bond and postpone payment of damages until after the appeal. If losing the appeal, the principal (or the surety) must pay the damages ordered in the original court proceeding.



• Bail Bonds guarantee a person’s appearance in court at a future date. Bail bonds are issued when the court establishes the dollar amount of bail and the surety provides a bond equal to that amount. Individuals and entities other than insurance companies may act as the surety for a bail bond—depending upon the jurisdiction. Payment for the bond is made in cash or with a combination of cash and the pledging of collateral, usually real estate. If a defendant (who is the principal) fails to appear in court, the surety pays the amount of the bond to the court and then secures reimbursement from either the defendant or the party that pledged money or property as collateral for the bond.

• License and Permit Bonds are required by local, county, and state governmental bodies for the protection of the public. Certain businesses are required to comply with regulations and ordinances; the purchase of a bond guarantees that such businesses will comply with all applicable laws. License and permit bonds are issued in five different categories: ◦ For the protection of the public’s health and safety ◦ For the protection of the public as a result of a public privilege granted to the principal, for

example, hanging a sign on a building adjacent to a sidewalk ◦ For the protection of the public against loss of money or property entrusted to a licensee, such

as an insurance agent ◦ For the protection of the public from businesses that pose high risks of financial loss, such as

car dealers and certain loan companies ◦ To guarantee the payment of taxes collected, such as gasoline and sales taxes

Fiduciary Bonds are required of individuals who act in a fiduciary capacity for others and guarantee the honest and faithful performance of fiduciaries appointed by the court. Examples of court-appointed fiduciaries include the guardian of minor children, the administrator of a deceased person’s estate, and the personal representative of a deceased person’s will (formerly called an executor). This type of bond is required by statute in order to protect the interests of those for whom the fiduciary acts. If a bonded fiduciary fails to conform to state law when carrying out its duties and financial loss occurs, the surety makes payment to inheritors, wards, beneficiaries, and creditors.

Contract Bonds guarantee that a contractor will perform according to a construction contract. If the contractor fails to perform according to the contract, the surety is responsible for the bond limit, which usually equals the value of the completed contract. Examples of contract bonds include:

Bid Bonds guarantee that contractors making bids will, upon acceptance of a bid by the obligor, proceed with the contract and replace the bid bond with a performance bond. Failure of a contractor to proceed with the contract results in default and the surety is required to pay the obligor the difference between the contractor’s bid and the next highest bid. If the contractor enters into the contract as agreed, the bid bond is released.

Performance Bonds promise that the party entering into a contract after making a bid performs the work as agreed in the bid. Contracts that often require the purchase of performance bonds are those for the construction of a home, commercial building, or road.

Completion Bonds promise a lender that the party using the borrowed money will only use the money for the work or project that is the subject of the loan and that the completed work will not be attached by liens.

Supply Bonds promise that materials and supplies will be provided in accordance with a contract, i.e., at the same price, in the same amount, and of the same type.

Payment Bonds promise that invoices for materials and labor will be paid in a timely fashion by the contractor.

Financial Institution Bonds are written to protect commercial banks, savings banks, and savings and loan institutions from numerous forms of dishonesty on the part of employees and others. Financial institution bonds contain six insuring agreements, which are similar to those offered on crime forms; however, they apply specifically to financial institutions and their activities:



• Fidelity – loss that is the direct result of the dishonest or fraudulent acts of employees

• On Premises – loss of property that is the direct result of burglary, robbery, mysterious disappearance, damage, destruction, theft, or larceny committed by a person on the premises

• In Transit – loss of property in transit while in the custody of a messenger or entity transporting the property for loss by robbery, larceny, theft, mysterious disappearance, damage, or destruction

• Counterfeit Currency – loss that is the direct result of acceptance in good faith by the insured of counterfeit money

• Forgery or Alteration – loss that is the direct result of forgery or alteration of any covered instrument

• Securities – loss that is the direct result of dealing in covered securities that it is later discovered were forged, altered, lost, or stolen

Miscellaneous Bonds are those that fall outside the categories previously discussed. A bond may be written to guarantee almost any type of performance required by a legal contract. Examples of miscellaneous types of bonds include Adoption Bonds, Bill of Lading Bonds, Lost Securities Bonds, U.S. Excise Bonds (i.e., Wine Maker’s Bonds and Tobacco Manufacturer’s Bonds), Travel Agency Bonds, and Warehouse Bonds.

Fidelity Bonds protect businesses against fraudulent acts by specified individuals; they are referred to as “dishonesty bonds.” Examples of fidelity bonds are Janitorial Service Bonds, Employee Dishonesty bonds, and Pension Trust (ERISA) bonds. Fidelity bonds usually insure businesses for losses caused by the dishonest acts of their employees.

• An Individual Bond protects an employer against the dishonest acts of a specific employee, such as the treasurer or a bookkeeper.

• A Schedule Bond protects an employer against the dishonest acts of the employees listed in the schedule, either by name (Name Schedule Bond) or by the position held (Position Schedule Bond). A company may wish to list all officers and directors on a name schedule bond or it may wish to list all its salespersons on a position schedule bond.

• A Blanket Bond protects an employer against the dishonest acts of any employees, regardless of their individual names or positions. Additional employees are automatically covered and premiums are adjusted upon audit at the end of the annual bond term. Types of Blanket Bonds include commercial blanket bonds, bankers blanket bonds, and D & O blanket bonds.

Crime and Bond Claim Examples

Crime ClaimsEmployee theft comes in all shapes and sizes:

• An employee initiated electronic funds transfers to bank accounts established in the name of fabricated entities.

• An employee stole more than 100 laptop computers over a long period of time while on site at a customer’s office for the purpose of maintaining its computer system.

• A payroll clerk who was unsupervised increased the amounts of her paychecks without the authorization or knowledge of her employer and embezzled over $65,000.

Other crime claims covered by commercial crime policies include:• An unknown party broke into the insured’s office and stole a safe containing over $70,000 after

unbolting the safe from the office floor.• The insured’s employee and an accomplice not employed by the insurer stole $73,000 from

inventory. The stolen property was discovered elsewhere and, after being investigated by police, the employee admitted to the theft and subsequent attempt to resell the property.



• A vice president of finance embezzled more than $1 million over a ten-year period by creating false invoices and substituting checks payable to the vendor with a check payable to himself in the same amount.

Surety Bond ClaimBecause the surety guarantees the performance of the principal when it issues a bond, it must indemnify the obligee if the principle does not perform as promised in a contract.

For example, Doris hired Callen Contractors to complete a remodeling of her home and required Callen to secure both performance and payment bonds. When Callen breaches the contract, Doris will submit a claim to the surety.The surety will investigate Doris’ allegations and will review the contract between the parties. It is of the utmost importance to the surety that the obligations of the contract be determined and carried out. If the contractor fails to fulfill its obligations, the surety must do so.In the contract between Callen and Doris, it was agreed that the contract would be completed no later than September 1st and that Callen would hire and pay all the subcontractors needed for the project. On August 25th, the electrical subcontractor calls Doris and says he is suspending all work on the project because Callen is behind in making payments and that he’ll be hiring a lawyer to place a lien on the project if Callen doesn’t make payment immediately. If the electrical contractor walks off the job, the project will not be complete by September 1st, which means Callen will be in default.Doris tells the electrician she will file a claim with the surety immediately, which she does. After the surety initiates its investigation of Doris’ claim, and completes it promptly, the surety agrees that Callen is in default. In fact, the surety determined that Callen never paid the electrical contractor for any of its work and, as the only contractor with outstanding work remaining before completion of the project, if the electrician walks off the job, the job will not be completed by September 1st.Because the surety is obligated to fulfill Callen’s obligations if it defaults, the surety immediately pays the electrician all outstanding invoices and assures the electrician it will make payment in full upon his completion of the work. Because the surety takes this action, the project will be completed on time and the surety will pursue reimbursement from Callen.If the surety’s investigation revealed that Callen had not breached the contract, however, it would respond differently. For example, if the surety’s investigation revealed that Callen had made payment to the electrician for all contracted work to-date, and that the electrician’s request for payment was for additional work Callen had not agreed to or contracted for, it would likely tell Doris that Callen had not breached its contract with her.

Chapter 1 Review Questions

1. What type of crime or fidelity products guarantee the fulfillment of contractual obligations, usually with respect to the performance of one of the parties to requirements stipulated in the contract?a. Employee theft coverageb. Surety bondsc. Commercial crime policiesd. Savings bonds

2. What type of insurance protects businesses from the dishonest acts of employees and others?a. Crime insuranceb. Surety bondsc. Savings bondsd. General liability insurance

3. What is the act of stealing or the felonious taking of personal property with intent to deprive the rightful owner of it?a. Burglaryb. Robberyc. Larcenyd. Theft

4. Sid is a contractor who enters into a contract with a homeowner to remodel her home. When the homeowner asks Sid to purchase a bond to guarantee that he will complete the project on time and according to the contract, what type of bond does Sid buy?a. Bid bondb. Appeal bondc. Performance bondd. Savings bond

5. Which of the following is NOT one of the coverages included on a commercial crime policy?a. Employee Theftb. Outside the Premisesc. Computer Fraudd. Counterfeit Fraud and Alteration

6. What crime endorsement may be added to the commercial crime policy to provide coverage if loss of money occurs because an employee was kidnapped and threatened with death?a. Kidnapb. Life insurancec. Extortiond. Robbery

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Chapter 2Business Interruption Insurance

According to the majority of risk managers, business interruption insurance is one of the most misunderstood types of property and casualty insurance. Business interruption insurance—specifically Business Income (BI)—also generates a significant amount of litigation because of misunderstandings both at the time coverage is purchased and during the claims process. The global expert services firm, Navigant, believes many business interruption insurance policies “aren’t thoughtful or well defined enough to address all of the issues that arise out of large scale loss, leading to inconsistent interpretation of policy terms.”1

Business interruption insurance is one form of Time Element Insurance, which is defined by the International Risk Management Institute (IRMI) as coverage for loss resulting from the inability to put damaged property to its normal use. For example, if a fire damages a retail store, in addition to the actual property damage the business suffers, the business will also suffer loss of income because it is no longer able to operate at its location. If the business chooses to resume operations at another location, either permanently or temporarily (while the current location is being repaired or rebuilt), the business will incur additional expenses that would not have become necessary in the absence of the fire loss.

The first issue at hand with respect to misunderstandings about coverage is the use of the terms business interruption and business income because they do not mean the same thing. Although many insurance professionals use these terms interchangeably, they refer to separate and distinct subjects. Business interruption refers to the actual slowdown or termination of business activities due to a loss. Business income is the net income a business would have earned had a business interruption not taken place.

It is essential for agents and clients to keep in mind that the coverage trigger for business interruption insurance contains three elements:

1. A covered peril must cause loss to the insured’s property

2. The property loss must suspend the insured’s business operations, and

3. The suspension of operations must only last as long as it takes to repair or replace the damaged property

Under most business interruption policies, if any of the three elements is absent, coverage is not applicable. It should also be kept in mind that business interruption caused by equipment breakdown is not insured by the Business Income (and Extra Expense) Coverage Form—it is insured under the Equipment Breakdown Coverage Form.

Because the amounts of these consequential losses resulting from an interruption of the insured’s activities depend upon the length of time required to repair or replace damaged property, the term “time element” is used to refer to several types of interruption insurance coverage. In personal lines, time element coverage includes Additional Living Expense (ALE) and Fair Rental Value coverages, which are found on homeowners, dwelling, and mobile home policies. In commercial lines, time element coverages are also referred to as Business Interruption Insurance—a broad term that includes Business Income, Extra Expense, and Contingent Business Income coverages.

In this chapter, our discussion and focus will be on the commercial lines business interruption coverages and forms, specifically ISO’s Business Income (and Extra Expense) Coverage Form, CP 0030 (10/12). Business interruption that results from equipment breakdown is covered later.

1 (Stan Johnson 2010)

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CHAPTER 2: BUSINESS INTERRUPTION INSURANCE 19

OverviewWhen reviewing a business client’s need for business interruption insurance, a number of factors must be considered. The foremost factor is the income at risk should a business suffer a loss covered by the commercial property or businessowners policy. It is important to understand that the limits of coverage for business income insurance must adequately reflect the income the business would have earned in the absence of a loss and NOT the income the business could have earned.

Another major factor is confirming the underlying property coverages adequately insure the business’ risks for loss. If the underlying property policy excludes a peril—for example, earth movement—then the business interruption coverage will also exclude that peril. Equipment breakdown coverage forms have business interruption insurance built into them precisely because that coverage is not included in standard property policies. It is for this reason business interruption caused by equipment breakdown is not covered in the Business Income (and Extra Expense) Coverage Form.

Depending upon the nature of the insured business and its activities and operations, endorsements and additional coverage options may be necessary to provide specialized coverage, such as extended period of interruption coverage, contingent business interruption, service interruption, and claim preparation expense coverage. Deductibles should also be chosen carefully, as different types of deductibles are available and their application to a loss may generate a significantly different outcome than a client might anticipate.

Because business interruption insurance is based on the limit of insurance appearing in the policy’s declarations, and those limits of insurance are calculated by the client, it is essential that the values provided on the original application, and any accompanying Business Income Report/Worksheet, are accurate. The BI Worksheet states (emphasis on the first sentence is that of this author):

The figure in L. represents 100% of your estimated Business Income exposure for 12 months, and additional expenses. Using this figure as information, determine the approximate amount of insurance needed based on your evaluation of the number of months needed (may exceed 12 months) to replace your property, resume operations and restore the business to the condition that would have existed if no property damage had occurred. Refer to the agent or company for information on available coinsurance levels and indemnity options. The Limit of Insurance you select will be shown in the Declarations of the policy.

The insured is expected to report one hundred percent of its business income exposures, along with its expectation of additional expenses should its operations be interrupted. How can a client be expected to see into the future and make allowances for every conceivable type of business interruption loss that might occur?

For example, if a fire damages the insured’s building, how long might it take to repair a fire-damaged building? Three months? Six months? Twelve months? Does the length of time needed for repairs vary based upon the degree of damage to the building? In other words, if a building is totaled by the fire, will it take more time—or less time—to resume operations at another location than to rebuild at the same site? What happens if the building cannot be repaired, but that determination is not made until months after the loss?

How will these questions be answered if the loss causing the business interruption is a windstorm or a truck driving through the side of the building? How will these questions be answered if the business interruption is caused by a hurricane, tornado, earthquake, or flood? How will these questions be answered if the loss causing the business interruption is the explosion at the warehouse of the insured’s only supplier of product? Clearly, each of these scenarios will affect a business in unique ways.

The BI Worksheet requires the insured to provide income and expense values for the following, which must be calculated based on a twelve-month period ending on a date stated in the worksheet. The worksheet also requires the insured’s estimated values for the same income and expenses, assuming a twelve-month period on a beginning date stated in the worksheet.

• Income ◦ Gross sales ◦ Finished stock inventory (at sales value) ◦ Gross sales value of production

CRIME & TIME ELEMENT COVERAGES


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◦ Prepaid freight, returns and allowances, discounts, bad debts, and collection expenses ◦ Other income and earnings, such as commissions, rents, and cash discounts received

• Expenses ◦ Cost of goods sold ◦ Cost of services purchased from outsiders to resell (that won’t continue under contract) ◦ Expenses for power, heat, and refrigeration (that won’t continue under contract) ◦ Payroll expenses (including payroll expenses to be excluded)

Once the expenses have been deducted from the income, the 12-month business income exposure is established. In addition to that figure, the insured must also estimate the value of any extra expenses that might be incurred to avoid or minimize the suspension of the insured business and to continue operations.

For example, if the insured’s premises were not fit for occupancy, how much would it cost to rent another location? Would additional employees need to be hired? What other additional expenses might be incurred? Assuming the insured business would be able to resume operations, how much time after it resumes operations might it take before the business is able to resume its original earnings capacity and/or production?

Agents should keep in mind that if business income values are not calculated correctly, or if the client does not understand precisely what the terms in the worksheet mean, the final numbers provided to the insurance company will not be accurate. Most of the E & O claims arising from business interruption insurance are the direct result of BI Worksheets—either they were not completed by the insured, they were not completed accurately by the insured, or the agent did not handle them properly.

If a business does not have a Business Continuity Plan (BCP), it will find the task of establishing values for ensuing business income loss, and foreseeing potential business interruption events, daunting. The Financial Industry Regulatory Authority (FINRA) publishes a Business Continuity Plan Template on its website for insurance professionals to use to comply with FINRA regulations concerning business continuity.2 FEMA3 and Inc.com4 are among many other entities that offer templates for creating a business continuity plan. Of course, hiring a risk manager or risk management firm is probably the best way to assure the most comprehensive of BCPs; however, any type of planning will prove more beneficial than not planning at all.

Statistics show that businesses with BCPs in place resume operations more quickly after suspended operations than businesses without contingency plans do. In addition, they are better able and equipped to mitigate the consequences of suspended operations to their businesses and personnel.

Because most business interruption policies contain language that requires them to make all efforts to mitigate loss, the existence of a BCP in advance of a loss will serve to facilitate the claim settlement and enhance the relationship with both the adjuster and the insurer. In effect, the BCP is proof the insured conducted due diligence in determining its risks for loss and properly insuring those risks.

Because business interruption claims seldom settle quickly or without contention, clients should be advised to conduct advance planning with respect to identifying the members of their team who will be involved in handling any future business interruption claim. Three essential team members will be called upon after a BI loss occurs:

• A single person will need to be appointed as risk manager (if none already exists) to act as the contact person for coordination of all claim efforts and processes.

• A finance person will need to be available to provide and receive financial information to document and support the insured’s claim to the insurer.

• A sales and/or operations person will need to be available to provide information that documents and supports the insured’s claim for loss of production and sales.

2 (FINRA 2010)3 (Federal Emergency Management Agency n.d.)4 (Inc.com n.d.)



Business Interruption Insurance TerminologyThe following definitions include generic terms used to discuss business interruption insurance, along with the definitions contained in ISO’s Business Income (and Extra Expense) Coverage Form, CP0030 (10/12).

Business IncomeBusiness income is the net income (net profit or loss before income taxes) that would have been earned or incurred had a business interruption not occurred. Business income is continuing normal operating expenses, including payroll. If the insured is a manufacturer, net income also includes the net sales value of production.

Business InterruptionBusiness interruption is the cessation or slowdown of a business’ operations due to a loss.

Extra ExpenseExtra expense is the necessary expenses incurred by the insured during the “period of restoration” AND that would not have been incurred by the insured if direct physical loss to covered property had not been caused by a covered peril. Extra expense represents additional costs the insured would not have experienced in the absence of the loss.

Finished StockFinished stock is stock the insured has manufactured, including alcoholic products being aged unless a coinsurance clause applies. Finished stock does not include stock the insured has manufactured if it is held for sale on the premises of any retail outlet insured under the coverage form.

OperationsOperations are the insured’s business activities that take place at the premises described in the declarations. If Rental Value coverage applies, operations also means the tenantability of the described premises.

Period of RestorationThe period of restoration is the time during which coverage is provided:

• After a loss that is caused by • A covered peril, and • That takes place at the described premises

For Business Income Coverage, the period of restoration begins 72 hours after the time of direct physical loss or damage. For Extra Expense Coverage, the period of restoration begins immediately after the time of direct physical loss or damage.

The period of restoration ends on the earlier of two dates:• The date the property at the described premises should be repaired, replaced, or rebuilt with

reasonable speed and similar quality, OR • The date when business is resumed at a new permanent location

The period of restoration does not include any extra time required because of the enforcement of, or compliance with, any ordinance or law regulating the construction, use, repair, or demolition of any property. Neither does the period of restoration include any extra time because of any requirement to test for, monitor, clean up, remove, contain, treat, detoxify, neutralize, respond to, or assess the effects of pollutants.



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Four goals must be accomplished during the period of restoration:1. The building must be repaired or rebuilt or the insured must find a new location2. New or replacement equipment and business personal property must be purchased and installed3. Stock and inventory must be replaced4. The insured business must resume its pre-loss level of operations

Most clients underestimate the length of time needed to accomplish these four goals. Failure to estimate adequately the period of restoration will activate the coinsurance clause, which results in a reduction in loss payments. The policy’s expiration does not affect the period of restoration.

PollutantsPollutants are any solid, liquid, gaseous, or thermal irritants or contaminants, such as smoke, vapor, soot, fumes, acids, chemicals, and waste.

Rental ValueRental value is business income that has two specific components. The first component is net income, or the net profit or loss before income taxes, that would have been earned as rental income from tenant occupancy of the premises described on the declarations—as furnished and equipped by the insured—of a loss had not occurred. Rental value also includes the fair rental value of any portion of the described premises occupied by the insured.

The second component of rental value includes normal operating expenses that continue after the loss and are incurred in connection with the rented premises. Continuing normal operating expenses include payroll and the legal obligations of the tenant that, if not charged to the tenant, would be the insured’s legal obligation.

SuspensionSuspension is the cessation or slowdown of the insured’s business activities. If Rental Value coverage applies, suspension is also the rendering of the described premises, or part of the described premises, as untenantable.

Business Income (and Extra Expense) Coverage FormNot all insurers use the ISO Business Income (and Extra Expense) Coverage Form (BIEE Coverage Form). Even when insurers do use the CP0030, they may allow the addition of manuscripted endorsements to the policy in addition to ISO endorsements. Agents are cautioned to read all policies, forms, and endorsements and to become familiar with not only the terminology used in the policy but also with the underwriting, valuation, and claims processes used by their insurers. As mentioned previously, business interruption insurance is responsible for an increasing number of agent’s E&O claims; agents must be vigilant when explaining coverage to clients, verifying that clients complete their BI worksheets properly, and submitting required BI worksheets to insurers in a timely fashion.

A. Coverage1. Business Income

Business income is the net income (net profit or loss before income taxes) the insured would have earned or incurred if a covered loss not occurred. Business income also includes the continuing normal operating expenses of the business that are incurred as a result of the covered loss, including payroll. If the insured is a manufacturing risk, net income also includes the net sales value of production.



If a limit of insurance is shown on the declarations, coverage for one or more of the following options is provided under the BIEE coverage form:

• Business Income including “Rental Value”• Business Income other than “Rental Value”• “Rental Value”

If separate limits of insurance are shown for more than one of the preceding options, coverage applies separately to each option.

The policy pays for the actual loss of business income the insured sustains due to the necessary suspension of the insured’s business operations. Payments are made during the period of restoration, which is the period of time between the onset of the suspension of operations and the insured’s resumption of operations.

The suspension of operations must be caused directly by physical loss of, or damage to, covered property at the described location listed in the declarations. Coverage applies only if a premium for that location is also shown in the declarations. The direct cause of loss must be included in the applicable causes of loss form attached to the policy.

For example, the insured business is a restaurant that suffers damage to its building when a taxi crashes through the wall in one of its two dining rooms. The restaurant completely shuts down its operations for three days while temporary repairs are made. On the fourth day, the restaurant reopens and is able to continue operations using the undamaged dining room. Repairs to the second dining room take six weeks to complete, after which the restaurant reopens.

Subject to any waiting periods shown in the declarations, the policy will pay for the total loss of income during the days the business is completely shut down. In addition, the policy will pay for the partial loss of income the restaurant sustains during the six weeks it is able to operate using one dining room. (Of course, payment is subject to all policy conditions, terms, and limitations.)

2. Extra ExpenseExtra expense is the necessary expenses incurred by the insured during the period of restoration that the insured would not have incurred in the absence of a loss. Other than for expenses related to the repair or replacement of property, coverage is provided for expenses incurred to avoid or minimize the suspension of the insured’s business and to continue operations at the described premises.

If operations cannot be continued at the described premises, expenses incurred to continue operations at replacement or temporary locations are covered. They include relocation expenses and costs to equip and operate the replacement or temporary locations. In addition, coverage is provided if the insured incurs additional expenses to minimize the suspension of business if the insured is unable to continue operations.

Extra expense coverage is only provided at the described premises and only if the premises is shown in the declarations and a premium charge for coverage also appears in the declarations. Using the restaurant example above, if the restaurant incurred extra expenses to rent equipment, furniture, and other items destroyed in the loss for use during the six-week period of restoration, this coverage would apply.

3. Covered Causes of Loss, Exclusions, and LimitationsThe provisions for the covered causes of loss, exclusions, and limitations of coverage are those of the causes of loss form that is attached to the policy and that appears in the declarations.



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4. Additional Limitation – Interruption of Computer OperationsCoverage under the BIEE coverage form does not apply if a suspension of operations is caused by the destruction or corruption of electronic data. Neither does coverage apply to any actual loss or damage to electronic data other than as provided under the Additional Coverage, Interruption of Computer Operations. This type of loss may be insured under the Equipment Breakdown Coverage Form.

For purposes of the BIEE coverage form, electronic data means information, facts, or computer programs stored, created, or used—as or on, or transmitted to or from:

• Computer software, including systems and applications software• Hard or floppy disks• CD-ROMs, tapes, and drives• Cells, data processing devices, and other repositories of computer software

This additional limitation does not apply if loss or damage to electronic data only involves data that is integrated in, and operates or controls, a building’s elevator, lighting, heating, ventilation, air conditioning, or security system.

5. Additional Coverages

a. Civil AuthorityUnder coverage for civil authority, the described premises is listed in the policy’s declarations and is the only premises at which coverage applies. If a covered cause of loss damages property other than property located at the described premises, business income and extra expense coverage is provided if a civil authority prohibits access to the described premises under two conditions—both of which must be met.

1. Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the covered property damage. The described premises must be within that area and not more than one mile from the damaged property.

2. The action of the civil authority must be taken in response to dangerous physical conditions that result from either the damage or continuation of the covered cause of loss that damaged the property OR to enable a civil authority to have unimpeded access to the damaged property.

The preceding conditions are very explicit and should be explained to the insured. If the insured’s location is more than one mile from the damaged property, civil authority coverage does not apply. In addition, if access is prevented or impaired because of any reason, other than civil authority, coverage does not apply.

For example, the insured is a manufacturing plant located two miles from the highway. The only access to the manufacturing plant is a two-mile private road. If the civil authority prevented access to the insured’s private road because of property damage to a building located at the intersection of the highway and the private road, no coverage would apply. Similarly, if the building at the intersection suffered an explosion and debris from the explosion littered the area for two weeks, preventing access to the insured’s private road, coverage would not apply.

Civil authority coverage for business income begins 72 hours after the time of the first action of the authority prohibiting access and lasts no more than four consecutive weeks from the date coverage first began. Civil authority coverage for extra expense has no waiting period and begins immediately after the time of the first action of the authority prohibiting access; it ends at the later of four consecutive weeks after the take of first action or when the civil authority business income coverage ends.



b. Alterations and New BuildingsCoverage for business income and extra expense is extended due to direct physical loss at the described premises if caused by a covered cause of loss to new buildings or structures, alterations, additions to existing buildings and structures. This additional coverage also applies to machinery, equipment, supplies, or building materials located on—or within 100 feet of—the described premises if such property is used in the construction, alterations, or additions and is incidental to the occupancy of the new buildings or structures.

c. Extended Business IncomeIf an insured suffers a business interruption that is not catastrophic in nature, it is usually able to resume operations within a relatively short period of time. However, most businesses do not automatically resume their pre-loss incomes immediately upon reopening. In fact, many businesses take weeks, and sometimes months, before being able to resume the same level of pre-loss earnings. Some businesses are never able to achieve their pre-loss level of income and go out of business.

Even during a four-week suspension of operations, a business’ customers may seek out a new provider of the products, merchandise, and/or services the insured provides. Acquiring “replacement” customers, and replacing the revenue lost by the customers who defected, may take considerable time.

This additional coverage provides coverage for the insured’s actual loss of business income for up to 60 days beyond the last day of the period of restoration. Some insurers permit the insured to extend coverage for a longer period of time (i.e., 90 days) with the payment of an additional premium. The coverage extension is usually available for up to 720 days after the period of restoration ends.

It is also important to realize this additional coverage does not apply to loss of income resulting from unfavorable business conditions caused by the covered cause of loss. For example, if a wildfire were the covered cause of loss, the community’s economic recovery would likely take considerable time. If the insured’s resumption of operations was negatively affected by the community’s inability to make as quick a recovery as the insured’s, the policy does not pay for the loss of income generated by the unfavorable economic conditions in the area.

Coverage applies separately to rental value and business income other than rental value.

d. Interruption of Computer OperationsSubject to the provisions of coverage, the insured may extend business income and extra expense coverage to a suspension of operations caused by an interruption in computer operations due to destruction or corruption of electronic data that occurs due to a covered cause of loss. Separate provisions apply based on the covered causes of loss form attached to the policy (i.e., Special Form, Broad Form, or other causes of loss added by endorsement).

The maximum limit of insurance provided by this additional coverage is $2,500 unless the declarations shows the insured purchased a higher limit. The limit applies to all losses sustained in any one policy year, regardless of the number of interruptions, premises, locations, or computer systems involved in the loss. This additional coverage does not apply to a loss sustained, or expenses incurred, after the period of restoration ends, regardless of the limit of insurance already paid or remaining.



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6. Coverage ExtensionIf a coinsurance percentage of 50% or more applies, and is shown in the declarations, coverage under the form may be extended to apply to property at any location the insured acquires, other than property located at fairs or exhibitions. The maximum limit of insurance paid under this coverage extension is $10,000 at each location, unless the declarations shows the insured purchased a higher limit.

Coverage provided by this extension ends at the earliest of the policy expiration, 30 days after the insured acquires or begins to construct the property, or the insured reports values to the insurance company. The Additional Condition, Coinsurance does not apply to this coverage extension.

B. Limits of InsuranceThe maximum amount of insurance the policy will pay for loss in any one occurrence is shown in the declarations. Payments made for the following coverages do not increase the limit shown in the declarations:

• Alterations and New Buildings• Civil Authority• Extra Expense• Extended Business Income

If the declarations shows separate limits of insurance for the Interruption of Computer Operations Additional Coverage or the Newly Acquired Locations Coverage Extension, the specified limits apply per the provisions of each separate coverage and apply separately from the limit of insurance shown in the declarations.

C. Loss ConditionsIn addition to the conditions found in the Common Policy Conditions and the Commercial Property Conditions, certain loss conditions apply. Some are similar to standard property conditions; others contain provisions specific to time element coverages. Distinct differences are mentioned below.1. Appraisal2. Duties in the Event of Loss – The insured is required to resume all or part of its operations as

quickly as possible if intending to continue the business.3. Loss Determination – This condition stipulates how the amount of business income and extra

expense losses will be determined.For business income losses, the business’ net income before the loss occurred will be considered. The likely net income of the business if loss had not occurred will also be considered; however, this does not include net income that would have been earned because of an increase in business due to favorable business conditions attributable to the covered cause of loss on customers or other businesses (this means the insured cannot benefit from the loss). The business’ operating expenses, including payroll, that are necessary to resume operations with the same quality of service the insured provided before the loss will be reviewed, along with other pertinent information, such as the insured’s financial records, accounting procedures, bills, invoices, deeds, liens, and contracts.

For extra expense losses, all expenses that exceed the normal operating expenses that would have been incurred by the insured’s business operations during the period of restoration if loss had not occurred will be considered. From that amount, a deduction will be made for the salvage value of any property purchased for temporary use during the period of restoration once operations are resumed. A deduction will also be made for the extra expense for other insurance except insurance written to the same terms as existing extra expense insurance. A final consideration will be made for the necessary expenses that reduce the insured’s business income loss that would otherwise have been incurred.



Specific conditions exist with respect to the insured’s resumption of operations. Specifically, the insurer will reduce the amount of the insured’s business income loss (not to include the extra expense loss) if the insured is able to resume operations, wholly or partially, by using damaged or undamaged property at the described premises or elsewhere. The amount of loss reduction will be made to the extent the insured did not use such damaged or undamaged property. For extra expense losses, the amount of the loss will be reduced to the extent the insured is able to return operations to normal and discontinue extra expense.

If the insured does not resume operations or does not do so as quickly as possible, the insurance company will make payment based on the length of time it would have taken to resume operations as quickly as possible. This condition concerning resumption of operations is often contentious during the claims settlement process because the insured and the insurer do not always agree about what constitutes “as quickly as possible.” Producers should be sure to discuss this condition with clients at the time coverage is purchased, and secure the insured’s acknowledgement of the consequences of failing to resume operations “as quickly as possible.”

4. Loss Payment – The policy begins paying for covered losses within 30 days after receiving the insured’s sworn proof of loss. Payment is contingent upon the insured’s compliance with all terms and provisions of the BIEE coverage form AND the insured and insurer have agreed about the amount of the loss or an appraisal award has been made.This is another provision that is important for producers and policyholders to understand. If the insurer and insured do not agree about the amount of the loss, the insurer does not have to begin making claim payments until an appraisal award has been made. It is essential for the insured to have established values adequately at the time coverage was purchased and for the insured to cooperate fully when providing the insurer with documentation and proof of the loss.

D. Additional ConditionCoinsuranceThe coinsurance provision on the BIEE coverage form differs from the coinsurance clause in traditional property policies. In property policies, the coinsurance percentage is applied to the value of the property being insured. For example, if the replacement value of a building is $100,000 and the coinsurance percentage is 90%, the building must be insured for at least $90,000 at the time of the loss to avoid a coinsurance penalty at the time of loss.

However, because business interruption insurance makes payment for loss based on time and not the value of property, its coinsurance provision is applied differently. The coinsurance percentage under Business Income coverage is applied to a 12-month period of time.

For example, 12 months equals 100% coinsurance. Six months equals 50% coinsurance (12 months x 50% = 6 months) and 9.6 months equals 80% coinsurance (12 months x 80% - 9.6 months).

The coinsurance percentage must equal the insured’s best guess about how long the period of restoration will last. Specifically, the coinsurance percentage is an indication of how long the insured believes it will take to get back to its pre-loss level of operations after a covered suspension of operations. This coinsurance percentage is chosen in conjunction with the insured’s completion of the Business Income Report/Worksheet.

The coinsurance condition on the BIEE coverage form stipulates that the insurer will not pay the full amount of any business income loss if the limit of insurance for business income is less than either:

• The coinsurance percentage shown in the declarations, OR• The sum of the net income and operating expenses that would have been earned or incurred in

the absence of the loss by the insureds operations at the described premises for the 12 months following the policy inception date (or last previous anniversary date), whichever is later



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The coverage form describes precisely how the amount of the reduction in loss payment will be calculated and applied and states payment will be made in the amount determined by the calculation or the limit of insurance, whichever is less. The BIEE coverage form also provides two examples; one involves adequate insurance and one involves underinsurance.

E. Optional CoveragesThe following optional coverages apply if a designation appears in the policy’s declarations. When provided, these optional coverages apply separately to each item insured.

1. Maximum Period of IndemnityThis optional coverage eliminates the coinsurance condition and replaces the limit of insurance for business income and extra expense to the lesser of the amount of loss sustained, and expenses incurred, during the 120 days immediately following the start of the period of restoration OR the limit of insurance appearing on the declarations. (This is four months of payments.)

2. Monthly Limit of IndemnityThis optional coverage eliminates the coinsurance condition and limits payment for business income and extra expense during each 30 consecutive days during the period of restoration to the limit of insurance multiplied by a fraction shown in the declarations.

For example, if the limit of insurance is $120,000 and the fraction is ¼, the most the policy will pay for each consecutive 30 days is $30,000 ($12,000 X ¼ = $30,000)—regardless of the actual loss sustained.

3. Business Income Agreed ValueThis optional coverage is contingent upon the insured’s completion, and submission to the insurer, of a Business Income Report/Worksheet (BI worksheet) during the 12 months prior to the beginning date contained on the worksheet, as well as estimates for the 12 months immediately following the inception date of this optional coverage. The policy’s declarations must indicate the Business Income Agreed Value option applies and an Agreed Value must also be indicated in the declarations.

The Agreed Value must be no less than the coinsurance appearing in the declarations multiplied by the amount of net income and operating expenses for the following 12 months as reported on the worksheet. Under this optional coverage, the coinsurance condition is suspended until 12 months after the effective date of this optional coverage or the expiration date of the policy, whichever occurs first. The coinsurance condition is automatically reinstated if the insured fails to submit a new BI worksheet and Agreed Value within 12 months of the effective date of this optional coverage or when the insured requests a change in the limit of insurance.

It is essential for the insured to submit the worksheet if it wants to continue suspending the coinsurance clause. Failure to submit the worksheet in timely fashion always reinstates the coinsurance provision. It should also be noted that if the limit of insurance were less than the Agreed Value, the policy would not pay more than the amount of a loss multiplied by the limit of insurance divided by the Agreed Value. This is a penalty!

4. Extended Period of IndemnityAfter a covered loss, an insured’s loss of business income often continues beyond the period of restoration. For example, a retail store may resume operations six months after a fire but may not enjoy its pre-loss level of sales until three months after reopening. This optional coverage extends coverage under paragraph A.5.c. Extended Business Income from 60 days to the number of days indicated in the declarations.



Endorsements and Optional CoveragesAs with any type of insurance policy, additional coverages may be added by endorsement to the business interruption coverage forms. Other coverage options may also be triggered by the payment of an additional premium and a designation on the policy’s declarations page. A brief discussion follows about the more commonly available endorsements and coverage options.

Claim Preparation Expense CoverageDuring the settlement of large property insurance claims, the insured inevitably incurs a great deal of lost time and expense in preparing the documents and other materials required by the insurer. In addition, the insured oftentimes is required to hire consultants, experts, and other professionals to assist with its efforts.

It should be noted that while some policies include coverage for claim preparation expenses, others do not. Even when providing claim preparation expense coverage, most policies and endorsements specifically exclude coverage for the fees charged by public adjusters. The ISO Business Income (and Extra Expense) Coverage Form CP 00 30 does not include coverage for claim preparation expense.

Contingent Business Interruption (CBI) CoverageWhen an insured business depends upon one or more suppliers or customers, it may suffer a business interruption if a supplier or customer suffers a covered property loss. Contingent business income (CBI) coverage provides insurance for the insured’s loss of business income, and extra expense, if the supplier or customer upon whom the insured depends suffers a property loss that causes the insured to have a business interruption. For example, if the insured is a lawn care business and the warehouse of its only supplier of fertilizer burns to the ground, the insured may be unable to continue operations until it locates another supplier from which it can purchase product.

In an article about contingent business interruption insurance, Daniel Torpey of Ernst & Young, LLP said, “CBI insurance, on its surface, may appear straightforward; however, the documentation and analysis needed to validate an insurance claim can be quite challenging.”5 Producers should familiarize themselves with the processes involved in accurately determining their clients’ exposures to loss and offering methods to calculate values appropriately.

Contingent business interruption insurance includes coverage for loss of business income and/or extra expense; it is also referred to as dependent properties insurance or contingent time element coverage. The coverage trigger of contingent business interruption insurance, as stated two paragraphs ago, is the covered direct physical loss to property owned by the insured’s supplier or customer—one upon which the insured depends to conduct normal business operations or to acquire and/or service its customers. The “dependent property” may be insured specifically by name in the endorsement or the insured may secure blanket coverage for all suppliers and customers.

The most common situations for which contingent business interruption coverage is needed fall into four major categories:

• The insured relies upon a few suppliers (or sometimes only one) to provide materials

• The insured relies upon a few manufacturers or distributors (or sometimes only one) for the majority of its goods

• The insured relies only upon a few customers to buy the majority of its products and/or goods

• The insured relies on a leader property to provide it with customers (a leader property is a neighboring business)

5 (Torpey 2003)



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If any of the preceding scenarios occur, the insured’s CBI coverage will apply, provided the property loss occurring at the dependent property is the result of a peril covered by the insured’s policy. Four types of dependent properties are addressed by the ISO Business Income (and Extra Expense) Coverage Form and its endorsements: contributing locations, recipient locations, manufacturing locations, and leader locations.

• A contributing location is one that delivers materials or provides services to the insured. The provision of utility services is typically excluded from this definition of dependent property but coverage may be obtained for interruption in service from a utility provider under another endorsement.

• A recipient location is one that receives materials and products from the insured—typically, a customer.

• A manufacturing location is one that delivers products to the insured’s customers per written sales contracts. Typically, the insured takes orders from customers, places the orders with the manufacturer, and the manufacturer ships the product(s) directly to the insured’s customer.

• A leader location is one that draws customers to the insured’s location because of its proximity to the insured business. For example, if the insured is located in a mall, the anchor store (the one drawing in the majority of the mall’s customers) is the leader location.

Contingent business interruption coverage does NOT provide insurance for the following, although coverage is available under other endorsements and coverage parts for these types of loss (except for downstream business interruption):

• Interruption of utility service caused by an off-premises power failure• Interruption of business caused by civil or military authority• Interruption caused by lack of ingress or egress• Downstream business interruption(when damage at a location owned by the insured causes

business interruption of another location owned by the insured)• Interruption caused by damage to heating or cooling equipment that causes a change in

temperatureAn important consideration of the insured and agent when providing CBI coverage is the consequences of the insured’s lack of control over access to the dependent property during the loss settlement process. Because the dependent property is owned by and under the control of another party, the insurance company may be unable to determine the appropriate “period of restoration” accurately.

As a result, the insured’s CBI coverage may be adversely affected by the dependent property’s decisions concerning the time needed to make repairs, move operations to temporary or new locations, etc. Documentation that often helps the insured facilitate prompt CBI claims settlement include monthly profit and loss statements, monthly and daily production reports, monthly inventory, monthly cost accounting reports, and invoices and purchase orders.6

Contingent Extra Expense (CEE) CoverageContingent extra expense (CEE) coverage works in a fashion similar to that of contingent business interruption coverage. It pays for necessary extra expenses that result from a covered property loss that occurs at the location of a dependent property and that renders the dependent property unable to continue operations either temporarily or permanently. Usually, the waiting period that applies to CBI coverage does not apply to CEE coverage.

6 (Insua 2012)



Delayed Completion CoverageAlso known as delay in start-up (DSU), delayed opening, soft costs, or advanced loss of profits (ALOP) coverage, delayed completion coverage provides insurance for lost business income and certain extra expenses caused by the delay in completion of a construction project. Coverage is provided if the delay is caused by damage to covered property by a peril insured against. This coverage is most often added to builder’s risk coverage.

Ingress/Egress CoverageThe subject of ingress/egress coverage is the insured’s access to insured property. Although the ISO BIEE coverage form provides insurance for lack of access to the insured property due to orders of a civil authority, it does not provide coverage for lack of access by other means. If an insurer provides an ingress/egress endorsement, coverage is provided when:

• A covered peril prevented or impaired ingress or egress from the described premises• Business interruption resulted from the prevented or impaired ingress or egress• A loss of business income resulted from the business interruption

Utility ServicesStandard property policies (i.e., the Business and Personal Property Coverage Form and Businessowners Coverage Form) exclude loss caused by the failure of utility services. Specifically, policy language precludes coverage for the failure of power, communication, water, or other utility service supplied to the described premises—however caused—if the failure originates away from the described premises or originates at the described premises and involves equipment used solely for the provision of services to the described premises from a source off-premises.

When a utility services endorsement is added, it essentially adds off-premises power failure as a covered peril for purposes of the time element coverages. The endorsement allows the insured to choose coverage for sources providing water supply, wastewater removal, communication, and power. Coverage may include, or exclude, overhead transmission lines. When the endorsement is added, the coinsurance additional condition does not apply to it.


1. Why does business interruption insurance generate a significant amount of litigation instituted by policyholders?a. Because it’s expensiveb. Because it’s purchased by lawyersc. Because it’s often misunderstoodd. Because it’s simple

2. What type of coverage provides insurance for loss resulting from the inability to put damaged property to its normal use?a. Time elementb. Equipment breakdownc. Inland marined. Flood

3. Which of the following is NOT one of the three elements of the trigger for business interruption insurance?a. A covered peril causes loss to the insured’s propertyb. The insured’s property loss suspends the insured’s business operationsc. The suspension of operations lasts until damaged property has been repaired or replacedd. The suspension of operations lasts for up to 180 days after the damaged property has been repaired or

replaced

4. What is the definition of Business Income?a. Gross salesb. Net salesc. Net incomed. Net sales

5. When does the “period of restoration” end?a. Within 72 hours of the covered lossb. The date the described premises should be repaired, replaced, or rebuiltc. 30 days after extra expenses are incurredd. Within 90 days of the submission of the sworn proof of loss

6. What type of business interruption coverage pays for loss when a dependent property suffers a loss that causes the insured to have a business interruption?a. Extended period of indemnityb. Extra expensec. Contingent business incomed. Ingress/egress coverage

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Chapter 3Equipment Breakdown Coverage

Because standard property insurance policies typically exclude loss caused by the breakdown of equipment, virtually all businesses and homeowners are exposed to significant financial loss if any of their equipment breaks down. The fact that most property insurance policies exclude coverage for equipment breakdown, and that coverage is available by endorsement or on a separate policy, is an indication about the degree of risk posed by this peril and the specialization required to settle equipment breakdown losses.

Although the focus of this chapter is on equipment breakdown coverage for businesses, it is important to recognize that individuals may also benefit significantly from the purchase of equipment breakdown endorsements on their homeowners policies. If an equipment breakdown loss renders a home unfit to live in, the Additional Living Expenses (ALE) coverage provided by the unendorsed homeowners policy will not apply because equipment breakdown is not a covered peril. (ALE coverage is only provided if the loss of use is caused by a covered peril.) If an equipment breakdown endorsement is added to the policy, however, loss of use coverage is provided by the endorsement. The cost of this endorsement to the homeowners policy can be as low as $20 – 25 per year!

Examples of equipment breakdown losses cited by national insurers include:• Businesses1 2 3

◦ Electrical arcing destroyed several major electrical panels in an office building and left it without power – the loss totaled over $1.5 million

◦ A turbine generator that supplied power to a hospital failed – the loss totaled nearly $300,000 ◦ Fresh scallops at a food processing plant were contaminated with ammonia when an ammonia

line ruptured – the loss totaled over $65,000 ◦ A power surge at a service station damaged the electrical system that powered its diagnostic,

telephone, paging, and security systems – the loss totaled over $30,000 ◦ An environmental control computer failed, destroying a crop of vegetables – the loss totaled over

$180,000 ◦ A compressor used in a dairy operation failed, preventing the processing of milk into powdered

milk – the loss totaled over $1 million• Homeowners4 5 6

◦ A device in a deep well pump burned out, requiring excavation to repair – the loss totaled over $5,000

◦ Cracked coils in a heating/air conditioning system required replacement of the system – the loss totaled over $9,000

◦ A central air conditioning system sustained electrical damage – the loss totaled over $10,000 ◦ A circuit board in a subzero freezer arced, requiring replacement of the entire appliance – the loss

totaled over $11,000

1 (CNA 2009)2 (Hartford Steam Boiler n.d.)3 (The Travelers Indemnity Company n.d.)4 (American National n.d.)5 (EMC Insurance 2009)6 (Factory Mutual Insurance Company 2012)

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When agents and consumers equate equipment breakdown coverage with boiler and machinery coverage (which is the title by which equipment breakdown coverage used to be called), they are mentally limiting the scope of coverage. Although equipment breakdown coverage does provide insurance for loss caused by the failure of steam boilers, it also provides four other categories of coverage. Five broad types of equipment are insured under commercial equipment breakdown coverage:

1. Electrical systems, including transformers, panels, and cables

2. Air conditioning and refrigeration systems

3. Boilers and pressure equipment used in heating systems, to provide hot water, and for cooking

4. Computer and communication systems, including telephone, TV satellite, point-of-sale, security, and fire alarm systems

5. Mechanical equipment, including generators, water pumps, ventilation fans, elevator and escalator machinery, motors, engines, etc.

Virtually all equipment contained in a home is insured under homeowners equipment breakdown endorsements, and includes:

• Air conditioning systems

• Electrical generators and panels

• Furnaces and heat pumps

• Washers, dryers, and other household appliances

• Sump pumps and deep well pumps

• Computers, stereos, and televisions

• Swimming pool equipment

• Chair lifts and elevators

• Air and water filtration systems

• Sauna equipment

• Home security systems

Businesses are especially vulnerable after suffering equipment breakdown losses because their operations are often interrupted by the inability to use the damaged equipment. These losses usually translate into an immediate loss of income.

Equipment breakdown coverage provides insurance for certain types of property damage and for business interruption on the same policy. Because insurers are aware of the high potential for significant financial loss as the result of equipment breakdowns, most insurers offer valuable and extensive loss control and risk management services to policyholders that purchase equipment breakdown coverage. These services are offered free of charge and include inspection of steam boilers and steam equipment—some of these inspections are actually required by state law. Since they are included as part of the policy coverage, and paid for by the policy premium, equipment breakdown coverage provides far more valuable a benefit than most businesses realize.

It is important for all businesses to understand their exposures to equipment breakdown loss, including businesses that rent their premises instead of owning them. Although a building owner is responsible for repairing damaged property and equipment it owns, a tenant’s operations can be impaired just as significantly by an equipment breakdown loss as the building owner’s operations can be—sometimes even more. Because a tenant has no control over the loss settlement process and timely repair of damaged equipment, a tenant that has not purchased equipment breakdown coverage is especially vulnerable.


CHAPTER 3: EQUIPMENT BREAKDOWN COVERAGE 35

Another consideration with respect to equipment breakdown coverage is the fact that businesses often depend upon vendors, suppliers, and others off-site. If any of those off-site associates suffer an equipment breakdown loss, it is likely the insured will also suffer a loss.

For example, a manufacturer purchases a component part for its product from an off-site supplier. If the supplier suffers an equipment breakdown loss, will the inability of the vendor to provide the component part affect the insured? Absolutely. If the insured’s Internet sales rely on an off-site IT provider will the provider’s breakdown of computer equipment affect the insured? Again, absolutely.

Because equipment breakdown coverage was specifically designed to address perils that are excluded in other property policies, it provides insurance on a named perils basis. Three major perils excluded by standard policies are specifically insured by equipment breakdown policies and endorsements and are included in the definition of “breakdown” on the equipment breakdown coverage form. The three exclusions are:

• Explosion of steam boilers, pipes, engines, and turbines owned or leased by the insured• Mechanical breakdown, including rupture and bursting caused by centrifugal force (centrifugal force

is associated with circular motion and draws a rotating body away from the center of rotation)• Artificially generated electrical current, including electrical arcing

Equipment breakdown policies exclude many of the same “wear and tear” perils found in other property policies (i.e., rust, corrosion, deterioration, settling, and inherent defect), along with the typically excluded perils of earth movement and water. They also exclude the majority of the named perils found in standard property policies precisely because they are covered perils in those policies; for example, fire, explosion, lightning, windstorm or hail, riot or civil commotion, sprinkler leakage, and volcanic action.

Despite the fact that standard property policies and equipment breakdown coverage appear to provide coverage in a way that fits together seamlessly—especially when agents work with clients to design a comprehensive insurance program—coverage gaps and issues often occur. Even when coverage is eventually provided, initial loss investigation may not provide a clear indication for the cause of a loss. If coverage determination is delayed or a coverage dispute arises, an insured may not be compensated by the insurer in time to stave off the financial consequences resulting from income loss, increased operating expenses, and/or the required repair of property.

An endorsement is available for addition to both the property and equipment breakdown policies to alleviate this issue. ISO calls the endorsement the Joint or Disputed Loss Agreement and other carriers also provide the same endorsement. A few carriers include this coverage automatically in some of their forms, although most do not.

Equipment breakdown policies include many limits and sub-limits of coverage. It is essential for producers to be sure they discuss thoroughly with every insured the potential for loss and provide adequate coverage. Separate limits of coverage are provided for direct damage to property, loss of business income, and increased operating expenses (extra expense). Sub-limits of coverage are provided for perishable items, expediting expense, demolition, ordinance or law, and hazardous substances. It is also important to realize that different deductibles apply to different types of coverage.

Before delving into the policy itself, agents should keep two facts at the forefronts of their minds when discussing equipment breakdown coverage with clients.

1. Equipment breakdown coverage is insurance, therefore, the equipment “breakdown” must be an accident. This means that whatever the cause of loss, it must be unexpected, unintended, and sudden. Equipment breakdown coverage does not provide for loss caused by defects, wear and tear, malfunction, improper maintenance, etc.

2. Different insurers use different forms of coverage, although many insurers (such as Hartford Steam Boiler, which is one of the largest issuers of equipment breakdown coverage) base their policies and endorsement language on the ISO policies and forms.

The remainder of this chapter discusses the Insurance Services Office’s (ISO’s) Equipment Breakdown Protection Coverage Form, (BM 0020 07/01), and a few selected endorsements that may be added to it.



The PolicyMost insurance professionals understand that equipment breakdown coverage, formerly known as Boiler and Machinery Coverage, provides insurance for the explosion of steam boilers, pipes, engines, etc. Although few businesses still have steam boilers and steam-powered machinery to generate heat or power, the businesses that do are often required by state regulations to be inspected annually. If those businesses purchase equipment breakdown coverage, the insurance coverage form provides an inspection by the insurer in addition to paying for covered losses.

With the advent of technology, however, many businesses and homeowners depend upon far more sophisticated systems to provide heat and other sources of energy than steam boilers and related equipment. Many consumers make the mistake of believing they do not need equipment breakdown coverage because they do not have “boilers” in their homes and buildings. However, steam is still used to power a variety of apparatus, such as air conditioning and heating systems, hot water equipment, steam engines, portable heat and hot water systems—and as components of other equipment.

Even if businesses and homeowners do not have exposure to loss by explosion of steam boilers and steam equipment, they certainly have significant exposure to the perils addressed by two other major coverages provided by equipment breakdown policies: mechanical breakdown and electrical failure. As time goes by, our society depends more and more upon technology. If their computer systems fail, most businesses are unable to continue all of their operations. If electricity is lost, all businesses and homeowners suffer some degree of loss—even if it is just of time and productivity.

Before delving into the equipment breakdown coverage form, a review of the standard property exclusions is in order to establish how and why equipment breakdown coverage fills several key exposures faced by most businesses. Specifically, the three exclusions contained in ISO’s Special Causes of Loss Form are shown below. (Homeowners policies contain their own versions of these exclusions.)

B. Exclusions, 2.a., Artificially generated electrical current, etc.Artificially generated electrical, magnetic, or electromagnetic energy that damages, disturbs, disrupts or otherwise interferes with any: (1) Electrical or electronic wire, device, appliance, system or network; or (2) Device, appliance, system or network utilizing cellular or satellite technology. For the purpose of this exclusion, electrical, magnetic or electromagnetic energy includes but is not limited to: (a) Electrical current, including arcing; (b) Electrical charge produced or conducted by a magnetic or electromagnetic field; (c) Pulse of electromagnetic energy; or (d) Electromagnetic waves or microwaves. But if fire results, we will pay for the loss or damage caused by that fire.

B. Exclusions, 2.e., Explosion of steam boilers, etc.Explosion of steam boilers, steam pipes, steam engines, or steam turbines owned or leased by you, or operated under your control. But if explosion of steam boilers, steam pipes, steam engines, or steam turbines results in fire or combustion explosion, we will pay for the loss or damage caused by that fire or combustion explosion. We will also pay for loss or damage caused by or resulting from the explosion of gases or fuel within the furnace of any fired vessel or within the flues or passages through which the gases of combustion pass.

B. Exclusions, 2.d.(6), Mechanical breakdownMechanical breakdown, including rupture or bursting caused by centrifugal force. But if mechanical breakdown results in elevator collision, we will pay for the loss or damage caused by that elevator collision.

The value and importance of equipment breakdown coverage will vary based upon the size of the business and its dependence upon various types of equipment. For example, the telephone and computer systems in a small, “main street” business may not be extensive and may be easily—and quickly—replaced in the event of breakdown or failure. On the other hand, a large manufacturing company that utilizes a great deal of complex machinery and technology might be crippled immediately by a breakdown.

Depending upon the nature of a business, the type of equipment needing coverage, and the capacity of the insurer, a great deal of equipment breakdown coverage is underwritten by specialty insurance companies and reinsurers—especially for very large and/or unusual risks. Agents should be aware that they do have access to these markets.



DefinitionsAlthough the definitions section of the equipment breakdown coverage form appears on the last two pages of the form, reference to some of the major definitions is included here to facilitate understanding of the coverage provided.

BreakdownBreakdown is clearly intended to provide coverage for accidental breakdown and not breakdown that is caused by wear and tear, inherent vice (a hidden quality in property that causes or contributes to its deterioration or damage), or issues concerned with maintenance of equipment. In most cases, the breakdown must occur within the covered equipment, and not from external perils such as fire and vandalism.

Three types of direct physical loss are included in the definition of breakdown. Breakdown must occur to “covered equipment” and require its repair or replacement. The three types of direct physical loss (unless otherwise excluded in the coverage form) covered by the form are:

1. Failure of pressure or vacuum equipment2. Mechanical failure, including rupture or bursting caused by centrifugal force3. Electrical failure, including arcing

Breakdown does not include any of the following:• Malfunction • Defects, erasures, errors, viruses, etc. in computer equipment and programs• Leakage of any valve, fitting, shaft seal, joint, connection, etc.• Damage to any vacuum tube, gas tube, or brush• Damage to any structure or foundation supporting covered equipment or any of its parts• The functioning of any safety or protective device• The cracking of any part on an internal combustion gas turbine exposed to the products of

combustion

Business IncomeWhen a covered loss provides insurance for loss of business income, business income is defined as the net profit or loss before income taxes that would have been earned by the insured had the loss not occurred and the insured’s continuing normal operating expenses, including payroll.

Computer EquipmentComputer equipment is the insured’s programmable electronic equipment used to store, retrieve, or process data. It includes related equipment that provides communication, including input and output functions such as printing and data transmissions. Data and media are not computer equipment.

Covered EquipmentFour distinct types of property are considered “covered equipment” on the coverage form:

1. Equipment built to operate under internal pressure or vacuum other than the weight of contents

2. Electrical or mechanical equipment used to generate, transmit, or utilize energy

3. Communication equipment and computer equipment

4. Equipment of the types listed above that is owned by a public or private utility and used solely to supply utility services to the insured’s premises



Other than property cited in number 4. above, all covered equipment must be located at a premises described on the Declarations and owned, leased, or operated under the insured’s control.

The following types of property are not covered equipment:• Media• Any part of pressure or vacuum equipment not under internal pressure of its contents or

internal vacuum• Insulating or refractory material unless it is a glass lining of covered equipment• Non-metallic pressure or vacuum equipment unless constructed and used per American

Society of Mechanical Engineers (A.S.M.E.) code or comparable code• Any catalyst• Vessels, piping, and other equipment buried below ground that requires the excavation of

materials to inspect, repair, remove, or replace it• Structures, foundations, cabinets, or compartments that support or contain covered equipment

or any part of covered equipment• Vehicles, aircrafts, self-propelled equipment, or floating vessels or any covered equipment

mounted on, or used solely with, such vehicles or equipment• Dragline, excavation, or construction equipment or any covered equipment mounted on, or

used solely with, any such equipment• Any felt, wire, screen, die, extrusion plate, swing hammer, grinding disc, cutting blade, non-

electrical cable, chain, belt, rope, clutch plate, brake pad, no-metal part, or any part or tool subject to periodic replacement

• Any machine or apparatus used solely for research, diagnosis, medication, surgical, therapeutic, dental, or pathological purposes or any covered equipment that is mounted upon, or used solely with, any such machine or apparatus

• Any equipment, or part of any equipment, manufactured for sale by the insured

Covered PropertyCovered property is property owned by the insured. Covered property is also property in the insured’s care, custody, or control and for which the insured is legally liable.

DataData is programmed and recorded material stored on media, along with programming records used for electronic data processing or electronically controlled equipment.

Extra ExpenseExtra expense is the additional cost incurred by the insured to operate the insured business during the “period of restoration” over and above the costs the insured would normally have incurred to operate if the insured breakdown had not occurred.

Hazardous SubstanceA hazardous substance is any substance other than ammonia that has been declared by a government agency to be hazardous to human health.

MediaMedia is any electronic data processing or storage films, tapes, discs, drums, or cells.

One BreakdownIf an initial breakdown causes other breakdowns, they will be considered, collectively, One Breakdown. In addition, all breakdowns that occur at any one premises, manifest themselves at the same time, and are the direct result of the same cause of loss will be One Breakdown.



Period of RestorationThe period of restoration begins and ends at specific times. It begins at the time of the breakdown, or 24 hours before the insurer receives notice of the breakdown, whichever occurs later. It ends 5 consecutive days after the date when the damaged property is repaired or replaced with reasonable speed and similar quality. Keep in mind that the damaged property must be located at the premises show on the Declarations unless it is owned by a utility company and used solely to provide services at the insured’s premises. The period of restoration may be extended by endorsement.

StockStock is merchandise the insured holds in storage for sale, raw materials, property in process, or finished products. Stock includes supplies used in its packing or shipping.

Covered Causes of LossThe equipment breakdown coverage form provides insurance on a named perils basis and the only covered cause of loss is a “breakdown” to “covered equipment.” For this reason, it is essential that agents and policyholders clearly understand the definitions of both terms.

Insuring AgreementsThe equipment breakdown coverage form provides ten different coverages, each of which provides its own insuring agreement. Three of the coverages are business interruption coverages and make payment in the event the insured’s operations are suspended partially or completely: Business Income and Extra Expense, Utility Interruption, and Contingent Business Income.

• Property Damage• Expediting Expenses• Business Income and Extra Expense (or Extra Expense Only)• Spoilage Damage• Utility Interruption• Newly Acquired Premises• Ordinance or Law Coverage• Errors and Omissions• Brands and Labels• Contingent Business Income and Extra Expense (dependent properties)

a. Property DamageThe policy pays for direct damage to “covered property” located at the premises designated on the Declarations. This coverage pays for damage to property owned by the insured if it is caused directly by a covered equipment breakdown, such as damage to the building or business personal property. Coverage is also provided for property of others in the insured’s care, custody, or control if a covered equipment breakdown causes loss and the insured is legally responsible for the damage.

b. Expediting ExpensesThis coverage pays for extra expenses the insured incurs to make temporary repairs after a covered equipment breakdown. It also makes payment for extra costs the insured incurs to hurry up, accelerate, or expedite permanent repairs and/or the replacement of damaged property. Although this coverage is similar to extra expense coverage, it is not as comprehensive.



c. Business Income and Extra Expense (or Extra Expense Only)This first of the three time element coverages provided by the equipment breakdown coverage form makes payment for the insured’s actual loss of business income during the period of restoration after a covered loss. It also pays for the extra expenses the insured incurs to operate the insured business during the period of restoration. (The insured has the option of purchasing coverage for extra expense only.)

Coverage is provided for total or partial suspensions of business operations and continues for five days after the damaged equipment is repaired or replaced (see definition for “period of restoration”). When settling losses, the insurance company will review the insured’s records to evaluate the income received, and expenses incurred, before the breakdown. It will also review other factors to determine the probable income the insured would have received, and probable expenses the insured would have incurred, had the breakdown not occurred.

The insured may extend coverage beyond the five days contained in the definition of period of restoration if a different number of days appears in the policy Declarations. ISO provides an endorsement for this purpose, Extended Period of Restoration.

If the covered breakdown damages media or corrupts data, business income and/or extra expense coverage will continue for the time the insured needs to research, replace, or restore the damaged property. It will also continue while the insured reprograms covered computer equipment.

The limit of liability for this coverage, unless the insured purchases higher limits, is the lesser of the insured’s business income and/or extra expense up to 30 days after the period of restoration, or $25,000, whichever is less.

d. Spoilage DamageThis coverage pays for spoilage to raw materials, merchandise in the process of manufacture, and finished products if three conditions are met. First, the property must be either in storage or in the process of being manufactured. Second, the insured must own or be legally responsible for the property. And third, the spoilage must be the result of a covered equipment breakdown loss that causes the lack or excess of power, light, heat, steam, or refrigeration. If the insured incurs necessary expenses to reduce the amount of spoilage loss, those expenses will also be covered.

e. Utility InterruptionThis second of the business interruption coverages only applies if Business Income and Extra Expense, Extra Expense only, and/or Spoilage Damage coverage is provided. Utility interruption coverage extends those coverages to breakdowns of covered equipment that result from the interruption of utility services if three conditions are met.

First, the interruption that causes the covered breakdown must damage “covered equipment” owned, operated, or controlled by a local utility or distributor. The utility services must be directly generated, transmitted, distributed, or provided to the insured.

Second, the covered equipment must be used to supply any of the following services to the insured’s premises: electric power, communication services, air conditioning, heating, gas, sewer, water, or steam. Finally, the interruption of utility service to the insured’s premises must last at least the same number of consecutive days (i.e., the waiting period) shown on the Declarations that applies to this coverage. Once the waiting period has been met, coverage begins at the time of the interruption and is subject to all applicable deductibles.

f. Newly Acquired PremisesIf the insured acquires a new premises, either via purchase or lease, coverage provided under the equipment breakdown coverage form is extended automatically to the new premises. The coverage extension begins the day the insured acquires the premises and continues for the number of days shown in the Declarations for Newly Acquired Premises.



The coverage extension is subject to four conditions, all of which must be met:1. The insured must inform the insurer of the acquisition of the premises “as soon as

practicable.”2. The insured must agree to pay an additional premium to be determined by the insurer.3. The coverage extension is subject to the same terms, conditions, exclusions, and limitations

insuring other premises.4. If coverages and deductibles are different for different premises appearing in the Declarations

at the time of the new acquisition, insurance for the newly acquired premises will be provided at the broadest coverage, highest limits, and deductible that apply to the existing premises.

g. Ordinance or Law CoverageThis coverage applies despite the Ordinance or Law Exclusion and is only provided if increased loss costs are incurred due to the enforcement of any ordinances or laws in effect at the time a covered breakdown occurs. The ordinances or laws to which this coverage applies must regulate the demolition, construction, repair, or use of the building or structure that was damaged because of a covered breakdown.

Loss payment is provided for the loss in value of the undamaged portion of the building or structure because it must be demolished due to enforcement of applicable ordinances or laws. Loss payment is also made for the insured’s actual cost to demolish and clear the site of the undamaged parts of the building or structure. Finally, loss payment will be made for the insured’s actual and necessary costs to repair or reconstruct both the damaged and undamaged portions of the building or structure.

If reconstructing or remodeling the undamaged portions of a building or structure, coverage will be provided for materials of like kind and quality and at the same height, floor area, and style of occupancy, regardless of requirements pertaining to demolition. This provision applies whether reconstruction takes place at the same premises or at another premises.

A number of exclusions apply, including:• Demolition or site clearing until the undamaged portions of buildings and structures are

actually demolished• Increase in loss until damaged or destroyed buildings and structures are actually rebuilt or

replaced and approved by any regulatory agency• Loss due to any ordinance or law that required the insured to comply before the loss occurred

and the insured failed to comply• Increase in loss due to the insured’s failure to meet minimum requirements of any ordinance

or law in effect at the time of the breakdown• Increase in loss caused by a substance declared to be hazardous to human health or the

environment by any government agencyIf a covered breakdown results in damage of which only a portion is covered by the equipment breakdown coverage form (meaning other damage occurred that is not insured by this form), the policy will only pay its proportionate share of any ordinance or law loss.

h. Errors and OmissionsThe equipment breakdown coverage form provides coverage that would otherwise be provided, under certain circumstances, if the insured inadvertently fails to notify the insurer about property or premises to be insured. Specifically, if the insured unintentionally makes a mistake or omission in providing a description or location of property to be insured under the coverage form and subsequent amendments, coverage will be provided.



Coverage will also be provided if the insured made an error and unintentionally failed to include an owned or occupied premises at the inception date of the policy or that resulted in cancellation of any premises insured by the policy. However, no coverage is provided if the insured makes an unintentional error with respect to the reporting of values or types of coverage to be provided.

If the insured discovers an error or unintentional omission, the correct information must be reported when discovered. The insurance company will adjust the policy premium to reflect the date the premises should have been added had the error or omission not been made.

i. Brands and LabelsIf a covered breakdown damages covered property, the insurer has the right to take all or part of the property at an agreed or appraised value. Because the property is considered salvage, the insurer requires the insured to stamp the damaged property (or its container) with the word salvage, if doing so does not physically damage the merchandise.

Because businesses generally do not want to keep their labels on property that will be sold as salvage, this coverage pays the insured’s reasonable costs to remove brands or labels from the damaged property (or its containers) if doing so does not physically damage the merchandise. After removing brands and labels, the insured is required to re-label merchandise and/or its containers to comply with any applicable laws.

The total amount paid for damage to the property and removing brands and labels will not exceed the value of the limit of insurance applying to the property.

j. Contingent Business Income and Extra Expense (or Extra Expense Only)This third, and final, of the business interruption coverages only applies if Business Income and Extra Expense (or Extra Expense only) coverage is provided. This insuring agreement provides business interruption coverage if a supplier, buyer, provider, or driver sustains a covered breakdown that renders the insured’s business unable to operate. Because the insured is highly dependent upon its suppliers, buyers, providers, and drivers, and because the insured’s operations are contingent, or dependent, upon them, they are referred to as “dependent properties.”

For example, an electric company may be the insured’s only source of power to operate its manufacturing plant. If the electric company’s equipment breaks down and renders it incapable of providing electricity to the insured’s premises, the insured may suffer significant, and profound, loss of income, even if it is able to purchase generators to power some of its machinery and equipment. In this circumstance, the insured would also sustain considerable extra expenses.

Another example of a dependent property is a local hotel that purchases the all the baked goods it serves in its restaurant from a local bakery on a daily basis. If the hotel sustains a covered equipment breakdown loss that renders it unable to operate—and therefore, doesn’t need to purchase baked goods until it’s back in operation—it will have a considerable negative effect on the bakery.

The location of the dependent property must be listed in the insured’s Declarations and the covered breakdown must occur at that location. A loss of sales at the insured’s premises (which must also appear in the Declarations) must also take place. The insured is required to “use your influence to induce the contributing or recipient premises to make use of any other machinery, equipment, supplies, or premises available in order to resume operations and delivery of services or materials” to the insured. In addition, the insured must cooperate in every way with the dependent property but may not cooperate in a financial manner unless the insurance company authorizes such financial cooperation.



ExclusionsThe general exclusions contained in the equipment breakdown coverage form apply to direct loss and any losses that are the result of concurrent causation. They are very similar to the general exclusions contained in standard property policies. Those specific to the equipment breakdown coverage form contain details of the exclusions.

• Ordinance or Law• Earth Movement• Water• Nuclear Hazard• War or Military Action• An explosion, other than explosions of covered equipment (i.e., steam boilers, electric steam

generators, steam piping, steam turbines, steam engines, gas turbines, or moving or rotating machinery when explosion is caused by centrifugal force or mechanical breakdown)

• Fire or combustion explosion, including those that result in a breakdown, occur at the same time as a breakdown, or ensue from a breakdown

• Explosion within a furnace• Damage to covered equipment that is undergoing a pressure or electrical test• Water or other means used to extinguish a fire• Depletion, deterioration, corrosion, erosion, or wear and tear• If the insured has a property policy that provides coverage for the following perils, even if

insurance isn’t collectible, breakdowns caused by the following perils: ◦ Aircraft or vehicles ◦ Freezing caused by cold weather ◦ Lightning ◦ Sinkhole collapse ◦ Smoke ◦ Riot, civil commotion, or vandalism ◦ Weight of snow, ice, or sleet

• Breakdowns caused by windstorm or hail• Delay in, or interruption of, any business, manufacturing, or processing activity not specifically

covered by the insuring agreements providing Business Income, Extra Expense, and Utility Interruption

• With respect to Business Income, Extra Expense, and Utility Interruption coverages: ◦ Business that would not, or could not, have been carried on in the absence of the breakdown ◦ The insured’s failure to use due diligence and all reasonable means to operate the insured

business as close to normal as possible at the premises shown in the Declarations ◦ Suspension, lapse, or cancellation of a contract following a breakdown beyond the time

business could have resumed had the contract not lapsed, cancelled, or been suspended• Lack or excess of power, light, heat, steam, or refrigeration except as otherwise provided in the

policy under the business interruption coverages• With respect to Utility Interruption Coverage:

◦ Acts of sabotage ◦ Collapse ◦ Deliberate acts of load shedding by the utility



◦ Freezing caused by cold weather ◦ Impact of aircraft, missile, or vehicle ◦ Impact of objects falling from aircraft or missiles ◦ Lightning ◦ Riot, civil commotion, or vandalism ◦ Sinkhole collapse ◦ Smoke ◦ Weight of ice, snow, or sleet

• Any indirect loss resulting from a covered breakdown except as provided under the business interruption coverages

• The insured’s neglect to use all reasonable means to save and preserve covered property from further damage at, and after, the time of a loss

Limits of InsuranceLimits of insurance may be chosen per individual insuring agreement or as one limit that applies for all coverages pertaining to a covered breakdown. Risk managers recommend that the minimum limit of insurance should equal the value of the property at the premises. Any applicable limits of insurance will appear in the policy’s Declarations.

Unless a higher limit of insurance appears on the Declarations, a limit of $25,000 is the most the policy will pay for each of the following:

• Ammonia Contamination (including salvage expense)• Consequential Loss• Data and Media, specifically, the insured’s cost to research, replace, or restore damaged data or

media• Hazardous Substance, specifically, the insured’s additional expense incurred for the clean-up,

repair, replacement, or disposal of covered property that is damaged, contaminated, or polluted by any “hazardous substance” (ammonia is not considered a hazardous substance)

• Water Damage, including salvage expense; however, no coverage applies to damage resulting from the leakage of a sprinkler system or domestic water piping

DeductiblesDeductibles for all insuring agreements may be combined or applied separately. If combined, the deductible appears in the Declarations as “Combined.” Otherwise, separate deductibles apply.

Four different types of deductibles are available.• A dollar deductible is stated in the Declarations and losses are paid only after that amount is

subtracted from the amount of the loss.• A time deductible is stated in the Declarations and applies to business interruption losses. When

shown in days, a day equals twenty-four consecutive hours. For example, a 3-day deductible would translate into 72 consecutive hours after the loss.

• A multiple of daily value deductible is stated in the Declarations and is used with business interruption losses. It is an alternative to other types of deductibles and is based on the daily value—or average daily value (ADV)—of lost income. A calculation is involved that divides the total amount of business income that was lost by the number of days the business would have been open during the loss’ period of restoration.

• A percentage of loss deductible is stated in the Declarations and is applied to the total loss. It is often used for spoilage losses.



The equipment breakdown coverage form includes a provision that allows for minimum and/or maximum deductibles to be shown in the Declarations. If such deductibles are shown in the declarations, and any multiple of daily value or percentage of loss deductibles are less than, or more than, these deductibles, the minimum and/or maximum deductibles will apply.

Equipment Breakdown Protection ConditionsIn addition to any common policy conditions that apply, the following conditions apply specifically to equipment breakdown coverage. They are very similar to the common policy conditions form contained in commercial property policies. Those specific to the equipment breakdown coverage form contain details of the conditions.

• Loss Conditions: Abandonment, appraisal, duties in the event of loss, other insurance, legal action against the insurer, loss payable clause, transfer of rights of recovery

• Privilege to Adjust With Owner: The insurer has the right to settle losses with the owner of property owned by others that is in the care, custody, or control of the insured.

• Reducing Your Loss: The insured is required, as soon as possible after a covered breakdown, to: ◦ Resume operations, either partially or completely ◦ Make up for lost business within a reasonable time ◦ Make use of every reasonable means to reduce or avert loss, including:

– Working overtime – Utilizing the property and/or services of other concerns – Using merchandise or other property, such as duplicate parts and surplus machinery the

insured owns, controls, or may be able to obtain – Salvaging damaged property

• Valuation: Covered property will be valued at replacement cost unless it is obsolete and useless to the insured. ◦ If the repair or replacement of damaged property improves the environment, increases

efficiency, or enhances safety while maintaining the existing function (i.e., includes an upgrade), the policy will pay up to 25% of the property’s value—subject to the limit of insurance.

◦ If a breakdown causes an extended warranty to a maintenance contract to become void, the policy reimburses the insured for the unused costs of non-refundable and non-transferrable warranties and contracts.

◦ Unless agreed otherwise in writing, if the insured does not repair or replace damaged property within 24 months of a covered breakdown, the policy pays the lesser of the cost it would have taken to repair or replace the damaged property or the actual cash value of the property at the time of the breakdown.

◦ If the insured holds finished stock, its value will be the selling price less discounts and costs for shipping if three conditions are met: (1) The insured manufactured the property, (2) The selling price is more than the replacement value of the property, and (3) The insured is unable to replace the property before its anticipated sale.

◦ Valuation of spoiled property varies based upon the type of property that spoiled: (1) For raw materials, valuation is replacement value; (2) For property in process, valuation is replacement value of the raw materials, the labor expended, and the appropriate proportion of overhead; and (3) For finished products, valuation is the selling price less discounts and expenses.

• Business Income and Extra Expense Conditions: The insured has three additional obligations with respect to BI and EE coverage. (1) The insured must complete an Annual Report of Values Form once a year within three months of the annual report date. (2) The insured must pay any premium due that is calculated based on the annual report. If the insured is owed a refund, the insurer will issue one; however, no refund will exceed 75% of the original premium. (3) If the annual report of values form is not received when due, a coinsurance provision applies.



General ConditionsMost of the general conditions contained in the equipment breakdown coverage form are typical property conditions; however, four are specific to the form. The typical conditions are:

• Additional Insured• Bankruptcy• Concealment, Misrepresentation, or Fraud• Liberalization• Mortgage holder• No Benefit to Bailee• Policy Period and Coverage Territory• Arbitration

The four conditions specific to the equipment breakdown coverage form are Premium and Adjustments, Suspension, Joint or Disputed Loss Agreement, and Final Settlement between Insurers.

The Premium and Adjustments condition requires the insured to report 100% of the total insurable values at each premises on an annual basis at the policy’s anniversary date. Values must be provided separately for each coverage provided by the policy. The insured must keep records pertaining to the values for inspection during business hours for the duration of the policy period and for twelve months after the end of the policy period.

The Suspension condition allows the insurer to suspend coverage for any piece of covered equipment if it is found to be in, or exposed to, a dangerous condition. Once suspended, coverage may only be reinstated by issuance of an endorsement.

The Joint or Disputed Loss Agreement condition is designed to facilitate claims payment under certain circumstances. The insured must have both equipment breakdown and commercial property policies in effect at the time of a loss. Covered property must be insured by both the equipment breakdown and commercial property policies. The insurers must disagree about whether coverage exists or about the amount of a loss that should be paid by each insurer under its own policy. Basically, each insurer pays the amount it agrees it owes. In addition, it pays immediately one-half the disputed amount and the insurers then proceed to arbitration to settle their dispute.

The Final Settlement Between Insurers condition stipulates how insurers will refund each other for any excess payments made under the Joint or Disputed Loss Agreement condition.


1. Which of the following is NOT a type of “covered equipment” under equipment breakdown coverage?a. Electrical systemsb. Air conditioning systemsc. Computer systemsd. Buildings

2. All of the following are coverages provided by the equipment breakdown coverage form that are specifically excluded in standard property policies, EXCEPT:a. Explosion of steam boilersb. Sprinkler leakagec. Artificially generated electrical currentd. Mechanical breakdown

3. Which of the following IS a “breakdown” under an equipment breakdown policy?a. A building fire damages an air conditioning systemb. A security system malfunctionsc. A power surge destroys a telephone systemd. A computer virus destroys a business’ entire communications system

4. If an insured speeds up the process of repairing damaged property after a covered equipment breakdown, which insuring agreement under the equipment breakdown coverage form will pay the additional costs incurred by the insured?a. Property Damageb. Business Income or Extra Expensec. Utility Interruptiond. Expediting Expenses

5. Which of the following is NOT one of the three business interruption insuring agreements on the equipment breakdown coverage form?a. Spoilage Coverageb. Contingent Business Incomec. Business Income and Extra Expensed. Utility Interruption

6. On what valuation basis are losses to covered property insured under the equipment breakdown coverage form settled?a. Actual Cash Valueb. Replacement Valuec. Agreed Valued. Functional Replacement Value\

47

Chapter Review Answer KeyChapter 11. B. Surety bonds guarantee the fulfillment of one party’s contractual obligations and/or its contractual

obligation to perform.2. A. Crime insurance, also called fidelity insurance, protects organizations from the loss of assets and

property due to business-related dishonesty and crime.3. D. Theft is the act of stealing—or the felonious taking of personal property with the intent to deprive the

rightful owner of it.4. C. Performance bonds guarantee that contractors will perform as agreed in the contracts they enter into. 5. D. Commercial crime policies include coverage for employee theft, outside the premises, computer

fraud, and counterfeit money—among other coverages.6. C. Extortion coverage may be added to the commercial crime policy by endorsement to cover bodily

harm to certain persons who were kidnapped or allegedly kidnapped.

Chapter 21. C. Business interruption insurance—specifically Business Income—also generates a significant amount

of litigation because of misunderstandings both at the time coverage is purchased and during the claims process.

2. A. Time element coverage provides insurance for loss resulting from the inability to put damaged property to its normal use.

3. D. The coverage trigger for business interruption insurance contains three elements: (1) A covered peril must cause loss to the insured’s property; (2) The property loss must suspend the insured’s business operations; and (3) the suspension of operations must only last as long as it takes to repair or replace the damaged property.

4. C. Business income is the net income (net profit or loss before income taxes) the insured would have earned or incurred if a covered loss not occurred.

5. B. The period of restoration ends on the earlier of two dates: the date the property at the described premises should be repaired, replaced, or rebuilt with reasonable speed and similar quality OR the date when business is resumed at a new permanent location.

6. C. Contingent business income provides insurance for the insured’s loss of business income, and extra expense, if the supplier or customer upon whom the insured depends suffers a property loss that causes the insured to have a business interruption.

Chapter 31. D. The five types of “covered equipment” are electrical systems, air conditioning and refrigeration

systems, boilers and pressure equipment, computer and communication systems, and mechanical equipment.

2. B. Three major perils excluded by standard policies are specifically insured by equipment breakdown policies and include explosion of steam boilers, mechanical breakdown, and artificially generated electrical current, including electrical arcing.

3. C. Artificially generated electrical current is a covered “breakdown.”4. D. Expediting Expenses pays for extra expenses the insured incurs to hurry up, accelerate, or expedite

permanent repairs and/or the replacement of damaged property.5. A The three business interruption coverages on the equipment breakdown coverage form are Business

Income and Extra Expense, Utility Interruption, and Contingent Business Income. 6. B Under the equipment breakdown coverage form, property will be valued at replacement cost unless it

is obsolete and useless to the insured.

48

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